JAIIB IE and IFS Paper-1 Module-D Unit 14 : Insurance Products

JAIIB Paper 1 (IE and IFS) Module D Unit 14 : Insurance Products (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for JAIIB Exam 2023. Following the format of the current exam, JAIIB 2023 will have now four papers. The JAIIB Paper 1 (Indian Economy & Indian Financial System) includes an important topic called “Insurance Products”. Every candidate who are appearing for the JAIIB Certification Examination 2023 must understand each unit included in the syllabus. In this article, we are going to cover all the necessary details of JAIIB Paper 1 (IE and IFS) Module D (FINANCIAL PRODUCTS AND SERVICES ) Unit 14 : Insurance Products  Aspirants must go through this article to better understand the topic, Insurance Products and practice using our Online Mock Test Series to strengthen their knowledge of Insurance Products. Unit 14 : Insurance Products

What Is Insurance

• Insurance can be defined as a contract between two parties, where one promises the other to indemnify or make good any financial loss suffered by the latter (the insured), in consideration for an amount received by way of ‘premium’.
• The contract of insurance is referred to as the ‘policy’.

Fundamental Principles Governing Insurance Products

• The business of insurance aims to protect the economic value of assets or life of a person.
• Apart from the above essentials of a valid contract, insurance contracts are subject to additional principles.  These are: 

The Principle of Utmost Good Faith (Principle of Uberrimae fidei) 

• It is a positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not.
• Non-disclosure of any material fact may be unintentional on the part of the insured.
• Even so, such a contract is rendered voidable, at the insurer’s option and it can refuse any compensation.
• An application for life and health insurance is the applicant’s proposal to the insurer for protection and is the beginning of the policy contract.
• The proposed insured is required to give accurate answers to questions in the application, relating to his personal and family history, habits, employment, insurance already in force and other applications for insurance that either are pending or have been postponed or refused, etc.
• Any concealment of material facts is considered ‘intentional’.

Principle of Insurable Interest 

• The legal right to insure arising out of a financial relationship recognised under the law, between the insured and the subject matter of insurance.
• Insurable interest simply means “right to insure”.
• The policyholder must have a pecuniary or monetary interest in the property, which he has insured.
• For example, the subject matter of insurance under a fire policy can be a building, stocks, machinery, under a liability policy, it can be a person’s legal liability for injury or damage, a ship in a marine policy, etc.
• Any damage to the property must result in financial loss to the policyholder.
• Only then, an insurable interest is said to exist.
• Insurable interest normally arises out of ownership where the insured is the owner of the subject matter of insurance, such as a car or a house.

Principle of Indemnity 

• The meaning of ‘indemnity’ is ‘the protection or security against damage or loss or security against legal responsibility’.
• Indemnity may be referred to as a mechanism by which, insurers provide financial compensation in an attempt to place the insured in the same pecuniary position, after the loss, as enjoyed just before it.
• The literal meaning of the term “indemnity” is making good the loss.
• On the happening of the insured event, for which, the insurance policy is taken up, the insured should be replenished, the amount of loss.
• Life insurance is not a contract of indemnity.
• However, property insurance or personnel accident insurance contracts are contracts of ‘indemnity’.
• Indemnity merely means to make good any financial loss suffered by the insured and to put him or her back in the same financial position, as he or she was, before the occurrence of the loss. 

The principle of indemnity also aims to control moral hazard. It is possible that the insured may try to secure the maximum amount through dubious and unfair means. For example, he may:

• Deliberately inflict loss upon the property, in order to seek compensation
• Resort to exaggerating the loss
• Make false claims, etc.

Example 

Mr. Rajesh owns a restaurant, which he had bought three years ago, for Rs.10 lakhs.  He had bought fire insurance worth Rs.8 lakhs (which is the written down value of his insured property).  His restaurant caught fire and he suffered a loss of Rs.6.00 lakhs. The amount of compensation to be paid by the insurance company

= `(sum insured/value of insured asset) * actual loss

= `(8 lakhs/10 lakhs) * 6,00,000

= Rs.4,80,000

Principle of Subrogation 

• Subrogation means the restitution of the rights of an assured in favour of the insurer.
• In accordance with the principle of subrogation, the insurance company acquires the right of the insured to sue the third-party to compensate for his negligence and loss inflicted upon, when it indemnifies the insured for the losses suffered by him.

Principle of Contribution 

• Contribution is the right of an insurer to call upon others similarly, but not necessarily equally liable to the same insured to share the cost of an indemnity payment. This principle of contribution enables the total claim to be shared in a fair way.
• The amount of total compensation or indemnity provided to the insured by all the insurers should not exceed the amount of loss. In case, one insurer indemnifies the insured in full, the insurance company concerned can claim the share of compensation from other insurance companies.

Principle of Proximate Cause 

• It is not the latest, but the direct, dominant, operative and efficient cause that must be regarded as proximate. The term “Proximate Cause” literally means the nearest cause or direct cause.
• In insurance parlance, it relates to the immediate cause of the mishap, which resulted in the loss. If a person has bought fire insurance for his house the protection will be from the loss caused by fire, which may have resulted from the sources mentioned in the policy.
• In case the fire occurs from any source other than that mentioned in the policy, the insurer is not liable to compensate the insured.

Classification Of Insurance

Types Of Insurance Business

The various types of insurance are

Life Insurance Products 

Life insurance benefit patterns fit into one or a combination of the following three classes: 

• Term life insurance
• Whole life insurance
• Endowment insurance

Term Insurance Plans 

• This type of insurance furnishes protection for a limited number of years.
• Terminates with no maturity value.
• The face amount of the policy is payable only if the insured’s death occurs, during the stipulated term.
• Nothing is paid in case of survival.
• Issued for a short period but customarily provides protection for at least a set number of years, such as 10 or 20 years, or to a stipulated age, such as 65 or 70 years.
• It is more comparable to property and liability insurance contracts than to any other life insurance contract.
• Initial premium rates are low compared to other life products, because the period of protection is limited.

Whole Life Insurance Policies:

• Whole life insurance is intended to provide insurance protection over one’s entire lifetime.
• It provides for the payment of the face amount upon the insured’s death regardless of when death occurs.
• Universal life policies can function as whole life insurance, if they have sufficient cash value.
• The face amounts payable under whole life policies typically remain at the same level, throughout the policy duration, although dividends are often used to increase the total amount paid on death.

Endowment Insurance Policies

• Unlike term policies, endowment policies promise not only to pay the policy face amount on the death of the insured during a fixed term of years, but also to pay the full-face amount, at the end of the term, if the insured survives the term.

An endowment policy has the following features: 

• Endowment plans promise protection from risk in the event of death of the insured during the policy term as well as an assured sum, upon the maturity of the policy. In this type of policy, the maturity of the policy is usually chosen to coincide with the retirement of the person.
• These policies are issued for specific terms chosen by the proposer, who can choose the duration of the policy, which may be 10, 15, 20 or 30 years.
• Where the duration is short the premium involved is higher. It is to be noted that whether the assured meets a premature death or not, the full amount of the policy has to be paid by the insurance company, provided the premiums have been paid, as stipulated in the policy.

Money Back Plans or Cash Back Plans 

• Under this plan, certain percentage of the sum assured is returned to the insured person periodically as survival benefit. On the expiry of the term, the balance amount is paid as maturity value.
• The life risk may be covered for the full sum assured during the term of the policy irrespective of the survival benefits paid.

Annuity (Pension) Plans

• When an employee retires, he/she no longer gets his/her salary, while his/her need for a regular income continues. Retirement benefits like Provident Fund and gratuity are paid in lump sum, which are often spent too quickly or not invested prudently with the result that the employee finds himself without regular income in his post – retirement days.

Immediate Annuity

• In case of immediate annuity, the annuity payment from the Insurance Company starts immediately. Purchase price (premium) for immediate annuity is to be paid in lump sum, in one installment only.

Deferred Annuity

• Under deferred annuity policy, the person pays regular contributions to the Insurance Company, till the vesting age/vesting date. The policy holder has the option to pay as single premium also.
• The fund will accumulate with interest and fund will be available on the vesting date. The insurance company will take care of the investment of funds and the policyholder has the option to encash 1/3rd of this corpus fund on the vesting age/vesting date tax free. The balance 2/3rd amount of the fund will be utilised for purchase of annuity (pension) to the annuitant.

Unit Linked Insurance Policy

• Unit Linked Insurance Policies (ULIPs) offer a combination of investment and protection and allow insured the flexibility and choice on how his/her premiums are invested.
• Typically, the policy will provide the insured with a choice of funds in which, he/she may invest. One also has the flexibility to switch between different funds, during the tenure of the policy.

Paid-up Value

• After premiums are paid for a certain defined period or beyond and if subsequent premiums are not paid, the sum assured is reduced to a proportionate sum, which bears the same ratio to the full sum assured

Health Insurance 

• The term ‘Health Insurance’ relates to a type of insurance that essentially covers medical expenses.
• A health insurance policy, like other types of policies, is a contract between an insurer and an individual/group in which, the insurer agrees to provide specified health insurance cover at a particular “premium”, subject to terms and conditions specified in the policy. 

Coverage of Health Insurance Policy

Expenses reasonably and necessarily incurred under the following heads in respect of the insured person, subject to the overall ceiling of sum insured (for all claims during one policy period) are covered. 

• Room, Boarding expenses
• Nursing expenses
• Fees of surgeon, anesthetist, physician, consultants, specialists
• Anesthesia, blood, oxygen, operation theatre charges, surgical appliances, medicines, drugs, diagnostic materials, X-ray, Dialysis, chemotherapy, Radio therapy, cost of pace maker, Artificial limbs, cost or organs and similar expenses.

There are some exclusions under health policies which can vary from product to product and from insurance company to company.

The sum insured may be on an individual basis or on a floater basis, for the family as a whole.

Health insurance comes with attractive tax benefits as added incentive. There is an exclusive “ Section 80D, and which is unlike the section 80C applicable to Life Insurance,  wherein, other form of investments/ expenditure also qualify for the deduction.

Travel Insurance 

• Travel Insurance offers insurance protection to the policy holder, while on travel.
• It is important for a person to check and understand whether the policy covers domestic travel or overseas travel or both.
• Travel Insurance protects self and/ or family against travel related accidents, unexpected medical expenditure during travel, losses such as baggage loss, loss of passport, etc., and interruption or delays in flights or delayed arrival of baggage, etc.

Motor Insurance 

Motor insurance gives protection to the vehicle owner against

• Damages to his/her vehicle and
• Pays for any Third-Party Liability, determined as per law, against the owner of the vehicle.

• Third Party Insurance is a statutory requirement.
• The owner of the vehicle is legally liable for any injury or damage to third-party life or property, caused by or arising out of the use of the vehicle in a public place.
• Driving a motor vehicle in a public place, without insurance, is a punishable offence, in terms of the Motor Vehicles Act, 1988.

Broadly, there are two types of insurance policies that offer motor insurance cover:

• Liability Only Policy (Statutory requirement)
• Comprehensive Policy (Liability Only Policy + Damage to owner’s Vehicle usually called O.D. Cover)

• If a person takes only a Liability Only Policy, damage to his/her vehicle will not be covered.
• Hence, it would be prudent to take a Comprehensive Policy, which would give a wider cover, including cover for the vehicle.

Motor Insurance Inclusions: 

• Fire, explosion, self-ignition, lightning
• Burglary/house-breaking/theft
• Riot & strike
• Earthquake
• Flood, storm, cyclone, hurricane, tempest, inundation, hailstorm, frost
• Accidental external means
• Malicious act
• Terrorism acts
• While in transit by rail/road, inland waterways, lift, elevator or air
• Land slide/rock slide Motor Insurance

Third-Party Liability Insurance:

• Mandatory for all vehicles plying on public roads in India.
• This covers liability for injuries and damages to others that a person is responsible for.
• In addition, it is prudent to cover loss or damages to the vehicle itself by way of Comprehensive/ Package policy, which covers both “Liability” as well as “Own damage” to Insured vehicle. 

Certificate of Insurance under Motor Vehicle Act: As per Rule 141 of Central Motor Vehicle Rules 1989, a certificate of Insurance is to be issued only in Form 51.

It is only in Motor Vehicle Insurance, apart from policy, a separate certificate of insurance

Property Insurance 

• Insurance of buildings, machinery, stocks, etc., against fire and allied perils, burglary and so on.
• Goods in transit via sea, air, railways, roads and courier can be insured under Marine Cargo Insurance.
• Hulls of ship and boats can be insured under Marine Hull Insurance.
• Further, there are specialised policies available such as Aviation Insurance Policy, for insurance of planes and helicopters.
• Thus, Property Insurance is a very vast category of General Insurance and the type of cover that a person needs depends upon the type of property a person is seeking to cover.

Fire Insurance 

• The most popular property insurance is the standard fire insurance policy. The fire insurance policy offers protection against any unforeseen loss or damage to/destruction of property, due to fire or other perils covered under the policy.
• The different types of property that could be covered under a fire insurance policy are dwellings, offices, shops, hospitals, places of worship, etc., industrial/manufacturing risks and contents such as machinery, plants, equipment and accessories;
• Goods including raw material, material in process, semi-finished goods, finished goods, packing materials, etc., in factories, godowns and in the open.  

Burglary Insurance 

• For a business enterprise or for a residential house.

Covers:

• Property contained in the premises including stocks/goods owned or held in trust, if specifically covered.
• Cash, valuables, securities kept in a locked safe or cash box in locked steel cupboard, if a person specifically requests for it.
• Damage to the house or premises caused by burglars during burglary or attempts at burglary.

• The Policy pays actual loss/damage to the insured property caused by burglary/ house breaking subject to the limit of sum insured.
• If sum insured is not adequate, policy pays only proportionate loss. Hence, one must ensure that the value the property is covered correctly to ensure that there is no under insurance.

Marine Cargo Insurance 

Covers

• Transits by water, air, road or rail, registered post parcel, courier or a combination of two or more of these.
• The interest in the cargo and also extend to cover the interests of any third party who has acquired interest upon transfer of ownership, as determined by the Terms of Sale.

• Meaning of Salvage: In case of claims under various types of insurance policies, the partly damaged goods or the wreck of a car or any machinery or any other property settled on Total Loss Basis is known as “Salvage”.

Group Insurance Schemes

• Group insurance is a plan of insurance which provides life cover to a number of persons, under a single policy called the ‘Master Policy’.
• It becomes possible to issue a cover to the group at a low cost, on account of savings in the administrative and medical examination expenses.
• One important feature is with regard to selection and underwriting of lives.

Micro Insurance

• To provide a hedge against these unforeseen risks, micro insurance is widely accepted as one of the essential ingredients of financial inclusion packages.
• Micro insurance regulations issued by IRDA have provided a fillip in propagating micro insurance as a conceptual issue.
• Effective from 2005.
• These regulations are in addition to the obligations for rural and social sector business to be done by all insurers, on an annual basis.
• The IRDAI Micro-Insurance Regulations, 2005 defines a micro-insurance policy, as a general or life insurance policy, with a sum assured of Rs. 50,000 or less. A general micro-insurance product could be: 

• Health insurance contract
• Any contract covering belongings such as huts, livestock, etc.
• Tools or instruments or Any personal accident contracts

Insurance Based Social Security Schemes 

In its drive to achieve a high degree of financial inclusion, including banking and insurance, the Government has introduced two insurance schemes, viz.,

• Prime Minister Jeevan Jyoti Bima Yojana (PMJJBY) and
• Prime Minister Suraksha Bima Yojana (PMSBY)

Prime Minister Jeevan Jyoti Bima Yojana (PMJJBY) 

• Life insurance scheme.
• Age group: 18 to 50 years having a bank/post office account – who give their consent to join/enable auto-debit.
• Primary KYC: Aadhaar (bank account)
• Life cover, which is for Rs. 2 lakhs, is available for a 1-year period, stretching from 1st June to 31st May of each year and is renewable every year.
• Risk coverage under this scheme is for Rs 2 lakhs in case of death of the insured, due to any reason. 
• Premium: Rs. 436 per annum
• Offered through LIC and all other life insurers, who are offering the product on similar terms, with necessary approvals and tie up with banks and Post Offices, for this purpose.
• Payment of pro-rata premium is permitted.
• The premium is Rs. 436 per annum as per the option given by him on or before 31st May of each annual coverage period under the scheme. 

Prime Minister Suraksha Bima Yojana (PMSBY) 

• An accident insurance scheme.
• Age group 18 to 70 years, with a bank/post office account, who give their consent to join/enable auto-debit on or before 31st May, for the coverage period 1st June to 31st May, on an annual renewal basis.
• Aadhaar is the primary KYC for the bank account.
• Risk coverage: Rs. 2 lakhs for accidental death and full disability and Rs. 1 lakh for partial disability.
• While full disability has been defined as loss of use in both eyes, hands or feet, partial disability has been defined as loss of use in one eye, hand or foot.
• Further, death due to suicide, alcohol, drug abuse, etc., are not covered.
• Premium: Rs. 20 per annum
• The scheme is offered by Public Sector General Insurance Companies or any other General Insurance Company who are offering the product on similar terms, with necessary approvals and tie up with Banks and Post Offices for this purpose.

Bancassurance

• Bancassurance is defined as selling of insurance products through banks. However, it is not just about selling insurance products to bank customers but exploiting the true synergies between the bank and insurer and optimally utilising their respective strengths.
• The concept of Bancassurance has roots in France in 1980s, and has spread across different parts of Continental Europe since then. It has also spread its wings in Asia, particularly in India. It commenced in India in the year 2000, when the Government issued a notification under the Banking Regulation Act, which allowed Indian Banks to undertake insurance distribution business.

Bancassurance Models 

Internationally, 4 models of Bancassurance are in vogue

 

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JAIIB Paper IE & IFS Module D Unit 14- Insurance Products (Ambitious Baba)

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