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GNDU Question Paper-2024
B.Com 5
th
Semester
GROUP-II: BANKING AND INSURANCE
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 the evolution of life insurance business in India.
2. Explain the organization structure of Insurance Management.
SECTION-B
3. Explain in detail agency commission structures.
4. Discuss the functions of the Insurance Agent.
SECTION-C
5. What is the need of underwriting? Explain in detail the principles of underwriting.
6. What is the role of surveyors ? Discuss the concept of surplus and its distribution.
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SECTION-D
7. What is the impact of taxation and policies on insurance product?
8. What is the relation between Cost Consciousness and Pricing of insurance product?
GNDU Answer Paper-2024
B.Com 5
th
Semester
GROUP-II: BANKING AND INSURANCE
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 the evolution of life insurance business in India.
Ans: The Evolution of Life Insurance Business in India: A Story of Growth and
Transformation
Imagine India as a young country learning to safeguard its people against the uncertainties
of life. The journey of life insurance in India is a fascinating story of risk, trust, and gradual
modernization. Over the centuries, it has transformed from a loosely organized service to a
highly regulated and vibrant industry that touches millions of lives today. Let’s explore this
evolution as a chronological journey, highlighting the key phases, challenges, and
innovations along the way.
1. Early Beginnings: The Seeds of Protection (Before 19th Century)
Long before life insurance became a formal business in India, the concept of protecting
one’s family against financial uncertainties existed in informal ways. Communities and
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families relied on mutual aid, where people would contribute small amounts to help
members in case of sickness, death, or financial hardship. These were mostly informal
arrangements, based on trust and community support.
During this period, India saw no organized insurance companies as we know them today.
The idea of paying a premium in exchange for a guaranteed benefit was largely unknown.
However, this era laid the groundwork for formal life insurance because people started
recognizing the need for financial security beyond their immediate family circles.
2. The Colonial Influence: The Arrival of British Companies (19th Century)
The story of formal life insurance in India begins with the British colonial era. The first
insurance company to operate in India was the Oriental Life Insurance Company,
established in Calcutta (now Kolkata) in 1818. It mainly served European residents, but
gradually Indian customers were also brought in.
By the mid-19th century, several other British insurance companies such as the Bombay
Mutual Life Assurance Society (1870) and Life Insurance Corporation of India (predecessor
companies) began operations. The business was concentrated in major cities like Calcutta,
Bombay, and Madras, and policies were mostly life insurance contracts for wealthy
individuals.
Challenges in this era included:
• Lack of awareness among the general population.
• Policies were expensive and complicated.
• Limited penetration in rural areas.
Still, this period marked the foundation of modern life insurance in India. It introduced the
structured concept of premiums, policy terms, and risk management, paving the way for
growth.
3. The Rise of Indian-Owned Life Insurance Companies (Early 20th Century)
As India moved towards independence, Indian entrepreneurs realized the potential of life
insurance not just as a business, but as a social need. The early 20th century saw the
emergence of Indian-owned insurance companies, which aimed to serve Indian customers
more effectively.
Key companies included:
• Bharat Insurance Company (1907)
• Bombay Mutual Life Assurance Society (1870, later Indian-managed)
• New India Assurance Company (1919)
These companies focused on providing affordable and culturally sensitive insurance
solutions, taking into account Indian lifestyles, social practices, and family structures. They
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began spreading awareness in smaller towns and cities, encouraging ordinary people to save
for their family’s security.
This era also saw the first regulatory measures, with the government realizing the need to
protect policyholders’ interests. The Life Insurance Companies Act of 1912 was enacted,
establishing rules for registration, management, and financial reporting.
4. The Era of Consolidation and Nationalization (Mid 20th Century)
The Indian independence movement created a sense of urgency to safeguard citizens’
interests. The post-independence government noticed that many life insurance companies
were financially weak or poorly managed. As a result, nationalization became the preferred
solution.
In 1956, a landmark event occurred: Life Insurance Corporation of India (LIC) was formed
by merging 245 private life insurance companies. This was a turning point in the evolution
of life insurance in India.
Key impacts of nationalization included:
• Ensured financial security and reliability for policyholders.
• Expanded the reach of life insurance to rural and semi-urban areas.
• Introduced standardized policies and uniform practices.
• Promoted social security through insurance for weaker sections of society.
LIC quickly became a trusted institution, offering a variety of policies like endowment, term,
and money-back plans. The trust and credibility built by LIC during this period still influence
Indian life insurance today.
5. Liberalization and the Entry of Private Players (Late 20th Century – 21st Century)
Until the 1990s, LIC dominated the Indian life insurance market. However, economic
liberalization in 1991 opened the doors for private and foreign players. The government set
up the Insurance Regulatory and Development Authority (IRDA) in 1999, providing a clear
framework for regulation and consumer protection.
Private and foreign companies brought modern technology, innovative products, and
customer-centric services. They introduced:
• Health-linked life insurance policies
• ULIPs (Unit Linked Insurance Plans)
• Online policy management
• Flexible premium payment options
This competition improved the quality of service, transparency, and financial literacy,
allowing customers to choose products tailored to their needs.
6. Life Insurance Today: Technology, Awareness, and Inclusion
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Today, life insurance in India is a dynamic and rapidly growing sector. Key features of the
modern life insurance business include:
• Digital penetration: Online policy purchase, instant quotes, and claim settlements.
• Diverse products: Term plans, child plans, retirement plans, critical illness coverage,
and investment-linked plans.
• Financial inclusion: Reaching rural and low-income families through microinsurance.
• Global partnerships: Foreign collaborations improving product design and
investment strategies.
Life insurance is no longer seen as a luxury but as a financial necessity. Awareness
campaigns, digital platforms, and government initiatives like Pradhan Mantri Jeevan Jyoti
Bima Yojana have made insurance accessible to millions of Indians.
Conclusion: A Journey of Trust and Transformation
The evolution of life insurance in India is like a journey from a small seed of community
support to a giant tree providing shade to millions. It has passed through phases of colonial
introduction, Indian ownership, nationalization, liberalization, and digital revolution. Each
stage added strength, trust, and inclusivity to the system.
Life insurance today not only protects families from financial uncertainty but also
contributes to economic growth by mobilizing savings and investments. The story of life
insurance in India is, ultimately, a story of security, innovation, and hope for every citizen.
This simple timeline captures the journey clearly and can make your answer visually
appealing in an exam.
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2. Explain the organization structure of Insurance Management.
Ans: The Story of Insurance Management: Building a Strong House of Protection
Imagine insurance management as a grand house built to protect people from life’s
uncertainties. The roof shields us from risks like accidents, illness, fire, or loss. But for the
roof to stand strong, the house must have a solid structure—pillars, walls, and rooms, each
with its own role.
This structure is what we call the organization structure of insurance management. It
defines how an insurance company is arranged, how responsibilities are divided, and how
different departments work together to provide security to millions of policyholders.
Let’s walk through this house step by step, exploring every floor and every room.
What is Insurance Management?
Insurance management refers to the planning, organizing, directing, and controlling of
insurance operations. It ensures that:
• Risks are properly assessed.
• Policies are designed and sold effectively.
• Claims are settled fairly.
• Investments are managed wisely.
• Customers remain satisfied and protected.
But to achieve all this, an insurance company needs a clear organizational structure.
Why Organization Structure Matters in Insurance
• Clarity of roles: Who handles underwriting? Who manages claims? Who invests
funds?
• Efficiency: Smooth flow of work between departments.
• Accountability: Each unit is responsible for its function.
• Customer trust: A well-structured insurer inspires confidence.
Without structure, insurance would be like a house without walls—chaotic and unsafe.
Levels of Organization in Insurance Management
The structure of an insurance company can be understood at three levels:
1. Top Management – The roof and pillars (strategic decisions).
2. Middle Management – The walls (coordination and supervision).
3. Operational Level – The rooms (day-to-day activities).
Components of Insurance Organization Structure
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Let’s explore the main departments and functions that make up this structure.
1. Board of Directors and Top Management
• Board of Directors: Sets overall policies, ensures compliance with regulations, and
protects shareholders’ and policyholders’ interests.
• CEO/Managing Director: Provides leadership, sets vision, and coordinates all
departments.
They are like the architects of the house, deciding its design and direction.
2. Underwriting Department
• Role: Evaluates risks and decides whether to accept or reject insurance proposals.
• Tasks:
o Assessing applications.
o Fixing premium rates.
o Designing policy terms.
• Importance: Ensures that the company does not take on unmanageable risks.
Think of them as the engineers who check whether the foundation is strong before
building.
3. Marketing and Sales Department
• Role: Promotes insurance products and acquires customers.
• Tasks:
o Advertising and branding.
o Managing agents and brokers.
o Customer relationship management.
• Importance: Without sales, no premiums flow in, and the company cannot survive.
They are the front door of the house, welcoming customers inside.
4. Claims Department
• Role: Handles policyholder claims when risks materialize.
• Tasks:
o Verifying claims.
o Preventing fraud.
o Settling payments quickly and fairly.
• Importance: Builds trust—customers judge insurers mainly by how they handle
claims.
They are the safety net of the house, ensuring protection when disaster strikes.
5. Actuarial Department
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• Role: Uses mathematics, statistics, and economics to calculate risks and premiums.
• Tasks:
o Designing insurance products.
o Estimating reserves.
o Forecasting future liabilities.
• Importance: Ensures financial stability of the company.
They are the foundation stones, invisible but essential for strength.
6. Finance and Investment Department
• Role: Manages the huge funds collected as premiums.
• Tasks:
o Investing in safe and profitable avenues.
o Maintaining liquidity for claims.
o Ensuring compliance with investment regulations.
• Importance: Insurance companies are also major institutional investors.
They are the treasury room of the house, keeping wealth safe and growing.
7. Legal and Compliance Department
• Role: Ensures adherence to laws, regulations, and ethical practices.
• Tasks:
o Handling disputes.
o Drafting contracts.
o Ensuring compliance with IRDAI (Insurance Regulatory and Development
Authority of India) or other regulators.
• Importance: Protects the company from legal risks.
They are the guardians at the gate, ensuring rules are followed.
8. Human Resource Department
• Role: Manages employees, training, and development.
• Tasks:
o Recruitment and training of agents and staff.
o Performance evaluation.
o Employee welfare.
• Importance: Insurance is a people-driven business; motivated employees are key.
They are the caretakers of the house, ensuring everyone inside works happily.
9. IT and Digital Services Department
• Role: Provides technological backbone.
• Tasks:
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o Online policy issuance.
o Digital claims processing.
o Cybersecurity.
• Importance: In the digital age, IT is the lifeline of insurance.
They are the electric wiring and internet connection of the house, keeping everything
running.
10. Customer Service Department
• Role: Handles queries, complaints, and service requests.
• Tasks:
o Call centers, online chat, and branch support.
o Policy renewals and updates.
• Importance: Retains customers and builds loyalty.
They are the living room of the house, where guests feel comfortable.
Types of Organization Structures in Insurance
Insurance companies may adopt different structures depending on size and strategy:
1. Functional Structure – Departments divided by function (underwriting, claims, etc.).
2. Geographical Structure – Divisions based on regions (North, South, East, West).
3. Product-Based Structure – Separate units for life, health, motor, fire, marine
insurance.
4. Hybrid Structure – Combination of the above.
Challenges in Insurance Organization
• Coordination between multiple departments.
• Regulatory pressure from authorities.
• Technological disruption (AI, blockchain).
• Customer expectations for faster service.
• Globalization and cross-border risks.
The Narrative Angle
Think of an insurance company as a well-orchestrated symphony.
• The Board is the conductor.
• Each department is an instrument—underwriting the violins, claims the drums,
actuarial the piano.
• If one instrument is out of tune, the whole performance suffers.
• But when all play together in harmony, the music is beautiful—customers feel
secure, employees feel proud, and society benefits.
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Conclusion
The organization structure of insurance management is the backbone of the industry.
• At the top, the Board and CEO set direction.
• In the middle, departments like underwriting, claims, actuarial, finance, and
marketing ensure smooth functioning.
• At the base, customer service and IT keep the system running.
This structure ensures that risks are assessed, policies are sold, claims are settled, funds are
invested, and customers are cared for.
In the end, insurance management is not just about money—it is about trust. And trust can
only be built when the house of insurance has a strong, well-designed structure.
SECTION-B
3. Explain in detail agency commission structures.
Ans: Agency Commission Structures: A Story of Business Partnerships
Imagine a bustling marketplace, full of sellers, buyers, and intermediaries. Among them, we
have a shop owner named Mr. Sharma, who produces exquisite handcrafted furniture.
While Mr. Sharma is excellent at making furniture, he struggles to reach customers
scattered across the city and beyond. To solve this problem, he decides to hire an agent—
let’s call her Ms. Aditi—whose job is to sell his furniture to customers on his behalf.
This scenario introduces the heart of agency commission structures: the system that
defines how an agent (Ms. Aditi) is compensated for facilitating business between the
principal (Mr. Sharma) and the customer. The commission is the agent’s reward for
performing this intermediary role, and it is usually structured in a way that motivates the
agent to perform better while keeping the principal’s interests in mind. Let’s explore this
concept in detail, covering all sides.
1. Understanding Agency Commission
At its core, a commission is a fee paid to an agent for services rendered in effecting sales or
transactions. It is usually expressed as a percentage of the transaction value. However,
commission structures can vary depending on business models, industry practices, and
agreements between the agent and principal.
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In our story, Ms. Aditi earns a percentage of every piece of furniture she sells for Mr.
Sharma. If she sells a chair for ₹10,000 and her commission is 5%, she earns ₹500. This
motivates her to sell more, as higher sales lead to higher earnings.
2. Types of Commission Structures
Agency commissions are not one-size-fits-all. They can be structured in different ways to
align the goals of the principal and the agent. Here are the most common types:
a) Flat-Rate Commission
In this structure, the agent receives a fixed percentage of every sale, irrespective of the
volume.
• Example: Ms. Aditi earns 5% on every furniture sale, whether it’s a small chair or a
large dining table.
• Advantage: Simple and easy to calculate.
• Disadvantage: Does not incentivize the agent to sell larger volumes beyond the fixed
rate.
b) Slab or Tiered Commission
Here, the commission percentage increases with higher sales volume or revenue thresholds.
• Example:
o 0–₹50,000 sales → 3% commission
o ₹50,001–₹1,00,000 sales → 5% commission
o Above ₹1,00,000 sales → 7% commission
• Advantage: Encourages agents to sell more, boosting revenue for the principal.
• Disadvantage: Slightly more complex to calculate, but highly motivating.
c) Performance-Based Commission
This is linked to achieving specific targets or KPIs (Key Performance Indicators). It may
include bonuses or incentives in addition to the regular commission.
• Example: If Ms. Aditi sells 50 pieces of furniture in a month, she receives an extra
₹5,000 bonus.
• Advantage: Highly motivating for agents to achieve targets.
• Disadvantage: Can pressure the agent, potentially compromising quality or ethics.
d) Gross Profit Commission
Instead of calculating commission on sales value, it is based on the profit margin earned by
the principal.
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• Example: Mr. Sharma’s cost to make a chair is ₹6,000, selling price is ₹10,000. Profit
= ₹4,000. Ms. Aditi earns 10% of profit = ₹400.
• Advantage: Aligns agent’s interest with profitability, not just sales.
• Disadvantage: Requires transparent profit reporting.
e) Fixed Fee or Retainer with Commission
Sometimes, agents are paid a small fixed fee plus a commission on sales.
• Example: Ms. Aditi gets ₹2,000 per month as retainer + 3% commission on sales.
• Advantage: Provides stability for agents and ensures motivation.
• Disadvantage: Higher fixed costs for the principal.
3. Key Elements of Agency Commission Agreements
A commission structure is effective only when clearly defined. The agreement should cover:
1. Commission Rate: The percentage or flat amount for each sale.
2. Payment Frequency: Weekly, monthly, or after each transaction.
3. Scope of Work: Types of products/services sold and areas of operation.
4. Performance Metrics: Sales targets or revenue thresholds.
5. Termination Clause: Conditions under which the commission stops or changes.
In our story, Mr. Sharma and Ms. Aditi agree that she will handle sales in the northern
region, get 5% commission per sale, and receive payments monthly.
4. Factors Influencing Commission Rates
Several factors influence the choice of commission rate:
• Industry Standard: Real estate agents may earn higher commissions than retail
agents.
• Profit Margins: Higher-margin products allow higher commissions.
• Experience of the Agent: Experienced agents often command higher rates.
• Sales Targets: Aggressive targets may lead to tiered commissions.
• Risk and Responsibility: Agents who take on more responsibility (e.g., marketing or
logistics) may earn higher commissions.
5. Advantages of Commission Structures
• Motivation: Agents are incentivized to increase sales.
• Cost-Efficiency: Principals pay primarily for results, not efforts.
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• Flexibility: Different structures suit different industries and markets.
• Alignment of Interests: Both agent and principal benefit from higher sales or profits.
6. Challenges of Commission Structures
• Short-Term Focus: Agents may prioritize quick sales over long-term relationships.
• Complex Calculations: Tiered or profit-based commissions can be tricky to manage.
• Conflict of Interest: Agents may favor high-commission products, ignoring others.
7. Visualizing Commission Structures
A simple diagram helps illustrate how commission can vary with sales volume:
Interpretation: This represents a tiered commission, where the percentage of commission
rises as sales volume increases, motivating the agent to sell more.
8. Real-Life Example to Wrap It Up
Think about insurance agents, real estate brokers, or freelance salespeople. These agents
often rely entirely on commissions, making the choice of structure critical. A flat commission
may suit beginners, while experienced agents often prefer tiered or performance-based
commissions to maximize earnings. In every case, the structure should balance fairness,
motivation, and profitability.
9. Conclusion
In essence, agency commission structures are the bridge connecting principals and agents.
A well-planned commission structure ensures that:
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1. Agents are motivated and fairly rewarded.
2. Principals gain maximum sales or profits.
3. Transparency and clarity reduce disputes.
In our story, Ms. Aditi sells furniture efficiently, earns a fair commission, and Mr. Sharma’s
business flourishes. Everyone wins, proving the power of a well-designed commission
structure.
4. Discuss the functions of the Insurance Agent.
Ans: The Story of the Insurance Agent: The Bridge of Trust
On a warm afternoon, a young man named Arjun walked into a small office in his town. He
had just started a family and was worried about their future. What if something happened
to him? How would his wife and children survive?
Sitting across the desk was Mr. Mehta, an insurance agent. With patience and empathy, Mr.
Mehta explained how a life insurance policy could protect Arjun’s family, how health
insurance could cover medical bills, and how motor insurance could safeguard his new car.
Arjun left the office relieved, holding a policy document that gave him peace of mind.
This simple story shows the true role of an insurance agent: not just selling policies, but
acting as a bridge of trust between the insurance company and the customer.
Let’s now explore in detail the functions of an insurance agent, step by step.
Who is an Insurance Agent?
An insurance agent is a licensed individual who represents an insurance company and sells
its products to customers.
• He is the face of the company to the public.
• He helps customers understand risks and choose suitable policies.
• He earns a commission for the business he brings.
In short: An insurance agent is both a salesperson and a guide.
Functions of an Insurance Agent
The functions of an insurance agent can be grouped into several categories. Let’s explore
them like chapters in a story.
1. Prospecting and Identifying Customers
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• The first function of an agent is to find potential customers (called prospects).
• He identifies individuals, families, or businesses that may need insurance.
• Example: A young family may need life insurance, a businessman may need fire
insurance, a car owner may need motor insurance.
This is like a farmer identifying fertile land before sowing seeds.
2. Educating and Advising Customers
• Many people don’t fully understand insurance.
• The agent explains the concept of risk, the need for protection, and the benefits of
insurance.
• He advises customers on the right type of policy, coverage amount, and premium.
He acts as a teacher and advisor, not just a seller.
3. Selling Insurance Policies
• The core function is to sell policies on behalf of the insurance company.
• He presents different products, explains features, and helps customers choose.
• He ensures that the sale is ethical and transparent.
This is the sales role, but built on trust and service.
4. Completing Documentation
• Insurance involves paperwork: proposal forms, declarations, KYC documents.
• The agent helps customers fill forms correctly and submit required documents.
• This reduces errors and speeds up policy issuance.
He is like a guide through the maze of paperwork.
5. Collecting Premiums
• In many cases, agents collect the first premium from customers.
• They ensure timely payment of renewal premiums.
• This keeps policies active and prevents lapses.
He acts as a link in the money flow between customer and company.
6. Providing After-Sales Service
• The agent’s job doesn’t end with selling.
• He helps customers with policy servicing:
o Address changes
o Nominee updates
o Policy loans
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o Renewals
• Good after-sales service builds long-term relationships.
He is like a family doctor, always available when needed.
7. Assisting in Claims Settlement
• The most critical function: helping customers when a claim arises.
• He guides them in filing claims, submitting documents, and following up with the
company.
• A supportive agent ensures quick and fair settlement.
This is where the true value of insurance is realized.
8. Acting as a Risk Advisor
• Agents often advise customers on risk prevention.
• Example: Suggesting fire safety measures to a factory owner.
• This reduces claims and builds goodwill.
He is not just a seller, but a risk consultant.
9. Maintaining Ethical Standards
• Agents must follow the code of conduct prescribed by regulators (like IRDAI in India).
• They must avoid mis-selling, false promises, or hiding facts.
• Ethical conduct builds trust in the entire insurance industry.
He is the guardian of trust.
10. Feedback to the Company
• Agents are in direct contact with customers.
• They provide valuable feedback to the company about customer needs, complaints,
and market trends.
• This helps companies design better products.
He is the eyes and ears of the company in the market.
Importance of Insurance Agents
• For Customers: They simplify insurance, provide guidance, and support during
claims.
• For Companies: They generate business, expand reach, and provide market insights.
• For Society: They spread awareness about risk protection and financial security.
Qualities of a Good Insurance Agent
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To perform these functions effectively, an agent must have:
• Good communication skills.
• Knowledge of insurance products.
• Integrity and honesty.
• Patience and empathy.
• Networking ability.
Challenges Faced by Insurance Agents
• Competition from online platforms.
• Customer mistrust due to past mis-selling.
• Complex regulations.
• Need for continuous learning in a changing market.
The Narrative Angle
Think of an insurance agent as a bridge:
• On one side stands the insurance company with its products.
• On the other side stands the customer with his needs and fears.
• The agent connects the two, ensuring that promises made by the company reach the
customer, and the customer’s trust flows back to the company.
Without this bridge, the insurance industry would struggle to reach people, and customers
would remain unprotected against life’s uncertainties.
Conclusion
The functions of an insurance agent go far beyond selling policies.
• He prospects customers, educates them, and sells suitable policies.
• He helps with documentation, collects premiums, and provides after-sales service.
• He supports customers during claims, acts as a risk advisor, and maintains ethical
standards.
• He also provides feedback to the company, helping improve products and services.
In essence, an insurance agent is not just a salesperson—he is a protector, advisor, and
trusted partner in the financial security of individuals and businesses.
So, the next time someone thinks of an insurance agent as “just a salesman,” remind them
of Mr. Mehta in our story—the man who gave Arjun peace of mind. That is the true function
of an insurance agent: to sell not just policies, but protection, trust, and hope.
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SECTION-C
5. What is the need of underwriting? Explain in detail the principles of underwriting.
Ans: Imagine a company named Bright Future Ltd. that wants to raise money to expand its
business. The company decides to issue new shares to the public. They prepare
advertisements, brochures, and all the paperwork. But when the day comes to sell the
shares, something unexpected happens—people don’t buy enough of them. Maybe the
market is weak, or investors are unsure about the company’s future.
Now, what happens if the company doesn’t sell all its shares?
It won’t get the required money, the project may stop midway, and the company’s
reputation might suffer.
Here enters the hero of our story — the underwriter.
An underwriter is like a safety net for the company. He guarantees that all the shares will be
sold, and if the public doesn’t buy them, he himself will purchase the remaining ones. This
process of ensuring the success of a public issue is known as underwriting.
So, underwriting works like insurance for the success of the company’s issue. Let’s
understand this step by step.
Meaning of Underwriting
In simple words, underwriting means giving a guarantee to a company that its shares or
debentures will be sold. If the public does not subscribe to all the shares, the underwriter
promises to buy the remaining unsold shares.
In return, the underwriter receives a commission from the company for taking this risk.
So, we can define underwriting as:
“Underwriting is an agreement whereby the underwriter agrees to take up the shares or
debentures that are not subscribed by the public, in exchange for a commission.”
Need of Underwriting
Now, you might wonder — why do companies need underwriting when they can directly sell
their shares?
Let’s understand the need or importance of underwriting through a few key points.
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1. To Ensure Full Subscription of Shares
When a company issues shares to the public, there is always a risk that not all of them will
be purchased.
If the issue is under-subscribed, it means the company won’t get enough funds.
Underwriting ensures that all shares are sold — either to the public or to the underwriter —
and thus, the company gets the full amount it needs.
2. To Build Confidence Among Investors
When investors see that an issue is underwritten, they feel more confident that the
company is reliable.
They think, “If experts (underwriters) are supporting this company, it must be a safe
investment.”
Hence, underwriting helps in increasing public trust and attracts more buyers.
3. To Help in Launching New Issues Smoothly
When a company is new or not well-known, people hesitate to invest in it. Underwriters—
who are usually banks, financial institutions, or investment agencies—help such companies
by backing their issues.
This helps new businesses enter the market successfully.
4. To Stabilize the Market
Underwriting prevents big fluctuations in the price of shares. If the shares are not sold, the
underwriter purchases them, which keeps the price stable and maintains market
confidence.
5. To Provide Expert Advice
Underwriters are financial experts. They don’t just guarantee sales—they also guide the
company in deciding the price of shares, timing of the issue, and marketing strategies.
Thus, underwriting also helps the company in making wise financial decisions.
6. To Reduce Financial Risk
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For companies, raising funds through the public issue is always risky. Underwriting transfers
this risk from the company to the underwriter.
So, it acts as a shield of protection for the company’s financial stability.
7. To Help in Large-scale Projects
Big industrial projects require huge funds. The public alone might not be able to provide all
of it. Underwriters ensure that such large capital requirements are met without any
shortage.
Principles of Underwriting
Just like a doctor follows certain medical principles before treating a patient, underwriters
also follow a set of professional principles before they accept an underwriting deal. These
principles help ensure fairness, security, and transparency in the whole process.
Let’s discuss them one by one.
1. Principle of Utmost Good Faith
Underwriting is based on trust. Both the company and the underwriter must share all
truthful and relevant information.
The company should not hide its financial position, risks, or legal problems, and the
underwriter should also be honest about his capacity to fulfill the contract.
If either party hides facts, the agreement can become invalid.
2. Principle of Insurable Interest
The underwriter must have a financial interest in the success of the issue. This means the
underwriter should benefit when the shares are sold successfully, and suffer a loss if they
are not.
This principle ensures that the underwriter works genuinely for the success of the
company’s issue.
3. Principle of Indemnity
This principle means the underwriter should be compensated only for the actual loss
suffered.
If the underwriter had to buy unsold shares, the company pays him accordingly. But if the
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public fully subscribes, no extra payment (except commission) is made.
Thus, underwriting doesn’t make the underwriter rich; it just protects him from loss.
4. Principle of Contribution
In many cases, there may be more than one underwriter involved in a single issue.
According to this principle, all underwriters will share the responsibility (and loss, if any) in
the agreed proportion.
No single underwriter bears the whole burden unless mentioned in the contract.
5. Principle of Subrogation
This principle means that once the underwriter compensates the company by buying the
unsold shares, he becomes the owner of those shares.
Hence, he gets all the rights related to them, such as dividends or the right to resell.
6. Principle of Reasonable Expectation
An underwriter should make decisions based on reasonable expectations of market
behavior. He must analyze whether the public issue is likely to be successful and must not
take unnecessary risks.
7. Principle of Consideration
The underwriter gives his guarantee only in return for a commission.
This payment is called the underwriting commission, which is generally a small percentage
of the total amount of the issue.
This principle ensures fairness in the business transaction.
Types of Underwriting (Optional but Useful)
Although not directly asked, knowing the types helps you understand the process better:
1. Firm Underwriting: The underwriter agrees to buy a fixed number of shares, no
matter what.
2. Partial Underwriting: Only a part of the total issue is underwritten.
3. Joint Underwriting: More than one underwriter jointly underwrites the issue.
4. Complete Underwriting: The entire issue is guaranteed by one or more
underwriters.
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Conclusion
In simple words, underwriting is like a protective umbrella for companies that wish to raise
money through public issues. It ensures that their efforts don’t fail even if public response is
poor.
Underwriting helps in:
• Reducing financial risk,
• Building investor confidence,
• Stabilizing the market, and
• Guiding companies through expert advice.
The principles of underwriting—such as utmost good faith, indemnity, contribution, and
subrogation—ensure that the whole process remains honest, balanced, and fair.
Thus, underwriting plays a vital role in the financial world by ensuring the smooth flow of
capital from investors to companies, helping both grow with confidence and security.
6. What is the role of surveyors ? Discuss the concept of surplus and its distribution.
Ans: One rainy evening, a textile factory in Ludhiana caught fire. Flames rose high, machines
were damaged, and goods worth lakhs were destroyed. The factory owner, devastated,
turned to his insurance company for help.
The insurer did not immediately hand over a cheque. Instead, they sent a professional—the
surveyor. This person carefully inspected the site, measured the loss, verified the claim, and
prepared a report. Only after this report did the insurance company decide how much
compensation to pay.
Meanwhile, in the insurer’s head office, another discussion was taking place. The company
had collected crores in premiums from thousands of policyholders. After paying claims and
expenses, a large amount of money remained. This was called the surplus. The management
now had to decide: How should this surplus be distributed? Should it be reinvested, kept as
reserves, or shared with policyholders as bonuses?
This story captures the two important aspects of insurance management we are about to
discuss:
1. The role of surveyors in claims settlement.
2. The concept of surplus and its distribution.
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Part I: The Role of Surveyors
1. Who is a Surveyor?
A surveyor in insurance is a licensed professional appointed by the insurance company to
assess and verify the extent of loss or damage claimed by the insured.
• They act as independent experts.
• They ensure that claims are genuine, fair, and accurate.
• In India, surveyors are regulated by the Insurance Regulatory and Development
Authority of India (IRDAI).
In simple words: A surveyor is like a referee in a match—ensuring fairness between the
insurer and the insured.
2. Functions of a Surveyor
The role of surveyors can be broken down into several key functions:
(a) Inspection of Loss
• Visit the site of accident, fire, theft, or damage.
• Examine the extent of loss to property, goods, or assets.
• Take photographs, measurements, and samples if needed.
(b) Verification of Cause
• Check whether the cause of loss is covered under the policy.
• Example: If a fire was caused by negligence, is it still payable?
(c) Estimation of Loss
• Calculate the monetary value of the damage.
• Compare with the sum insured and policy terms.
(d) Checking Documents
• Verify invoices, stock registers, repair bills, and other documents.
• Ensure there is no exaggeration or fraud.
(e) Preparing the Survey Report
• Submit a detailed report to the insurer.
• Recommend the amount payable under the claim.
(f) Advising on Risk Prevention
• Suggest safety measures to prevent future losses.
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• Example: Installing fire extinguishers or CCTV cameras.
3. Importance of Surveyors
• Fairness: Protects both insurer and insured.
• Expertise: Brings technical knowledge in engineering, fire safety, marine cargo, etc.
• Fraud Prevention: Detects false or inflated claims.
• Trust Building: Customers trust insurers more when claims are assessed
professionally.
Without surveyors, insurance would be like a cricket match without umpires—chaotic
and unfair.
4. Example
If a car insured for ₹10 lakh meets with an accident, the owner may claim ₹5 lakh. The
surveyor inspects the car, checks repair estimates, and finds the actual loss is ₹3.5 lakh.
Based on this report, the insurer pays ₹3.5 lakh, ensuring fairness.
Part II: Concept of Surplus and Its Distribution
Now let’s move to the second part of our story—the surplus.
1. What is Surplus?
In insurance, surplus is the excess of income over expenditure.
• Income comes mainly from premiums and investment earnings.
• Expenditure includes claims paid, operating expenses, and reserves.
Formula: Surplus = Total Income – (Claims + Expenses + Reserves)
2. Sources of Surplus
• Premiums collected from policyholders.
• Investment income from government securities, bonds, shares, etc.
• Savings from efficient management (lower expenses, fewer claims).
3. Importance of Surplus
• Indicates financial strength of the insurer.
• Provides funds for expansion and innovation.
• Builds reserves for future uncertainties.
• Allows sharing of benefits with policyholders.
4. Distribution of Surplus
The distribution of surplus depends on the type of insurance company and policies.
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(a) In Life Insurance
• Surplus is often shared with policyholders in the form of bonuses.
• Example: Reversionary bonus, cash bonus, or loyalty additions.
• This makes life insurance policies more attractive.
(b) In General Insurance
• Surplus is usually retained for reserves and expansion.
• Sometimes, dividends are paid to shareholders.
(c) Among Stakeholders
• Policyholders: Receive bonuses or reduced premiums.
• Shareholders: Receive dividends.
• Company: Retains part of surplus for reserves and solvency.
5. Methods of Distribution
• Cash Bonus: Paid directly to policyholders.
• Reversionary Bonus: Added to the sum assured, payable at maturity or death.
• Reduced Premiums: Future premiums are lowered.
• Dividends: Paid to shareholders in case of joint-stock insurers.
• Reserves: Retained for solvency and future claims.
6. Example
Suppose an insurance company collects ₹500 crore in premiums.
• Claims paid = ₹300 crore
• Expenses = ₹100 crore
• Reserves = ₹50 crore
Surplus = ₹500 – (300 + 100 + 50) = ₹50 crore
This ₹50 crore may be distributed as:
• ₹20 crore as bonuses to policyholders.
• ₹15 crore as dividends to shareholders.
• ₹15 crore retained as reserves.
Linking the Two Concepts
Surveyors and surplus may seem unrelated, but they are connected.
• Surveyors ensure that claims are fair and accurate.
• This prevents overpayment and protects the company’s finances.
• By controlling claims, surveyors indirectly help in creating surplus.
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• The surplus, in turn, benefits policyholders and shareholders.
Thus, surveyors are like gatekeepers, and surplus is the treasure chest they help
protect.
The Narrative Angle
Think of an insurance company as a kingdom.
• The surveyors are the inspectors who check damages after battles, ensuring
compensation is fair.
• The surplus is the kingdom’s treasury, filled with taxes (premiums) and trade profits
(investments).
• The king (management) must wisely distribute this surplus—some for the people
(policyholders), some for nobles (shareholders), and some kept aside for future wars
(reserves).
Only when both roles are performed well does the kingdom remain strong and prosperous.
Conclusion
• Surveyors play a crucial role in insurance by inspecting losses, verifying claims,
estimating damages, preventing fraud, and ensuring fairness. They are the referees
who maintain balance between insurer and insured.
• Surplus is the excess of income over expenditure in insurance operations. It reflects
financial strength and is distributed among policyholders (bonuses), shareholders
(dividends), and reserves for future stability.
Together, surveyors and surplus management ensure that insurance companies remain
trustworthy, solvent, and beneficial to society.
So, the next time a factory fire breaks out or a policyholder receives a bonus, remember:
behind the scenes, surveyors and surplus distribution are silently shaping the fairness and
strength of the insurance world.
SECTION-D
7. What is the impact of taxation and policies on insurance product?
Ans: A Fresh Beginning – The Story of Riya and Her Insurance Journey
Imagine a young professional named Riya. She has just started her career, earns a decent
salary, and wants to secure her future. Her friend advises her to buy an insurance policy —
not only to protect her family but also to save tax.
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When Riya meets the insurance advisor, she learns that the world of insurance is not just
about safety and protection; it is also deeply connected with government taxation rules
and financial policies. These two – taxation and government policies – shape how insurance
products are designed, sold, and purchased.
So, let’s walk through this world of insurance step by step, understanding how taxation and
policies affect it, just like Riya did.
1. Understanding the Basics – What Are Insurance Products?
Before diving into taxation and policies, we must understand what insurance products really
are.
An insurance product is a financial agreement between the insurer (insurance company)
and the insured (policyholder). In exchange for a premium, the insurer promises to provide
compensation in case of certain events such as:
• Death or illness (life or health insurance)
• Damage or loss (motor or property insurance)
These products serve three key purposes:
1. Protection – Financial safety in tough times.
2. Savings and Investment – Many life insurance plans combine protection with long-
term savings.
3. Tax Benefits – Government allows tax deductions to encourage people to buy
insurance.
And this is where taxation and policies step into the picture.
2. The Role of Taxation in Insurance
Taxation plays a powerful role in shaping people’s financial decisions. Governments often
use tax incentives to encourage socially desirable behavior — like saving for the future,
investing in health, or protecting dependents.
Insurance is one such area. Let’s explore how taxation impacts insurance products from
different angles.
A. Tax Benefits for Policyholders
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The most direct impact of taxation is seen in tax benefits given to individuals who buy
insurance. These benefits make insurance more attractive and affordable.
(i) Life Insurance
• Under Section 80C of the Income Tax Act (India), premiums paid for life insurance
policies are eligible for deduction up to ₹1.5 lakh per year.
• This encourages people to buy policies not just for protection but also for tax
savings.
• The maturity proceeds (the amount received after policy ends) are often tax-free
under Section 10(10D), if certain conditions are met (like the premium not exceeding
10% of the sum assured).
This means Riya, if she buys a life insurance policy, can reduce her taxable income while
securing her family’s future.
(ii) Health Insurance
• Under Section 80D, individuals can claim deductions on premiums paid for health
insurance for themselves, their family, or parents.
• The maximum deduction can go up to ₹25,000 for self/family and an additional
₹50,000 for senior citizen parents.
• This policy encourages citizens to invest in healthcare safety.
(iii) Pension Plans
• Contributions made towards pension or annuity plans (like National Pension Scheme
or pension-linked insurance) are eligible for tax deductions.
• The aim here is to promote retirement security and reduce future financial
dependence.
B. Taxation on Insurance Companies
Taxation doesn’t just affect policyholders — it also affects insurance companies themselves.
Insurance companies must pay corporate taxes on their profits, but the government
sometimes offers tax relaxations or deductions to support the growth of the insurance
industry.
For instance:
• Lower tax rates or exemptions for re-investing profits in government securities.
• Special tax treatment for different types of insurance (life, health, general) to ensure
fair growth in all sectors.
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These tax structures influence how insurance companies design products, set premium
rates, and manage claims.
C. Indirect Taxes and Policy Pricing
Insurance services are also subject to indirect taxes such as GST (Goods and Services Tax).
• Currently, insurance attracts an 18% GST rate in India.
• This tax increases the cost of premiums, especially for high-value policies.
• Therefore, higher GST can sometimes discourage people from purchasing insurance,
especially those from lower income groups.
So, when Riya sees her premium amount, part of it actually goes toward taxes, which
indirectly affects her decision-making.
3. The Role of Government Policies in Insurance
Taxation is one side of the coin; government policies form the other.
Policies determine how the insurance industry functions, how companies operate, and how
customers are protected.
Let’s look at the major ways policies influence insurance products.
A. Regulatory Framework
In India, the insurance sector is regulated by the Insurance Regulatory and Development
Authority of India (IRDAI).
IRDAI ensures that:
• Insurance products are transparent and fair.
• Companies maintain financial stability.
• Policyholders’ interests are protected.
The authority also decides:
• The types of products that can be introduced.
• The maximum commission agents can charge.
• The minimum return or sum assured in certain policies.
Thus, policies by IRDAI ensure that customers like Riya get reliable and safe insurance
options.
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B. Liberalization and Foreign Investment Policies
Government policies on foreign investment (FDI) also affect the insurance market.
For example, when the Indian government increased FDI in insurance from 26% to 74%, it
allowed more global insurers to enter the market.
This led to:
• More competition
• Better product innovation
• Improved customer service
• Lower premium rates in some areas
So, policies encouraging foreign participation have made insurance products more diverse
and competitive.
C. Social and Welfare Policies
The government also uses insurance as a tool for social welfare.
Policies like:
• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
• Pradhan Mantri Suraksha Bima Yojana (PMSBY)
• Ayushman Bharat Health Scheme
These government-backed insurance programs aim to cover low-income groups, providing
them affordable access to financial protection.
Hence, government policies ensure that insurance is not just for the rich, but a right for
every citizen.
4. The Combined Effect – How Taxation and Policies Work Together
Taxation and government policies together create a cycle of growth and security in the
insurance sector.
Aspect
Taxation Impact
Policy Impact
Combined Result
On
Customers
Encourages buying
insurance through tax
savings
Ensures fair products
and protection
Increased participation
in insurance
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On
Companies
Affects profitability and
pricing
Regulates operations
and promotes
innovation
Balanced and stable
industry
On
Economy
Promotes savings
culture
Expands social security
network
Economic stability and
reduced financial risk
Diagram: The Impact of Taxation and Policies on Insurance Products
5. Conclusion – Building a Balanced Future
Riya finally decides to buy a term insurance plan and a health policy. She is happy because
she not only safeguards her family’s future but also saves a good amount in taxes.
Through her story, we see how taxation and government policies act as the backbone of
the insurance industry:
• Tax incentives make insurance appealing to individuals.
• Government policies ensure fairness, growth, and protection.
Together, they create a healthy insurance ecosystem where individuals, companies, and the
nation all benefit.
So, the next time someone buys an insurance plan, they are not just making a personal
financial decision — they are also participating in a policy-driven system that promotes
security, savings, and stability for the entire society.
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8. What is the relation between Cost Consciousness and Pricing of insurance product?
Ans: The Story of Cost Consciousness and Pricing of Insurance Products
One morning in the boardroom of a large insurance company, the CEO asked a simple but
powerful question: “Why do some of our products sell like hotcakes, while others struggle to
find buyers?”
The actuary replied, “Because of pricing. If our premiums are too high, customers walk
away. If they are too low, we risk losses.”
The finance manager added, “And pricing depends on how conscious we are about our costs.
Every rupee we spend—on administration, marketing, claims handling—affects the final
price of our insurance products.”
This conversation captures the essence of our topic: the relationship between cost
consciousness and pricing of insurance products.
Understanding the Two Concepts
1. Cost Consciousness
• Meaning: Cost consciousness means being aware of, controlling, and minimizing
costs in every aspect of business operations.
• In insurance, costs include:
o Claims costs (the biggest portion).
o Administrative costs (salaries, offices, IT systems).
o Distribution costs (commissions to agents, advertising).
o Regulatory costs (compliance, solvency requirements).
In simple words: Cost consciousness is the discipline of managing expenses wisely.
2. Pricing of Insurance Products
• Meaning: Pricing in insurance means deciding the premium that policyholders must
pay.
• Premiums must be:
o Adequate (cover expected claims + expenses + profit).
o Competitive (affordable compared to rivals).
o Fair (not exploitative, not underpriced).
In simple words: Pricing is the art of balancing protection for customers with
sustainability for insurers.
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The Relationship Between Cost Consciousness and Pricing
Now let’s connect the dots.
• If an insurance company is cost-conscious, it keeps expenses low.
• Lower expenses mean premiums can be priced more competitively.
• Competitive pricing attracts more customers, increasing market share.
• On the other hand, if costs are high, premiums rise, making products unattractive.
Thus, cost consciousness directly influences the pricing of insurance products.
How Costs Affect Pricing
Let’s break down the cost components and see how they impact pricing.
1. Claims Costs
• The largest expense for insurers.
• If claims are frequent or fraudulent, costs rise.
• Cost-conscious insurers invest in risk assessment, fraud detection, and preventive
measures.
• Result: Lower claims costs → Lower premiums.
2. Administrative Costs
• Salaries, rent, IT systems, paperwork.
• If these are bloated, premiums must rise to cover them.
• Cost-conscious insurers use automation, digital platforms, and lean management.
• Result: Efficiency reduces costs → Competitive pricing.
3. Distribution Costs
• Commissions to agents, marketing campaigns.
• If distribution is inefficient, costs rise.
• Cost-conscious insurers balance between traditional agents and digital channels.
• Result: Smart distribution keeps premiums affordable.
4. Regulatory and Capital Costs
• Insurers must maintain reserves and solvency margins.
• Cost-conscious financial management ensures compliance without waste.
• Result: Stable pricing without sudden hikes.
Example Story
Imagine two insurance companies:
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• Company A is cost-conscious. It uses digital platforms, reduces paperwork, and
trains agents to prevent fraud. Its expenses are 15% of premiums.
• Company B is careless. It has high admin costs, inefficient claims handling, and pays
excessive commissions. Its expenses are 30% of premiums.
Both face the same claims costs. But Company A can price its products at ₹10,000 per year,
while Company B must charge ₹12,000 for the same coverage.
Customers naturally prefer Company A. This shows how cost consciousness leads to
better pricing and competitiveness.
Benefits of Cost Consciousness in Pricing
1. Competitive Advantage
o Lower premiums attract more customers.
2. Customer Satisfaction
o Affordable products increase trust and loyalty.
3. Profitability
o Efficient cost management ensures profits even at lower premiums.
4. Market Expansion
o Competitive pricing allows insurers to reach rural and low-income markets.
5. Sustainability
o Cost control ensures long-term survival in a competitive industry.
Risks of Ignoring Cost Consciousness
• Overpriced Products: Customers shift to competitors.
• Underpriced Products: Losses mount, leading to insolvency.
• Reputation Damage: Customers lose trust if premiums rise suddenly.
• Regulatory Trouble: Inefficient cost management may breach solvency norms.
Practical Strategies for Cost-Conscious Pricing
1. Use of Technology
o Online policy issuance, AI-based underwriting, digital claims.
2. Fraud Detection Systems
o Prevent false claims, saving huge costs.
3. Efficient Distribution
o Mix of agents, bancassurance, and digital channels.
4. Lean Administration
o Reduce paperwork, automate renewals.
5. Data Analytics
o Predict risks accurately, price policies fairly.
Real-Life Illustration
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• In India, new-age insurers like digital-first companies (e.g., Acko, Digit) have
disrupted the market.
• By being cost-conscious (no physical branches, online sales, automated claims), they
offer motor insurance at lower premiums compared to traditional insurers.
• This shows how cost consciousness directly translates into competitive pricing.
The Narrative Angle
Think of insurance pricing as cooking a meal.
• The ingredients are the costs (claims, admin, distribution).
• The chef is the insurer, who must prepare the dish (policy) at the right price.
• If the chef buys ingredients wastefully, the dish becomes too expensive, and
customers won’t buy it.
• But if the chef is cost-conscious—buying smartly, avoiding waste—the dish is tasty
and affordable.
In the same way, cost consciousness ensures that insurance products are priced attractively,
fairly, and sustainably.
Conclusion
The relationship between cost consciousness and pricing of insurance products is
inseparable.
• Cost consciousness means controlling claims, administrative, distribution, and
regulatory costs.
• Pricing means setting premiums that are adequate, competitive, and fair.
• When insurers are cost-conscious, they can price products attractively, gain market
share, satisfy customers, and remain profitable.
• When they ignore costs, products become overpriced or unsustainable, leading to
losses and reputational damage.
In the end, cost consciousness is not just about saving money—it is about building trust,
ensuring fairness, and making insurance accessible to all.
“This paper has been carefully prepared for educational purposes. If you notice any mistakes or
have suggestions, feel free to share your feedback.”
