FINANCIAL SERVICES

NON BANKING PRODUCTS

By Nadya Narsidani
INSURANCE:

Insurance can be described as a financial instrument to

reduce or minimize the financial loss arising from loss to
life or property.

Insurance cannot prevent the occurrence of an undesirable event (risk), but it

provides for the losses arising out of such events, e.g. death of an earning family
member, loss of property due to fire, accident etc. Insurance covers large risks
by the payment of small amounts of money at regular intervals (mostly on an
annual/ yearly basis). Certain types of insurance can also be a means of savings
and investments. The objectives of insurance differ from other investment
vehicles in that life insurance primarily covers risk of death.
Insurance is considered as a risk management tool as well as an investment
opportunity. In insurance, an insured person or entity transfers the cost of
potential loss to another entity for monetary compensation known as premium.
It allows individuals, businesses and other entities to protect themselves against
significant losses and financial hardship at a reasonable rate. Higher the losses
and financial hardship, higher is the premium for such insurance.

Some of the coverage given under Insurance policies are:

•Protection against the death of a key individual in your business

•Ensuring debt repayment after death
•Covering contingent liabilities
•Protection of business from business interruption and loss of income
•Protection yourself against unforeseeable health expenses.
•Protection against theft, fire, flood and other hazards
•Protection against any legal complications
•Protection against any event of accident
•Protection of vehicles against theft or losses

FUNCTIONS OF INSURANCE

PRIMARY FUNCTIONS:

The act of bearing financial risks and collecting premiums for the distribution of
risks are the primary of insurance. Some of the primary functions are:

Provides certainty and assurance : Financial risks are unpredictable therefore

insurance provides assurance by the agreement of compensation of losses.
Misfortune may occur at any stage of life and both the loss and the time of
losses are uncertain. Insurance helps change uncertainty into certainty.
Provides guarantee for the protection : Insurance provides guarantee for the
protection against large and certain losses in return of a nominal amount of
premium. Insurance provides certainty of payment in case of losses. Insurance is
to provide protection against future risk, accident, and uncertainty.

Distribution of risks: Individuals and business are always prone to various risks
which can be eliminated or minimized. Insurance is such a cooperative which
shares risk through distribution of risks. Risks are distributed among all the
insured individuals and business.

SECONDARY/SUBSIDIARY FUNCTIONS

All functions other than primary functions are subsidiary or secondary

functions:
Insurance mobilizes capital: Insurance creates a pool of funds through premium
against the policies taken by individual clients and corporate clients. The
collected premiums amounts to huge capital which is used for compensation for
the future losses and for investment purposes.

Helps to increase efficiency: Insurance is a risk management tool and provides

protection against future risks. Individuals and entities feel safe, more active and
enterprising which eventually lead to increase in efficiency.

Helps to minimize losses: Insurance companies insure individuals and entities

from future uncertainties. Insurance companies make investigations to find out
the tools to minimize the losses. Insurance companies investigate the
circumstances for the losses and later it can be used for minimizing future
losses.
Helps to maintain financial stability: Various natural hazards and other similar
nature of risks create instability in the business world. Insurance companies
compensate for the amount of loss which stabilizes the financial position.

Helps in Economic Progress: The insurance protects the society from huge
losses of damage, destruction, and provides an initiative to work hard for the
betterment of the masses.

Insurance companies are the major source for capital as they have a huge pool
of funds. Insurance companies resort to funds during financial stress and bailout.
LIFE INSURANCE

Life Insurance can be defined as a contract between an insurance

policy holder and an insurance company, where the insurer
promises to pay a sum of money in exchange for a premium,
upon the death of an insured person or after a set period.
As per the life insurance definition, the insurer (insurance company) pays a sum
assured to the policyholder or to the named nominees in case the policyholder meets
with an untimely demise in exchange for the premium payments made towards a life
insurance policy.

Based on the arrangement, in the event of the death of the policyholder or, if the
policy matures, the insurance provider shall pay the person or his family a lump sum
amount after a certain amount of time. There are different types of life insurance
policies to suit the individual needs and requirements of the policy buyers.
Though the concept seems like a feature of contemporary society, life insurance
can actually be traced to around 600–100 BCE in ancient Greece and Rome.
These sophisticated early societies provided a form of both health and life
insurance to some of their citizens
Types of Life Insurance Policies:
1. Term Life Insurance Plans
Term life insurance plans are the purest form of life insurance types as they
offer life cover with no savings or profit elements. Term life insurance plans are
the most affordable types of life insurance policies as premiums are relatively
cheaper in comparison to other life insurance plans.

2. Unit linked insurance plan (ULIP)

One of the most unique life insurance types, a unit-linked insurance plan, is a
thorough mixture of investment (market-linked returns) and insurance. As per
the life insurance definition, the premium paid for the ULIP plan is partially
used as a risk (insurance) cover and partially invested in different funds.
Depending on the policyholder’s risk tolerance, they can invest in different
funds offered by the insurance provider. Then the insurance provider invests the
collected amount into different money-market instruments such as shares and
equities.
3. Endowment Plan
The endowment plan is a traditional types of life insurance policy that is a blend of
insurance and savings.
With life insurance types such as an endowment plan, if the life assured live longer
than the policy period, the insurance company provides maturity benefit to the
policyholder. Additionally, some endowment plans may offer periodic bonuses that
are either paid on maturity or to the beneficiary in case of the policyholder’s
untimely death.

4. Money-Back
Money-back life insurance plans are a unique types of life insurance policy in
which a portion of the sum assured is paid back directly to the insured at regular
intervals as a survival benefit. This way, the policyholder can achieve short-term
financial objectives.
5. Whole Life Insurance
Whole life insurance plans are amongst the life insurance types that cover the life
insured for a lifetime, or in a few cases, up to the age of 100 years.
At the time of purchasing a whole life insurance policy, the sum assured gets
determined. During the purchase, a nominee is mentioned. In case of any
unfortunate event, as per the whole life insurance definition, they get paid with the
death claim and any bonuses, if applicable.
Nevertheless, if the life assured lives longer than 100 years, the insurance provider
gives the life insured with a maturity benefit equal to the endowment corpus.

6. Child Plan
Child life insurance plans aim at building a corpus for the future development of a
child. Typically, such life insurance types helps in funding the education and
marriage of a child.
Such plans provide instalments annually or in one lump sum pay-out, following
the major milestones of a child’s life. In case the insured parent meets with an
untimely death during the policy term – future premiums are waived off, and the
policy benefits continue without disruption.

7. Retirement Plan
Retirement life insurance plans support building a stable financial source for an
individual’s retirement years. The purpose and meaning of life insurance for
retirement is to help one become financially independent and live without any
worry.

Most retirement life insurance definitions fall under life insurance types that offer
annual pay-out (by means of annuities) or a one-time lump sum pay-out (by means
of commutation of the accumulated amount, up to the prescribed limits) on the
completion of 60 years of age.

In case of an eventuality, within the policy term, the insurer pays the insurance
benefit to your family.
NON LIFE INSURANCE

The non-life insurance business can be sub-divided into

health insurance and general insurance.
General insurance covers insurance of property against fire, burglary, theft;
personal insurance covering health, travel and accidents; and liability insurance
covering legal liabilities. This category of insurance virtually covers all forms of
insurance except life. Other covers may include insurance against errors and
omissions for professionals, credit insurance etc. Common forms of general
insurance are motor, fire, home, marine, health, travel, accident and other
miscellaneous forms of non-life insurance.

Unlike life insurance policies, the tenure of general insurance policies is normally
not that of a lifetime. The usual term lasts for the duration of a particular economic
activity or for a given period of time. Most general insurance products are annual
contracts. There are however, a few products which have a long term.
Motor Insurance:

As per the Motor Vehicles Act, 1988 it is mandatory for every owner of a vehicle
plying on public roads, to take an insurance policy, to cover the amount, which
the owner becomes legally liable to pay as damages to third parties as a result of
accidental death, bodily injury or damage to property . A Certificate of Insurance
must be carried in the vehicle as a proof of such insurance. Motor insurance needs
to be renewed every year. Driving a motor vehicle without insurance in a public
place is a punishable offence.

Two types of covers are available:

1. Liability only policy. This covers third party liability for bodily injury liability
and / or death and property damage. Personal Accident cover for Owner-driver is
also included.
2. Package policy. This cover loss or damage to the vehicle insured in addition to
(1)above.
i.e., Motor insurance offers protection to the vehicle owner against: Damage to
the vehicle and it also pays for any third party liability determined by law against
the owner of the vehicle. Third party insurance is a statutory requirement in our
country i.e. the owner of the vehicle is legally liable for any injury or damage
caused to a third party life or property, by or arising out of the use of the vehicle
in a public place.

A comprehensive motor insurance policy would include personal accident and

liability only policy (third party insurance) in addition to own damage cover
damage to owner’s vehicle) in one policy.

Common motor insurance categories include:

Car Insurance
Two Wheeler Insurance
Commercial Vehicle Insurance
Some attractive benefits of motor insurance include roadside assistance, cashless
servicing at nation-wide network of workshops and garages, personal accident
cover, towing assistance.

No- claim discounts are available on renewal of policy, ranging from 20% to
50%, depending upon the type of vehicle and the number of years for which no
claim has been made.

Home Insurance

Home is often the most treasured possession of an individual and also the largest
financial investments one makes in life. Safeguarding the physical structure and
contents of home seems like a logical thing to do. Home insurance protects the
house and/or the contents in it, depending on the scope of insurance policy opted
for. It secures the home against natural calamities and man-made disasters and
threats. Home insurance provides protection against risks and damages from fire,
burglary, theft, flood, earthquakes etc. covering the physical asset (building
structure) and valuables (contents) in it. Certain incidents can lead to sudden and
huge expenses, which you are generally not prepared for. In such instances,
insurance policy will safeguard you from suffering from financial setbacks at that
time, ensuring complete protection to you, your family and your Home.
•Home Insurance/House Insurance Policy provides coverage for losses or
damages caused to properties or contents by an unfortunate event - natural and
accidental
•It is not just limited to Landlords who buy property insurance to those who have
home ownership, it can also be purchased by tenants living in rented properties
for their contents.
•the option to insure either your home or its contents, or both
•The policies may be enabled even when away from home, ensuring a stress free
trip
•Option of Home Insurance Policy for up to 3 years
•Option of Fire Insurance Policy which covers the cost of replacement or repair and
reconstruction of property and contents in case of damage from fire and allied
perils including Earthquake and other natural perils
•Covers your home against loss from burglary and theft
•It also covers the contents of your home, including portable equipment, even on a
worldwide basis
•It provides cover for jewellery, valuables and works of art kept at your home
•Additional benefit of rent for alternate accommodation in case of need of
relocation temporarily from home due to a peril
•Home Insurance/House Insurance Policy comes with useful add-ons to provide
with a complete protection

Home insurance ensures that one’s hard-earned savings are utilised to meet
important needs instead of using them for rebuilding the house if some harm was to
come to it.
Marine (Cargo) Insurance

Business involves the import and export of goods, within national borders and
across international borders. Movement of goods is fraught with risk of mishaps
which can result in damage and/or destruction of shipments. This leads to
substantial financial losses for both the importers as well as the exporters.

Marine cargo insurance covers goods, freight, cargo and other interests against loss
or damage during transit by rail, road, sea and/or air. Shipments are protected from
the time the goods leave the seller’s warehouse till they reach the buyer’s
warehouse. Marine cargo insurance offers complete financial protection during
transit of goods and compensates in the event of any loss suffered.

The party responsible for insuring the goods is determined by the sales contract.
Marine cargo insurance policy can be taken by buyers, sellers, import/export
merchants, buying agents, contractors, banks etc. The policy usually covers the
cargo, but can also be extended to cover
the interest of a third party post transfer of ownership as determined by terms of
sale.
Common types of policies:
•Open Cover
•Open Policy
•Specific Voyage Policy
•Annual Policy
The hull of a ship or boat can be insured under marine hull insurance.

Rural Insurance

Insurance solutions to meet the needs of agriculture and rural businesses form part
of rural insurance. IRDA has stipulated annual targets for insurers to provide
insurance to the rural and social sector.
As per these regulations, insurers are required to meet year-wise targets:
•In percentage terms of policies underwritten and percentage of total gross
premium
income by general insurers under rural obligation
•In terms of the number of lives under social obligation

Commercial Insurance

Commercial insurance encompasses solutions for all sectors of the industry

arising out of business operations. Insurance solutions for automotive, aviation,
construction, chemicals, foods and beverages, manufacturing, oil and gas,
pharmaceuticals, power, technology, telecom, textiles, transport and logistics
sectors. It covers small and medium scale enterprises, large corporations as well
as multinational companies.
Common types of commercial insurance:
•Property Insurance
• Fire Insurance
• Marine Insurance
• Liability Insurance
• Financial Lines Insurance
• Engineering Insurance
• Energy Insurance
• Employee Benefits Insurance
• International Insurance Solutions

Other Types of General Insurance:

• Property Insurance
• Personal Accident
• Householder
•Shopkeeper
•Corporate Insurance
•Commercial Insurance
•Fire Insurance
•Crop Insurance
Currently the PSU non-life insurance companies along with ICICI Lombard and
Bajaj Allianz General Insurance account for 90% of business in the country.

Fire Insurance

Under section 2(6A) Insurance Act 1938, the fire insurance business is defined as
follows: “Fire insurance business means the business of effecting, otherwise than
independently to some other class of business, contracts of insurance against loss by
or incidental to fire or other occurrence customarily included among the risks
insured against in fire insurance policies”.
Example: The following are the items which can be burnt/ damaged through fire:
Buildings Electrical installation in buildings Contents of buildings such as
machinery, plant and equipments, accessories, etc. Goods (raw materials, in–
process, semi–finished, finished, packing materials, etc.) in factories, godowns etc..
Goods in the open Furniture, fixture and fittings Pipelines (including contents)
located inside or outside the compound, etc. The owner of abovementioned
properties can insure against fire damage through fire insurance policy which
provides DIPLOMA IN INSURANCE SERVICES MODULE - 4 Notes Fire
Insurance Practice of General Insurance 4 financial protection for property against
loss or damage by fire.

Liability Insurance

Legal liability means the liability which can be enforced in the court of law and the
same can be insured. The legal liability can fall under two heads: 1) Criminal
Liability 2) Civil Liability
1) Criminal Liability : is enforced by the State Government and punishable under
the law in the form of fine or imprisonment or both
2) Civil Liability: occurs when an action is taken by one party against another party
resulting in the damage of the property or death or bodily injury of the aggrieved
party and the compensation is payable under the law of the land.
The Bhopal Gas Tragedy in which many died or were left permanently disabled
prompted the Government to pass the Public Liability Insurance Act, 1991 which
imposes a no fault liability on anyone who handles hazardous substances to pay
compensation to the victims of an accidental occurrence. Besides the compulsory
insurance, the growing awareness of the public and the high compensation being
awarded by the courts has made this class of insurance a necessity for
professionals and businessman who may become liable to pay for damages.

VARIOUS TYPES OF LIABILITY INSURANCE

1. Compulsory Public Liability Policy: For those industries which are using
hazardous material in their manufacturing process.
2. Public Liability Policy (Industrial / Non-Industrial Risks): ¾ Industrial Risks
are manufacturing premises including godowns, warehouses etc., forming part
thereof, ¾ Non-Industrial Risks are Hotels, Motels, Club houses. Restaurants,
Boarding and Lodging houses. Flight kitchens, Cinema Hails, Auditoriums,
Theatres, Public Halls, Pandals and Open air theatres.
3. Product Liability: If the use of a product causes death or bodily injury or
property damage then the manufacturer is liable to pay compensation. Product
liability insurance is available to cover that risk. This is useful for manufacturer of
food products and for the auto industry.
4. Professional Indemnities : Professional indemnities are designed to provide
insurance protection to professionals such as doctors, solicitors, chartered
accountants, architects etc. against their legal liability to pay damages arising out
of negligence in the performance of their professional duties.

Health Insurance

Health Insurance, (also commonly known as Mediclaim in India), is a form of

insurance which covers the expenses incurred on medical treatment and
hospitalisation. It covers the policyholder against any financial constraints arising
from medical emergencies. In case of sudden hospitalisation, illness or accident,
health insurance takes care of the expenses on medicines, oxygen, ambulance,
blood, hospital room, various medical tests and almost all other costs involved. By
paying a small premium every year, you can ensure that any big medical expenses,
if incurred, will not have an adverse effect on your finances. The plan can be taken
for an individual or for your family as a Family Floater Health Insurance Plan.

Major features of a Health Insurance policy

•Cashless facility Each health insurance company ties up with a large number of
hospitals to provide cashless health insurance facility. If you are admitted to any of
the network hospitals, you would not have to pay the expenses from your pocket.
In case the hospital is not part of the network, you will have to pay the hospital
and the insurance company will reimburse the costs to you later.
•Pre-hospitalisation expenses
In case you have incurred treatment costs for the ailment for which you later get
admitted to a hospital, the insurance company will bear those costs also. Usually
the payout is for costs incurred between 30 to 60 days before hospitalisation.
•Hospitalisation expenses
Costs incurred if a policyholder is admitted to the hospital for more than 24 hours are
covered by the health insurance plan.
•Post- hospitalisation expenses
Even after you are discharged from the hospital, you will incur costs during the
recovery period. Most mediclaim policies will cover the expenses incurred 60 to 90
days after hospitalisation.
•Day care procedure expenses
Due to advancement in technology some of the treatments no more require a 24
hours of hospitalisation. Your health insurance policy will cover the costs incurred
for these treatments also.
•Ambulance charges
In most cases the ambulance charges are taken up by the policy and the policy
holder usually doesn't have to bear the burden of the same.
•Cover for pre-existing diseases
Health insurance policies have a facility of covering pre-existing diseases after 3 or 4
years of continuously renewing the policy, i.e. if someone has diabetes, then after
completion of 3 or 4 years of continuous renewal with the same insurer (depending
on the plan offered and his age), any hospitalisation due to diabetes will also be
covered..
•No claim bonus
The premiums paid for a Health Insurance Policy are exempted for Under Section
80D of the Income Tax Act. Income tax benefit is provided to the customer for the
premium amount till a maximum of Rs. 15,000 for regular and Rs. 20,000 for senior
citizen respectively.
•Tax benefits
If there has been no claim in the previous year, a benefit is passed on to the
policyholder, either by reducing the premium or by increasing the sum assured by a
certain percentage of the existing premium.
•Health check up
Some health insurance policies have a facility of free health check-up for the well
being of the individual if there is no claim made for certain number of years.
•Organ donor expenses
The medical expenses incurred in harvesting the organ for a transplant is paid by the
policy.

Investments for Insurance companies- given by IRDA

The guidelines for investments by Insurance companies are different for the Life and
Non-life sectors. In the Life insurance sector too, there are different guidelines for
Insurance and pension/ annuity plans.
Bancassurance

Bancassurance is an arrangement in which a bank and an insurance company form a

partnership so that the insurance company can sell its products to the bank's client
base. This partnership arrangement can be profitable for both companies. Banks can
earn additional revenue by selling the insurance products, while insurance
companies are able to expand their customer bases without having to expand their
sales forces or pay commissions to insurance agents or brokers. RBI has allowed
banks three routes of participation in the insurance business- (i) providing fee based
insurance services without risk participation; (ii) investing in an insurance company
for providing infrastructure and logistical support; (iii) setting up a separate joint
venture insurance company.
Bancassurance, being the combination of both sectors- insurance and banking,
comes under purview of both RBI and IRDA. a) Any scheduled commercial bank
would be permitted to undertake insurance business as agent of insurance
companies on fee basis, without any risk participation. The subsidiaries of banks
will also be allowed to undertake distribution of insurance products on agency basis.
b) Banks which satisfy the eligibility criteria mentioned as under would be
permitted to set up a joint venture company for undertaking insurance business with
risk participation, subject to safeguards. The criterion are net worth being at least
INR 300 Cr., CRAR being at least 10%, reasonable NPA, performance of
subsidiaries (if any) should be satisfactory and there should have been net profit for
at least 3 consecutive years.

Corporate Agency Regulations- Banks can act as corporate agents for only one life
and one non life insurance company for a commission, as per the current regulatory
framework set up by IRDA. The banks are not eligible for any payout other than
commission. It is also mandated that banks should also observe code of conduct
prescribed towards both customer and the principal who is the insurer.

Broker Route- Banks cannot become brokers, as regulations require brokers to be

exclusively engaged in insurance broking.
Intermediaries in Insurance sector

Insurance intermediaries facilitate the placement and purchase of insurance, and

provide services to insurance companies and consumers that complement the
insurance placement process. Insurance intermediaries have been categorized as
either insurance agents, insurance brokers, surveyors and loss assessors, third party
administrators and banks.

Insurance Agents- Insurance agents are, in general, licensed to conduct business on

behalf of insurance companies. Agents represent the insurer in the insurance process
and usually operate under the terms of an agency agreement with the insurer. Agents
are like retailers of any consumer product who help in selling and distributing the
product. Individual agents are those who have undergone requisite training, passed
an examination (conducted by Insurance Institute of India) and been duly licensed
by IRDA to sell insurance polices to the public and provide after-sales service
including assisting at the time of a claim. His licence may be for life insurance,
general insurance or both. In addition to representing one life insurance
company and one non-life insurance company, an agent can also represent one
standalone health insurance company as well as Agriculture Insurance Company of
India for selling crop insurance and Export Credit Guarantee Corporation of India
for credit insurance.

Corporate agents- according to IRDA guidelines should normally be a company

whose principal business is other than distribution of insurance products. Insurance
business should be a subsidiary activity. Many banks and financial services firms
are corporate agents. Entities not regulated by RBI are not eligible for corporate
agent license. Additionally, only those entities which are part of a group having
Indian insurance company or scheduled commercial bank as part of the group are
given corporate license to do insurance business as principal business. as per IRDA,
Corporate Agents may have arrangements with a maximum of three life, three
general and three health insurers to solicit, procure and service their insurance
products

Insurance Brokers-Insurance brokers typically work for the policyholder in the

Insurance process and act independently in relation to insurers. They are like agents
but with a difference unlike agents, they can sell policies of several life and non-
insurance companies at a time. Brokers assist clients in the choice of their insurance
by presenting them with alternatives in terms of insurers and products. Acting as
“agent” for the buyer/ insured, brokers usually work with multiple companies to
place coverage for their clients. Brokers obtain quotes from various insurers and
guide clients in determining the adequate policy from a range of products. Most, if
not all, brokers are active in commercial lines, some also intermediate personal lines
policies. IRDA has classified four categories of brokers as follows-
Category I – Direct General Insurance broker
Category II – Direct Life Insurance broker
Category III – Reinsurance broker
Category IV- Composite broker
Currently there are over 450 insurance brokers in India. IRDA has made it
mandatory for every insurance broker to get professional indemnity insurance with
an insurer in India.
Surveyors and loss assessors-
Independent professionals appointed by insurance companies to assess the loss or
damage when a claim is notified under the policy issued by them. An insurance
surveyor must be duly licensed by IRDA which has classified them into 3
categories- A, B and C based on their skill and experience. Insurance companies
allot them work depending upon their competence in the relevant fields. Duties of
surveyors are to investigate and confirm the cause of loss, assess the quantum of
loss, determine liability of insurers, advise the insured to take necessary steps to
contain the loss, and act on behalf of the insurance company in disposal of salvage
to realise maximum value.

Third party administrators

TPAs are middlemen in the healthcare delivery chain, which link physicians,
hospitals, pharmacies, etc. they are distributors of insurance products in health care
sector. They facilitate smooth operation of a health cover by acting as a link
between insurance companies and their clients and hospitals. They enable cashless
payment of claims to the insured wherein they settle claims with hospital instead of
insured. Since October 2002, the state owned non-life insurance companies- New
India, United, Oriental, National, appointed TPAs (over two dozen). All new
Mediclaim policies are serviced by TPAs. The data of new policies are forwarded
to TPAs, who within 7 days provide ID card and guidebook detailing claim
procedures. The TPAs are provided float funds by insurance companies. There are
multiple constraints to this model including complaints about service, improper
guidance by help lines, settlement of claim for lesser amount, non-receipt of
settlement cheques within stipulated time, etc.
Reinsurance

Reinsurance is primarily insuring of risks assumed by primary insurer known as

ceding company. Reinsurance occurs when multiple insurance companies share
risk by purchasing insurance policies from other insurers to limit the total loss the
original insurer would experience in case of disaster. By spreading risk, an
individual insurance company can take on clients whose coverage would be too
great of a burden for the single insurance company to handle alone. When
reinsurance occurs, the premium paid by the insured is typically shared by all of
the insurance companies involved.
Reinsurance can help a company by providing:
1.Risk Transfer - Companies can share or transfer of specific risks with other
companies
2. Arbitrage - Additional profits can be garnered by purchasing insurance
elsewhere for less than the premium the company collects from policyholders.
3. Capital Management - Companies can avoid having to absorb large losses by
passing risk; this frees up additional capital.
4. Solvency Margins - The purchase of surplus relief insurance allows companies to
accept new clients and avoid the need to raise additional capital.
5. Expertise - The expertise of another insurer can help a company obtain a proper
rating and premium.

The reinsurance business assumes greater importance in case of war and natural
calamities when the smaller firms are unable to take on the full risk due to their
lower capital base.

Reinsurance contracts are those contracts in which one insurance company transfers
its risk to another insurance company. Insurance companies which transfer the risk
are known as ceding companies also, direct writers. Accepting company .i.e. the
company which accepts the risk is also known as reinsurer.
Say for instance Mr. X has a life insurance policy with an insurance company for
Rs.10 crore and the insurance company wants to transfer 30% of the risk to a
reinsurer then in case of loss direct writer has to pay the sum assured to X’s
beneficiary and then claim for the 30% from reinsurer. Mr. X has no relation with
the reinsurer. It has contract with the direct writer alone and direct writer is bound to
fulfill his part of the contract in case risk happens and then claim for it from the
reinsurer. It has a separate contract with the reinsurer.

Not all insurance players are in this business because the capital requirement is
much higher than if the insurance company functions only in insurance. In India
LIC, GIC, Lloyds of London are few reinsurers. Ceding company may shift part or
all of the insurance originally written to the reinsurer. The amount of insurance
retained by ceding company for its own account is known as retention. There are
basically two types of reinsurance namely :-
(i) Facultative- reinsurer can accept or reject any risk presented by ceding company.
Used to cover large industrial firms
(ii) Treaty reinsurance
Facultative coverage insures against a specific risk factor. The underwriter would
evaluate the individual risk factor and write a policy accordingly.

Facultative reinsurance is when all individual policies are taken into consideration
and then a decision as to which policy needs reinsurance and what % of risk needs
to be transferred. It is called facultative because it need not be covered by one
company; it can be covered by multiple companies. What risks need to be
transferred is decided by ceding company.

One major disadvantage of facultative reinsurance is accepting company goes by the

underwriting standards or policies of the ceding company. Now if there is any fault
in classification of risk and it has been put in the wrong risk category (referred to as
risk basket), then the loss may be suffered by the reinsurer too. Now a days, in order
to have a better coverage or protection, reinsurance companies have started
involving themselves in the underwriting process of the ceding company.
Treaty reinsurance agreements cover all or a portion of an insurer's risks, and they
are effective for a certain time period.

Reinsurance by treaty is when there is an agreement between direct writer and the
reinsurer. Reinsurance companies come up with proposals to the direct writers as to
what is the maximum amount of risk they are ready to accept and what kinds of
risks they are ready to accept from the direct writers. The direct writers choose the
best offer and they enter into agreement. Reinsurance by treaty is basically of two
types; namely :
Quota or Quota share- It’s not always on an individual basis, it is always
consolidated. Direct writer transfers some percentage and keep certain percentage
of risk. Here the percentage is fixed.
Surplus reinsurance (excess of loss)- Here 3 aspects are looked into
i) Maximum coverage available .i.e. what amount reinsurer is ready to accept.
ii) Estimated maximum loss .i.e in case of life insurance it is sum assured and in
case of general insurance it has to be assessed by the direct writer.
iii) What is the % of loss or risk to be transferred?
Treaty and facultative reinsurance policies can be proportional or non proportional
in structure. A proportional reinsurance (also known as "pro rata" or Quota
reinsurance) agreement obligates the reinsurer to bear a portion of the losses, for
which it receives a prorated share of the insurer's premiums. Non-proportional
reinsurance (also known as "excess of loss" or surplus reinsurance) agreements
kick in when the insurer's losses exceed a set amount.

Facultative and treaty reinsurance are both common in India. There is a regulatory
expectation that only retail lines of insurance are covered under treaty reinsurance.
Facultative reinsurance has been mainly reserved for unconventional risks, project
risks, mega risks, and liability lines.
Reinsurance policies in India commonly include:
Claims control/claims co-operation clause.
Follow the fortune clause.
Set off clause.
Ex-gratia payment exclusion clause.
 Comprehensive dispute resolution and arbitration clauses.

Premiums in case of reinsurance

They are of two types :
Original premium/ direct premium, i.e. if 30% of risk is transferred then 30% of the
premium received by the direct writer is also transferred to the reinsurer.
Revised risk premiums: reinsurers are not concerned with what direct writer
collects from its clients, they quote their own premium for certain sum of risk to be
covered.

Reinsurance contracts The reinsurance regulations issued by the IRDAI define a

contract of reinsurance as a legally binding document on all the parties that
provides a complete, accurate and definitive record of all the terms and conditions
and other provisions of the reinsurance contract. Reinsurance arrangements must be
documented and filed with the IRDAI within the stipulated time period.
The form and content of the main types of insurance policies is highly regulated
(see 18.).
Reinsurance arrangements do not need to be pre-approved by the IRDAI, but they
need to be documented and filed with the IRDAI within the stipulated time period
(see 3.).
There are separate sets of regulations governing reinsurance arrangements of
general insurers and life reinsurers, including the manner by which cross-border
reinsurers (those reinsurers who do not have a physical presence in India) can
reinsure risks written by Indian insurance/reinsurance companies. Cross-border
reinsurers must file certain specified information with the IRDAI by the end of
each financial year, to accept any reinsurance/retrocession from India.