Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS

OBJECTIVES At the end of this lesson, the student should have understood
1. 2. 3. 4. 5. The basic concepts relating to insurance business The meanings of the words 'peril' and 'risk' Different kinds of risks The ways of managing risk Importance of insurance on society and economy

PRELIMINARY WHAT IS LIFE ASSURANCE, how it is being operated, what are its basic principles, are all studies, which are fascinating, but somewhat complicated exercise. It will not be an exaggeration if it is said that such an exercise will prove not only to be interesting but unforgettable also. For such an exercise to be fruitful one must be prepared to understand and appreciate certain seemingly conflicting principles, the invisible linkage between them and even some gaps that seemed to exist between them. Such underlying principles when closely studied will reveal its scientific background based on Actuarial principles; a study based on high degree mathematical analysis.

Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 02) Life Insurance being basically a business run on scientific principles, has over a period undergone rapid changes and today exists as a social necessity affording financial protection to innumerable number of persons, who may unfortunately die prematurely or those who live even beyond their earning period. In the present day context, living too long is as much a problem as dying too young. The funds accumulated in the process of Insurance are utilized for Nation building activities fulfilling the twin objectives of providing for individual as well as National financial needs. (All good insurance companies have huge funds, accumulated through payments of small amounts of premia of individuals. These funds are invested in ways that contribute substantially towards the economic development of the country in which they do business.) The scientific exercise of Insurance is based on certain first

principles and these first principles have been extensively used in ensuring that the business of Insurance functions on firm and established foundations. As it is difficult to segregate principles and practice, if one wishes to know something about Life Insurance, he has to first understand the first principles. The first thing that we will be doing in the study of Life insurance is to understand the linkages that exist between Theory and Practice. Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 03) An intelligent person like you who is on the threshold of ENTERING A LUCRATIVE AND INTERESTING sales career in a life insurance institution, already knows that a life office issues policies, collects premium and pays claims on policies which results either on death or maturity; in such a situation you will be interested to know how insurance premium is computed, how claims are settled, how insurance policies serve as an useful tool for customer and further more how insurance institutions serve as instruments for individual and social security and as a tool for economic development. You will also be interested to know the secrets of successful selling and other connected details. And how a career in insurance selling can be highly rewarding and satisfactory one. WHAT IS INSURANCE Insurance is the business of protecting the economic value of an asset. An asset is defined as something which generates income to its owner. An asset can be lost or destroyed due to various reasons: like floods, fire, riots, death, etc. They are called hazards or perils. More often than not, the loss of an asset will result in the complete ruination of the owner. Even though Insurance cannot physically protect an asset, it can compensate the economic loss arising out of an unexpected occurance of an event. Perils are therefore unexpected occurences of events and risk is the possibility of damages arising out of peril. The damage may or may not occur, which means, when we use the word risk, there is an element of

uncertainty. Insurance guards against such uncertainties, properties and people are exposed to. It therefore goes without saying that if there is no risk, there is no need for insurance. In other words, it is an element of uncertainty which creates the need for insurance. Risks cannot be prevented or avoided; so they are transferred to an insurance company. By availing insurance, the individual transfers his responsibility of continuous generation of income even in the event of his death to an insurance company. Only economic consequence can be insured. Examples of noneconomic losses are love and affection, sentimental attachment and creative abilities. Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 04) HOW INSURANCE FUNCTIONS? INSURANCE IS COOPERATION IN ACTION. (The mechanism of insurance is very simple. People who are susceptible to losses arising out of accidents or perils form an association among themselves and agree that in the event of any one or more among them suffer losses as a result of such a peril, the others will come to the rescue of person/s incurring losses. By this process, the losses of a few are shared by many thereby minimizing the impact of such losses. In other words, the risk is spread among the community and the likely huge impact on one is reduced to smaller manageable impact on all. This is a boon to all those in the group, because those who incur losses are indemnified and those who do not incur losses, will have the satisfaction that by making a small contribution (premium) they will have the peace of mind that even in case of catastrophic losses, they will still be in business and not out of it. The manner in which the loss is to be shared can be determined before-hand. Insurance companies have the role to collect the share in advance and create a fund from which the losses are paid.) Example - Let us take a group of 1000 taxi owners in a city who agree to indemnify losses to any of their vehicles in the case of accidents. If the value of each vehicles is Rs 2 lakhs and in a year five vehicles got involved in accidents resulting in a loss of Rs 5 lakhs, the loss of Rs 5 lakhs is to be shared by 1000 persons as per their agreement, which means each one of them has to contribute Rs 500/=. By making a small payment of Rs 500/= they

have ensured that in the event of their vehicle whose value is Rs. 2 lakhs is lost or damaged they are completely protected. THIS IS INSURANCE IN ACTION. P01 | P02 | P03 | P04 | P05 | P06 | P07 | P08 | P09 | P10 | P11 | P12 | P13 | P14 | T01 Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 05) DEFINITION OF INSURANCE Insurance is an Economic based on the principle of mutuality for the purpose of raising a fund, the need for which arises because of chance occurrences of nature, whose occurrences can fairly be estimated. international Congress of Actuaries, 1906 - Dictionary of Life Insurance (Pitmans) Every term in this definition is important -

the uncertainty of loss caused by perils.

exposed to similar risks and making each one contribute to the loss whether he actually suffers or not. hence it is a cooperative enterprise - each for all and all for each. Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 06)

an adequate fund out of which compensation can be found in money for the losses sustained by those who contribute to the fund. It follows that an Insurance organization is a financial institution collecting money and paying money. The contribution by the Insured which is the price charged is called the PREMIUM. Payments made to contributors are called amounts paid to meet CLAIMS. The contributions paid by the INSURED accumulate to a fund called LIFE FUND. When Insurance is organized as a business enterprise, the contributions (Premium) should be adequate not only to meet the cost of claims, but also to provide the expense for running the business and to leave reasonable profit for the enterpreneur.

erils whose occurrence can reasonably be estimated. Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 07) WHAT IS LIFE INSURANCE? Having seen what Insurance is, let us try to find out what is Life Insurance; how it operates; to whom it is required and all other connected details. Perils associated with life are too many. One's life is put to an end by Death. We have just seen how losses arising out of perils in Non Life are indemnified by the process of insurance. While in the case of Non-life Insurance, the accident may or may not happen, in the case of life insurance death is bound to happen; the time when it will take place being the only uncertainty. In the event of death of the bread-winner, his earning ceases resulting in deprivation of income to his dependents. While the mental agony to the next of kin as a result of death is unavoidable and has to be borne by them patiently, at least the financial loss as a result of loss of earnings can be made good. This is the function of Life Insurance. In the case of Non-Life Insurance, indemnification of financial loss is taken care of by insurers. In the case of life insurance, the principle of indemnity does not apply in principle since the value of human life is indeterminate, because his earning potential depends on a host of circumstances, while in the case of insuring physical assets like a car, a house, a factory, it is possible to determine exactly its replacement value at any particular point of time. Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 08) In the case of Life insurance instead of indemnification, insurers try to make good the loss of earnings arising as a result of the death of the bread-winner. Because death is certain, the Life Insurance procedure assumes an important role in the concept of Insurance. Let us try to understand the concepts through two case studies. Example:- There are 1000 persons aged 40 normal (standard)

lives - it is estimated that 10 persons of the group die during the year. If the economic value of the loss suffered by the family of each person is Rs 15000/- the total loss will be Rs 1,50,000/-. If each person contributes Rs 150/- a year, the total accumulated amount will be sufficient to pay to the dependents of 10 persons dying, Rs 15,000/- each. Thus the risks in case of 10 persons are shared by 1000 persons. THIS IS LIFE INSURANCE IN ACTION. In the case of a human being, he/she may have made arrangements of his/her needs after his/her retirement. These may have been made on some expectations like linking his/her date of retirement and the possibility of his/her living for a minimum period of 15, 20, 25, etc, years. He/she assumes that his/her children will look after him/her when his/her income ceases. If any of these expectations do not become true, the original arrangement would become inadequate and there could be difficulties. Living too long can be as much a problem as dying too young. These are risks, which need to be safeguarded against.

Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 09)

DEFINITION OF LIFE INSURANCE Life insurance is Contract between two persons; one person agreeing to pay a given sum on the happening of an event, contingent upon the duration of human life; the other person agreeing to pay the prescribed amount in Instalments or in a Lump Sum; the duration of payments being death or the efflux of the Agreed period, whichever is early. (by Benson) HISTORY OF LIFE INSURANCE If we start tracing the history of Life Insurance it will prove to be a sweet exercise. it is seen that the underlying concept of Life Insurance is nothing but making good to the dependents the loss of earnings of the breadwinner, in the event of his/her unfortunate death. IN our country, even from the days of Indus Valley Civilization, the provision of taking care of the dependents of those dying was practiced. Further, the concept of joint family system in itself is a method of taking care of the dependents of those who die prematurely. In Hamurabhi-Manu-Manav Dharma Shashtra - there are mentions about taking care of the dependents of those dying as also taking care of people during

old age. The terms YOGAKSHEMA is found in RIG VEDA thereby indicating the existence of some type of joint family system even 3000 years ago. In the times of Buddha, mention about the existence of Burial System is available, thereby indicating the concept of mutual welfare, which is nothing but the existence of Life Insurance in action, though not termed as 'Life Insurance'.

Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 10)

ORIGIN OF LIFE INSURANCE The first life insurance policy was reported to have been issued in England in AD 1583 to one Richard Martin, citizen and alderman of London on the life of William Gibbon, a citizen and salter of London. The policy was for a period of twelve months at a premium of 8 pounds per cent. The first Insurance Company to be established was Amicable Society in 1705, which issued policies covering various periods. With the development of Mortality Tables, Life Assurance acquired a scientific character. The equitable Society, founded in 1762, was the first Society established on scientific basis practicing Insurance. The first Indian insurance company to be started was the Bombay Mutual Assurance Society Ltd, formed in 1870.This was followed by the Oriental Life Assurance Company (1874), the Bharat (1896), and the Empire of India (1897). With the increasing number of Life Insurance Companies, the INSURANCE ACT, 1938 was passed to regulate and control them. This was done in the interest of innumerable number of policyholders whose hard earned money was collected as Trust Money by these companies. In the year 1955, nearly 250 companies were in existence with no protection or guarantee to the policyholders money. By 1956, the life insurance business was nationalised and the LIFE INSURANCE CORPORATION OF INDIA (LIC), came into existence on 1st SEPTEMBER 1956, with assets and liabilities of 245 insurance companies existing in 1956.

Chapter 1

INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 11)

The main objectives of Nationalisation were:1. 2. 3. 4. 5. To provide Security to the policyholders; To utilize the funds for nation-building activities; To avoid unhealthy competition; Abolish malpractices; and To spread the message of Insurance to every nook and corner of the country.

By the process of Nationalisation, excepting few Government (Central/State) Departments, who were allowed to provide Insurance protection to their employees, there was only a single insurer which was authorized to accord Life Insurance Protection. (But after the amendments to the relevant laws in 1999, several new players have come in to the insurance business. New insurers have been registered making the business of insurance highly competitive.) Even though the business of life insurance was functioning in a fairly satisfactory manner, it was felt by the Government that some grey areas required improvement, as detailed here-under: As at the beginning of the new millennium, 1. Only one in five of the Insurable persons have been given the cover of Life Insurance protection; 2. The policyholders have to be provided better service by innovation of new product and after sales service;

Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 12)

With the above avowed objectives, the Central Government decided to open up the Insurance Business to private Insurers also, who will compete with the Nationalised Insurance Institutions. Accordingly, the Central Government brought in the Insurance Regulatory and Development Bill. By this legislation, susequently notified as Insurance Regulatory and Development Act-1999, it was felt that the Policyholders will get a better deal

and also the number of persons who will get the insurance protection will improve substantially. Acceptability of Life Insurance has increased by leaps and bounds during the last 50 years as the following figures indicate. ADVANTAGES OF LIFE INSURANCE
It is superior to an ordinary savings plan - In the event of death, the amount assured for which premium was paid will become payable. In the case of other forms of savings, the accumulated amount with interest till date of death alone will become payable. Insurance encourages compulsory savings and forces thrift - In the life insurance process, if the premium is not paid on the due date, the policy will lapse resulting in the loss of valuable insurance protection - forcing the policyholder to continue paying premium, thereby acting as a method of compulsory saving in addition to forcing thrift. Easy settlement and protection against creditors - Because of the facility of nomination and assignment, the insurance proceeds can be collected faster by the heirs. Further, under of the provisions of Married Women's Property Act, 1874, the proceeds of a policy are not liable for attachment by creditors.

Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 13)

Marketability and Suitability for quick borrowing - In the event of the policyholder not in a position to pay premium or requiring money for some urgent expenses, there are provisions like SURRENDER, availing of loans from Insurers or Banks, by assigning the policy. - By paying insurance premia, the assured obtains considerable relief in Income Tax etc. OBJECTS OF INSURANCE Proposals are normally entertained where the object of assurance is legal: Examples 1. 2. 3. 4. 5. Family Protection; Provision for Old Age; Tax Concessions; Housing Loans; To serve as collateral security to educational funds in respect of loans advanced for educational purposes; 6. To provide donations to charitable institutions like hospitals

and schools. 7. To create `Estate' for beneficiaries under provisions of Section 6 of MWP Act, 1874. ROLE OF INSURANCE IN THE DEVELOPMENT OF THE ECONOMY Insurance companies, particularly Life Insurance companies, collect huge amounts of money from their policyholders on a long term basis.

Chapter 1 INTRODUCTION TO INSURANCE - CURRENT TRENDS (Page 14)

The life insurance contracts are long-term contracts. The premium structure is so designed that the companies collect more money than what is required to cover risks in the earlier years, because of the level premium system. This amount is utilized for covering risks in later years when the risk premium will be more than the amount collected by way of annual premium. The excess amount collected in the eartier years with accrued interest will accumulate to a very large amount which will be the Trust Money of the poiicyholders and have to be invested properly, providing maximum yield to them. As the amount accumulated is public money, it has to be utilized for public benefit instead of enriching the coffers of private individuals. Government therefore has, through legislation, detailed the procedure of such investments 65% of such investments have to be in Government securities and socially purposive investments and not more than 20% of the investment can be in equities. The socially purposive investments are for:1. 2. 3. 4. Generation and Distribution of electricity; Housing Schemes; Piped water supply and sewerage projects/schemes; Development of Road Transport and Industrial Development.

It will thus be seen that the Insurance Companies play a vital role in improving the living conditions of people through investment in Infrastructure Projects besides helping Industrial Development.

Chapter 02 PRINCIPLES OF LIFE INSURANCE

OBJECTIVES At the end of his lesson, the student should have understood
1. 2. 3. 4. the legal requirements for an insurance contract The unique principles that govern insurance contracts Difference between life and general insurance contracts Needs of people for life insurance

Just as a foundation is the base of a multi-storied building, basic principles forms the platform for any business venture. Basic principles form the base for linking theory and practice as to make the business venture economically viable proposition. This applies equally for insurance. In life insurance there are three basic principles. They are Economic principles, Legal principles, and Actuarial principles.

Chapter 02 PRINCIPLES OF LIFE INSURANCE (Page 02)

ECONOMIC PRINCIPLES: Life is uncertain. How long a person can live is not known. Every prudent person knows that 1. His family depends on his income. 2. Inherited wealth is not sufficient to carry on. 3: Earnings will cease at some time or the other, and 4. Life insurance can provide immediate monetary relief on death. He therefore decides to make provision through life insurance so as to ensure financial protection to his family in the event of his untimely death. If loss of eamings are not there, there may not be need for Insurance. Depending on the financial need of his famliy as also his earnings, one can make provision through insurance. If one chooses life insurance, not as an economic need, it has to be assumed as a profit making exercise and not to cover for the hardships that follows the death of the family's bread winner. For such a profit making exercise, life insurance WILL NOT assist and SHOULD NOT assist. LEGAL PRINCIPLES: Life assurance is a contract, in terms of the Indian Contract Act, 1872. Similarly the provisions of the Transfer of Property Act 1882, the Indian Stamp Act, the Hindu Succession Act etc, equally apply for Life Insurance contracts. Any agreement

entered into providing life insurance protection should be as per the provisions contained in such legislations, as to be a legally enforceable agreements, otherwise called Contract as defined in the Indian Contract Act, 1872.

Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 03 )

Section 2(h) of the Indian Contract Act defines a Contract as "An agreement enforceable by law is a contract." The essentials of a valid contract are 1. Offer. 2. Acceptance. 3. Form or Consideration. 4. Capacity to contract. 5. Legality of object or purpose. 6. Parties must be ad-idem (i.e. of the same mind). OFFER AND ACCEPTANCE: The proposer signifies his intention to take insurance by submitting the proposal and the Insurance Institution by its acceptance letter conveys to the proposer the acceptance of the proposal. T'he proposer by fulfilling the conditions contained in the acceptance letter ensures the completion of the contract. Such an agreement, because of the existence of a valid OFFER AND ACCEPTANCE, becomes an enforceable contract. CAPACITY TO CONTRACT: The parties to a life insurance contract must be capable of entering into contracts. The proposer is competent to contract if he 1) has attained the age of 18. 2 ) is not of unsound mind, and 3) is not disqualified by any Law. Corporate bodies are also legal entities capable of entering in to contracts. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 04 ) PARTIES MUST BE AD-IDEM (OF THE SAME MIND): If there is to be an agreement, the parties to the contract must be

of the same mind, i.e. they should be of the same mind with regard to the subject matter of insurance, terms of agreement etc. If there is disagreement on any terms of the contract, the contract is not enforceable. This is also known as free consent. Consent is considered free when it is not obtained by coercion, undue influence, fraud, misrepresentation or mistake. CONSIDERATION: For any enforceable agreement, the price has to be fixed and such fixed price should be agreed to by the parties to the contract. In the case of life insurance contract, the sum assured to be paid is the consideration agreed to by the insurer. In the case of policyholder, the premium payable by him is the consideration to the contract. LEGALITY OF OBJECT: The main condition to satisfy this requirement is that the contract should not be based on mere gambling instinct and the object of insurance is not a) fraudulent, b) immoral, c) forbidden by law Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 05 ) INSURABLE INTEREST All risks are insurable. In wagering contracts the risk is speculative and therefore not insurable. Such contracts where risk is not pure but speculative are illegal and invalid. Insurance contracts assume that the event that is insured against is not in the control of the insured and that the insured must have insurable interest in the subject matter of insurance. In simpler terms it means that the proposer has a stake in the continuance of the subject ensured and will be a financial loss if the risk is not covered. The extent of loss when proved will be the extent to which one can take an insurance of the life of the person to be insured. Another important point to be noted in this connection is that the Insurance Act, 1938, does not define insurable interest. We have to rely on court judgements which have given guidelines on the circumstances in which insurable interest is deemed to exist. Insurable interest does not arise simply on account of family ties; if however the members of the family have some business ties then insurable interest arises.

Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 06 ) In the following cases, insurable interest is presumed to exist: a) A person on his own life or on the life of his spouse is deemed to have insurable interest to an unlimited extent. In such cases, insurable interest need not be proved. It is presumed. b) An employer has insurable interest in the life of his employee to the extent of the value of service agreed to be rendered by the employee. An employee has insurable interest in the life of the employer to the extent of the remuneration payable for the period of service. c) A creditor has insurable interest in the life of the debtor to the extent of the debt. d) Partners have insurable interest in the life of the co-partners to the extent of the amount invested in the business by the partner whose life is sought to be insured. e) A company has an insurable interest in the life of a key or valuable employee, as an asset to the company. A surety has insurable interest in the life of his co-surety to the extent of the debt. In the case of Life Insurance, insurable interest must exist at the inception of the policy and need not exist thereafter, whereas in the case of Non-Life Insurance, interest should exist both at the commencement and at the time of Claim. In Marine Insurance, the insurable interest should exist at the time of claim. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 07 ) UBERRIMAE FIDES (UTMOST GOOD FAITH): In ordinary contracts, it is presumed that the parties to the contract can make themselves aware of the necessary details before entering into contracts. In Life Insurance contracts, only one party to the contract i.e. the proposer will be knowing all the facts about himself such as details about his health, family history, habits, and matters relevant to the life insurance. If the insurer is made known all the facts truthfully, he will be in a position to assess the risk properly and arrive at the correct

premium to be charged. If such matters are not made known correctly, the insurer will be misguided in entering into a wrong contract thereby rendering such contract void or invalid. It is therefore obligatory that the proposer who alone knows all the facts, informs all the facts about the risk to be undertaken. In other words in Life Insurance Contracts there should be high degree of good faith known as utmost good faith. Life Insurance Contracts are therefore called contracts of Utmost Good Faith, or Uberrimae Fides. Contracts other than Life Insurance, i.e. all other commercial contracts are governed by another principle called caveat emptor, i.e. let the buyer beware. Here the contracting parties can examine in detail each item which forms the subject matter of the contract and ask for proofs if necessary. There is no need to rely on assumptions. Therefore the buyer is buying at his own risk. He has no right to come out at a later date and demand termination of the contract on grounds of deficiency or defect. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 08 ) In case of Life Insurance, proposal forms contain declaration to be signed by the proposer whereby the proposer undertakes that the statement given by him in the proposal are true to the best of his knowledge and belief and in case any of the statements/facts are proved untrue, the insurer has the right to cancel the contract with forfeiture of money paid till then. (It is the duty of the proposer to make full disclosure to the underwriter. The implication is that, in an event of failure to disclose material facts, the contract can be held to be void ab initio.) The effect of this declaration is to turn representations in the proposal to warranties which must be complied in toto. In spite of the declaration by the proposer agreeing for the cancellation of the contract, if any of the statement/fact is proved untrue, Insurance Act 1938 (Section 45) has provided liberal interpretation instead of rigid application of the declaration. This section stipulates that a policy cannot be called in question after 2 years on the grounds of inaccurate or false statements unless it is proved to be material and fraudulent. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 09 )

(However there are certain circumstances which need not be disclosed. These include commonly known facts of knowledge, facts of law, facts revealed by surveys, and facts which could be reasonably discovered, by reference to previous records or policies which are available with the insurer.) SECTION 45 OF THE INSURANCE ACT, 1938 INDISPUTABILITY CLAUSE It has been provided under Section 45 of the Insurance Act, 1938, that if an insurer chooses to avail the provision of the declaration in the proposal for cancellation of a Life Insurance Contract, he can cancel the contract within 2 years from the date of the contract even for minor violation. After 2 years from the date of proposal, if the insurer chooses to avail the provisions of the declaration for canceling the contract he should prove that the facts undisclosed are material to the risk undertaken and had they been disclosed, the insurer would not have undertaken the risk on the terms agreed to but only on modified terms or would have even refused to undertake the risk. He should also prove that the non-disclosure or misrepresentation was made wilfully and fraudulently by the proposer. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 10 ) In spite of such declaration and provisions of Section 45, Insurers do not avail these provisions liberally but choose to cancel contracts/repudiate Iiability in the case of claims only in rare instances and that too for serious violations and non-disclosures thereby functioning as Business Institutions run on Business Principles. Utmost Good faith can therefore be defined as the duty to disclose all facts material to the risk. Utmost Good Faith is not one way traffic. It is applicable both to the Insurer and the Insured. WHAT IS A MATERIAL FACT? Every circumstance is material, which would influence the judgments of a prudent Insurer in fixing the Premiums or determining whether he will undertake the risk. Facts regarding age, health factor like having suffered from any serious ailments, height, weight, family history of early deaths, previous Insurance particulars, hazardous occupations, etc must be disclosed.

Proposer is not the person to decide as to which fact is to be disclosed and what is not to be disclosed. However the following facts need not be disclosed. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 11 ) 1. Facts of which every one is supposed to know. 2. Facts of common knowledge. 3. Facts which lessen the risk. 4. Facts which could be found out from previous policies, records of which are available with the Insurer. Duty of disclosure persists from the date of submission of proposal till the risk commences. Revival being a `Novatio' (new contract), duty of disclosure persists and all facts relevant to the risk to be undertaken have to be disclosed since revival is re-instatement of the lapsed policy. ACTUARIAL PRINCIPLES In life assurance, risk is shared by many on payment of small contributions, known as premium. The premium payable is based on the age of the proposer. The risk of death increases as age advances. Further the probability of death depends on the person's health, personal history, family history, habits etc. Since the premium depends on the risk involved, the premium to be charged differs from person to person. To determine the premium chargeable, it is necessary to assess the risk. Actuarial principles are used in assessing the risk and in premium computations. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 12 ) At this stage it would be sufficient if it is known that the premium chargeable for covering risk are computed by the use of the following factors. i) Mortality. ii) Interest. iii) Expenses, and iv) Bonus loading for with profits policies. Premium computation as also valuation to be conducted for determining the bonus payable to the policyholders are arrived using the Actuarial Principles. The Insurance Act of

India requires that acturial valuations be done every year. As a result of Level Premium System, (about which we shall study in detail in later chapters) funds are accumulated called 'Reserve'. Paid up value and surrender value are based on such 'Reserve' - Valuations are conducted to determine whether there is surplus or deficit and to decide on the bonus payable to the With Profits Policyholders, where there is surplus. Chapter 02 PRINCIPLES OF LIFE INSURANCE ( Page 13 ) Senior executives who have studied Actuarial Science and qualified in the examinations conducted by the Actuarial society are called Actuaries. Actuaries are involved in the computation of premiurn, conducting valuations and in assignment of risk. (In a valuation, the actuary estimates the liability of the insurer in respect of the business in its books. The amount of premiums to be received in the future are then estimated by him, as these will add to the funds to meet the liability. The method of estimating the liability of business and the future premiums is highly technical and complex.) The subjects covered in Actuarial examination include Life Contingencies, Statistics, Compound Interest, Investment, Pensions, etc. Actuaries play a very important role in the functioning of Insurance Companies and it is mandatory that every insurance company should have at least one actuary, either on its rolls as a full time employee or as a consultant..