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GNDU Question Paper-2023
Bachelor of Commerce
(B.Com) 5
th
Semester
INSURANCE SERVICE MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Write a note on organization forms of life insurance in India.
2. Write short notes on
(a) Policies Contracts
(b) Insurance Documentation
SECTION-B
3. What are the strengths and weaknesses of insurance intermediaries in India? Suggest
some important improvement in it.
4. Discuss the agency commission structures in detail.
SECTION-C
5. Explain and illustrate the computation of premium and bonuses.
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6. What are the different principles of underwriting?
SECTION-D
7. What is the impact of legislation and competition on Pricing?
8. What are the factors having impact on the demand for insurance?
GNDU Answer Paper-2023
Bachelor of Commerce
(B.Com) 5
th
Semester
INSURANCE SERVICE MANAGEMENT
Time Allowed: Three Hours Max. Marks: 50
Note: Attempt Five questions in all, selecting at least One question from each section. The
Fifth question may be attempted from any section. All questions carry equal marks.
SECTION-A
1. Write a note on organization forms of life insurance in India.
Ans: Organization Forms of Life Insurance in India
Imagine you’re sitting in a park on a breezy evening, watching people around you. On one
bench, an elderly man is telling his grandchildren how their family stayed financially secure
even after difficult times because of a life insurance policy. On another side, a young
professional is on his phone paying premiums to keep his future secure. In the same park, a
middle-aged shopkeeper is proudly explaining to his friend how he bought a policy from a
private company that suited his business needs.
All of them are connected by one invisible thread—Life Insurance.
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But here’s the twist: life insurance in India is not just sold by “one” type of company. Over
the years, it has taken many organizational forms, each with its own style, purpose, and way
of serving people. To really understand this, let’s go on a journey together, almost like
walking through a museum of insurance history in India.
The Beginning of Life Insurance in India
Before independence, insurance in India was like a scattered market. Different small private
companies used to sell policies. Some were reliable, many were not. People often felt
cheated because these companies sometimes shut down overnight. Clearly, something
more organized and trustworthy was needed.
This led to different organizational forms of life insurance evolving step by step.
1. Proprietary (Private) Insurance Companies
Think of this form as “business houses trying to sell insurance like any other product.”
• These companies are owned by shareholders.
• Their main motive is profit.
• The money collected from policyholders (premiums) is partly used to provide
insurance benefits and partly to generate returns for the shareholders.
For example, before nationalization in 1956, many such private insurers were working in
India. Some were ethical and genuine, but many were only chasing profits. Because of this,
trust issues grew, and the government felt the need to step in.
Still, proprietary companies have one strength: they bring in competition, innovation, and
variety of products. In today’s times, many private players like HDFC Life, ICICI Prudential,
and Max Life fall into this category. They design policies for young professionals,
businesspeople, and families—making insurance modern and customer-focused.
2. Mutual Life Insurance Companies
Now imagine a cooperative society where all members pool money and help each other in
times of need. That’s the idea of mutual life insurance.
• Here, the company is owned by policyholders themselves, not outside shareholders.
• Profits are not taken away by a few owners; instead, they are redistributed among
members as bonuses or reduced premiums.
• The motive is service, not pure profit.
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Globally, mutual insurance has been very popular, but in India, it could never become the
dominant form. The complexity of managing it and lack of capital made it difficult to
expand.
But conceptually, mutual insurance is the most people-friendly form, because it treats
insurance like a community shield rather than a business product.
3. Provident Societies
Think of provident societies as the “baby step” towards organized insurance.
• These are small-scale societies formed to provide insurance to members for specific
needs.
• They usually offered limited coverage (like up to ₹500 or so in the old days).
• They were governed under the Provident Insurance Societies Act, 1912.
Provident societies were useful for small communities or groups who could not afford
bigger insurance policies. However, because of their limited scope and weak financial base,
they never became very strong. Eventually, many of them either merged or disappeared.
Still, they represent an important form because they show how people started realizing the
power of pooling money for security.
4. Public Sector Life Insurance – The Giant Called LIC
Here comes the turning point in the story.
In 1956, the Government of India decided: “Enough of unorganized and profit-hungry
private insurers. We need one strong, reliable institution that people can trust with their
lives.”
And so, all existing 245 private life insurers were merged into a single entity: the Life
Insurance Corporation of India (LIC).
Why LIC was special:
• It was fully owned by the government.
• The main motive was service and social security, not profit.
• It spread life insurance to rural and urban areas alike.
• People began to trust insurance because it was backed by the government.
LIC became not just a company but almost a family name in India. For decades, if someone
said “insurance,” people automatically thought of LIC.
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Even today, LIC remains the largest life insurer in India with the widest reach. Its role is not
only selling policies but also supporting national development by investing funds in
infrastructure, railways, and welfare schemes.
5. Private Insurance Companies After Liberalization (Post-2000)
By the 1990s, India was changing—globalization, new markets, rising incomes. Insurance
also needed more variety and competition.
So in 2000, the government allowed private players to re-enter the life insurance sector,
under the supervision of a new regulator called IRDAI (Insurance Regulatory and
Development Authority of India).
• Foreign companies were allowed to partner with Indian firms (with limited stake).
• Suddenly, the market became vibrant: ICICI Prudential, HDFC Life, SBI Life, Bajaj
Allianz, etc., came into the picture.
• These companies brought modern marketing, digital services, innovative products
like unit-linked insurance plans (ULIPs), and quicker claim settlement.
This was a shift from the old monopoly to a competitive mixed system where LIC and
private companies co-exist.
6. Other Emerging Forms: Microinsurance & Online Insurers
As India grows, new forms of life insurance are also emerging:
• Microinsurance: Policies designed for low-income groups with very small premiums.
This is crucial for financial inclusion.
• Online Insurers: Now, some companies operate fully digitally, offering quick,
paperless, and affordable policies.
Though small today, these forms represent the future of life insurance in India.
Summing It Up Like a Story
If life insurance in India were a movie, it would look like this:
• Act 1: Private insurers (many small companies, profit-driven, unorganized).
• Act 2: Mutual companies and provident societies (community-focused but weak).
• Act 3: LIC (the government-backed hero that restored trust).
• Act 4: Entry of private insurers after 2000 (competition, innovation, modernization).
• Act 5: Emerging forms like microinsurance and online insurers (future-ready).
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Each organizational form has shaped the industry in its own way. Together, they tell the
story of how India moved from mistrust and chaos to reliability and now towards
innovation.
Conclusion
The organization forms of life insurance in India reflect the changing needs of society. From
private profit-driven companies to government-backed LIC, from mutual societies to
modern private players, each form has played a role in securing the lives of millions.
Today, we live in a mixed environment where LIC and private companies compete and
coexist, while new forms like microinsurance are making insurance more inclusive.
In the end, life insurance in India is not just about money—it’s about trust, security, and the
promise that even if life is uncertain, our loved ones will always have a shield of protection.
2. Write short notes on
(a) Policies Contracts
(b) Insurance Documentation
Ans: (a) Policy Contracts — The Formal Promise
A policy contract is the legal agreement between the insurer (the company) and the insured
(the customer). It’s not just a piece of paper — it’s a carefully structured document that
spells out:
• What the insurer promises to do.
• What the insured must do.
• Under what conditions the promise will be honoured.
How a Policy Contract Comes to Life
1. Invitation to Offer: The insurer advertises or explains a policy — this is not yet an
offer, but an invitation for you to apply.
2. Proposal (Offer): You fill out a proposal form, giving details about yourself, your
health, your property, or whatever is being insured.
3. Acceptance: The insurer reviews your proposal, assesses the risk, and if satisfied,
accepts it — sometimes with modifications.
4. Consideration: You pay the premium; the insurer issues the policy document.
5. Contract Formation: Once issued, the policy contract becomes legally binding.
Essential Features of a Policy Contract
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• Offer and Acceptance: Both parties agree to the terms.
• Consideration: The premium you pay and the promise to pay claims.
• Legal Purpose: The contract must be for a lawful object.
• Competent Parties: Both insurer and insured must have legal capacity.
• Free Consent: No coercion, fraud, or misrepresentation.
• Utmost Good Faith (Uberrimae Fidei): Both sides must disclose all material facts
honestly.
Special Characteristics of Insurance Contracts
• Aleatory: The outcome depends on uncertain events (like accidents or death).
• Conditional: Payment depends on the insured meeting certain conditions.
• Contract of Adhesion: The terms are set by the insurer; the insured accepts them as
is.
• Unilateral: Only the insurer makes a legally enforceable promise (to pay claims),
while the insured’s promise is to pay premiums.
Contents of a Policy Document
A typical policy contract includes:
1. Heading and Policy Number
2. Names of Parties — insurer and insured.
3. Operative Clause — the core promise.
4. Schedule — details like sum assured, premium, term.
5. Definitions — key terms explained.
6. Conditions — duties of the insured, claim procedures.
7. Exclusions — what is not covered.
8. Endorsements/Riders — additional benefits or changes.
In simple words: A policy contract is like a detailed map for a journey — it shows the
destination (benefit), the route (conditions), the tolls (premium), and the roadblocks
(exclusions).
(b) Insurance Documentation — The Paper Trail of Trust
If the policy contract is the promise, insurance documentation is the evidence and
record-keeping that makes the promise enforceable. It’s the collection of forms, receipts,
and records created before, during, and after the policy is issued.
Why Documentation Matters
• Legal Evidence: Proves the existence and terms of the contract.
• Reference Point: Helps resolve disputes or clarify terms.
• Regulatory Compliance: Required by law and regulators like IRDAI.
• Operational Efficiency: Ensures smooth servicing and claims settlement.
Key Documents in Insurance
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1. Proposal Form
• The starting point of the contract.
• Contains personal, financial, and risk-related details.
• Must be filled truthfully — misstatements can void the policy.
2. First Premium Receipt (FPR)
• Proof that the first premium has been paid.
• Often acts as temporary cover until the policy is issued.
3. Policy Document
• The formal contract issued by the insurer.
• Contains all terms, conditions, and endorsements.
4. Renewal Premium Receipts (RPR)
• Proof of payment for subsequent premiums.
• Keeps the policy in force.
5. Endorsements
• Written amendments to the policy — e.g., changing the nominee, adding a rider.
6. Riders
• Additional benefits attached to the main policy — e.g., accidental death benefit,
critical illness cover.
7. Nomination and Assignment Forms
• Nomination: Naming the person who will receive the policy benefits.
• Assignment: Transferring policy rights to another person or institution (e.g., as loan
security).
8. Claim Forms
• Submitted when a loss occurs.
• Supported by relevant evidence (death certificate, medical reports, etc.).
The Documentation Process — Step by Step
1. Pre-Contract Stage:
o Proposal form completed.
o Medical reports (if required).
o Proof of age, identity, and address.
2. Contract Stage:
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o Policy document issued.
o Premium receipts provided.
3. Post-Contract Stage:
o Renewal receipts.
o Endorsements for changes.
o Claim documentation when needed.
Good Documentation Practices
• Keep copies of all forms and receipts.
• Read the policy document carefully.
• Update nomination details when life circumstances change.
• Store documents safely but accessibly.
A Story to Tie It Together
Think of Raj, who buys a life insurance policy:
• He fills out a proposal form truthfully, attaches his ID proof, and pays the first
premium.
• The insurer issues a policy document — the formal contract.
• Each year, Raj gets renewal receipts as proof of continued coverage.
• Later, he adds a critical illness rider through an endorsement.
• When a claim arises, his nominee submits the claim form with supporting
documents.
• The insurer refers to the policy contract and the documentation to process and
settle the claim quickly.
Without proper documentation, even a valid promise could be delayed or disputed.
Conclusion
• Policy Contracts are the heart of insurance — the legal promise that defines rights
and duties.
• Insurance Documentation is the lifeblood — the records that prove, support, and
execute that promise.
One without the other is incomplete. A promise without proof is just words; proof without a
promise is just paper. Together, they ensure that when life’s uncertainties strike, the
insurer’s promise is honoured swiftly, fairly, and without confusion.
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SECTION-B
3. What are the strengths and weaknesses of insurance intermediaries in India? Suggest
some important improvement in it.
Ans: Imagine walking into a bustling marketplace, not of fruits and clothes, but of
promises—promises of protection, security, and peace of mind. This is the world of
insurance in India. And in this vibrant market, there are facilitators—insurance
intermediaries—who act like friendly guides helping people navigate the complex terrain of
policies, premiums, and benefits. But, just like every guide, they have their strengths and
weaknesses. Let’s explore this story of insurance intermediaries in India, understand their
strengths and limitations, and finally, suggest how they can become even more effective.
Who Are Insurance Intermediaries?
Before we dig deeper, let’s first understand who these intermediaries are. In simple terms,
insurance intermediaries are middlemen who connect the insurers (the companies
providing insurance) with the insured (the customers seeking protection). They are broadly
categorized into agents, brokers, and corporate agents. Agents work for one insurance
company and promote only their products, while brokers are independent and can sell
policies from multiple companies. Corporate agents are businesses authorized to sell
insurance on behalf of insurers. Think of them as the bridge between the insurance world
and ordinary people who may find policies intimidating or confusing.
Strengths of Insurance Intermediaries in India
1. Expert Guidance and Personalized Advice
Imagine trying to choose a health insurance plan without knowing the fine print.
Overwhelming, right? Intermediaries simplify this process. They understand policy
terms, coverage details, exclusions, and premium structures. By analyzing a
customer’s needs, they recommend suitable products, which can prevent costly
mistakes. For a student buying their first life insurance policy, an intermediary
becomes a knowledgeable friend guiding them step by step.
2. Access and Reach in Tier-2 and Tier-3 Cities
India is a vast country, and insurance penetration is low in smaller towns and
villages. Intermediaries, especially agents, act as the local face of insurance
companies. They visit villages, small towns, and remote areas, educating people
about insurance products. Without them, many would remain unaware of the
benefits of insurance, leaving large sections of the population unprotected.
3. Building Trust Through Relationship Management
Insurance is a business of trust. People are hesitant to part with money for a promise
they may never see. Intermediaries nurture long-term relationships with clients.
They offer reassurance during claim settlements and are often the first point of
contact in times of crisis. This human connection strengthens customer loyalty and
encourages repeat business.
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4. Facilitating Claims and Reducing Complexity
Filing an insurance claim can be stressful. Intermediaries assist clients in
understanding claim procedures, submitting documents, and following up with
insurers. This service reduces frustration for customers and ensures faster claim
settlements. Think of an elderly policyholder unsure about paperwork—an
intermediary can become their lifeline, ensuring they receive the benefits they are
entitled to.
5. Market Intelligence for Insurers
Intermediaries provide valuable feedback to insurance companies about customer
preferences, emerging needs, and complaints. This insight helps insurers design
better products and improve services. Essentially, intermediaries act as the ears and
eyes of insurance companies on the ground.
Weaknesses of Insurance Intermediaries in India
Despite these strengths, insurance intermediaries in India face several challenges and
limitations.
1. High Dependence on Commission
The income of intermediaries largely depends on commissions earned from selling
policies. While this motivates them to sell more, it may sometimes lead to unethical
practices. For instance, an agent may push a policy that earns higher commission
rather than the one best suited for the client. This can undermine customer trust and
harm the reputation of the insurance sector.
2. Limited Product Knowledge
Not all intermediaries have in-depth knowledge of complex insurance products.
Some may lack understanding of health insurance riders, investment-linked plans, or
term insurance intricacies. Customers relying solely on such intermediaries may
make uninformed decisions, which can have financial consequences in the long run.
3. Inconsistent Customer Service
While some intermediaries provide excellent service, others may fail to follow up or
assist clients adequately, especially after policy issuance. Poor customer service can
result in dissatisfaction, policy lapses, and even mistrust towards insurance in
general.
4. Regulatory Compliance Issues
Insurance intermediaries are required to follow strict guidelines set by the Insurance
Regulatory and Development Authority of India (IRDAI). However, lapses in
compliance, such as incorrect documentation, mis-selling, or failure to disclose policy
terms, remain a concern. These issues can lead to penalties and create negative
perceptions among customers.
5. Technological Gap
In the digital age, customers increasingly prefer online solutions, instant quotes, and
digital policy management. Many intermediaries, especially in smaller towns, lack
digital skills or tools to meet these expectations. This makes them less competitive
compared to online platforms offering convenience and transparency.
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Suggested Improvements for Insurance Intermediaries
To strengthen their role and serve the insurance ecosystem more effectively, intermediaries
must embrace change and innovation. Here are some suggestions:
1. Enhanced Training and Certification Programs
Regular training sessions and updated certifications can equip intermediaries with
deep product knowledge and modern sales techniques. IRDAI and insurance
companies can collaborate to ensure intermediaries are well-prepared to advise
customers responsibly.
2. Focus on Ethical Sales Practices
Creating awareness about ethical responsibilities, coupled with monitoring
mechanisms, can reduce mis-selling. Incentives for customer satisfaction rather than
just sales volume can promote long-term trust over short-term gains.
3. Leverage Technology
Intermediaries should adopt digital tools like customer relationship management
(CRM) software, mobile apps, and online policy management systems. This not only
improves efficiency but also enhances customer experience. Virtual consultations
and online claim tracking can be game-changers in bridging the urban-rural
insurance gap.
4. Transparency and Clear Communication
Intermediaries must simplify policy terms and communicate benefits and limitations
clearly. Using visual aids, simple language, and practical examples can help clients
make informed decisions. For instance, showing a family how a term insurance plan
can secure their children’s education can be more persuasive than technical jargon.
5. Expand Reach Through Microinsurance
Intermediaries can promote low-cost, simple insurance products like microinsurance
to cover basic health, accident, and life risks in rural and semi-urban areas. This not
only increases insurance penetration but also builds the habit of financial planning
among underserved populations.
6. Feedback Mechanism
A structured feedback system where clients can rate intermediary services
encourages accountability and continuous improvement. Insurers can monitor
performance and reward intermediaries who excel in customer support and
professionalism.
Conclusion
In the grand narrative of India’s insurance industry, intermediaries are unsung heroes—
bridges connecting insurance companies with ordinary people, often educating, guiding, and
supporting them through financial uncertainties. Their strengths, from personalized advice
to local outreach, make them indispensable, yet weaknesses like commission-driven bias,
knowledge gaps, and technological lag pose challenges.
By investing in training, ethical practices, digital adoption, and transparent communication,
insurance intermediaries in India can transform into trusted financial advisors for millions.
Like a skilled guide in a complex market, a competent intermediary not only helps people
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choose the right insurance but also fosters a culture of trust, security, and informed
financial decision-making across the country.
4. Discuss the agency commission structures in detail.
Ans: What is an Agency Commission?
An agency commission is the payment an insurance company makes to its agent for
bringing in business — that is, for selling an insurance policy. It’s usually calculated as a
percentage of the premium paid by the customer.
The commission:
• Rewards the agent for acquiring the customer.
• Covers the agent’s selling and servicing costs.
• Motivates the agent to maintain the relationship so the customer renews the policy.
Why Commission Structures Matter
Commission structures are not random — they are designed to:
• Encourage long-term business (not just quick sales).
• Balance customer interests (so premiums aren’t inflated just to pay high
commissions).
• Ensure fairness among agents selling different products.
• Comply with IRDAI regulations that cap maximum commissions.
The Two Big Factors That Shape Commission
1. Type of Insurance Product — Life, health, general (motor, fire, marine, etc.).
2. Nature of Premium Payment — Single premium, regular premium, first-year
premium, renewal premium.
Commission Structures in Detail
Let’s break it down by category.
1. Life Insurance Commission Structure
Life insurance policies are long-term contracts, so the commission structure is designed to
reward agents for both acquiring and retaining customers.
a) Term Plans (Pure Protection)
• First Year Premium: Can be up to 100% of the first-year premium for policies with at
least a 10-year term.
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• Renewal Premiums: Around 25% for subsequent years (for long-term policies).
b) Traditional Plans (Endowment, Money Back, Whole Life)
• First Year Premium: Up to 80% for policies with at least a 10-year term.
• Renewal Premiums: Around 17.5%.
c) Single Premium Policies
• Commission is much lower because the premium is paid only once.
• For term plans: around 14%.
• For other single premium life products: around 5%.
d) Annuities
• Deferred Annuity: First year ~15%, renewal ~6%.
• Immediate Annuity: Around 2%–5% of the purchase price.
2. Health Insurance Commission Structure
Health insurance is usually renewed annually, so commissions are designed to encourage
renewals.
• Individual Health Policies: Up to 35% of the premium.
• Family Floater Policies: Similar to individual — up to 35%.
• Group Health (Corporate): Lower commissions, around 7.5%.
3. General Insurance Commission Structure
General insurance covers a wide range — motor, fire, marine, property, etc. The
commission depends on the product type and whether it’s retail or corporate.
a) Motor Insurance
• Own Damage (OD) Component: Around 15% for cars, 17.5% for two-wheelers.
• Third Party (TP) Component: Capped lower, often around 2.5%.
b) Fire Insurance
• Retail Risks: Around 15%.
• Corporate Risks: Around 10%.
c) Marine Insurance
• Marine Cargo: Around 15%.
• Marine Hull: Around 10%.
d) Miscellaneous (Property, Liability, etc.)
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• Typically ranges from 10%–15%.
First-Year vs Renewal Commissions
One of the most important aspects of commission structure is the difference between first-
year and renewal commissions.
• First-Year Commission: Higher, to reward the effort of acquiring a new customer.
• Renewal Commission: Lower, but still important — it motivates the agent to ensure
the customer stays with the insurer.
Example: If an agent sells a 20-year endowment policy with an annual premium of ₹50,000:
• First-year commission @ 80% = ₹40,000.
• Renewal commission @ 17.5% = ₹8,750 per year for the next 19 years.
Why IRDAI Regulates Commissions
Without regulation, there’s a risk of:
• Mis-selling: Agents pushing products with higher commissions, not those best for
the customer.
• Overpricing: Premiums inflated to cover excessive commissions.
• Short-term focus: Agents chasing quick sales without servicing customers.
IRDAI’s caps ensure:
• Fairness to customers.
• Sustainability for insurers.
• Reasonable earnings for agents.
Other Earnings for Agents
Apart from basic commission, agents may also earn:
• Performance Bonuses: For meeting sales targets.
• Persistency Bonuses: For maintaining high renewal rates.
• Incentives: Trips, awards, recognition.
A Story to Tie It Together
Meet Ananya, a new insurance agent:
• She sells a 15-year term plan with a ₹20,000 annual premium. First-year commission
@ 100% = ₹20,000. Renewal commission @ 25% = ₹5,000 per year for the next 14
years.
• She also sells a family health policy with a ₹15,000 premium. Commission @ 35% =
₹5,250 every year as long as the family renews.
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• Over time, her renewal commissions grow into a steady income stream — rewarding
her for building lasting relationships.
Conclusion
Agency commission structures are the financial backbone of the insurance distribution
system. They:
• Reward agents for acquiring and retaining customers.
• Differ by product type and payment mode.
• Are carefully regulated by IRDAI to protect customers and ensure fairness.
For an agent, understanding these structures is like knowing the rules of a game — it helps
them play smart, build trust, and create a sustainable career. For a customer, it’s reassuring
to know that commissions are transparent and regulated, so the advice they receive is more
likely to be in their best interest.
SECTION-C
5. Explain and illustrate the computation of premium and bonuses.
Ans: Part 1 – Computation of Premium
A premium is the price of the insurance promise. It’s not plucked from thin air — it’s
calculated using a careful mix of mathematics, statistics, and practical considerations.
Step 1: Estimating the Risk Cost (Pure Premium)
The starting point is the pure risk premium — the amount needed to cover the expected
claims.
• Actuaries use mortality tables (for life insurance) or morbidity tables (for health
insurance) to estimate the probability of a claim.
• Example: If the probability of death for a 30-year-old in the next year is 0.001 (1 in
1,000), and the sum assured is ₹10,00,000, the expected claim cost for that year is:
₹10,00,000 × 0.001 = ₹1,000.
Step 2: Considering the Time Value of Money
Premiums are paid in advance, but claims may be paid years later. The insurer invests the
premiums and earns interest, so the present value of future claims is discounted using an
assumed interest rate.
• If the insurer expects to earn 5% annually, the amount needed today to pay ₹1,000 a
year from now is slightly less than ₹1,000.
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Step 3: Adding Expenses
Running an insurance company costs money:
• Agent commissions
• Salaries
• Office rent
• Medical examinations
• Policy servicing
These are added to the pure premium to get the gross premium.
Step 4: Adding a Margin for Contingencies and Profit
No one can predict the future perfectly — unexpected events (like a pandemic) can increase
claims. A small margin is added to ensure financial stability and shareholder returns.
Step 5: Adjusting for Payment Mode
Premiums can be paid annually, half-yearly, quarterly, or monthly. More frequent payments
mean higher collection costs and less investment income, so the premium per instalment is
slightly higher.
Simplified Formula:
Gross Premium = (Present Value of Expected Benefits + Present Value of Expenses + Margin)
÷ Present Value of Premiums Payable
Illustration – Premium Calculation: Ravi, aged 35, wants a 20-year term policy with a sum
assured of ₹20 lakh.
1. Risk Cost: Mortality table shows probability of death each year; multiply by ₹20 lakh
to get yearly expected claims.
2. Discounting: Apply 5% interest rate to find present value of all expected claims.
3. Expenses: Add ₹500 per year for admin and ₹1,000 for acquisition cost.
4. Margin: Add 5% for contingencies.
5. Divide by the present value of 20 annual premiums.
Result: Annual premium might come to around ₹6,000.
Part 2 – Computation of Bonuses
If Ravi’s policy is a participating policy, he may also get bonuses. Bonuses are the insurer’s
way of sharing profits with policyholders.
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Step 1: Understanding the Surplus
At the end of each financial year, the insurer prepares a valuation balance sheet:
• Assets: Investments, cash, receivables.
• Liabilities: Present value of future claims, reserves, expenses.
If assets exceed liabilities (after keeping a safety margin), the excess is the surplus.
Step 2: Allocating the Surplus
Regulations (like IRDAI norms) often require that a large portion — e.g., 90% — of the
surplus from participating business be distributed to policyholders as bonuses.
Step 3: Types of Bonuses
1. Simple Reversionary Bonus (SRB)
o Declared annually as a fixed amount per ₹1,000 sum assured.
o Added to the sum assured and paid at maturity or death.
o Example: ₹40 per ₹1,000 SA on a ₹5 lakh policy = ₹20,000 bonus for that
year.
2. Compound Reversionary Bonus (CRB)
o Declared on the sum assured plus previously added bonuses — grows faster
due to compounding.
3. Final Additional Bonus (FAB)
o One-time bonus at maturity for long-term policies.
4. Interim Bonus
o Paid if a policy matures or a claim arises between two bonus declaration
dates.
Step 4: Bonus Calculation Example
Meera has a ₹10 lakh participating endowment policy for 20 years.
• The insurer declares a simple reversionary bonus of ₹50 per ₹1,000 SA each year.
• Annual bonus = ₹50 × (₹10,00,000 ÷ ₹1,000) = ₹50 × 1,000 = ₹50,000.
• Over 20 years, if the rate stays the same, total bonuses = ₹10,00,000.
At maturity, she gets:
• Sum assured: ₹10,00,000
• Total bonuses: ₹10,00,000
• Total payout: ₹20,00,000
Step 5: Factors Affecting Bonus Rates
• Investment performance of the insurer.
• Claim experience (fewer claims = higher surplus).
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• Expense control.
• Economic conditions (interest rates, inflation).
Why This Matters to Policyholders
• Premium calculation ensures fairness — you pay in proportion to the risk you bring
and the benefits you expect.
• Bonus calculation rewards you for being part of the insurer’s success.
• Understanding both helps you choose the right policy and set realistic expectations.
A Story to Tie It Together
Think of the insurer as a cooperative farm:
• Premiums are like seeds you and other members contribute each season.
• The farm uses these seeds (money) to grow crops (investments) and protect against
pests (claims).
• At the end of the season, after setting aside enough seeds for next year (reserves),
the extra harvest is shared among members as bonuses.
The better the farm is managed — good weather (economy), fewer pests (claims), efficient
farming (low expenses) — the bigger your share of the harvest.
Conclusion
The computation of premiums is a careful balancing act of risk assessment, investment
returns, expenses, and safety margins. The computation of bonuses is about measuring the
surplus after meeting all obligations and sharing it fairly among participating
policyholders.
Both are rooted in mathematics, but their purpose is deeply human — to keep promises
made today, decades into the future, and to reward loyalty along the way.
6. What are the different principles of underwriting?
Ans: Imagine a young entrepreneur named Aman, who has just started his small insurance
company called SecureLife Insurance. Aman is very enthusiastic, but one day, while
reviewing his books, he realized something worrying: if he accepts every applicant without
careful consideration, he could face huge financial losses. This is where underwriting enters
the story, acting like a wise guardian who ensures that the company remains financially
healthy while still helping people.
Underwriting, in simple terms, is the process by which an insurance company assesses risk
and decides whether to accept an applicant for insurance and at what terms. It’s like a
gatekeeper deciding who can enter a protected world and under what conditions. But
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underwriting isn’t random; it follows certain guiding principles. Let’s walk through them,
using Aman’s journey to make it relatable.
1. Principle of Utmost Good Faith (Uberrimae Fidei)
Aman first learned that trust is the foundation of insurance. The principle of utmost good
faith means that both the insurer (Aman’s company) and the insured must provide all
relevant information honestly.
Imagine a person named Ravi applies for life insurance but hides his smoking habit. If
Aman’s team later finds out, it can lead to claim rejection and financial loss. This principle
ensures transparency: the insured must disclose all material facts, and the insurer must also
be honest about terms and conditions.
In simple terms, it’s like a friendship built on trust—if one side hides something important,
the whole relationship can fail. Utmost good faith protects both parties and keeps the
insurance system fair.
2. Principle of Insurable Interest
Next, Aman realized that insurance isn’t meant to profit from someone else’s misfortune.
The principle of insurable interest states that the person taking insurance must have a
financial or emotional stake in the subject matter of insurance.
For example, Aman cannot sell a life insurance policy on a stranger he doesn’t know and
have no relationship with; he can only insure someone whose life or property affects him
financially, like a business partner or a family member.
Think of it like watering a plant you own—you care for it because it’s yours, not someone
else’s. This principle ensures that insurance remains a protection tool, not a gambling
instrument.
3. Principle of Indemnity
Aman remembered a recent claim where a client’s house caught fire. The principle of
indemnity says that insurance is meant to restore the insured to their original financial
position, not to make them richer than before the loss.
For example, if a client’s home worth ₹10 lakhs burns down, the insurance payout cannot
exceed ₹10 lakhs, even if the client wishes it could.
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This principle is crucial for underwriting because Aman must assess the exact value of risk
before accepting it. It prevents misuse of insurance as a profit-making tool and keeps the
company financially stable.
Imagine indemnity as a healing bandage—it helps recover from a wound but doesn’t give
extra strength beyond what was lost.
4. Principle of Contribution
One day, Aman received a claim from a client who had multiple insurance policies for the
same car. How should the company respond? Here comes the principle of contribution,
which states that if the same risk is insured by multiple insurers, each insurer contributes
proportionally to the claim.
For instance, if the car is insured by three companies for the same value, and Aman’s
company insured it for one-third of the value, they only pay one-third of the claim.
This principle ensures fairness and prevents the insured from claiming more than the actual
loss. It also protects Aman’s company from being financially exploited. Think of it as sharing
the burden equally among friends when carrying a heavy load.
5. Principle of Subrogation
Another principle Aman found intriguing was subrogation. This principle allows the insurer,
after paying a claim, to recover the loss from a third party responsible for it.
For example, if a client’s shop burns down due to a negligent contractor, after paying the
claim, Aman’s company can take legal action against the contractor to recover the money.
This principle encourages accountability and ensures that the insurer doesn’t bear the loss
unnecessarily. It also keeps premiums lower because the company can recover losses from
responsible parties.
Imagine it like a detective solving a case after helping the victim—the insurer steps in to
ensure justice while protecting its own financial stability.
6. Principle of Risk Assessment and Classification
Aman realized that all risks are not equal. Some clients are healthier, some have safer
homes, and some businesses operate in safer environments. The principle of risk
assessment states that the insurer must carefully evaluate the risk level before accepting it.
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This is where underwriting becomes more of an art than a rulebook. Aman’s team uses
medical exams, property inspections, financial checks, and historical data to classify risk into
categories like low, medium, or high.
The premium is then adjusted according to the risk level. High-risk clients pay more; low-
risk clients pay less. This principle keeps the insurance system fair and financially viable.
Think of it as grading students in a class—everyone is assessed individually, and rewards or
responsibilities are given based on their specific situation.
7. Principle of Loss Minimization (Risk Prevention)
Finally, Aman understood that insurance isn’t just about paying claims; it’s also about
preventing losses. The principle of loss minimization says that the insured must take
reasonable steps to prevent or reduce loss.
For instance, if a client installs smoke detectors and a sprinkler system in their home, the
risk of fire damage reduces. Aman can offer lower premiums because the client is actively
minimizing risk.
This principle encourages responsible behaviour and creates a partnership between the
insurer and the insured. It’s like two people rowing a boat together—both must contribute
to reach the destination safely.
Bringing It All Together
Through Aman’s journey, we see that underwriting is a careful balance of trust,
responsibility, fairness, and risk assessment. Every principle plays a crucial role:
1. Utmost Good Faith – honesty is the foundation.
2. Insurable Interest – insurance protects only genuine interests.
3. Indemnity – restoring, not enriching.
4. Contribution – fairness among multiple insurers.
5. Subrogation – accountability through recovery.
6. Risk Assessment – evaluating and classifying risks carefully.
7. Loss Minimization – encouraging preventive measures.
By following these principles, Aman’s company can protect its clients, remain financially
stable, and contribute to a trustworthy insurance system. Without them, underwriting
would be chaotic, claims would explode, and the company could collapse under the weight
of unchecked risks.
In essence, underwriting is both a science and a responsibility. It requires data, analysis,
and human judgment, guided by principles that ensure fairness and sustainability. A well-
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underwritten policy protects everyone involved, turning risk into a manageable, predictable
part of life.
In conclusion, principles of underwriting are the rules of the game in the insurance world.
They ensure honesty, fairness, and financial discipline while promoting a cooperative
relationship between insurer and insured. Without these principles, insurance would not
function as a reliable safety net. By understanding and applying these principles, Aman—
and anyone in insurance—can confidently navigate the complex world of risk, ensuring
protection for clients and profitability for the company.
SECTION-D
7. What is the impact of legislation and competition on Pricing?
Ans: Impact of Legislation on Pricing
Legislation is like the rulebook of the bazaar. In India, the Insurance Regulatory and
Development Authority of India (IRDAI) is the chief referee, and laws like the Insurance
Act, 1938 and its amendments set the framework.
1. Price Controls and Caps
In some insurance segments — especially motor third-party liability and certain health
products — IRDAI directly prescribes or approves the premium rates.
• Impact: This ensures affordability and prevents overcharging, but it also means
insurers must work within fixed margins.
• Example: Motor third-party premiums are revised annually by IRDAI, based on claim
experience and inflation.
2. Solvency and Capital Requirements
Legislation requires insurers to maintain a solvency margin — a financial cushion to ensure
they can pay claims even in bad years.
• Impact on Pricing: Higher capital requirements mean insurers must price products to
generate enough surplus to maintain solvency. This can push premiums up,
especially for high-risk products.
3. Product Approval and Standardisation
Before launching a new product, insurers must file it with IRDAI (under the “File & Use”
guidelines).
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• Impact: This ensures products are fair, transparent, and not misleading.
Standardised products (like Arogya Sanjeevani health policy) have uniform features
and benefits, which limits how much insurers can differentiate on price.
4. Consumer Protection Rules
Legislation mandates clear disclosure of terms, a free-look period, and restrictions on unfair
practices.
• Impact on Pricing: Compliance costs (training agents, updating documents,
grievance redressal systems) are factored into premiums. While this may slightly
increase prices, it builds trust and reduces disputes.
5. Taxation and Levies
Goods and Services Tax (GST) on premiums, stamp duties on policy issuance, and other
levies directly affect the final price to the customer.
• Impact: Even if the insurer’s base premium stays the same, changes in tax rates can
make the product more or less expensive.
6. Legislative Reforms and Market Entry
Recent amendments — like proposals to allow 100% FDI in insurance and permit agents to
work with multiple insurers — aim to bring in more players and flexibility2.
• Impact on Pricing: More players can mean more competition (lower prices), but also
higher initial marketing and compliance costs for new entrants.
In short: Legislation acts as both a safety net and a boundary line. It protects customers and
ensures industry stability, but it also sets the playing field on which pricing decisions are
made.
Impact of Competition on Pricing
If legislation is the rulebook, competition is the energy of the bazaar — the constant push
and pull between insurers to win customers.
1. Price Wars
When many insurers offer similar products, they may lower premiums to attract customers.
• Impact: Good for customers in the short term, but if prices fall too low, it can hurt
insurers’ profitability and long-term service quality.
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2. Innovation and Value-Added Benefits
To stand out, insurers may add features — wellness programs, faster claim settlement,
digital servicing — without increasing the price much.
• Impact on Pricing: Sometimes these extras are absorbed as marketing costs; other
times, they’re built into the premium.
3. Segmentation and Risk-Based Pricing
Competition pushes insurers to refine their pricing — offering lower rates to low-risk
customers and charging more to high-risk ones.
• Example: A healthy non-smoker may get a cheaper life insurance premium than a
smoker of the same age.
4. Distribution Channel Influence
Different channels (agents, bancassurance, online) have different cost structures.
• Impact: Online sales often have lower acquisition costs, allowing insurers to offer
slightly lower premiums compared to agent-sold policies.
5. Global Players and Best Practices
With liberalisation and higher FDI limits, foreign insurers bring global pricing models and
efficiency.
• Impact: This can lead to sharper, more competitive pricing and better risk
management.
6. Customer Awareness and Comparison Tools
Web aggregators and comparison sites make it easy for customers to compare premiums
instantly.
• Impact: Transparency forces insurers to keep prices competitive and justify any
higher rates with better features or service.
When Legislation and Competition Interact
Sometimes, legislation and competition work hand in hand:
• Example: Allowing agents to sell products from multiple insurers increases customer
choice and competitive pressure, leading to better pricing.
Other times, they pull in different directions:
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• Example: Strict solvency requirements may push prices up, even in a competitive
market, because insurers can’t afford to underprice and risk financial instability.
A Simple Story to Tie It Together
Think of the insurance market as a cricket match:
• Legislation is the umpire — setting the rules, ensuring fair play, and protecting
players from injury.
• Competition is the game itself — each team trying to outscore the other, sometimes
with aggressive batting (price cuts), sometimes with clever fielding (value-added
services).
If the umpire is too strict, the game may slow down (less innovation, higher prices). If the
game is too aggressive without rules, players may get hurt (mis-selling, insurer losses). The
best matches — and the best insurance markets — happen when rules are fair and
competition is healthy.
Conclusion
The impact of legislation on pricing is about creating a safe, fair, and sustainable market —
setting boundaries, ensuring solvency, and protecting customers. The impact of
competition is about pushing insurers to be efficient, innovative, and customer-friendly —
often leading to sharper pricing and better value.
For customers, the sweet spot is when legislation ensures fairness and stability, while
competition ensures affordability and choice. For insurers, it’s about balancing compliance
costs with competitive positioning — a constant dance between playing by the rules and
playing to win.
8. What are the factors having impact on the demand for insurance?
Ans: Imagine a bustling town, where people go about their daily lives, running shops, taking
care of families, traveling to work, or investing in small businesses. In this town, life is
unpredictable—sometimes sunny, sometimes stormy, and occasionally, disaster strikes.
Now, imagine that in this town, there is a wise old man named Mr. Sharma, who always tells
people, “Life is uncertain, but a little preparation can make a huge difference.” This is where
the concept of insurance comes in—it is the tool people use to prepare for the uncertainties
of life. But have you ever wondered why some people in the town rush to buy insurance
while others hesitate? What makes someone eager to invest in insurance while another
person ignores it completely? The answer lies in the factors that influence the demand for
insurance. Let’s take a detailed, journey-like exploration of these factors.
1. Income of Individuals
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Let’s first visit Mr. Sharma’s neighbor, Mrs. Mehta, a schoolteacher with a moderate
income. She carefully plans her expenses and thinks about the future. Income plays a
fundamental role in deciding whether she will buy insurance and how much coverage she
might seek.
When people have higher disposable income, they are more willing to spend on securing
their future. They can afford health, life, and property insurance. Conversely, in families
where income is limited, insurance might feel like a luxury rather than a necessity. For
example, a small shop owner may prioritize daily expenses and rent over buying insurance.
Thus, as income increases, the demand for insurance typically rises because people have the
means to plan ahead financially.
2. Cost of Insurance (Premium)
Now, let’s peek into the office of an insurance agent in the town. The agent explains to Mr.
Sharma that the price of insurance, or the premium, is a deciding factor. If the premium is
very high, fewer people will buy insurance. For instance, a young professional may find life
insurance premiums too expensive and postpone buying it.
However, if insurance companies offer flexible, affordable premiums, more people are likely
to take the step. Discounts, installment plans, or tailored packages attract more buyers. In
essence, the affordability of insurance directly impacts demand—much like how a well-
priced product sells faster in a busy market.
3. Awareness and Knowledge
Let’s meet Ravi, a young college student who never thought much about health insurance.
Awareness and knowledge about insurance products are crucial factors in shaping demand.
People who understand the benefits of insurance—such as financial security during illness,
accident coverage, or protection of family income—are more likely to purchase policies.
In many rural or semi-urban areas, limited awareness can result in low demand. If people
don’t understand how insurance works, or if myths and misconceptions prevail (for
instance, “insurance is a waste of money”), they tend to avoid it. On the other hand,
awareness campaigns, workshops, or word-of-mouth success stories increase confidence
and create demand.
4. Age and Life Stage
Age is like the invisible clock influencing financial decisions. Let’s consider two residents:
Ramesh, a 25-year-old bachelor, and Sita, a 45-year-old mother of three. Ramesh might
focus on health or accident insurance, considering he is starting his career. Sita, on the other
hand, may look for life insurance or pension plans to secure her children’s future.
Younger individuals often underestimate risks and may delay buying insurance, whereas
older individuals, having experienced life’s uncertainties, are more inclined toward it.
Similarly, people planning for retirement or starting families often increase their insurance
coverage. Age and life stage shape the type and amount of insurance demanded.
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5. Occupation and Risk Perception
Next, let’s walk into a construction site. Workers face high accident risks daily. For them,
accident or health insurance becomes a practical necessity. Conversely, office workers in a
low-risk environment may not feel the urgency for certain insurance policies.
Occupation determines exposure to risks. Higher risk encourages more insurance demand.
For example, drivers, pilots, or industrial workers are naturally more inclined toward
insurance policies that mitigate occupational hazards. This factor directly links the perceived
risk of daily life to the insurance purchased.
6. Family Size and Dependents
Back in the Mehta household, there are two young children. The family is concerned about
securing their education and future, even in the event of an untimely mishap. The number
of dependents plays a critical role in deciding insurance needs.
A person with a large family may demand higher life insurance coverage to ensure that
dependents are financially protected. On the other hand, a single individual with no
dependents may not see life insurance as a priority, though health or accident insurance
may still be relevant. Family responsibilities amplify the perceived need for insurance.
7. Government Policies and Incentives
In our town, the government recently launched a health insurance scheme offering
subsidies for low-income families. Government policies can significantly influence insurance
demand. Tax benefits, subsidies, or mandatory insurance laws encourage people to
purchase insurance.
For instance, in India, tax deductions under Section 80C for life insurance premiums have
historically increased the uptake of policies. Similarly, mandatory motor insurance laws
ensure that car owners buy at least third-party insurance. Policies, incentives, and
regulations act as external motivators that drive people toward insurance.
8. Cultural and Social Factors
Insurance is also influenced by culture and social norms. In some communities, relying on
family support is considered sufficient, and insurance is seen as unnecessary. In others,
planning for the future is a norm, and insurance is widely accepted.
Peer influence matters too. If friends, colleagues, or neighbours emphasize the importance
of insurance, individuals are more likely to adopt similar behaviours. Social attitudes, trust in
institutions, and societal habits subtly shape demand for insurance.
9. Economic Environment
Finally, the town’s overall economy plays a role. During periods of economic stability and
growth, people feel confident about investing in insurance. But during recessions, high
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inflation, or financial crises, people prioritize immediate needs and may reduce insurance
spending.
Moreover, insurance companies’ reputation and reliability also influence demand. In times
of economic uncertainty, individuals prefer companies with proven track records, ensuring
that claims will be honoured without hassle.
In conclusion, the demand for insurance is not dictated by a single factor but by a blend of
personal, social, economic, and policy-related influences. Income, affordability, awareness,
age, occupation, family size, government policies, social norms, and the broader economic
environment all interact to shape whether and how much insurance people buy. Like our
town’s residents navigating daily uncertainties, every individual balances risk, resources, and
future goals, ultimately deciding on insurance as a shield against life’s unpredictable storms.
Understanding these factors is essential not only for students of economics or finance but
also for anyone who wishes to plan wisely for the future. Insurance is more than a contract;
it is a story of foresight, security, and responsible planning.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
