Recent Developments in the Insurance Sector Sean McDermott, Director, Quest Group, London, UK Introduction When looking at the

insurance sector there is a wide spectrum of business types which includes life insurers, non-life insurers and reinsurers. Life insurers are best categorised as asset businesses usually linked in some way to the provision of savings, pensions or annuities of some kind. Non-life (or Property & Casualty) insurers are by contrast predominately liability businesses where premiums are received now to provide cover for claims (i.e. liabilities) that might arise at some point in the future. Life and non-life insurance companies both operate in a highly regulated environment and the typical balance sheet will have very substantial cash and investments so liquidity is generally not an issue. As a consequence, the ability of these entities to meet the liabilities as they fall due in the short term is invariably not the critical factor but rather the overall assessment of the balance sheet position which can include some very material and significant assumptions. As a consequence restructuring in the insurance arena, common with other areas of financial services, has different pressure points and therefore there is a tendency for insurance restructuring assignments to follow a very different path to other business sectors requiring specialist industry specific expertise. The restructuring need is predominately balance sheet driven often through some increase in liabilities (e.g. new reported losses on a catastrophic event.) such that the assets are insufficient to discharge the liabilities. Alternatively there may be some decrease in the value of assets with a similar balance sheet outcome. A significant, and common, exception to this is a restructuring that may be required where financing (debt or equity) is structurally subordinated in non-regulated holding companies or some intermediate holding company. The structural subordination protects policyholders in a regulated vehicle but can give rise to liquidity issues in servicing the debt if there is insufficient dividend funds flow from the regulated vehicle to service debt structures at the holding company level. This very issue can be observed in a number of recent situations such as Goshawk, Quanta and PXRE where the companies ceased underwriting new business following hurricanes Katrina, Rita and Wilma in 2005 and regulatory intervention impeded the release of capital to the holding company vehicles. Over the last few years the international insurance market has seen a relatively

benign environment from a restructuring perspective with a hard market (one where premium rates are high) and an absence of any major claims event. This coincided with a time when investment performance was generally very good and the major insurers around the world have been reporting record profits for the 2007 calendar year. By contrast, at the most recent year end renewal, premium rates have softened considerably and coupled with the deteriorating investment environment the situation may be about to change. Many of the earnings announcements from the insurer have directly commented on this changing landscape. Legal and regulatory developments (Solvency II) The EU is currently in the process of developing a comprehensive new framework for insurance supervision and regulation. This new framework is referred to as Solvency II and is scheduled to be implemented in or around 2012. The change in approach is a significant one with the development of a comprehensive risk based approach to regulation. Insurance groups are upgrading their capital modelling in anticipation of the new regime and at the same time using this as an opportunity to assess capital efficiency and ways in which that can be improved. For some groups the spotlight has turned on the capital cost of discontinued lines of business. Discontinued lines of business arise where business has been underwritten in the past but the obligation to pay claims may continue to run for many years after the last receipt of premiums. Historically the focus for capital measurement has been on future premium income. Capital modelling also considers the volatility in claims reserves and where such reserves relate to discontinued business this can be a significant capital drain. Recent Developments in Insurance Coverage Law By Sarah E. Morris View article as PDF (Requires Adobe Acrobat Reader) Both Minnesota's appellate courts and the U.S. District Court for the District of Minnesota have generated important insurance coverage decisions in the past year.

The courts tackled topics ranging from the requisites of a defense tender to the business pursuits exclusion and insurance coverage for sexual abuse. One decision alone - In re Silicone Implant Insurance Coverage Litigation, 652 N.W.2d 46 (Minn. App. 2002) - addresses 12 separate coverage questions. A summary of key recent cases follows. Tender of Defense In The Home Insurance Company v. National Union Fire Insurance, 658 N.W.2d 522 (Minn. 2003), the Minnesota Supreme Court tackled a coverage issue of first impression - what constitutes a tender of defense. The court held that an insured successfully tenders the defense of a lawsuit to an insurer simply by providing the insurer with "notice of a suit and opportunity to defend." 658 N.W.2d at 534. The insured need not specifically request that the carrier defend the suit. In Home Insurance Company, an attorney for the insured, Cargill, Inc., sent a copy of a complaint in a patent infringement suit against the company to its umbrella carrier. After the carrier declined coverage and Cargill started a declaratory judgment action, the carrier asserted the defense that Cargill never gave a "'formal tender of defense.'" Id. at 531. The court theorized that the notice and opportunity to defend rule would clarify the parties' obligations early in the action and acknowledge the insurer's greater sophistication, without burdening insurers. Id. at 533. The court's decision defied the prediction of the Eighth Circuit Court of Appeals in C.J. Duffey Paper Company v. Liberty Mutual Insurance Company, 76 F.3d 177, 178 (8th Cir. 1996), which had interpreted prior case law to imply a requirement that the insured specifically request a defense. Business Risk Doctrine Thomes v. Milwaukee Insurance Company, 641 N.W.2d 877 (Minn. 2002), the court's first business risk doctrine decision in several years, demonstrates the great impact business risk principles have on the court's view of exclusions that appear designed to preclude coverage for third-party property damage. The insured in Thomes contracted to clear land for development. Pursuant to erroneous instructions from its client, the insured cleared land owned by third parties, who sued the insured for damages. 641 N.W.2d at 879. When the insured sought CGL coverage from Milwaukee, the trial court granted summary judgment for the insurer, relying in part on an exclusion for "'property damage to . . . that particular part of real property on which you . . . are performing operations.'" Id. at 882.

The court of appeals held that the insured was entitled to coverage under the business risk doctrine and reversed. The Minnesota Supreme Court voted 4-3 to affirm. Although the court stated that the business risk doctrine did not provide a basis to disregard express policy exclusions, its extremely narrow reading of the exclusions in Milwaukee's policy appeared strongly influenced by its view that CGL policies are intended to insure against "risks arising from tort liability to third parties." 641 N.W.2d at 881. The court held the terms "that particular piece of real property" and "operations" were ambiguous and noted the insured's contention that the exclusion was intended to apply only to property identified in its contract, not to property owned by third parties. Id. at 883. The court also rejected a second exclusion, which precluded coverage for "'property damage to . . . that particular part of any property that must be restored, repaired or replaced because 'your work' was incorrectly performed on it.'" 641 N.W.2d at 883. The court concluded that "incorrectly performed" could encompass work performed on the wrong property, but that it could also apply to work performed in a faulty manner. Accordingly, this exclusion was also ambiguous. Id. at 884. In a strongly-worded dissent, Justice Stringer, joined by Justices Blatz and Paul Anderson, attacked the majority's construction of the policy exclusions as a "distortion," arguing "what could be more incorrect than performing the work on the wrong property?" 641 N.W.2d at 884-85. Declaratory Judgment Fee Award; Trigger And Allocation In Products Liability Action In late 2002, the Minnesota Court of Appeals issued its decision in In re Silicone Implant Insurance Coverage Litigation, 652 N.W.2d 46 (Minn. App. 2002), rev. granted (Minn. Dec. 17, 2002), the widely-watched complex coverage action arising from breast implant claims against 3M. The court reversed the trial court's precedent-challenging decision that although the insurers had breached no duty of defense, they were obligated to pay 3M's attorney fees in the coverage action. 652 N.W.2d at 74. The trial court had based its fee award on its finding that the insurers breached the implied covenant of good faith and fair dealing. The court of appeals noted that in the 36 years since the supreme court decided Morrison v. Swenson, 274 Minn. 127, 137-38, 142 N.W.2d 640, 647 (1966), the court had consistently refused to permit a fee award absent breach of a contractual duty to defend. 652 N.W.2d at 72. The court found the trial court's

criticism of the Morrison rule as "baffling" and discouraging prompt performance of insurance obligations to be inapt, because neither the legislature nor the supreme court has sanctioned fee recovery without statutory authorization or breach of the duty to defend. Id. at 73 (quoting Garrick v. Northland Ins. Co., 469 N.W.2d 709, 714 (Minn. 1991) ("[i]f the change in Minnesota's historical doctrine is to be made, it seems to us that this argument ought to be directed to the legislature.")). The court of appeals also addressed trigger of coverage and allocation of damages. The parties disputed whether coverage was triggered at the time of implant, or when the medical records revealed disease symptoms. 3M's experts argued that disease might not manifest itself until years after the injury. The insurers' experts contended that injury occurred immediately before disease symptoms appeared. 652 N.W.2d at 58. The court noted that although neither party accepted the contention that silicone implants could cause autoimmune disease, the claimants had obtained settlements with 3M on that theory. It concluded that on the conflicting testimony, the trial court's finding that bodily injury occurred at the time of implant when leaked silicone contacted body tissues was not clearly erroneous. Id. at 59. The court of appeals also affirmed the trial court's finding that the bodily injury was continuous, necessitating allocation of damages pro rata among the multiple carriers on the risk under Northern States Power Company v. Fidelity & Casualty Company, 523 N.W.2d 657 (Minn. 1994). 652 N.W.2d at 60. However, it concluded that the trial court erred by establishing an allocation period which ended on the last date the policies were in effect. The court applied the rule in Domtar, Inc. v. Niagara Fire Insurance Company, 563 N.W.2d 724 (Minn. 1997), which compared the period of time the insurer was on the risk to "the entire period during which damages occurred." 652 N.W.2d at 61 (quoting Domtar, 563 N.W.2d at 732 (emphasis in original)). Under Domtar, the proper allocation period extended from the date of implant to the date the underlying plaintiffs' lawsuits were filed or the plaintiffs died. Id. at 62. In Re Silicone Implant Insurance Litigation is significant as the first decision to apply the allocation principles of NSP and Domtar in the mass tort context. The Minnesota Supreme Court accepted review of the trigger, allocation and fee award issues in In Re Silicone Implant Insurance Litigation and heard argument on June 3, 2003. Practitioners will want to review the high court's decision on these important questions. Knowledge Of Potential Claim - Legal Malpractice Coverage

The Minnesota Court of Appeals recently decided a legal malpractice insurance coverage case that highlights the impact of an insured's failure to disclose a potential malpractice claim to its malpractice carrier. In Buller v. Minnesota Lawyers Mutual, 648 N.W.2d 704 (Minn. App. 2002), the court of appeals considered whether a lawyer's failure to report the possibility of a malpractice claim against him to his insurer precluded him from obtaining coverage for the claim. The insured in Buller represented two silo purchasers in an action against a silo distributor. 648 N.W.2d at 706. After the case was tried, the purchasers sued the insured for malpractice, alleging that they were damaged by his failure to properly plead fraud and punitive damages. The trial court in the underlying case found on September 22, 1992 that the parties had not tried a fraud claim by consent. The Minnesota Supreme Court affirmed the decision on June 24, 1994. Id. In June 1993, the insured had completed the application for his 1993-94 malpractice insurance policy. Although the application included a question regarding whether he was aware of "any incident which could reasonably result in a claim being made against [him]," the insured did not disclose the silo purchasers' potential claim against him. 648 N.W.2d at 706. When the former clients commenced a malpractice action, the carrier denied the insured's claim for coverage. The carrier cited the claims-made policy's insuring agreement, which provided that the policy covered prior errors and omissions, "if the insured had no knowledge of facts which could reasonably support a claim at the effective date of the first policy written and continuously renewed." Id. at 710. The carrier had insured the attorney from 1987 through 1999. From 1987-1994, the policy was renewed on an annual basis. On September 15, 1994, after the firm with which the attorney practiced disbanded, the policy was cancelled. 648 N.W.2d at 711. The carrier issued a new policy on the same date insuring the attorney's new solo practice. The attorney argued that because he had been an insured under a policy issued by the carrier since 1987, the first policy written and continuously renewed was the 1987 policy. Because he did not have notice of the claim when the 1987 policy became effective, the claim fell within the insuring agreement, under the insured's interpretation of the insuring agreement.Id. at 710. The court of appeals concluded that because the 1987 policy was cancelled and the insured purchased a new policy in 1994, the 1994 policy was the first policy written and continuously renewed. 648 N.W.2d at 711. The court reasoned that if the attorney had obtained a policy with another carrier in 1994, it would be clear

the policy was a new policy and the same result should follow even though the insured chose to use his prior firm's carrier. Because the supreme court had affirmed the decision that the parties to the underlying action had not tried a fraud claim by consent several months before the new policy's effective date, the court affirmed the trial court's ruling that the attorney had knowledge of facts that could reasonably support a claim on the policy's effective date. Id. Coverage for Sex Abuse Claims In B.M.B. v. State Farm Fire and Casualty Company, No. C3- 03-92, 2003 Minn. LEXIS 403 (Minn. July 10, 2003), the Minnesota Supreme Court, responding to a question certi- fied by U.S. District Court Judge Richard Kyle, ruled that a trial court may not infer intent to injure as a matter of law from nonconsensual sexual conduct where there is a genuine issue as to whether the insured's actions were unintentional due to mental illness. The insured inB.M.B. sexually abused his niece, who obtained a $1,595,000 judgment against him. Slip op. at 3. As assignee to the insured's policy rights, B.M.B. relied on expert testimony that the insured's sexual disorders prevented him from controlling his conduct and argued that his acts should be deemed unintentional under State Farm Fire & Casualty Company v. Wicka, 474 N.W.2d 324 (Minn. 1991). In Wicka, the supreme court held that an insured's actions are treated as unintentional for purposes of the intentional act exclusion when, because of mental illness, the insured does not know the nature of the act, or cannot control his conduct. 474 N.W.2d at 331. Subsequent to Wicka, the supreme court ruled in several cases that an intent to injure is properly inferred as a matter of law from non-consensual sexual conduct. See, e.g., R.W. v. T.F., 528 N.W.2d 869 (Minn. 1995); Allstate Ins. Co. v. S.F., 518 N.W.2d 37 (Minn. 1994); D.W.H. v. Steele, 512 N.W.2d 586 (Minn. 1994). The court rejected the insurer's argument that the Wicka holding does not apply to nonconsensual sexual contact. The court reasoned that the policy behind the intentional act exclusion - holding responsible those who choose to violate the law or intrude upon the rights of others - does not apply when the insured suffers from a mental illness. Slip op. at 9. The court noted the fact that "the insured-against conduct involves injury to members of the public" in support of its decision. Id. When policyholders' counsel become aware of the limits B.M.B. imposes on the intentional act exclusion, coverage counsel relying solely on this exclusion will have difficulty obtaining summary judgment in a coverage action arising from sexual abuse or sexual assault. Because B.M.B. does not impact other exclusions

explicitly directed at sexual abuse or other sexual conduct, insurers that have included these more specific policy exclusions should be able to obtain summary judgment in declaratory judgment actions seeking coverage for sexual abuse. In another interesting sex abuse decision, Capitol Indemnity Corporation v. Especially for Children, Inc., No. 01- 2425, 2002 U.S. Dist. LEXIS 17121, (D. Minn. Aug. 29, 2002), the Honorable Ann Montgomery ruled that an endorsement issued to a day care center for damages "'arising out of the rendering or failing to render professional services'" covered negligence and strict liability claims asserted against the center when an aide purportedly molested a child enrolled there. Id. at 9. The court reasoned that the center provided professional services when it cared for children. Plaintiff's allegations that the center had failed to perform duties in hiring and supervising the aide and in caring for the child "[could] only be described as falling within the scope of failure to render professional services." Id. at 11. In contrast, the court held that the endorsement did not cover battery and negligence claims against the aide, whose duties "did not include sexually abusing the children under his care." Id. _ .. Development of Insurance in India Articles & Presentations > Insurance Articles Development of Insurance in India

By Manoj Kumar, ACII (UK), CPCU (USA), ARe (USA), ARM (USA), FIII (India). MBA President & Managing Partner, Bancassurance Consultants Worldwide Ltd. (BCWL) Website: www.bc-worldwide.com | Email: manoj@bc-worldwide.com This is an award winning article which was critically acclaimed by Geneva Association and was published in 'Eutes et Dossier No. 236" from Geneva.

A thriving insurance sector is of vital importance to every modern economy. First because it encourages the savings habit, second because it provides a safety net to rural and urban enterprises and productive individuals. And perhaps most importantly it generates long-term investible funds for infrastructure building. The nature of the insurance business is such that the cash inflow of insurance companies is constant while the payout is deferred and contingency related. This characteristic of their business makes insurance companies the biggest investors in long-gestation infrastructure development projects in all developed and aspiring nations. This is the most compelling reason why private sector (and foreign) companies which will spread the insurance habit in the societal and consumer interest are urgently required in this vital sector of the economy. With the nation's infrastructure in a state of imminent collapse, India couldn't have afforded to be lumbered with sub-optimally performing monopoly insurance companies and therefore the passage of the Insurance Regulatory & Development Authority Bill on December 2, 1999 heralds an era of cautious optimism where stakes are high for all parties concerned. For the Govt. of India, Foreign Direct Investment (FDI) must pour in as anticipated; for foreign insurers, investments must start yielding returns and for the domestic insurance industry - their market penetration should remain intact. On the fringe, the customer is pondering whether all the hype created on liberalization will actually benefit him. The IRDA Bill provides for the establishment of an authority to protect the interests of the holders of insurance policies, to regulate, promote and insure orderly growth of the insurance industry and amend the Insurance Act, 1938, the Life Insurance Act, 1956 and the General Insurance Business (Nationalization) Act, 1972. The bill allows foreign equity stake in domestic private insurance companies to a maximum of 26 per cent of the total paid-up capital and seeks to provide statutory status to the insurance regulator. The insurance business in India is pegged at $ 6.6 Billion whereas industry leaders feel privatization will increase it

to

40

Billion

within

next

3-5

years.

Background India, with a population of 1 Billion offers great potential and opportunity for the insurance industry. Currently, two state-owned monoliths - Life Insurance Corporation and General Insurance Corporation (GIC), run the insurance industry. The General Insurance Corporation commands the general insurance sector along with four of its fully owned subsidiaries viz. National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. Malhotra Committee, appointed by the Government of India for conducting a study on insurance, in its report in 1994 stated that only 22% of the Indian population are insured. The poor reach of insurance in the country and the sheer numbers make India a market with tremendous potential. The following facts show how under-developed the Indian insurance business is due to state monopoly and lack of aggressive marketing of insurance policies: Per capita insurance premium in India is a mere US$ 6, one of the lowest in the world. In South Korea, the corresponding figure is US$1,338, in USA it is $ 2250 and in UK it is $1589. Insurance premium in India accounts for a mere 2 per cent of GDP compared to the world average of 7.8 per cent and G-7 average of 9.2 per cent. Insurance premium as a percentage of savings is barely 5.95 per cent in India compared to 52.5 per cent in the UK. Nationalized insurance companies have not been able to target niche markets that are currently served poorly or not at all. Life insurance products provide a good example. They compete with investment and savings options like mutual funds. It is imperative that they should offer comparable returns and flexibility. For instance, pure protection products like term assurance account for up to 20 per cent of policies sold in developed countries. In India, the figure is less than one percent because policies are inflexible. Besides, no Indian life assurance product is linked to non-traditional investment avenues such as stock market indices. Therefore, returns are lower than those on other savings instruments.

Similar is the case with pensions. The lack of a comprehensive social security system combined with a willingness to save means that Indian demand for pension products will be large. However, current penetration is very poor. By March 1998, LICs pension premium was only $ 22 Million. Making pension products into attractive saving instruments would require only simple innovations already common in other markets. For example, their returns might be tied to index-linked funds or a specific basket of equities. Buyers could be allowed to switch funds before the annuities begin and to invest different amounts at different times. Health insurance is another segment with great potential because existing Indian products are insufficient. By the end of 1998, GICs Mediclaim scheme covered only 2.5 per cent of total population. Indian products do not cover disability arising out of illness or disability for over 100 weeks due to accident. Neither do they cover a potential loss of earnings through disability. Retail segment or personal lines insurance, especially in general insurance is another area unexplored. Currently personal insurance, including health, householders, shopkeepers, personal accident, travel insurance and professional indemnity covers, constitute only 12 per cent of Indian general insurance premium. This poor figure is largely due to the lack of adequate distribution channels rather than a lack of products. By tapping such under-served niches, new entrants can expand the market substantially. Since service and speed will be valued, a price premium is also possible. Premium rates are at present set most unscientifically with very little attempt to fine tune the risk attached to different categories of businesses. The result is that they penalize the low risk category, which is in majority. This can be seen in the failure to differentiate between smokers and non-smokers in fixing premium for life and personal accident covers or between flood-prone areas and dry lands for fire and allied perils cover. This results in a great deal of cross-subsidization. Low premium rates in one area necessitate higher premium elsewhere. Mortality tables are not revised for ages and no effort is made at all to re-evaluate the rating of other classes based on recent loss experiences. Need for Global Integration

Recent economic liberalization started few years ago have started bringing in new investments from global giants and the government was hard pressed to facilitate global integration by lowering trade barriers for the free flow of technology, intellectual and financial capital. Additionally, reforms are essential if the Indian

economy is to achieve and sustain a growth rate of 7 to 8 per cent per annum. Reaching a faster growth path also implies attracting foreign direct investment inflows of $ 10 Billion every year, up from the current level of $ 3 to $ 3.5 Billion. Thus liberalization of insurance creates an environment for the generation of long term contractual funds for infrastructural investments. The Rakesh Mohan Report on Infrastructure says that 85% of funds for infrastructure development have to come from the domestic industry. It further says that India would need $ 100 Billion over the next five years to meet its infrastructure needs. Given the rate of savings in India, there is much more room to grow and one can expect an additional revenue of about $ 10 Billion a year entering the market to enhance infrastructure. Insurance is definitely going to be one area that will assist in mobilization of these funds. Multinationals' interest

Multinational insurers are indeed keenly interested in emerging insurance because their home markets are saturated while emerging countries have low insurance penetrations and high growth rates. International insurers often derive a significant part of their business from multinational operations. As early as 1994, many of the UKs largest life and general insurers derived 40 per cent to 60 per cent of their total premium from outside their home markets. The figure at Commercial Union was 76 per cent in that year. While the impact of global operations on their business may be large, typically foreign insurers take only a small share of an individual countrys market. In Taiwan for example, foreign companies took only a 3 per cent share even seven years after opening up. In Korea, their share was 1 per cent after 20 years. In China, a large and complex market like India, private insurers have not made much headway. Yet, new entrants find insurance attractive because even a small share of a large and growing market can be profitable. The Korean insurance market for example, was only the 30th largest market in the world by premium volume in 1971. It moved up to 6th largest in 1996. In any case, in India multinational insurers will be restricted to a minority shareholding in new companies. The new entrants will therefore be private Indian companies. The other reason why these large MNCs are interested in India is the economies of the insurance market. Insurance companies survive on the principle of spreading of

risk. No matter what the size of each player, an insurer cannot afford to operate in a niche market. Operating in a particular region would expose them to the economic downtrends in the region and derail their profits. Insurance companies, being long-term players, also have to avoid sudden dips in earnings to inspire confidence among investors to invest long-term funds. This can be achieved by spreading their operations over a wide geographical area. Moreover, for them, big is not just beautiful, but essential for survival. Which brings us to the avenues for growth. According to the Sigma report on global insurance brought out by the worlds second largest reinsurer Swiss Re - the international market is completely saturated. In the developed world, the growth in life insurance premium has been a meager 1.5%. As compared to this, LIC despite all its handicaps has been growing at a healthy clip of around 20%. Nationalized Sector: A Performance Review

In 1995-96, LIC had a total income from premium and investments of $ 5 Billion while GIC recorded a net premium of $ 1.3 Billion. During the last 15 years, LIC's income grew at a healthy average of 10 per cent as against the industry's 6.7 per cent growth in the rest of Asia (3.4 per cent in Europe, 1.4 per cent in the US). LIC has even provided insurance cover to five million people living below the poverty line, with 50 per cent subsidy in the premium rates. LIC's claims settlement ratio at 95 per cent and GIC's at 74 per cent are higher than that of global average of 40 per cent. Compounded annual growth rate for Life insurance business has been 19.22 per cent per annum and for General insurance business it has been 17 per cent per annum. However, there is other side of the coin too. Their large scale of operations, public sector bureaucracies and cumbersome procedures hampers nationalized insurers. The field staff and the agents of the GIC and its four wholly owned subsidiary companies have seldom bothered to venture out into the rural hinterland to sell crop or any other personal line insurance. Given the woeful lack of penetration of the rural market by the GIC subsidiaries, it is hardly surprising that a growing number of farmers across the country are resorting to the extreme remedy of suicide when their usually uninsured crops fail

The highest paid employees of the public sector, the estimated half-a-million employees of the nationalized insurance companies, are characterized by abysmal productivity, utter ignorance of the basic principles of the insurance business, endemic corruption, gross indiscipline and sheer laziness. Dominating the inevitably weak management of the nationalized insurance companies, the militant and strongly unionized employees of the nationalized monopoly insurance companies have transformed Indian insurance from volumedriven into class-based business. The domestic insurance companies, despite meeting their social objectives of going into the deepest interiors of the country, have lagged behind in meeting customer expectations in products and services. Privatization: Start Up Strategy

Potential private entrants therefore expect to score in the areas of customer service, speed and flexibility. They point out that their entry will mean better products and choice for the consumer. Critics counter that the benefit will be slim, because new players will concentrate on affluent, urban customers as foreign banks did until recently. This might seem a logical strategy from the point of view of new players. Start-up costs-such as those of setting up a conventional distribution network-are large and high-end niches offer better returns. However, in the long run 'middle-market' offers the greatest potential as in terms of it is the second largest market in the world. This may still be an urban market but goes beyond the affluent segment. Insurance, even more than banking, is a volume game. A very exclusive approach is unlikely to provide meaningful numbers. Therefore, private insurers would be best served by a middle-market approach, targeting customer segments that are currently untapped. Regulatory Issues

The IRDA Bill lays down that the Indian promoter must dilute the stake in the private insurance firms from 74 per cent to 26 per cent in ten years. The bill stipulates tough solvency margins -- Rs 500 million for life insurance firms, Rs

500 million or a sum equivalent to 20 per cent of net premium income for general insurance and Rs 1 billion for reinsurance business. The insurer has to maintain separate accounts relating to fund of shareholders and policyholders. The funds of policyholders should be retained within the country but does not cover repatriation of profits and dividends. Insurance companies under the new regime will have to have exposure to rural and social sectors. Foreign investment in insurance, the bill states, is crucial to financing infrastructure and better insurance cover. The key to success in opening up the insurance sector in India is regulation. An example of how poor regulation can destroy a market is the mutual fund industry. A combination of improper marketing practice and unfullfilable promises has resulted in a loss of investor faith in that industry. Incidentally, the insurance industry in India itself has gone through the same phase. One of the reasons for nationalization of the insurance industry (LIC in 1956 and GIC in 1973) was the mismanagement and malpractice of erstwhile private players. But if the statements of IRA officials are anything to go by, the new regulations are expected to be on the right track. N I Rangachary, chairman, IRA, has already provided the time table for the changes once the Bill is passed. The IRA has already indicated that it will have tough norms for new participants. Repositioning by Nationalized Sector

Floodgates of competition opened up by the privatization of insurance industry did throw a challenge to the well-protected nationalized sector and it seems they have picked up the gauntlet. LIC and GIC, both are trying to reposition themselves by having re-engineering done on the structure and operations of their respective organizations. Life Insurance Corporation is at present going through presentations from top management consultants. These consultants have been asked to narrate their experiences in countries where the insurance sector has been opened up for private competition so that the public sector player can draw lessons. Based on these, LIC will appoint a consultant which can provide them broad terms of reference on what changes are required to tackle the impending competition. GIC has already identified the areas that need to be activated and given a shape

through the four subsidiary companies. Foremost is the area of providing health insurance services. A change in the GIC Act will enable the corporation to float a joint venture company for health insurance. Other areas that the GIC is looking at are savings-linked insurance products and use of alternate distribution channels including bancassurance. Also in progress is the co-ordination of all foreign operations of the group. Even state-owned entities, SBI and UTI have serious plans for insurance sector as the banks have unsurpassed advantages over any other player. The intermediaries are also getting more organized with a little nudging from the IRA. The Reinsurance Consultants Association is planning to convert itself into the Insurance Brokers Association of India in anticipation of the laws being amended to allow insurance broking. Cross Border Experience

Cross-country experience shows that nowhere in the world has the entry of foreign firms threatened the position of domestic companies. Whether it is Malaysia, where the insurance sector has been open for more than 50 years and foreign companies account for about 10 per cent of market penetration or it is Indonesia, Thailand, China or the Philippines, where the market has been opened more recently, the total market share of foreign companies is less than 10 per cent except in Indonesia where it is about 20 per cent. Closer home, we have the experience of the banking sector where despite the presence of 42 foreign banks, their share in total banking assets is less than 10 per cent. Today hardly 20 per cent of the population in India is insured and insurance premium (life as well as non-life) account for just 2 per cent of GDP as against the G-7 average of 9.2 per cent. Consequently, the fear that new companies will displace public companies is misplaced. There is room for more for not only the existing companies but also for any number of competitors. In China, insurance premium accounted for just over 1 per cent of China's GDP in 1995 but in the four years since the market has been liberalized (albeit partially), spending on insurance has grown at a compound annual rate of 33 per cent. It is not just foreign companies alone that have grown but also the national PICC as well. The story is no different in S Korea. There, the opening of the sector saw the Big Six domestic players, who initially controlled the entire market, increase their business from 7 to 37 trillion won by 1997. Meanwhile foreign companies were not able to capture more than a miniscule 0.7 per cent of the market.

Future

Possibilities

(Next

5-10

Years)

Job opportunities are likely to increase manifold. The number of people working in the insurance sector in India is roughly the same as in the UK with a population that is 1/7 India's; the US with a population 1/4 the size of India has nearly 4 times the number. In the emerging markets, the picture is no less encouraging. In S Korea, the no of full time employees more than doubled over a ten year period. Thailand added 50 per cent more jobs in four years. The liberalization of the insurance sector promises several new jobs opportunities for those employed in the finance sector who are equipped with degrees in finance. Finance professionals who had witnessed a slump in the job market would be a much-relieved lot to hear about the privatization of the insurance sector. Let us look into the type of jobs that will be created once the private players come on the scene. Certainly, it won't be far different from the traditional streams in any other industry. There will be demand for marketing specialists, finance experts, human resource professionals, engineers from diverse streams like the petrochemical and power sectors, systems professionals, statisticians and even medical professionals. Apart from this, there will be high demand for professionals in the streams like Underwriting and claims management and actuarial sciences. There could be a huge inflow of funds into the country. Given the industry's huge requirement of start-up capital, the initial years after opening up are bound to see a strong inflow of foreign capital. Moreover, given that the break-even, typically, comes much later than in the case of other sectors, odds are that the first remittance of dividend will not happen before a good 10-15 years. In the areas of reinsurance, huge capacity is likely to be created with players like Swiss Re and Munich Re keenly observing the unfolding saga of liberalization of insurance industry in India. Not only the outward reinsurance will reduce, it is bound to attract inward reinsurance from the neighboring countries and regions. If the regulator is forward looking and legislature is supportive, this trend may well lead to the creation of a Lloyds like market for the direct as well as reinsurance businesses. However, increased competition is very likely to result in rate reductions in certain classes of business, but in those areas that have so far been cross subsidized, an increase in rates may be possible. Overall, the rate reductions may outweigh the

increases, thus bringing down the re-insurance premium volume available. Apart from pure re-insurance activities, which is providing insurance protection, a revolution will come in service related fields like training, seminars, workshops, know-how transfer regarding risk assessment and rating, risk inspections, risk management and devising new policy covers, etc. Also, with more players in the market, there will be significant increase in advertising, brand building, and keen pricing not ridiculous pricing and this will benefit whole lot of ancillary industries. Another effect of de-regulation will be that, projects, especially mega-projects where one needs the capacities of the international re-insurance market, will get exposed to international trends to an even greater extent than is the case today. This will affect rates too. Areas like the personal lines segment, where we also expect to see substantial growth as also new types of covers, would usually not be affected by international trends in the same way as, there is much less need for global re-insurance support. Substantial shift in the distribution of insurance in India is likely to take place. Many of these changes will echo international trends. Worldwide, insurance products move along a continuum from pure service products to pure commodity products. Initially, insurance is seen as a complex product with a high advice and service component. Buyers prefer a face-to-face interaction and place a high premium on brand names and reliability. As products become simpler and awareness increases, they become off-the-shelf, commodity products. Sellers move to remote channels such as the telephone or direct mail. Various intermediaries, not necessarily insurance companies, sell insurance. In the UK for example, retailer Marks & Spencer now sells insurance products. In some countries like Netherlands and Japan, insurance is marketed using post office's distribution channels. At this point, buyers look for low price. Brand loyalty could shift from the insurer to the seller. In other markets, notably Europe, this has resulted in bancassurance: banks entering the insurance business. The Netherlands led with financial services firms providing an entire range of products including bank accounts, motor, home and life insurance, and pensions. Other European markets have followed suit. In France over half of all life insurance sales are made through banks. In the UK, almost 95% of banks and building societies are distributing insurance products today. In India too, banks hope to maximize expensive existing networks by selling a

range of products. Various seminars and conferences on bancassurance are taking place and many bankers have clearly shown their inclination to enter insurance market by leveraging their strengths in the areas of brand image, distribution network, face to face contact with the clients and telemarketing coupled with advanced information technology systems. The mergers of Citibank with Travellers in USA and of Winterthur, the largest Swiss Co. with Credit Suisse are recent examples of the phenomenon likely to sweep India too. Insurers in India should also explore distribution through non-financial organizations. For example, insurance for consumer items such as refrigerators can be offered at the point of sale. This piggybacks on an existing distribution channel and increases the likelihood of insurance sales. Alliances with manufacturers or retailers of consumer goods will be possible. With increasing competition, they are wooing customers with various incentives, of which insurance can be one. Another potential channel that reduces the need for an owned distribution network is worksite marketing. Insurers will be able to market pensions, health insurance and even other general covers through employers to their employees. These products may be purchased by the employer or simply marketed at the workplace with the employers co-operation. Worldwide interest in E-commerce and India's predominant position in information technology and software development is also likely to be a major factor in the marketing of insurance products in the immediate future. The internet account is increasing in arithmetic progression and the trend has already been set by some of the leading insurers and insurance brokers worldwide. Finally, some potential Indian entrants into insurance hope to ride their existing distribution networks and customer bases. For example, financial organizations like ICICI, HDFC or Kotak Mahindra intend to tap the thousands of customers who already buy their deposits, consumer loans or housing finance. Other hopeful entrants anticipate specific alliances such as with hospitals to provide health cover. Conclusion Over the past three years, around 40 companies have expressed interest in entering the sector and many foreign and Indian companies have arranged anticipatory alliances. The threat of new players taking over the market has been overplayed. As is witnessed in other countries where liberalization took place in recent years we can safely conclude that nationalized players will continue to hold strong market share positions, but there will be enough business for new entrants to be

profitable. Opening up the sector will certainly mean new products, better packaging and improved customer service. Both new and existing players will have to explore new distribution and marketing channels. Potential buyers for most of this insurance lie in the middle class. New insurers must segment the market carefully to arrive at appropriate products and pricing. Recognizing the potential, in the past three years, the nationalized insurers have already begun to target niches like pensions, women or children. . IRDA bringing new changes to strengthen insurance sector India's supreme authority in insurance, i.e. the Insurance Regulatory and Development Authority (IRDA) is in the process of bringing in many positivistic regulatory changes to tone up the developing insurance industry. On Tuesday, while addressing the Assocham global insurance summit, IRDA Chairman J. Hari Narayan expressed, Expect a fair amount of continued regulatory activity in the insurance sector." Mr. Narayan further said that there is a need to bring changes in the insurance agents' training curriculum to enhance their strength and productiveness. He also addressed the issue of increasing the insuring companies' reach to enhance the reaching ability of insurance products to common man. Assocham President Dilip Modi also remarked on the emerging insuring sector. Boosted by other favourable factors such as better terms, availability of wide variety of products and tax benefits, the insurance sector could emerge as one of the fastest growing insurance markets in the coming decade," Mr. Modi contributed. . Insurance Trends in India :

With the de-regulation in Indian Insurance industry, the monopoly of public sector companies in life insurance and general insurance has come to an end. This has augmented the innovative practices initiated by the private players. Growth in the interactive technology such as internet has further created a wave of excitement in the insurance market. Indian economy and Indian Insurance sector is committed to a double digit growth. Heres a glimpse of Insurance Industry over 190 years. Background : Insurance is a Rs 450 billion industry in India. The value of the market is determined by gross premium incomes. The life insurance segment writes about 80% of the overall market value.Indian Insurance market was at its all time high in 2003 with a growth of about 17.4% over the pervious year. Since 2001 Insurance is growing at the rate of 15-20 % annually. The growth in the insurance industry is affected by volatility in real estate rates, GDP rates and long term interest rates. Fluctuations in exchange rates also affect the growth in this sector. The gross premium as a percentage of the GDP has gone up from 2.3 in the year 2000 to 4.8 in 2006. Together with banking services, it adds about 7% to the countrys GDP. History of Indian Insurance : A] Ancient Historical Times : Insurance is as old as human society itself. The ancient origin of insurance is Emerigon, whose brilliant and learned Traite des Assurances, first published in 1783, is still read with respect and admiration. The result shows that insurances were known to the ancients such as Romans, Phoenicians Rhodians, although the business of underwriting commercial risks was probably not highly developed. The histories of Livy and Suetonius shows that the contractors who undertook to transport provisions and military stores to the troops in Spain stipulated that the government should assume all risk of loss by reason of perils of the sea or capture and this was probably the first time when insurance process was known. There were friendly societies organized, for the purpose of extending aid to their unfortunate members from a fund made up of contributions from all. These societies undoubtedly existed in China and India in the earliest times. The earliest traces of Insurance in the ancient Indian history was in the form of marine trade loans or carriers contracts, which can be found in Kautilyas Arthashastra, Yajnyavalkyas Dharmashastra and Manus Smriti. These works show that the system of credit and the law of interest were well developed in India. They were based on clear appreciation of hazard involved and the means of safeguarding against it. B] British-India Period : Insurance in India without any regulations started in the nineteenth century. It was a typical story of a colonial era where a few British insurance companies

dominated the market serving mostly large urban centers. Company started by Europeans in Calcutta was the first life insurance company on Indian Soil. Bombay Mutual Life Assurance Society indicated the birth of first Indian life insurance company in the year 1870, and covered Indian lives at normal rates. 1930s was the last of the old-style crises in the Indian economy because it marked the beginning of the end of the colonial state and an acceleration of the pace of industrialization as entrepreneurs moved their capital out of the countryside. Independent India reduced its vulnerability to external economic shocks by close control of foreign exchange and by promoting a massive change in the export schedule. Till the end of nineteenth century insurance business was almost entirely in the hands of overseas companies. C] Post Independence era of Indian Insurance : The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon. During Mrs. Gandhis tenure (from 1966-1968), there was a split within the business community of protectionists and those who wanted more open trade. But what maintained the momentum was the commitment of Two Ministers, Ashok Mehta and Subramaniam towards liberalization of the economy. This was seconded with high hope of getting increased foreign aid. Deregulation actually helped the poorest in India as it would eventually create more employment and faster growth. Yet the intense fears of liberalization in the lower middle class and among working class employees of the state sector, pose serious risks in freeing the economy. It might be preferable to introduce liberalization during an economic upswing when the risk of switching jobs is less traumatic. The three liberalization episodes in Indian economic policy have followed clear cyclical patterns. Economic policy has swung broadly between controls and greater openness, with a tendency toward decontrolling larger and more important segments of the economy. D] Nationalization Phase of Indian Insurance : 1944 : The Nationalization of insurance industry gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. 1956 : 154 Indian insurance companies, 16 non-Indian companies and 75 provident societies were taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 Crore from the Government of India. 1972 : The General Insurance Business (Nationalisation) Act, which nationalised the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance

Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership too was taken by means of a comprehensive bill. However, it was only in 1956, LIC was nationalised, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.And as of 2007, LIC is Indias leading Insurance company, with 2000 branches, which probably is the highest number of branches across India insurance sector. E] Liberalization of Indian Insurance : 1994 : Insurance sector invited private participation to induce a spirit of competition amongst the various insurers and to provide a choice to the consumers. 1997 : Insurance regulator IRDA was set up as there felt the need: a) To set up an independent regulatory body, that provides greater autonomy to insurance companies in order to improve their performance, b) To Enable them to act as independent companies with economic motives. c) To Protect the interest of holders of insurance policies. d) To Amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General insurance Business (Nationalisation) Act, 1972 e) To end the monopoly of the Life Insurance Corporation of India and General Insurance Corporation and its subsidiaries . In the first year of insurance market liberalization (2001) as much as 16 private sector companies including joint ventures with leading foreign insurance companies have entered the Indian insurance sector. Of this, 10 were under the life insurance category and six under general insurance. Thus in all there are 25 players (12-life insurance and 13-general insurance) in the Indian insurance industry till date. F] Indian Insurance in 21st Century : 2000 : IRDA starts giving licenses to private insurers : ICICI prudential and HDFC Standard Life insurance first private insurers to sell a policy 2001 : Royal Sundaram Alliance first non life insurer to sell a policy 2002 : Banks allowed to sell insurance plans. As TPAs enter the scene, insurers start setting non-life claims in the cashless mode 2007 : First Online Insurance portal, www.insurancemall.in set up by an Indian Insurance Broker, Bonsai Insurance Broking Pvt Ltd. The Government of India liberalised the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership.

Minimum capital requirement for direct life and Non-life Insurance company is INR1000 million and that for reinsurance company is INR 2000 million. In the 2004-05 budget, the Government proposed for increasing the foreign equity stake to 49%, this is yet to be effected. Under the current guidelines, there is a 26 percent equity cap for foreign partners in direct insurance and reinsurance Company. (World Bank Economic Review-2000). Online Insurance In India : Internet access in India has doubled every year over the last five years and forecasts predict this growth to quadruple every year over the next three years. According to emarketer report on India online, in 2007, about 33.2 million people in India accessed internet and thats about 2.9% of Indian population. This figure is going to be 71.6 million people, which will be about 6% of population by 2011. Considering limited access of human-insurance agents in rural areas, there will more demand of purchasing insurance online from these areas, followed by semiurban areas. The insurance portals that are active in online distribution are www.icicilombard.com, www.bajajallianz.co.in, www.insurancemall.in, www.bimaonline.com, www.insurancepandit.com. Recently, Compare Choose Buy portals like Bonsai Insurance Brokers www.insurancemall.in, have been developed for providing comparison of different types of insurance policies, their premiums and their purchase online. The policy details are stored digitally and all transactions are made over secure channels. E-insurance offers a new gateway of incomes and provides additional market penetration, which is a need of an hour for Indian Insurance Segment. The First Movers in eDistribution of Insurance goes to 3 companies in India : 1. ICICI Lombard General Insurance 2. Bajaj Allianz General Insurance 3. www.insurancemall.in ( Created by Bonsai Insurance Broking.) . Policy lapse - what happens if you stop paying your life insurance premium Many of us are often unable to continue to pay the premium towards our life insurance policy. Whether its because we were careless and forgot, or if its because we don't see value in continuing with the policy, or because we are in a financial crisis and can't afford it any further, our inability to pay the premium due can result in the policy becoming lapsed. As a result our life insurance coverage ceases to exist. This situation can be dangerous because if something happens to you, your financial dependants/beneficiaries might not get any benefit, which was the reason

for you to get the insurance policy in the first place. Here are some basics on policy lapsation and revival that all policyholders must know. Why will my life insurance policy lapse? As long as you are regular and up to date with your premium payments, your policy will remain alive. If something happens to you during this period, the insurance company will honour its commitment and pay you or your beneficiaries, depending upon the type of policy you have. However, if you stop paying your premium, then the insurance company will no longer be obliged to continue providing an insurance cover on your life. In this situation, your policy is said to have lapsed. The insurer might not provide any monetary benefits (the sum assured under the policy) to you or your beneficiaries if something were to happen to you. Before your policy lapses, you still have a limited time period during which you can make good on a delayed premium payment. If you are late on your premium payment, the insurer will send you a reminder and give you a grace period within which to pay your premium. This is usually 15 days when you pay your premium monthly and 30 days in all other cases. If even after this grace period you have not paid the premium, then your policy will lapse. The insurer will send you a letter informing you of the same. Can I revive a lapsed policy? Will the benefits be the same after revival? Most traditional policies (like term, whole-life and endowment plans) can be revived, subject to certain criteria that your insurer might impose on you. Revival can happen at any time, but the conditions for revival might depend upon how long the policy has been lapsed for. At a minimum, under the insurance laws, if the policy has been in force for at least 3 years, the insured gets up to 2 years to revive the policy. (Some insurers like LIC have special schemes under which policies can be revived for up to 5 years from being lapsed). If you revive the policy within 6 months from the date of lapsation, the process might be as simple as paying the overdue premium (and interest) to catch up on the delay on your part. If you revive the policy after 6 months from the date of lapsation, you might be required to pay the overdue premium, penalty fees, as well as interest payment that

could be up to 12%-18% of the premium payment, depending upon the type of policy and the date of purchase. At the time of revival, the insurer might impose a lot of conditions or even decline your request for a policy revival if it is not convinced about the integrity of your application on grounds of suspected fraud or the like. It can be very likely that the insurer will ask you to appear for a medical test before the policy can be revived to ascertain whether you have a developed a new medical condition during policy lapse that might expose the insurance company to a high risk in insuring your life. At revival, usually, the full benefits you or your beneficiaries are eligible for will be reinstated. However, if after revival, the insured commits suicide within 1 year, the insurer can deny the claim. Similarly, if the insured passes away within 2 years of the revival, the insurer has the option of conducting an inquiry before they decide to pay the claims to the beneficiaries. Can one still file a claim on a lapsed policy? If a policy is less than 3 years old but then lapses, and if something happens to you after the policy lapses, and a claim is filed, the insurer will not pay you anything. At best, the insurer might be willing to give you or your dependants the premium payments that you made. But, this is also totally at the insurer's discretion. If a policy is more than 3 years old but then lapses, and if something were to happen to you, under existing insurance rules your dependants can still get some benefit. However, the insurer will pay out only a reduced sum assured based on a pre-set formula (for those who are technically inclined, its the number of premiums paid to the total number of premiums payable). What if I am facing a cash crunch and can't pay my premium? One choice you have is to review your insurance contract and change the terms. For instance, you can reduce your sum assured amount and your premiums will go down accordingly, perhaps making it more affordable for you to keep the policy in force. Life insurance is a necessary financial instrument that every person with financial dependants must have. Don't let your policy lapse, otherwise your financial dependants might end up facing financial hardship when you are not around to provide for them.

 Revive your lapsed policies, the easy way Dhruv Agarwala & Kartik Varma, Aug 13, 2010, 07.00am IST Tags: LIC| insurance| Health Policy Many of us are often unable to continue paying premiums towards our life insurance policy, causing the policy to lapse. Policy lapsation can be dangerous as you or your financial dependants/beneficiaries may not get any benefit, which was the reason for buying the insurance cover.

One needs to know the reasons behind the policy lapsation and how one can revive it, if need be, at a later date. An insurance policy may cease to exist due to various reasons. It could be because of carelessness or because one doesn't see value in continuing with the policy, or because of a financial crisis and can't afford it any longer. Here are some basics on policy lapsation and revival that all policyholders must know. Your Policy Bond And Its Safety The policy bond is the document that is given to you after we accept your proposal for insurance. The risk coverage commences after acceptance of your proposal and the conditions and privileges of your policy are mentioned in the policy bond. This is an important document which would be referred to for various servicing interactions with you Keep the policy bond safe. It will be required at the time of settlement of claims on the policy. You will also require it if you are availing a loan or want to assign the policy. Inform your spouse/Parents/Children as to where the policy is kept. In case you are handing over the policy bond to any person or office, please take a written acknowledgement. Keep a Photostat copy of the policy for your reference.

Your Policy Number The policy number is consisting of nine digits and can be found at the top left hand corner of the schedule of your policy bond. This is a unique identification number that distinguishes your policies from other policies and will remain unchanged throughout the lifetime of the policy. Remember to quote the policy number every time in your correspondence, as it helps us to locate your records for reference.

Policy Conditions Every policy is taken for different types of needs; therefore the conditions for your policy will vary according to the Plan and Term of the policy. The policy schedule contains on the first page of your policy, like the ones mentioned above as well as other information like nominee, your address etc. It also shows the date of commencement of your policy, date of birth, date of maturity, due dates and months in which the renewal premiums are to be paid etc. The second page onwards carries the various policy conditions like risk coverage, additional risks coverage if opted for, standard benefits that are available for all policies, accident benefit if opted for, exclusion of risks if any and other conditions that govern the contract of insurance. Apart from death benefits there are other standard benefits and benefits opted by the policyholder, which you might want to familiarize yourself with (Clickhere to know more about various types of policy conditions and their implications).

Alterations In Policy There may be instances when you would like to make alterations in your policy like change of premium payment mode, reduction in premium paying term etc. Your applications may be given in writing to the branch that services your policy for our further action. There are different types of alterations that are allowed on our life insurance policies( Click here to know more about alterations).

If Your Policy Is Lost Kindly make a thorough search before concluding that you have lost the policy bond. Look for the same within your residence, among your investment papers, at your office and even with your agent to whom you might have entrusted the document for some reason. It could have been even pledged with LIC/any other financial institution for availing a loan by you. LIC retains the policy bond when you go in for a loan against the policy. Make sure that the document you are searching is not one that has already been assigned to LIC, or to another financial institution. If the policy bond is partially destroyed due to natural causes like, fire, flood, etc, the remaining portion may be returned as evidence of loss of policy to LIC, while applying for a duplicate policy. In case you are sure that the policy bond is untraceable due to unknown causes, there is a simple procedure to comply with while applying for the duplicate policy at the branch that services your policy (Click here to know about obtaining duplicate policies).

Your Contact Address Keep Us Posted Without Fail Your address is very important for us. Without your latest address we would not be in a position to contact you for any service offering. We would not like to keep any benefit that is due to you pending for want of this very important information.

Whenever you shift residences, please inform the new address to us. Otherwise any communication we send to you, like premium notices, discharge vouchers for maturity and survival benefits etc., will get delayed in reaching you. LIC provides for change of addresses, inclusion of telephone numbers, mobile numbers and email addresses in your contact addresses information. Kindly inform your servicing branch to incorporate the same in your policy records.

Admission Of Age Check your policy bond and see if your date of birth is correctly given therein. This is one of the factors on which the premiums you pay for your policy is arrived at. This would also form the basis of all future policies you might avail from us. In case your earlier policies do not have your date of birth incorporated and you do have a date of birth certificate issued by the competent authority, you may send an attested copy of the same to us, with a request to admit your age (Click here to find out the certificates of age that LIC accepts.)

Nomination Ensure that the nominees name is correctly incorporated in the policy bond. You may change the nomination in your policy any time during the lifetime of the policy In case you have not included the name of the nominee till now, please do not delay; inform us your nomination immediately. Kindly note that the change of nomination has to be done in the branch that services your policy. The nominee is the person to whom the insurance claim amounts would be payable, in case anything unfortunate within the purview of the policy conditions happens to you. The policy is usually taken by you to benefit your family nominate the persons

wholl have the welfare of your family in your absence; the usual preferences being spouse and children. You may nominate even minors like your children, in which case you have to name another person wholl have the welfare of the minor children, as an appointee( Click here to know more about nomination).

Assignment In case you are raising a loan against your policy from LIC or any other financial institution, your policy would have to be assigned to LIC or the financial institution. When you assign the policy the title of the policy is shifted from your name to that of the institution. The policy would be reassigned to you on the repayment of the loan. A fresh nomination should be done after reassignment of the policy. Assignment of policies can be done even when a loan is not required or for some special purposes (To learn more about assignment Click here).

When To Pay The Premiums Remember to pay your premium in time, even if our notices do not reach you. There may be a postal delay. LIC usually sends premium notices one month in advance to the due month of the premium. The months in which premiums are due are given on the first page of the Policy bond.

Grace Period For Premium Payment In case you have not paid the premium within the due date there is still time for you to make the payments without payment of interest on the premium. This period is called the grace period. (With the exception of some plans) The grace period for policies where the premium payment mode is monthly is 15 days from the due date. The grace period for policies where the premium payment mode is quarterly, halfyearly or yearly is one month but not less than30 days.

How And Where To Pay The Premiums

By cash, local cheque (subject to realization of cheque), Demand Draft at Branch Office. The DD and cheques or Money Order may be sent by post. You can pay your premiums at any of our Branches as 99% of our Branches are networked. Many Banks do accept standing instructions to remit the premiums. So by providing a standing instruction to your Bank to debit your account for the premium amount and send it vide a bankers cheque to LIC, on the due dates and months mentioned on your policy bond. Through Internet : Payment of premiums can be made through Internet through Service Providers viz.HDFC Bank, ICICI Bank, Times of Money, Bill Junction, UTI Bank, Bank of Punjab, Citibank, Corporation Bank, Federal Bank and BillDesk. Premium payment can also be made through ATMs of Corporation Bank and UTI Bank. Premium payment can also be made through Electronic Clearing Service (ECS) which has been launched at Mumbai, Hyderabad, Chennai, Kolkata, New Delhi, Kanpur, Bangalore, Vijaywada, Patna, Jaipur, Chandigarh, Trivandrum, Ahmedabad, Pune, Goa, Nagpur, Secunderabad & Visakhapatnam. A policyholder having an account in any Bank which is a Member of the local Clearing House can opt for ECS debit to pay premiums. The policyholders wishing to use this system would have to fill up a Mandate Form available at our Branches/DO and get it certified by the Bank. The certified Mandate Forms are to be submitted to our BO/DO.

Policy can be anywhere in India: Citibank Kiosks at Industrial Assurance Building, Churchgate, New India Building, Santacruz, Jeevan Shikha Building, Borivili are dedicated for collection of premiums through cheques.

Policy Status Where Available Status of your policy indicates if your policy is in force or has lapsed due to nonpayment of premium. It also provides other important information with respect to your policy, for your reference. The status of your policy is available at the branch that services your policies. It is also available through our Interactive Voice Response Systems in select cities (Click here to find out if your city is covered). In cities connected by our computerized networks the status will be available in any of the branches. Now the policy status of policies being serviced in the cities connected by network are also available through Internet (Click here to register for these services). In select cities online touch screen kiosks are also provided where you can view your policy status.

Revival Of Lapsed Policies If your policy has lapsed due to non-payment of premiums within the due date, the terms and conditions of the policy contract are rendered void, till you revive your policy. A lapsed policy has to be revived by payment of the accumulated premiums with interest as well as giving the health requirements as required . (Clickhere for knowing more about the revival procedure and the different types of revival allowed) Always keep your policy in force to ensure that your family gets their financial protection assured by your policy. However certain concessions dependent on the term for which you have paid the

premiums are available with the exception of some plans for claims concession. (Clickhere to know the concessions for delayed premium payment and for claims during the lapsed period).

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Availing Loans On Policies Many of our plans are of endowment type and you would be allowed to raise a loan against your policy should you require funds. You repay the loan with interest or continue paying the interest and allow the loan to be deducted at the time of the claim payments. Further loans on policies are also allowed after deduction of earlier out standings (Click here to find out more about loans on policies). Most financial institutions too allow loans against LIC policies based on the value LIC quotes on request from you.

Surrender Value This is the value which is the amount payable to you should you decide to discontinue the policy and encash the same from LIC. Surrender value is payable only after three full years premiums are paid to LIC. More over if it is a participating policy the Bonus get attached to it as per prevalent rules. Surrender of policy is not recommended since the surrender value would always be proportionately low. Should you decide to go in for another insurance at this stage further insurance would be available to you at a much higher premium because your age would have advanced since taking out the earlier policy. Therefore retention of earlier policies and continuation of all policies without allowing them to lapse is the best strategy for continuing life insurance protection.

Maturity, Survival Benefits, Disability And Death Claims: When your Survival Benefits (For Money back policies) or maturity benefits are due, we send intimations to you in advance. However, if the survival benefit amount is less than or equal to Rs.60,000/- the same will be sent to you directly without policy or discharge forms with a few exceptions. If such intimations have not come to you before the due date kindly inform us so that we may take necessary action (Click here to know about the claims procedure)

Policies Under Salary Savings Scheme If you have taken your policy under salary Saving Scheme please read the following suggestions : 1. For each Salary Savings Scheme Policy your employer deducts the premium from your salary and sends a consolidated cheque for all the policies of the employees to a designated Branch of LIC, where all the policy files are maintained. 2. You can find out which Branch of LIC your policy file will be serviced either from your Agent or from the pay roll department of your employer. 3. You will need to know which branch of LIC services your policy because you will require their help in getting your Maturity/Survival Benefits, for any alterations like change of address and for availing loans etc. 4. In case you are in a transferable job please inform the designated Branch of LIC about your new place of posting. After you join your new place of posting please ask your employer the LIC Branch where the premiums are being remitted by your office there and inform the LIC Branch which was servicing you earlier so that your policy files can be transferred. 5. This way your records will be at correct place and will receive the services from us like maturity, in time. In case you are leaving your employer for a new job or joining another firm, you have the facility to either continue the policy under the Salary Savings Scheme of your new firm or to convert the payment mode into quarterly, half yearly or yearly mode.

6. Always ensure the continuity of premium payments to avoid frequent revivals of policy. This may become a cumbersome process for a person who is in a transferable job. 7. Please do not send any installments directly to us. Your premium must come through your employer only. We do not have systems to adjust single installments received from our policy holders. Otherwise please convert the mode into quarterly, halfyearly, or yearly and pay directly. This way you also get a discount on the premium payable. 8. Leave a permanent local address with us so that we can reach you wherever you are even after many years. Disclaimer: The information contained herein is only to guide you and does not purport to be binding on either party. The contractual implications of your policy will be subject to the terms and conditions of your proposal and the policy document issued to you. They may be also subject to the rules and regulations of the corporation notified from time to time which may be subject to revision and change. The contract will also be subject to the prevailing laws of the country.

Helpline To ensure that you get the best out of your policy please read our guidelines carefully. 1. Keep the policy bond safe. It will be required at the time of maturity or Survival Benefit. You will also require it if you are availing a loan or want to assign ypur policy. 2. Inform your spouse/Parents/Children as to where the policy is kept. 3. When you shift residences, please inform the new address to us. Otherwise any communication we send to you, like premium notices, discharge vouchers, etc., will get delayed in reaching you. 4. Ensure that the nominees name is correctly incorporated in the policy bond. 5. Remember to pay your premium in time, even if our notices do not reach you. There may be a postal delay. The months in which premium are due are given in the Policy bond. 6. You may pay the premium by Cheque, DD or Money Order. Remember to quote the policy number everytime in your correspondence. The policy

number is consisting of nine digits and can be found at the top left hand corner of the policy bond. 7. Check your policy bond and see if your date of birth is correctly given therein. 8. In case you are handing over the policy bond to any person or office, including the LIC office please take a written acknowledgement. 9. When your Survival Benefits (For Money back policies) or maturity benefits are due, we send intimations to your three months in advance. If such intimations have not come to your even within one month of the due date kindly inform us so that we may take necessary action. 10.When in doubt call your agent or the Branch from where you took the policy. Our Branches are our Operating Units. Hence, for any servicing matter, contact the Servicing Branch of your policy. However, for obtaining general information, you can contact any of the Branches of LIC. . . Life Insurance Cover Policy Lapse & Revival

Under the current economic scenario many of us are tightly placed when it comes to our finances. Many of us are in a worser situation that the others. Some of us are even unable to pay their life insurance policy dues. Under such testing times it is our prime responsibility to ensure that our insurance policies remain intact and do not get lapsed. What is a Lapsed Policy? The insuring company provides us the insurance policy based on the premium amount we pay them on a regular basis. This can be monthly or quarterly or half yearly or even annual. A policy lapse means that the life insurance contract between the insurer and the insured (YOU) is terminated. When does a policy lapse?

As long as we pay our dues on time the policy remains in force. The moment we stop paying our premiums the policy lapses and theinsurance cover provided by the policy becomes nullified. A lapse occurs when premiums are not paid even during the grace period. The life cover continues during the grace period whose duration varies based on the type of policy and premium payment frequency. What is the Grace Period offered by Insurance Companies? The grace period offered to us differs on the policy type and the premium payment frequency. Let us take 3 major categories of policies and analyze the available grace time. 1. ULIPs that are 3 years old or less For ULIPs that have been in effect for three or less years and that have a regular premium paying system, the grace period offered by the companies is usually one month. Once this period is over the policy lapses. But, during the grace period the cover continues. So if a claim is made during the grace period, the nominee would get the benefits. 2. ULIPS that are more than 3 years old ULIPs that have been in effect for more than 3 years, assume a paid up value since an investment corpus is already accumulated from the premiums paid in the previous years. This means that even if further premiums are not paid, the policy continues so long as the fund value covers the expenses that the insurance company incurs in managing your fund. 3. Traditional Insurance Plans In case of traditional policies like term plans, money back plans or endowment plans etc the insurers give a grace period of about a month or upto a maximum of 3 months. The cover continues during this period. If the premium is not paid by the end of this period, the policy lapses and the life cover ceases.

What can we do if a policy lapses? Most insurance companies have an option wherein we can revive the policy by paying a small penalty amount. Even after the grace period is over, we can pay our premiums with a small penalty which the company takes as charges for not paying the premium on time and revives the policy. Since insurance is an important aspect of our financial plans, it is very important that we do not delay our premium dues and pay them on time . 7 main Insurance Lapse Conditions 1. Lapse of Policies : The insurer shall remain liable for the payment of the claim so far the assured continues to pay the premiums when they fall due. If the policyholder fails to pay any of the due premiums within the days of grace, the insurance liability ordinarily ceases under the policy and the contract comes to an end. Thus the policy is lapsed and all the benefits related to the policy are terminated. The insurer, however, provides certain alternatives to help the insured at the time of causation. 2. Revival of Lapsed Policies : If a policy lapses by non-payment of premium within the days of grace, it may be revived to the full policy amount at any time during the life time of the life assured, but within a period of five years from the due date of the first unpaid premium and before the date of maturity. The revival is possible within six months from the due date of the first unpaid premium without evidence of health on payment of the premiums in arrears with interest at the rate of 7 x A per cent per annum compounded half yearly. The revival after the first six months from the due date of the first unpaid premium but before five years from the due date of the first unpaid premium will be

effective only on satisfactory production of evidence of health and habits of the life assured and no adverse change in personal or Family History or occupation. 3. Special Revival Scheme : Many policyholders find it difficult to pay the arrears of premiums with interest to revive their policies. For them the special revival scheme is beneficial to gain the cover of insurance. Under this scheme, the date of commencement of policy will be fixed by dating back the policy. The period for which the policy will be dated back depends upon the amount of premium paid. The plan and period of insurance will be the same as those under the original policy. The revival will be effected ordinarily by issue of a fresh policy. The special revival is possible only when all of the following conditions are fulfilled. 1. The policy must not have acquired surrender value. 2. Period from the date of lapse must not be less than 6 months and not over two years. 3. Such a revival is not allowed more than once under the same policy. 4. Surrender Value : When the assured is unable to revive his policy, he can surrender his policy and can get cash surrender value. With this payment, the contract comes to an end and the assured will get the cash value without any liability to pay further premiums. In India, the Corporation has guaranteed surrender value if the premiums have been paid for at least two years or to the extent of one-tenth of the total number of premiums stipulated for in the policy provided such one-tenth exceeds one full year's premium. The minimum surrender value allowable under this policy is equal to 30 per cent of the total amount of the, within mentioned, premium paid excluding the premiums for the first year and all extra premium.

The percentage increases along with the increase in duration of premium payment because the amount of the surrender on any policy depends on its reserve value. Thus, on such policies which do not have any reserve, no surrender value is allowed. Since January 1st, 1976, the provision for non-forfeiture clause has been amended. 1. If the premiums under the policy have been paid for a period of five years or 1/4 of the original premium paying period of the policy, whichever is less but subject to the condition that minimum 3 years' premiums are paid. 2. The paid up value under the policy is not less than Rs. 250 (excluding of attached bonuses) for policies where under original sum assured is Rs. 1,000 or more and Rs. 100 exclusive of attached bonus where the original sum assured is less than Rs. 1,000. The above non-forfeiture conditions would apply to proposals completed on and after 1-1-1976. Since April, 1980, the above conditions have been changed. Surrender value is secured only when the policy was continued for three years. 5. Extended Term Insurance : If a premium remains unpaid at the end of the days of grace and the policy has been in force for at least three years, the insurance will continue as paid up for the full sum assured up to a period called term. The term depends upon the amount of premium paid. During this period, if the life assured dies payment will make up to the full amount. But, if the assured survives the period, no payment is made. Actually, the amount of premium paid before the causation is utilised as a single premium or purchasing term insurance and the duration of the term insurance upon the amount of premium paid for meeting as single premium. 6. Automatic Premium Loan : The assured may use the option of automatic premium loan before the maturity of the policy. In this case, if the assured is unable to pay the premiums the insurer will

not allow the policy to lapse but will automatically pay the premiums out of the net surrender value. The assured can repay the unpaid premiums with interest at any time while the policy is so kept in force without furnishing evidence of insurability. If the whole of surrender value is exhausted by advances on account of payment of premium, the policy will lapse and can be revived only after payment of all the premiums unpaid and interest thereon at the rate of 7 1/2 per cent per annum compounded half yearly. This option can be exercised only when premiums of consecutive three years have been paid. Policy Condition: In this case one benefit is also available that if after at least three years, premiums have been paid, the assured dies without payment of the premium within six months from the due date of the first unpaid premium, the policy amount will be paid subject to deduction of unpaid premiums with interest thereon up to the date of death. 7. Reduced Paid-up Insurance : When the policyholder is unable to pay further premiums and does not want cash immediately he can pay up the policy. The sum assured under the policy is reduced in the same proportion as the amount of premiums paid bears to the total premiums payable. The reduced sum assured is payable according to the original term of the policy. Where uniform premiums are payable, as in the case of endowment or whole life limited payment assurances, this proportion is easily ascertained. The paid up value for the age when the policy was affected, and d(x + n) is the premium for the present age of the life assured when policy is surrendered. Surendra Nath, owing to some financial difficulty, was not regular in paying his insurance premiums and, as a result, his policy lapsed. But Nath and people like him whose covers have lapsed need not lose hope as they can still revive it.

If a person forgets to pay his premium on the due date, any mode (quarterly, half yearly and annually other than monthly), he or she can pay within a 30-day grace period. If the premium is not paid for six months, LIC [ Get Quote ] charges an 8 per cent interest on the premium (which depends on the duration and nature of the policy) for the deferred payment of the policy while the risk cover extends up to six months. Simply put, it means a policyholder, who has defaulted on his premium payments for nearly six months and if an unfortunate development occurs, his life cover is still available. The benefit is, however, only for those who regularly paid their premiums for a minimum of three years. In case, there is a person who wants to revive his or her policy in the seventh or eighth month, he will have to give a personal health statement. Kotak Life Insurance offers a grace period of 30 days after the due date for paying the outstanding premium. If the customer fails to pay the premium within this period, the policy lapses. But the policy can be revived by paying the outstanding premium and 6 per cent handling charges. This facility is available for six months. Kotak customers, however, can still revive the policy within five years from the issue date. "But if a person is applying for a revival of policy in this period, then he/she shall entail submission of proof of good health and premiums will be recalculated," said Rahul Sinha, vice-president, marketing, Kotak Life Insurance. According to an ICICI [ Get Quote ] Prudential Life Insurance spokesperson, the process for reviving a lapsed policy differs between unit linked insurance policies (ULIP) and traditional insurance plans. For ICICI Prudential, ULIP can just pay the premium due and the policy is reinstated. For a traditional ICICI Prudential life policy there is a grace period of one month from the premium due date of the policy. After which the policy lapses and can be revived by paying the premium along with the applicable interest charges. Should the policy have been lapsed for more than six months, the life assured would once again have to go through medical tests. For LIC policy holders, who have crossed the minimum three-year benchmark of paying their premiums regularly, there are three revival options available.

Suppose a person has defaulted in his premium payments for nearly two years, but is wondering how to scrap the lumpsum money towards premium defaults and interest payments on it. LIC offers a loan-cum-revival option. In this option, the loan will be adjusted with the default premium and the person will have to pay the loan, which comes at an interest rate of 9 per cent. The interest on the loan is compounded at half yearly intervals and, therefore, works out cheaper than bank loans, said the LIC official. The second option is called 'Survival Benefit-cum-Revival.' This is a money-back policy which has lapsed and the insurance holder wants to revive it. The amount defaulted will be adjusted with the payment the individual is supposed to get at the end of the fifth, tenth or fifteen years. In this case, the maturity cover may reduce defaults but not the risk covered. The last option available is 'instalment revival.' Suppose the insurance holder finds it difficult to pay a lumpsum money to revive his policy then convenient repayment schedules are available. The amounts to be paid will, however, depend on the type of insurance policy, premiums to be paid and sum insured. LIC policy holders, who do not fulfill the minimum three-year condition and have defaulted in premiums payments, need not lose heart, as there is a revival option called 'special revival' available to them as well. The policy is modified (in terms, of the person age, premiums, the period of the sum insured) in manner that it is like going in for new policy. The premium payments will, however, be lesser than if he were to go for a new policy. Sinha said lapses in life insurance policies are very small for the Kotak Life. A senior LIC official said the incidence of policy lapses witnessed by the public insurer was larger being the largest player compared with private players, which have been in existence only for the last three to four years and, therefore, their lapse rate will be a fraction. Sinha said if there was a long gap in reviving the policy, particularly for a high sum, the financial and medical certificates must be validated by the policyholder. A senior LIC official said though the policy can be revived at all times, LIC advises its customers to revive their policy within five years or go in for new policy as it is detrimental to the customer.

Types of premium payments available

All insurance companies advise their customers to pay their premium on time as there are various payment choices available now. Electronic clearing services. Customers can give a mandate so as to deduct the premium amount on a specified date and it automatically gets cleared. Insurers have tie-ups with banks so customers can also pay their premiums through bank accounts. In fact, some banks are also offering payment of premiums through their ATM network.

.. Premium payment , Policy Lapse , Revival Modes of payment of premium Premiums are payable in advance Premiums other than single Premiums may be paid by the Policy holder to L I C in Yly , Hly , Qly or Monthly Mode The policy lapses when Premiums are not paid on the Due date and the Risk cover ceases when the policy laps Days of Grace Premiums must be paid on or before due date One month but not less than 30 days of grace is allowed for payment of yearly , half yearly and quarterly premiums and fifteen days for payment of monthly premiums When the days of grace expires on a Sunday or a holiday observed by the office of the Corporation where premiums are payable ; the premium may be paid on the following working day to keep the policy in force Lapses

If premiums are not paid within the due date the Policy lapses A policy should not lapse But if it does , it can be revived Revival means bringing the policy back to life. It is a previlage given to life assured Different companies follow different procedures for revival

Revival In L I Cs a lapsed policy can be revived under the following four methods

Ordinary Revival Revival by installments Special Revival Loan - cum Revival method

Importance of reviving the policy The cost of revival (including interest on outstanding premiums) could be high if the Revival is not done at the earliest. The insurer may refuse to revive the lapsed policy ( Medical Underwriting) A new policy would come at a higher premium rate The decision to revive being an underwriting decision (there is check that the person is not in bad health) , a delay may necessitate more elaborate verification and proofs If the due premiums is not paid within the days of grace, the policy lapses. A lapsed policy can be revived any time within 5 years from the date of the first unpaid premium. There are five differentschemes under which a policy can be revived. 1. ORDINARY REVIVAL SCHEME Under this scheme, all the arrears of unpaid premiums with interest have to be paid. Alongwith this, DGH- Declaration Of Good Health in Form No. (680) and medical, if necessary, is required. 2. SPECIAL REVIVAL SCHEME If a person is not in a position to pay all the arrears, he can choose this scheme. Under this scheme, the date of commencement will be shifted so that the policy is not lapsed just prior to the date of revival, i.e., the date of commencement is advanced approximately by the period of lapse. Other requirements like DGH and Medical wherever necessary are required as in Ordinary Reivval. Conditions:

(a) The policy should not have acquired any Surrender Value (b) Revival should be within 3 years of lapse (c) Special Revival is allowed only once during term 3. REVIVAL BY INSTALMENT METHOD If a policyholder cannot pay all arrears in one lumpsum and if the policy cannot be revived under Special Revival Scheme, he can make use of Instalment Revival Scheme. In this scheme, on the date of revival he has to pay immediately: a) 6 Monthly premiums, if mode is Mly, b) 2 Quarterly Premiums, if mode is Qly, c) 1 Half Yearly Premiums, if mode is Hly, d) Half of the yearly premium, if mode is Yly. Balance of revival amount is paid in instalments spread over two years along with normal premium instalments. Other requirements regarding health are as required in Ordinary Revival Scheme. IV) LOAN-CUM-REVIVAL SCHEME: If a policy acquires surrender value on the date of revival the policy can be revived by taking a policy loan. Loan amount will be calculated treating the premiums as paid upto the date of revival. If a loan amount is more than required for revival, the excess will be paid to the policyholder. V) SURVIVAL BENEFIT-CUM-REVIVAL SCHEME. The Survival Benefit (SB) which fails due in a money-back type of policy can be used for revival of the policy, if date of revival is later than the SB due date.Here, if the SB amount is less than the revival amount, the short fall will be called for. If the SB is more than the revival amount, the excess is paid to the policyholder. The other requirements are to be fulfilled. Life table From Wikipedia, the free encyclopedia

2003 US mortality table, Table 1, Page 1 In actuarial science and demography, a life table (also called a mortality table or actuarial table) is a table which shows, for each age, what the probability is that a person of that age will die before his or her next birthday ("probability of death"). From this starting point, a number of inferences can be derived.

the probability of surviving any particular year of age remaining life expectancy for people at different ages

Life tables are also used extensively in biology and epidemiology. The concept is also of importance inproduct life cycle management. Contents [hide]

1 Background 2 Insurance applications 3 The mathematics 4 Ending a Mortality Table 5 Epidemiology 6 See also

7 Notes 8 References 9 External links

[edit]Background There are two types of life tables: Period or static life tables show the current probability of death (for people of different ages, in the current year) Cohort life tables show the probability of death of people from a given cohort (especially birth year) over the course of their lifetime.

Static life tables sample individuals assuming a stationary population with overlapping generations. "Static Life tables" and ""cohort life tables" will be identical if population is in equilibrium and environment does not change. "Life table" primarily refers to period life tables, as cohort life tables can only be constructed using data up to the current point, and distant projections for future mortality. Life tables can be constructed using projections of future mortality rates, but more often they are a snapshot of age-specific mortality rates in the recent past, and do not necessarily purport to be projections. For these reasons, the older ages represented in a life table may have a greater chance of not being representative of what lives at these ages may experience in future, as it is predicated on current advances in medicine, public health, and safety standards that did not exist in the early years of this cohort. Life tables are usually constructed separately for men and for women because of their substantially different mortality rates. Other characteristics can also be used to distinguish different risks, such as smoking status, occupation, and socioeconomic class. Life tables can be extended to include other information in addition to mortality, for instance health information to calculate health expectancy. Health expectancies such as disability-adjusted life year and Healthy Life Years are the remaining number of years a person can expect to live in a specific health state, such as free

of disability. Two types of life tables are used to divide the life expectancy into life spent in various states: Multi-state life tables (also known as increment-decrement life tables) are based on transition rates in and out of the different states and to death Prevalence-based life tables (also known as the Sullivan method) are based on external information on the proportion in each state. Life tables can also be extended to show life expectancies in different labor force states or marital status states.

[edit]Insurance applications In order to price insurance products, and ensure the solvency of insurance companies through adequate reserves, actuaries must develop projections of future insured events (such as death, sickness, and disability). To do this, actuaries develop mathematical models of the rates and timing of the events. They do this by studying the incidence of these events in the recent past, and sometimes developing expectations of how these past events will change over time (for example, whether the progressive reductions in mortality rates in the past will continue) and deriving expected rates of such events in the future, usually based on the age or other relevant characteristics of the population. These are called mortality tables if they show death rates, and morbidity tables if they show various types of sickness or disability rates. The availability of computers and the proliferation of data gathering about individuals has made possible calculations that are more voluminous and intensive than those used in the past (i.e. they crunch more numbers) and it is more common to attempt to provide different tables for different uses, and to factor in a range of non-traditional behaviors (e.g. gambling, debt load) into specialized calculations utilized by some institutions for evaluating risk. This is particularly the case in non-life insurance (e.g. the pricing of motor insurance can allow for a large number of risk factors, which requires a correspondingly complex table of expected claim rates). However the expression "life table" normally refers to human survival rates and is not relevant to non-life insurance. [edit]The mathematics

p chart from Table 1. Life table for the total population: United States, 2003, Page 8
t x

The basic algebra used in life tables is as follows. : the probability that someone aged exactly will die before reaching age . : the probability that someone aged exactly will survive to age

: the number of people who survive to age lives, typically

note that this is based on a radix.,[1] or starting point, of taken as 100,000

: the number of people who die aged

last birthday

: the probability that someone aged exactly will survive for more years, i.e. live up to at least age years

: the probability that someone aged exactly will survive for more years, then die within the following years

x : the force of mortality, i.e. the instantaneous mortality rate at age x, i.e. the number of people dying in a short interval starting at age x, divided by lx and also divided by the length of the interval. Unlike , the instantaneous mortality rate, x, may exceed 1.

Another common variable is

This symbol refers to Central rate of mortality. It is approximately equal to the average force of mortality, averaged over the year of age. [edit]Ending a Mortality Table In practice, it is useful to have an ultimate age associated with a mortality table. Once the ultimate age is reached, the mortality rate is assumed to be 1.000. This age may be the point at which life insurance benefits are paid to a survivor or annuity payments cease. Four methods can be used to end mortality tables[2]: The Forced Method: Select an ultimate age and set the mortality rate at that age equal to 1.000 without any changes to other mortality rates. This creates a discontinuity at the ultimate age compared to the penultimate and prior ages. The Blended Method: Select an ultimate age and blend the rates from some earlier age to dovetail smoothly into 1.000 at the ultimate age. The Pattern Method: Let the pattern of mortality continue until the rate approaches or hits 1.000 and set that as the ultimate age.

The Less-Than-One Method: This is a variation on the Forced Method. The ultimate mortality rate is set equal to the expected mortality at a selected ultimate age, rather 1.000 as in the Forced Method. This rate will be less than 1.000.

[edit]Epidemiology In epidemiology and public health, both standard life tables to calculate life expectancy and Sullivan and multistate life tables to calculate health expectancy are commonly used. The latter include information on health in addition to mortality. . Definition of 'Mortality Table' A table that shows the rate of deaths occurring in a defined population during a selected time interval, or survival from birth to any given age. Statistics included in the mortality table show the probability a person's death before their next birthday, based on their age. Death-rate data help determine prices paid by people who have recently purchased life insurance. A mortality table is also known as a "life table," an "actuarial table" or a "morbidity table." 'Mortality Table' Life tables are usually constructed separately for men and for women. Other characteristics can also be included to distinguish different risks, such as smoking status, occupation and socio-economic class. There are even actuarial tables that determine longevity in relation to weight. Mortality tables

Actuarial tables used in the insurance industry to predict the life expectancy and the death rates for various types of people. . LIFE TABLES I. INTRODUCTION Each year, estimates of future income and expenditures of the Old-Age, Survivors, and Disability Insurance (OASDI) program are presented to the Congress in the Annual Report of the Board of Trustees. These estimates illustrate possible scenarios of the future financial position of the OASDI program, under present law, and thus are valuable in the policy making process for the program. To produce these financial estimates, projections of the population in the Social Security coverage area are needed. One of the essential components of population projections is a projection of mortality, which is the subject of this study. For the 2005 Trustees Report, three separate projectionsintermediate, low cost, high cost were prepared. These projections are based on three different sets of assumptions about future death rates. The intermediate projections reflect the Trustees' best estimate of future experience. All mortality projections presented in this study are from the intermediate projections of the 2005 Annual Report of the OASDI Board of Trustees. These projections were also used in estimating the future financial status of the Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) programs as described in the 2005 Annual Report of the Medicare Board of Trustees. Mortality rates are presented in this study in the context of life tables, which are commonly used by actuaries and demographers. Tables on both period and cohort bases are included. These tables supersede those published in Actuarial Study Number 116, which were used in the preparation of the 2002 Annual Reports II. BASIC CONCEPTS A life table is a concise way of showing the probabilities of a member of a particular population living to or dying at a particular age. In this study, the life tables are used to examine the mortality changes in the Social Security population over time.

An ideal representation of human mortality would provide a measure of the rate of death occurring at specified ages over specified periods of time. In the past, analytical methods (such as the Gompertz, Makeham, or logistic curves) satisfied this criterion approximately over a broad range of ages. However, as actual data have become more abundant and more reliable, the use of approximate analytical methods have become less necessary and acceptable. Today, mortality is most commonly represented in the form of a life table, which gives probabilities of death within one year at each exact integral age. These probabilities are generally based on tabulations of deaths in a given population and estimates of the size of that population. For this study, functions in the life table can be generated from the qx, where qx is the probability of death within a year of a person aged x. Although a life table does not give mortality at non-integral ages or for non-integral durations, as can be obtained from a mathematical formula, acceptable methods for estimating such values are well known. Two basic types of life tables are presented in this study, period-based tables and cohort-based tables. Each type of table can be constructed either based on actual population data or on expected future experience. A period life table is based on, or represents, the mortality experience of an entire population during a relatively short period of time, usually one to three years. Life tables based directly on population data are generally constructed as period life tables because death and population data are most readily available on a time period basis. Such tables are useful in analyzing changes in the mortality experienced by a population through time. If the experience study is limited to short periods of time, the resulting rates will be more uniformly representative of the entire period. This study presents period life tables by sex for decennial years 1900 through 2000 based on United States and Medicare data, and for decennial years 2010 through 2100 reflecting projected mortality. A cohort, or generation, life table is based on, or represents, mortality experience over the entire lifetime of a cohort of persons born during a relatively short period of time, usually one year. Cohort life tables based directly on population experience data are relatively rare, because of the need for data of consistent quality over a very long period of time. Cohort tables can, however, be readily produced, reflecting mortality rates from a series of period tables for past years, projections of future mortality, or a combination of the two. Such tables are superior to period tables for the purpose of projecting a population into the future when mortality is expected to change over time, and for analyzing the generational trends in mortality. This study presents cohort life tables by sex for births in

decennial years 1900 through 2100, reflecting the mortality experience and projections described above. A life table treats the mortality experience upon which it is based as though it represents the experience of a single birth cohort consisting of 100,000 births who experience, at each age x of their lives, the probability of death, denoted qx, shown in the table. The entry lx in the life table shows the number of survivors of that birth cohort at each succeeding exact integral age. Another entry, dx, shows the number of deaths that would occur between succeeding exact integral ages among members of the cohort. The entry denoted Lx gives the number of person-years lived between consecutive exact integral ages x and x+1 and Tx gives the total number of person-years lived beyond each exact integral age x, by all members of the cohort. The final entry in the life table, , represents the average number of years of life remaining for members of the cohort still alive at exact integral age x, and is called the life expectancy. The lx entry in the life table is also useful for determining the age corresponding to a specified survival rate from birth, which is defined as the age at which the ratio of lx to 100,000 is equal to a specified value between 0 and 1. A stationary population is what would result if for each past and future year:

The probabilities of death shown in the table are experienced 100,000 births occur uniformly throughout each year The population has no immigration and emigration

A population with these characteristics would have a constant number of persons from year to year (in fact, at any time) both in their total number and in their number at each age. These numbers of persons, by age last birthday, are provided in the life table as the Lx values. The lx entry is interpreted as the number of persons who attain each exact integral age during any year, and dx is the number of persons who die at each age last birthday during any year. The entry Tx represents the number of persons who are alive at age last birthday x or older, at any time. III. CONSTRUCTION OF CENTRAL DEATH RATES A. DATA SOURCES Annual tabulations of numbers of deaths by age and sex are made by the National Center for Health Statistics (NCHS) based on information supplied by States in the

Death Registration Area, and are published in the volumes of Vital Statistics of the United States. These are now available on the web at www.cdc.gov/nchs/nvss.htm. Deaths are provided by five year age groups for ages 5 through 84, in total for ages 85 and older, and by single-year and smaller age intervals for ages 4 and under. One requirement for admission to the Death Registration Area, which since 1933 has included all the States, the District of Columbia and the independent registration area of New York City, was a demonstration of ninety percent completeness of registration. Because incentives for filing a death certificate are so strong (obtaining burial permits, collecting insurance benefits, settling estates, etc.) and because every State has adopted laws that require the registration of deaths, it is believed that errors of under-registration of deaths are insignificant for the nation as a whole. Errors of misstatement of age on the death certificate, however, may very well cause distortion in the distribution of numbers of deaths by age group. Annual estimates of the U.S. resident population by single year of age and sex are made by the Census Bureau and are published in Current Population ReportsSeries P-25. The most recent population information is available and updated regularly on the Census Bureau web site at www.census.gov. These estimates are affected by both undercount and misclassification in the decennial census. These errors, which may either offset or compound, are usually considered together as net undercount. Postcensal estimates are made by the "inflation-deflation" method which inflates the last previous census-level population by net undercount, carries the inflated population forward according to the births and deaths tabulated in the Vital Statistics, adjusts the population by estimated net immigration, and then deflates by net undercount. Thus, the postcensal population estimates are affected by errors in the Vital Statistics and the effect tends to accumulate as the elapsed time from the last previous census increases. When results of the following census become available, the postcensal estimates are revised, and are then called intercensal estimates, thus removing much of the effect of errors in Vital Statistics and in net immigration estimates. Central death rates calculated by comparing numbers of deaths tabulated by the National Center for Health Statistics to the mid-year population estimated by the Census Bureau are affected by the errors from both sources, which may either offset or combine. Further, errors of noncomparability of numerator and denominator may also be introduced. Although efforts are made to minimize errors of noncomparability (by excluding armed forces overseas from the population estimates, for example), complete comparability is intrinsically impossible.

The errors of noncomparability can be eliminated if the numbers of deaths and the population are drawn from the same source. This approach, however, generally involves so large a reduction in the size of the population being observed, that more random error is introduced than noncomparability error is eliminated. One source of data on aged persons which is not subject to errors of noncomparability and yet does permit a very large number of observations, is Medicare program enrollment. Also, this source involves fewer errors of misstatement of age, because most of the data relate to individuals who have had to prove their date of birth to become entitled to benefits. An error analogous to net undercount does appear to be present in the Medicare data, although the error is believed to have an insignificant effect on calculated death rates, except for the very aged (beginning at roughly age 95). This error stems from the presence in the data of "phantom records" which may have arisen because the person was registered in the program more than once, or because information about a person was miscoded when he/she registered, or because the person's death was not reported. Such phantom records are not of much concern to cost-conscious program administrators, however, because the Medicare program only pays benefits when bills for covered services rendered are submitted. In an effort to reduce the number of phantom records, the Medicare based death rates calculated for years after 1987 were limited to the records of those Medicare participants who were also eligible for Social Security or Railroad Retirement monthly income benefits, or who were government employees or retirees with enough Medicare qualifying government employment. This limitation eliminated approximately three percent of the Medicare records. Data needed in order to project central death rates by cause of death were obtained from Vital Statistics tabulations for years since 1979. For the years 1979-1998, adjustments were made to the distribution of the numbers of deaths by cause. The adjustments were needed in order to reflect the revision in the cause of death coding that occurred in 1999, making the data for the years 1979-1998 more comparable with the coding used for the years 1999 and later. The adjustments were based on comparability ratios published by the National Center for Health Statistics. For the years 1900-1967, age-sex specific central death rates were calculated from NCHS Vital Statistics tabulations of deaths and Census estimates of populations. For the period 1968-2001 those same two sources were used for ages under 65, but records of the Medicare program were used to calculate rates for ages 65 and over.

The numbers of deaths by cause from Vital Statistics tabulations were used to distribute the age-sex specific rates into age-sex-cause specific rates for the years 1979-2001. B. ADJUSTMENTS IN POPULATION Populations in some five-year age groups for some years were estimated from published figures for broader age groups. Death Registration States' populations during 1900-1932 for five-year age groups, 5-9 through 70-74, were estimated from the ten-year age groups, 5-14 through 65-74, by assuming that the distributions of five-year age groups within ten-year age groups were as published for the United States resident population from the Census Bureau. Death Registration States' populations during 1900-1932, and United States population during 1933-1939 for the age group 75-84, were distributed between the 75-79 and 80-84 age groups by using linear interpolation of the age distributions from the Decennial Census enumerations. Death Registration States' populations during years 1900-1932 and United States population during years 1933-1967 for age groups 85-89, 90-94, and 95 and over were estimated by distributing the age group 85 and over using NCHS tabulated deaths for each year and Medicare data. The split of the conterminous United States populations aged 0-4 into age groups 0 and 1-4 for the years 1950-1959 was estimated from the group 0-4 by assuming the same distribution as in the United States, Alaska, and Hawaii combined. For 1959, deaths occurring in Alaska were excluded from total deaths, so that the population of the conterminous United States could be used to calculate the death rates. For all years, deaths tabulated at "age unstated" were prorated across the tabulated age groups. IV. METHODS A. DEFINITIONS OF LIFE TABLE FUNCTIONS The following are definitions of the standard actuarial functions used in this study to develop mortality rates based on mid-year population and annual death data. Dx = the number of deaths at age x last birthday in a population during a year Px = the number of persons who are age x last birthday in a population at midyear the central death rate for the subset of a population that is between exact ages yMx = x and x+y yqx = the probability that a person exact age x will die within y years

The following are the additional definitions of standard life table functions. The table represents a hypothetical cohort of 100,000 persons born at the same instant who experience the rate of mortality represented by 1qx, the probability that a person age x will die within one year, for each age x throughout their lives. The stationary population definitions, that are given in parentheses, refer to the population size and age distribution that would result if the rates of mortality represented by1qx were experienced each year, past and future, for persons between exact ages x and x+1, and if 100,000 births were to occur uniformly throughout each year. lx dx the number of persons surviving to exact age x, (or the number of persons reaching exact age x during each year in the stationary population) the number of deaths between exact ages x and x+1, (or the number of deaths = at age last birthday each year in the stationary population) the number of person-years lived between exact ages x and x+1, (or the number of persons alive at age last birthday x at any time in the stationary = population) We assume a uniform distribution of deaths for ages greater than 0. the number of person-years lived after exact age x, (or the number of persons = alive at age last birthday x or older at any time in the stationary population) = = the average number of years of life remaining at exact age x mx = the central death rate for the population that is between exact ages x and x+y separation factor; the average number of years not lived between exact ages x = yfx and x+y for those who die between exact ages x and +y
y

Lx

Tx

The life table functions lx, dx, Lx, Tx, and l0 dx lx L0 Lx Tx = = = = = = 100,000 lx 1qx lx-1 (1 - 1qx-1) l0 - 1f0 d0 lx - .5 dx Lx + Lx+1 + Lx+2 + ... + L148

were calculated as follows:

x = 1, 2, 3, ... x = 1, 2, 3, ... x = 1, 2, 3, ... x = 0, 1, 2, 3, ... x = 0, 1, 2, 3, ...

= T x / lx

The fundamental step in constructing a life table from population data is that of developing probabilities of death, qx, that accurately reflect the underlying pattern of mortality experienced by the population. The following sections describe the methods used for developing the rates presented in this actuarial study. These methods, as will be seen, vary significantly by age. Actual data permit the computation of central death rates, which are then converted into probabilities of death. Exceptions to this procedure include direct calculation of probabilities of death at young ages and geometric extrapolation of probabilities of death at extreme old age, where data is sparse or of questionable quality. B. DEATH RATES AT AGES 0 - 4 For the period 1940-2001, the probability of death at age 0 (q0) was calculated directly from tabulations of births by month and from tabulations of deaths at ages 0, 1-2, 3-6, 7-28 days, 1 month, 2 months, ..., 11 months. For the period 19001939, that probability was calculated from the population central death rate at age 0 using the relationship between probabilities of death and central death rate determined by ordinary least squares regression on values for 1940-2001. After 2001, the probability was calculated from the population central death rate for age 0, assuming that the ratio of probability of death to central death rate measured for 2001 would remain constant thereafter. For the period 1940-2001, probabilities of death at each age 1 through 4 (1qx, x=1,2,3,4) were calculated from tabulations of births by year and from tabulations of deaths at ages 1, 2, 3, and 4 years. For the period 1900-1939, the probabilities were calculated from the population central death rate for the age group 1-4 using the relationship between probabilities of death and central death rate. After 2001, the probabilities were similarly calculated from the population central death rate for the age group 1-4. Based on a comparison of values from the 1900-1902 and 1909-1911 U.S. Decennial Life Tables, we concluded that the regression relationships used to determine probabilities of death from population central death rates during 19001939 gave reasonable results. The ratios used to determine probabilities of death from population central death rates after 2001 are assumed to give reasonable results because those probabilities are very low and are projected to change relatively little over the projection period. The following are the coefficients of the linear equation (y = mx+b) used for estimating probabilities of death as functions of population central death rates.

Male

Female

y 1q0 1q1 1q2 1q3 1q4 1q0 1q1 1q2 1q3 1q4

Coefficients for Converting Death Rates to Death Probabilities for Ages under 5 1900-1939 2001 and later x m b m b 0.788233 0.004156 0.985612 0.000000 1M0 1.866636 -0.000367 1.474317 0.000000 4M1 0.946686 0.000048 0.995975 0.000000 4M1 0.649013 0.000140 0.828139 0.000000 4M1 0.516733 0.000137 0.644733 0.000000 4M1 0.799021 0.003195 0.992001 0.000000 1M0 1.899636 -0.000250 1.574276 0.000000 4M1 0.926904 0.000045 1.026362 0.000000 4M1 0.670318 0.000070 0.767284 0.000000 4M1 0.533706 0.000077 0.574473 0.000000 4M1

During the first year of life, mortality starts at an extremely high level, which becomes progressively lower, unlike mortality at other ages which does not change very much within a single year of age. Thus, it is particularly important at age 0 to estimate accurately the pattern of mortality throughout the year of age, as described above, for the calculation of 1q0. Computation of other life table functions, particularly Lx, Tx, and requires an additional factor related to this pattern called the separation factor, which is the average fraction of a year not lived by those who die within the year. For each of the years 1940-2001 the separation factor at age 0 (1f0) was calculated directly from probabilities of death within the exact age intervals 0-1, 1-3, 3-7, and 7-28 days and 1-2, 2-3, ..., 11-12 months. For each of the years 1900-1939 that separation factor was linearly interpolated between the factor for 1940 and the factor calculated from the 1900-1902 U.S. Decennial Life Tables. Tests using data from the 1909-1911, 1919-1921, and 1929-1931 U.S. Decennial Life Tables showed that this interpolation gave reasonable results. For years after 2001, the separation factor at age 0 was assumed to remain constant at the 2001 level. Because mortality does not change very much within each of the second through fifth years of life, a separation factor of was assumed. C. DEATH RATES AT AGES 5 - 94

One method that has been used to calculate probabilities of death for a life table that are consistent with the underlying pattern of mortality experienced in the population is to require that the life table central death rates for quinquennial age groups, 5mx, equal the population central death rates, 5Mx. That is 5mx = 5Mx for x = 5, 10, 15, ..., 90 where
5

mx

dx + dx+1 + dx+2 + dx+3 + dx+4 Lx + Lx+1 + Lx+2 + Lx+3 + Lx+4 Dx + Dx+1 + Dx+2 + Dx+3 + Dx+4 Px + Px+1 + Px+2 + Px+3 + Px+4

and

Mx

Unfortunately, making these central death rates equal may introduce error when they should differ because the age distribution within the quinquennial age groups in the stationary population implied by the life table differs from that in the actual population under study. The degree of consistency can be improved using the relationship,
5

mx

dx + dx+1 + dx+2 + dx+3 + dx+4 Lx + Lx+1 + Lx+2 + Lx+3 + Lx+4 dx+1 Lx+1 dx+2 dx+3 Lx+2 + Lx+3 + Lx+2 Lx+3 Lx + Lx+1 + Lx+2 + Lx+3 + Lx+4 dx+4 Lx+4

dx Lx + = Lx

Lx+1 +

Lx+4

mxLx + mx+1Lx+1 + mx+2Lx+2 + mx+3Lx+3 + mx+4Lx+4 Lx + Lx+1 + Lx+2 + Lx+3 + Lx+4

The central death rate for an age group is viewed in this equation as a weighted average of the central death rates for the single ages comprising the group. The degree of consistency between the level of mortality in the life table 5mx and the population 5Mx is thus improved by eliminating the inconsistency in weighting by population at single year of age. This is accomplished by using the actual population as weights instead of the stationary population and producing This means that, .

mxPx + mx+1Px+1 + mx+2Px+2 + mx+3Px+3 + mx+4Px+4 Px + Px+1 + Px+2 + Px+3 + Px+4 has essentially the same implied age distribution as 5Mx, a higher

Because

degree of consistency in the level of mortality is obtained by requiring = 5Mxfor x = 5, 10, 15, ..., 90. This requirement, which we use as the basis for constructing our life tables, is achieved by a rapidly-converging iterative process. We assume that, initially, the separation factors for quinquennial age groups are such that deaths occurred on average at the midpoint of the age interval. That is 5fx = 2.5 for x = 5, 10, 15, ..., 90. We proceed to calculate first approximations of probabilities of death within five years at exact quinquennial ages by the following relation:
5 x

55Mx 1+5fx 5Mx

x = 5, 10, 15, ..., 90

Probabilities of death within one year are interpolated from the probability of death within five years based on the relationship ln (1-5 qx) = ln (1-qx)+ln (1-qx+1)+...+ln (1-qx+4). To accomplish the interpolation we apply a fourth degree osculatory formula developed by H.S. Beers to the natural logs of the complements of 5qx values, as suggested by the equation above. Coefficients for starting and ending groups are as follows: q .3333 .2595 .1924 .1329 .0819 .0404 .0093 -.0108
5 5

q5 q6 q7 q8 q9 q10 q11 q12

q -.1636 -.0780 .0064 .0844 .1508 .2000 .2268 .2272

5 10

q -.0210 .0130 .0184 .0054 -.0158 -.0344 -.0402 -.0248

5 15

q .0796 .0100 -.0256 -.0356 -.0284 -.0128 .0028 .0112

5 20

q -.0283 -.0045 .0084 .0129 .0115 .0068 .0013 -.0028

5 25

q94 q93 q92 q91 q90 q89 q88 q87

q13 q14

-.0198 -.0191 5q90

.1992 .1468 5q85

.0172 .0822 5q80

.0072 -.0084 5q75

-.0038 -.0015 5q70

q86 q85

Coefficients for interior groups are as follows: q -.0117 -.0020 .0050 .0060 .0027 5qx+10
5 x-10

qx qx+1 qx+2 qx+3 qx+4

q .0804 .0160 -.0280 -.0400 -.0284 5qx+5

5 x-5

q .1570 .2200 .2460 .2200 .1570 5qx

5 x

q -.0284 -.0400 -.0280 .0160 .0804 5qx-5

5 x+5

q .0027 .0060 .0050 -.0020 -.0117 5qx-10

5 x+10

qx+4 qx+3 qx+2 qx+1 qx

For subsequent iterations, the separation factors were revised based on the 5qx of the previous iteration as follows: f = 5
5 x

5 x

x = 5, 10, 15, ..., 90

The iteration process was continued until was acceptably close to 5Mx (within .00001) for x = 5, 10, 15, ..., 90. D. DEATH RATES AT AGES 95 AND OLDER It has been observed that the mortality rates of women, though lower than those of men, tend to increase faster with advancing age than those of men. An analysis of the mortality of Social Security charter Old-Age Insurance beneficiaries has shown that at the very old ages mortality increased about five percent per year of age for men and about six percent per year for women. Probabilities of death at each age 95 and older were calculated as follows for men: qx = qx-1 ( q94 99-x q93 5 + 1.05 x-94 ) x = 95, 96, 97, 98, 99 5

qx = 1.05 qx-1

x = 100, 101, 102, ...

For women, the same formulas were used, except that 1.06 was substituted for 1.05. The larger rate of growth in female mortality would eventually, at a very high age, cause female mortality to be higher than male mortality. At the point where this crossover would occur, we set female mortality equal to male mortality. The life table values for lx, dx, Lx, Tx and were truncated at age 150. However, the life tables included in this study only show values through age 119. E. HISTORICAL TRENDS AND PROJECTIONS Any sound procedure for projecting mortality must begin with an analysis of past trends. In this actuarial study, the mortality experience in each year since 1900 has been summarized in age-adjusted central death rates in order to control for changes in the age distribution of the population. Rates were adjusted to the distribution of the 2000 U.S. resident census population. Final mortality data for both deaths and resident population, were available for years through 2001. Table 1 shows ageadjusted historical rates for 1900 through 2001. An examination of the age-adjusted central death rates reveals several distinct periods of mortality reduction since 1900, as shown in Table 5. During the period 1900-1936, annual mortality reduction summarized for all ages, averaged about 0.7 percent for males and 0.8 percent for females. During the following period, 19361954, there was more rapid reduction, averaging 1.6 percent per year for males and 2.4 percent per year for females. The period 1954-1968 saw a much slower reduction of 0.7 percent per year for females and an actual increase of 0.2 percent per year for males. From 1968-1982 rapid reduction in mortality resumed, averaging 1.8 percent for males and 2.2 percent for females, annually. From 19822001, mortality rates decreased an average of 1.0 percent per year for males and 0.4 percent for females. More detailed analysis of average annual percentage reduction in age-adjusted central death rates for selected periods is shown in 5. For the entire period 1900 to 2001, mortality, summarized over all ages, declined at an average annual rate of 0.93 percent for males and 1.19 percent for females. However, mortality has generally declined at a slower rate for older individuals, throughout the last century. Between 1900 and 2001, the age-adjusted rates for ages 65 and older declined at an average annual rate of 0.59 percent for males and 0.84 percent for females.

For the period 1982-2001, the average annual rate of improvement for females was considerably less than that for males for most of the age groups shown in 5. For earlier historical periods, the opposite is true, i.e., the average annual rate of improvement for males was generally less than that for females. A number of extremely important developments have contributed to the rapid average rate of mortality improvement during the twentieth century. These developments include:

Access to primary medical care for the general population Improved healthcare provided to mothers and babies Availability of immunizations Improvements in motor vehicle safety Clean water supply and waste removal Safer and more nutritious foods Rapid rate of growth in the general standard of living.

Each of these developments is expected to make a substantially smaller contribution to annual rates of mortality improvement in the future. Future reductions in mortality will depend upon such factors as:

Development and application of new diagnostic, surgical and life sustaining techniques Presence of environmental pollutants Improvements in exercise and nutrition Incidence of violence Isolation and treatment of causes of disease Emergence of new forms of disease Prevalence of cigarette smoking Misuse of drugs (including alcohol) Extent to which people assume responsibility for their own health Education regarding health Changes in our conception of the value of life Ability and willingness of our society to pay for the development of new treatments and technologies, and to provide these to the population as a whole.

Figure 1 shows historic and projected total male and female age-adjusted central death rates per 100,000 population.

Figure 1Age Adjusted Central Death Rates by Sex and Calendar Year

[D] Table 5 compares historical and projected average annual percentage reductions in age-adjusted central death rates during selected periods. Future reductions for those under age 65 are projected to be relatively small compared with past reductions. Reductions for the aged are expected to continue at a relatively rapid pace, as further advances are made against degenerative diseases, such as heart and vascular disease. For males age 65 and older, the average projected rate of improvement over the period 2029-2079 (0.68 percent per year) is slightly higher than that experienced over the last century (0.59 percent per year). The projected rate of improvement for women age 65 and older for the period 2029-2079 (0.66 percent per year) is slightly lower than that assumed for men (0.68 percent per year), and only about three-fourths the rate experienced by aged women over the last century (0.84 percent per year). This is consistent with the assumption that rates of mortality improvement for women, which had been faster than those for men until 1982, would ultimately be slightly less than those for males. Evidence that improvement for females will not always be faster than for males is apparent in data for years since 1981. The rate of improvement in mortality for aged women

averaged only 0.15 percent per year during the period 1982-2001. This amount was about one-fifth the average rate of improvement for aged men during this period (0.77 percent). Table 5 shows that, for all ages combined, the average rate of improvement under the intermediate alternative for the period 2029-2079 is 0.72 percent per year for men and 0.68 percent per year for women. Given these assumed average annual rates of reduction, the actual projections of death rates are constructed on the basis of a consistent set of cause-specific ultimate rates of reduction. Toward this end, death rates for the years 1981-2001 were calculated and analyzed by age group and sex for the following seven groups of causes of death, based on the Tenth Revision of the International List of Diseases and Causes of Death code numbers: I. II. III. IV. V. VI. VII. Heart Disease Cancer Vascular Disease Violence Respiratory Disease Diabetes Mellitus All Other Causes I00-I09, I11, I13, I20-I51 C00-C97 I10, I12, I14-I19, I52-I78, N02, N03, N05-N07, N26 V01-Y35, Y85, Y86, Y87.0, Y87.1, Y87.2, Y89.0, Y89.9 J00-J06, J10-J18, J20-J22, J30-J47, J60-J98 E10-E14

Average annual percentage reductions in cause-specific death rates were calculated as the complement of the exponential of the slope of the least-squares line through the logarithms of the central death rates, multiplied by 100 to convert to percent form, and are given in Table 2. The sharpest reductions for the 1981 to 2001 period were in the categories of Heart Disease, averaging 2.1 percent and Vascular Disease, which averaged about 1.9 percent reduction per year. The categories of Violence and Cancer averaged 0.9 percent and 0.2 percent reduction per year, respectively. On the other hand, the categories Respiratory Disease, Diabetes Mellitus and the residual group of Other causes actually averaged an increase of about 1.1 to 2.5 percent per year. Ultimate annual percentage reductions in central death rates by sex, age group, and cause of death were postulated for years after 2029. The broad age groups for which specific rates of reduction were selected are: under age 15, ages 15-49, ages 50-64, ages 65-84, and age 85 and older. The postulated ultimate annual percentage reductions are shown in Table 3.

Annual reductions in mortality by age, sex, and cause from 2001 to 2002 and from 2002 to 2003, were assumed to equal the average annual reductions observed for the period 1981-2001. For years after 2003, the reductions in mortality were assumed to change from initial levels of 100 percent of the average annual reductions observed for the period 1981-2001, to the postulated ultimate percentage reductions shown in Table 3, whenever these initial rates of reduction were positive. However, if the initial rates of reduction for a specific age, sex, and cause group were negative, the initial level was assumed to be 75 percent of the 1981-2001 average annual reduction. To move from the initial level to the ultimate percentage reduction, a relative decrease in the difference to the ultimate reduction is moved each year. The postulated ultimate percentage reductions were assumed to apply after the year 2029. Tables 4a and 4b show historical and projected ageadjusted central death rates by cause of death and sex for the period 1979-2100. Even though ultimate annual percentage reductions in central death rates are postulated for the seven causes listed in Table 3, the resulting percentage reduction in age-adjusted central death rates for all causes combined are carefully reviewed, analyzed, and adjusted to assure consistency with the overall assumed rates of reduction. For each age and sex group, the decomposition of the percentage reduction by causes also provides a useful tool to test the reasonableness of the overall reduction. V. RESULTS Tables 6 and 7 show values for the functions qx, lx, dx, Lx, Tx, and by age and sex for selected years. Table 6, the period table (by calendar year), presents values for every tenth year from 1900 through 2100. Table 7, the cohort table (by year of birth), includes every tenth year 1900 through 2100. The methods used to produce the values shown in these tables have been described in Section IV of this actuarial study. For each calendar year, or cohort, death rates are relatively high in the first year after birth, decline very rapidly to a low point around age 10, and thereafter rise, in a roughly exponential fashion, before decelerating (or slowing their rate of increase) at the end of the life span. Cohort tables show less rapid increase in the death rate with advancing age than do period tables because cohort tables reflect in succeeding ages the general improvement in health and safety conditions that occur over time. Conversely, period tables show more rapid increase in death rates with increasing age because calendar year experience for each higher age does not reflect the improved mortality of the succeeding years.

Table 8 presents a summary comparison of one-year probabilities of death for selected ages, by sex and calendar year. This allows a more detailed year-by-year analysis of the improvement in age specific death rates over time than was presented in Table 6. The greatest relative improvement in mortality during the twentieth century occurred at the young ages, resulting largely from the control of infectious diseases. For each sex, the probability of death at age 0 decreased 95 percent between 1900 and 2001 and a further reduction of about 83 percent is projected between 2002 and 2100. At age 30, the decrease between 1900 and 2001 was 83 percent for males and 92 percent for females, reflecting the rapid decline in childbearing mortality experience for females. Over the period 2002-2100, further decreases of 58 and 51 percent for males and females respectively, are projected. At ages 60, 65, and 70, shown in Table 8, the probability of death decreased by about 55 percent for males and by over 65 percent for females between 1900 and 2001. Death rates are projected to decrease by about 55 percent for males and 50 percent for females in the 2002-2100 period. This large sex differential in mortality improvement is attributed partly to genetic factors and partly to environmental factors. If the genetic factors are more important, then the sex gap in mortality can be expected to remain large or even widen. If the environmental factors are more important, then the sex gap can be expected to close somewhat as women become increasingly subject to the same pressures and hazards as men. For example, during the period 1970 through 1980 when great strides were made in treating degenerative diseases affecting the cardiovascular system, male mortality at age 65 decreased 18 percent while female mortality decreased only 11 percent. Over the following 20-year period, from 1980-1999, male mortality at age 65 continued to decrease faster than female mortality, with male mortality decreasing 30 percent and female mortality decreasing only 13 percent. Increasing levels of tobacco use and job stress for women are expected to tend to narrow the gap in the future. Table 9 presents a summary comparison of cohort qx's, one-year probabilities of death at selected ages by sex and year of birth. The values in this table are the same as those in Table 8; however, they are organized so that relative levels of death probability at each age can be conveniently compared across cohorts rather than across calendar years of experience. Table 10 presents life expectancy at selected ages, by sex and calendar year on a period basis. That is, life expectancy at a particular age for a specific year is based on the death rates for that and all higher ages that were, or are projected to be, experienced in that specific year. Life expectancy at age 0 for males increased 27.7 years from 46.4 years in 1900 to 74.1 years in 2001. During the same period, life

expectancy at age 0 for females increased 30.5 years from 49.0 years to 79.5 years. Thus the sex gap in life expectancy at birth has increased from 2.6 years in 1900 to 5.4 years in 2001. However, the sex gap has declined from a level of 7.8 years for 1973 and is projected to continue declining at a slow rate reaching a difference of 4.2 years in 2025. Figure 2a shows life expectancy at age 0, by sex and calendar year, based on period life tables. Rapid gains in life expectancy at age 0 occurred from 1900 through the mid 1950's for both males and females. From the mid 1950's through the early 1970's, male life expectancy at age 0 remained level, while female life expectancy at age 0 increased moderately. During the 1970's faster improvement resumed for both males and females. Life expectancy for males and females in the 1980's improved only slightly with males improving more than females. In the 1990's, life expectancy has remained fairly constant for females, increasing only slightly for males. Figure 2b shows life expectancy at age 65, by sex and calendar year, based on period life tables. Life expectancy at age 65 for males increased from 11.3 years in 1900 to 15.7 years in 2001, while for females the increase was from 12.0 years to 18.9 years. However, this sex gap diminished during the 1980's and 1990's and is projected to decrease only slightly in the future. Little increase was experienced from 1900 to 1930. Since then, rapid gains occurred for females until the significant slowdown of the 1980's. The 1990's have been stable for females. For males, improvement has been rapid since the 1930's, but with a stable period during the 1950's and 1960's. Table 11 shows, on a cohort basis, life expectancies at selected ages, by sex and year of birth. That is, life expectancy at a particular age for a specific year is based on death rates for that age in the specific year and for each higher age in each succeeding year. Life expectancies on a cohort basis tend to fluctuate less from year to year than do period-based life expectancies because of sudden and temporary events, such as a flu epidemic, which may affect the entire population, for a brief period of one or two years, but affect only one or two years of mortality experience for each of the cohorts alive during the period. Therefore, cohort life expectancies are more useful in analyzing subtle and gradual generational trends in mortality. Figure 2aLife Expectancy at age 0 by Sex and Calendar Year

(Based on Period Tables)

[D] Figure 2bLife Expectancy at age 65 by Sex and Calendar Year (Based on Period Tables)

[D] Figure 3a shows life expectancy at age 0, by sex and year of birth, based on cohort life tables. Life expectancy at age 0 for males increased 28.6 years from 51.5 years for births in 1900 to 80.1 years for births in 2001. During the same period, life expectancy at age 0 for females increased 26.0 years from 58.3 years to 84.3 years. Thus the sex gap in life expectancy at birth in a cohort has decreases from 6.8 years for births in 1900 to 4.2 years for births in 2001. However, substantial increases in the sex gap in life expectancy at birth were experienced during this period, reaching 7.5 years for births in 1920, followed by a gradual decline to the projected gap for births in 2001. Figure 3b shows life expectancy at age 65, by sex and year of birth, based on cohort life tables. Life expectancy at age 65 for males is projected to increase from 13.5 years for males born in 1900 to 20.5 years for males born in 2001. During the same period, the life expectancy for females at age 65 is projected to increase from 18.0 years for females born in 1900 to 23.0 years for females in 2001. Thus the sex gap in life expectancy at age 65, on a cohort basis is projected to decrease from 4.5 years for those born in 1900 to 2.5 years for those born in 2001.

Table 12 presents ratios of female to male values for life expectancies and for oneyear probabilities of death, for selected ages and calendar years, based on period life tables. These ratios provide another perspective from which to consider sex differences. Table 12 shows that the ratio of female to male life expectancy generally rose fairly steadily from 1900 through 1979 at ages 0 through 70. This ratio has declined since 1979 and is expected to continue to decline at a slow rate in the future. This trend reflects the general decline through 1970 in the ratio of female to male death probabilities at the important ages 60 through 70, and the actual and projected increase, thereafter, in this ratio for these ages. Table 12 also shows that the ratio of female to male life expectancy at age 100 was constant from 1900 through 1959 reflecting the fact that male and female death probabilities are estimated to have been essentially the same at this and higher ages throughout this period. Since 1959, however, the ratio of female to male life expectancy at age 100 has increased, and is projected to be around 1.15 after 2001. Table 13 presents ratios of female to male values similar to those in Table 12, but based on cohort life tables. The ratio of female to male life expectancy declines steadily at ages 0 through 70, for cohorts born after 1906. This again reflects the increase throughout that period in the ratio of female to male death probabilities at the important early-elderly ages. Declines in the ratio of female to male life expectancy at age 100 reflect the past and projected increases in the ratio of female to male death probabilities at very high ages. Figure 3aLife Expectancy at age 0 by Sex and Calendar Year (Based on Cohort Tables)

[D] Figure 3bLife Expectancy at age 65 by Sex and Calendar Year (Based on Cohort Tables)

[D] Table 14 presents the age for three selected survival rates, by sex and calendar year on a period basis. The median of the inverse survival distribution increased 22.6 years, from 55.2 years for males in 1900 to 77.8 in 2001. For females the increase was 24.6 years, from 58.2 years in 1900 to 82.8 years in 2001. Increases in life expectancy between 2002 and 2100 are projected to be 8.2 years for males and 6.2 years for females. Figure 4a shows median lifetime by sex and calendar year, based on period life tables. The shapes of the survival function at S(x) = .5 are similar to the shapes of the life expectancy curves at age 0, except that increases are smaller. Table 14 shows that for the survival rate = 0.00001, the corresponding age for males increased from 104.4 years in 1900 to 109.8 years in 2001, while for females it increased from 104.9 years to 112.0 years. From 2002 to 2100, the age for males is expected to increase by 8.2 years and for females by 7.3 years. This trend runs counter to the widely held belief that the age attained by the oldest survivors in the population has risen little, if at all, during the twentieth century.

Figure 4b shows the extreme old age, age x such that S(x) = 0.00001, by sex and calendar year, based on period life tables X, such that S(x) = 0.00001 increased very little from 1900 through 1930. Between 1930 and 1954, and again between 1963 and 1982, saw a rapid increase in age. Since 1982, age x for S(x) = 0.00001 has decreased for both males and females. For the period 2001-2100, x such that S(x) = 0.00001 is projected to briefly continue to decline then begin to rise steadily and slowly at about 0.1 year per year for males and 0.05 year per year for females. Figure 4aMedian Age at Death (S(x) = .5 ) by Sex and Calendar Year (Based on Period Tables)

[D] Figure 4bAge at which S(x) = 0.00001 by Sex and Calendar Year (Based on Period Tables)

[D] Figure 5 presents the population survival curves based on period life tables for selected calendar years. Great strides were made in the twentieth century toward eliminating the hazards to survival which existed at the young ages in the early 1900's. Very little additional improvement to survival rates is possible at these young ages. Survival rates at the older ages are projected to continue to improve steadily. Projected gains in the probability of surviving to age 90 during the next 50 years are about the same as experienced during the past 50 years. For age 100, projected gains are much greater than for the past. Figure 5 shows population survival curves based on period life tables for, from left to right, 1900, 1950, 2000 and projected years 2050 and 2100. Although the shape of the survivorship curve has become somewhat more rectangular (less diagonal) through time, it appears that very little additional rectangularization will occur because survival rates are already so high at the young ages and are expected to continue increasing at older ages. The so-called "curve squaring" concept, though appealing to many, simply cannot be supported by the mathematics of mortality. The age at which the survivorship curve comes

close to zero, through the compounding of single-year probabilities of survival, has increased greatly during the twentieth century and will continue to increase, as further strides are made against degenerative diseases. That mortality rates are found to continue to decline, at every age for which adequate data are available, demonstrates that no absolute limit to the biological life span for humans has yet been reached, and that such a limit is unlikely to exist. Figure 5Survival Function for SSA Population for Selected Calendar Years (1900, 1950, 2000, 2050, 2100) (Based on Period Tables)

. Nomination vs assignment in life insurance Life insurance policies are long-term contracts and the benefits are more complicated as they are dependent on the happening or not happening of some predefined insured events.

The contingent nature of the benefits makes it all the more important to clearly define the beneficiaries. Nomination and assignment are the tools conferred upon the policyholders to effectively manage the benefits accruing under a life insurance policy. Nomination is a right given to the life insurance policyholder to appoint a person or persons to receive the benefit under the policy in case it becomes a death claim. Simply put, if a person who is insured dies, the person in whose favour the nomination is effected, is entitled to receive the policy proceeds. The person in whose favour the nomination is effected is termed as 'nominee'. Policy proceeds under a death claim typically comprise the sum assured and the bonuses accrued, if any. For unit-linked plans it fetches the market value of units and the sum assured. A life assured who has attained 18 years of age can make nomination. Nomination ensures smooth transfer of policy proceeds when the life assured is not around. Nomination is a part of life insurance proposal. While applying for life insurance one can mention the nominee details in the proposal itself. The details of the nominee will typically include full name, age, address of the nominee and nominee's relationship with the life assured. One can have multiple persons as nominees and can also specify their shares of the policy proceeds in percentage terms. Section 39 of Insurance Act, 1938, deals with such nomination. The policyholder can change nomination as many times as he wants. The same can be done using a 'change of nomination form' from the life insurance company. The nominee himself cannot influence the policy. In the currency of the policy and the lifetime of the life assured, the nominee has a little role to play. The nominee comes into the picture only after the death of the life assured, where he can claim the benefits under the policy. On the other hand, the assignment is a transfer of rights, title and interest of the life insurance policy to a person or persons. 'Assignor' is the policyholder who transfers the title, and 'assignee' is the person who derives the title from the assignor. The assignment is of two types conditional and absolute. An absolute assignment is done for money consideration. One can typically come across an assignment where the policyholder is trying to use the life insurance policy as collateral against a loan he intends to raise. However, one must note that the assignment must be in writing and a notice to that effect must be given to the insurer. The assignee acquires the complete title of the policy and can sue under the policy. He can further assign the policy and can surrender the policy if he so desires. The assignment once effected cannot be cancelled.

In case of death of the absolute assignee the rights under the policy delve on the legal heirs of the assignee. It can only be reassigned. Section 38 of Insurance Act deals with assignment. . Nomination is an authorization to receive the claim arising out of policy in the event of the death of the life assured, it does not give the nominee an absolute right over the money received to the exclusion of other legal heirs. Further, the Nomination can be changed or cancelled at any time during the lifetime of the policyholder at his will and pleasure or by a subsequent assignment. On the other hand, assignment of an insurance policy is a transfer or assignment of all rights and liabilities to the insurance policy in favour of the assignee. .. Nomination & Assignment Difference between Nomination and Assignment:Sl.No Nomination 1. Assignment

Nomination is appointing some Assignment is transfer of rights, title person(s) to receive policy benefits and interest of the policy to some only when the policy has a death person(s). claim. In other words, by merely nominating someone, the right, title and interest of the insured over the policy is not transferred straight forwardly to that nominated person and remains with the insured person only. In other words, the insurer is bound to pass over the benefits, claims and/or interests to the assigned person(s). Even during the time the insured is alive (or even prior to the death of the insured person). since the policy benefits are assigned till the time the assignment is revoked once again.

2.

3.

We can also say that Nominee is taken to be one of the named

custodian of the insured (after his death) to whom the insurer are suppose to handover the policy benefits, claim proceeds subject to "No Objection" being raised by the legal heirs of the insured after his death. That means, the right of the legal heirs to recover the money from the nominee is protected by law. 4. Nomination is done at the instance Along with the instance of the insured, of the insured consent of insurer is also required It can be changed or revoked several times. Normally assignment is done once or twice during the policy period. Assignment can be normally revoked after obtaining the "no objection certificate" from the concerned Assignees.

5.

Nomination and assignment by way of an example : In 2001, Mr. Deepak takes a Life insurance - Money Back policy of Rs. 5,00,000 sum assured (s.a.) for a 20 years term with survival benefits payable @ 20% of s.a. at the end of every 4th year and balance payable at the time of maturity (2020) along with bonus and final loyality addition bonus, if any. Death benefits payable to the nominee or a legal heir full sum assured (Rs. 5,00,000) + bonus without deducting the survival benefits earlier paid. Sl.No. Year Event 1 2001 Remarks / Beneficiary Payment Made Nil

Policy in force & Nominee Mrs. Deepak premium paid

2 3 4

2002 2003 2004

Policy in force & Nominee Mrs. Deepak premium paid Policy in force & Nominee Mrs. Deepak premium paid

Nil Nil

Policy in force & Nominee Mrs. Deepak / S.B. Rs 1,00,000 premium paid paid to Mr. Deepak Rs 1,00,000

Assignment in favor of Policy in force & 2008 Bank / S.B. paid to the premium paid Bank 2012 2016

6 7 8 9

Policy in force & Assignment in favor of Rs 1,00,000 premium paid Bank / S.B. paid to the Bank Policy in force & Assignment in favor of Rs 1,00,000 premium paid Bank / S.B. paid to the Bank Mrs. Deepak will receive Death Benefit Rs. 5,00,000 + Bonus for 18 years

2018 Mr. Deepak dies 2019 Policy ceases death claim paid

In this case Mr. Deepak is entitled to receive survival benefit / other benefits if he continues to pay regularly the annual premium and policy is in force. Now we need to understand what will happen and who will receive the survival benefit (s.b.)/ death claim on different events. Further if Mr. Deepak assigns the policy in 7th year, earlier nominated in her wife's name, to his bankers from where he took a loan and amount repayable inclusive interest Rs. 3,00,000/-. Otherwise, loan amount of bank, if any would have due the same would have been paid to bank and rest would go to Mrs Deepak the nominee of Mr. Deepak.

From the above illustration we can make out the following:1. Nominee are entitled to receive payment after death of the insured and not otherwise even their name is nominated.

2. Assignees are entitled to receive payment not more than the amount they are entitled to receive. 3. In the instant case, the payment of Rs. 3 lakh was made by insurance company directly to bank till 2016 evwn Mrs. x is a nominee under the policy and Mr. x is alive 4. The final payment in 2018 on account of death of Mr. Deepak passes to Mrs. Deepak being nominee under the policy and assignment being earlier revoked. In both Life insurance and non-life insurance there are times when nomination and assignment under the policy is required by the insured. Almost all forms of life insurance policies can be nominated and/or are assignable. Examples under Nonlife insurance were nomination/ assignment can be effected :1. Personal Accident policy 2. Marine Insurance policy 3. Workmen Compensation Policy 4. Overseas Travel policy are Central Government Act Section 39 in The Insurance Act, 1938 39. Nomination by policy- holder. (1) The holder of a policy of life insurance 3[ on his own life 4[ ] may, when effecting the policy or at any time before the policy matures for payment, nominate the person or persons to whom the money secured by the policy shall be paid in the event of his death: 5[ Provided that, where any nominee is a minor, it shall be lawful for the policy- holder to appoint in the prescribed manner any person to receive the money secured by the policy in the event of his death during the minority of the nominee.] (2) Any such nomination in order to be effectual shall, unless it is incorporated in the text of the policy itself, be made by an endorsement on the policy communicated to the insurer and registered by him in the records relating to the policy and any such nomination may at any time before the policy matures for payment be cancelled or changed by an endorsement or a further endorsement or a will, as the case may be, 3[ but unless notice in writing of any such cancellation or change has been delivered to the insurer, the insurer shall not be liable for any

payment under the policy made bona fide by him to a nominee mentioned in the text of the policy or registered in records of the insurer]. 1. Subs. by Act 11 of 1939, s. 14, for the original sub- section. 2. Subs. by s. 14, ibid., for" life of the policy- holder". 3. Ins. by s. 15, ibid. 4. The words" not being an absolute assignee of the benefits under the policy" rep. by Act 13 of 1941, s. 26. 5. Ins. by Act 47 of 1950, s. 29 (w. e. f. 1- 6- 1950 ). (3) 1[ The insurer shall furnish to the policy- holder a written acknowledgment of having registered a nomination or a cancellation or change thereof, and may charge a fee not exceeding one rupee for registering such cancellation or change.] (4) A transfer or assignment of a policy made in accordance with section 38 shall automatically cancel a nomination: 2[ Provided that the assignment of a policy to the insurer who bears the risk on the policy at the time of the assignment, in consideration of a loan granted by that insurer on the security of the policy within its surrender value, or its re- assignment on repayment of the loan shall not cancel a nomination, but shall affect the rights of the nominee only to the extent of the insurer' s interest in the policy.] (5) Where the policy matures for payment during the 3[ lifetime of the person whose life is insured] or where the nominee or, if there are more nominees than one, all the nominees die before the policy matures for payment, the amount secured by the policy shall be payable to the policy- holder or his heirs or legal representatives or the holder of a succession certificate, as the case may be. (6) Where the nominee or if there are more nominees than one, a nominee or nominees survive the 4[ person whose life is insured], the amount secured by the policy shall be payable to such survivor or survivors. (7) The provisions of this section shall not apply to any policy of life insurance to which section 6 of the Married Women' s Property Act, 1874 (3 of 1874 ), applies 5[ or has at any time applied: Provided that where a nomination made whether before or after the commencement of the Insurance (Amendment) Act, 1946 (6 of 1946 ), in favour of the wife of the person who has insured his life or of his wife and children or any of them is expressed, whether or not on the face of the policy, as being made under this section, the said section 6 shall be deemed not to apply or not to have applied to the policy]. COMMISSION AND REBATES AND LICENSING OF AGENTS A ten-year insurance plan you bought in a hurry just to save tax or aunit-linked policy some insurance agent or a bank executive persuaded you to buy when a simple term plan would have better met your requirements are situations we are all familiar with.

While there is nothing wrong in discontinuing such policies, it is important to know the correct way to handle such a situation. READ: Reworked Ulips may not offer better returns KNOW WHAT'S UNWANTED While most of us know the risks of being under-insured, being over-insured can be equally damaging. "Most people continue unwanted policies without realising the negative effect this has on their overall financial portfolio. They pay more premium than required, which could have been invested for better returns," says Divya Gandhi, head, general insurance and principal officer, Emkay Insurance Brokers. So it is important to review your insurance portfolio from time to time to know what's redundant. "As life insurance is a long-term product, one can review every two to three years. In case of unit-linked plans, you can track the funds more frequently, say, once a quarter," says Anil Rego, CEO, Right Horizons. SPECIAL: Are you insured enough? BEFORE YOU QUIT Make sure your life doesn't remain uncovered at any point. You must have another policy or funds that will keep you financially secure. Find out the type of policy and its maturity date. Evaluate whether the surrender value, if re-invested, will give sufficient returns. Check whether you have an alternative investment to fulfil the goals that were to be met by this policy. If financial crunch is the reason to quit, compare the premiums of similar plans. Chances are that you may find a cheaper policy. Typical situations that call for a review include change in income or expenses, birth or death in the family, a medical condition that will alter future expenses, acquiring assets such as a home or a car, a new loan or any other increase or decrease in liabilities. "Policies bought to build a contingency fund become unnecessary if the financial need is fulfiled by the primary investment meant for it," says Satkam Divya, business head, Rupeetalk.com. For instance, an endowment plan taken to fund your child's college expenses will become

useless if mutual funds earmarked for the purpose amass the required amount. In such a situation, it makes sense to surrender the policy and invest the premium in avenues that give better returns. Regulatory changes can also trigger a review. "The new guidelines on Ulips completely restructured the product. This is an appropriate trigger," says Rego. SITUATIONS AND SOLUTIONS The solution depends on the plan you want to discontinue and the situation you are in. This is especially true for long-term life policies, such as Ulips and endowment plans which have a savings component. If premium is becoming a burden, many policies give the flexibility of stop payment without withdrawing the capital. "Converting an endowment policy into a paid-up plan means you can stop premium payments, but your insurance cover will come down by the same proportion. So, for a Rs 10 lakh cover with a term of 20 years, paying premiums for four years before making it a paid-up policy will bring down the cover to Rs 2 lakh as you have paid for just 20% of the term," says Gandhi. "Loans against policies can be used to pay your short-term dues," says Rego. In Ulips, the decision of whether to discontinue or not will depend on the premiums paid and the period left for maturity. Ideally, unit-linked plans give best returns when held till maturity. Ulips have a 5-year lock-in (for policies bought before 1 September 2011, it is three years) and one should try to retain the policy at least for this period. "With coming of new Ulips, if your aim is to upgrade, look at the performance of the existing policy and calculate the surrender value before moving to a new plan," says Rego. WHEN NOT TO SELL Policies held for several years become rewarding with age as the insurer has already recovered its expenses. Benefits at maturity are huge. "If near maturity, it doesn't make sense to miss the huge payout you will get at the end of the tenure,"

says Divya. Even if you are half-way to the maturity date, there are some serious calculations you must do. "If you are planning to surrender and invest the proceeds in another scheme, remember that you'll first have to recover the loss before you start earning any return. So, surrender only if the new investment opportunity is exciting enough," says Pankaj Mathpal, a certified financial planner and MD, Optima Money Managers. Timing is also important. If it's a market-linked plan, giving up the policy when the markets are at a low point will be foolish. It is also not advisable to cancel a policy if you don't have alternative ways to insure your life. Five ways to exit an insurance policy you don't need Do you have an insurance policy that you think is not needed any more? Or do you have a policy that your agent convinced you to buy, and now feel is not suited to your need? We often find investors taking an insurance policy at the end of a financial year just to save more tax. The result: Of course you do save some tax, however, you may also end up with a policy that you actually may not need. But this does not mean you need to be stuck with the policy through its entire course. Almost all insurance policies (with the exception of a term plan) have some sort of exit option that could be exercised, although they come at a cost. So when and how do you exit such life insurance policies that you don't need any more? Here are some ways... Exiting in the initial phase of the policy The free-look period The earliest exit option provided by insurance companies (and mandated by IRDA) is the free look period. The free look period entitles every policy holder 15 days from the receipt of the policy to rethink over the purchase. So in case you feel you have been mis-sold, or are not happy with the policy you could return it to the insurance company and request for a premium return.

The insurance company returns the premium amount after deducting charges towards medical tests, stamp duty and service charges. These charges would not be refunded. Letting the policy lapse If you have missed the free look period, the easiest way to exit a policy during the initial years is to let the policy lapse. In fact, there is no other way, but to let the policy lapse, as insurance companies do not provide any exit option in the first three policy years. Stop paying your premiums and your policy lapses. Do remember, you will not receive anything if the policy lapses and all your premiums would be lost. Term plans do not have any exit option beyond the free look period. Hence it is best to let it lapse. Exiting after three years Insurance companies offer the following exit options after the policy has completed three policy years. Surrendering the policy Policy surrender is a voluntary termination of the insurance policy, before its maturity. When you surrender an insurance policy, the insurer pays you a lump sum amount known as the cash value or surrender value. From the regular premiums that you pay, a part goes towards investments and the remaining goes towards the life cover. This invested portion accumulates as the cash value during the course of the policy, and is paid out on surrender of the policy (net of all charges). Cash value accumulates as long as the policy exists. In the early years of the policy, this value remains pretty low. It increases as the policy moves closer to maturity. Insurance companies offer a guaranteed surrender value of around 30 per cent of the total premiums paid subsequent to the first year. Letting the policy become paid up Instead of completely exiting a policy, you could also opt to make your traditional endowment plans paid up.

In a paid-up policy, you could discontinue paying your premiums. The policy does not go void but continues at a reduced sum assured. This reduced sum assured is known as the paid-up value. All additional benefits, future bonuses and dividends attached to the policy would be lost in such a policy. Any bonuses accrued in the first three years however would be paid on maturity. Timing the market If you are exiting your unit linked plan, your units would be redeemed at the prevailing NAV on the date of redemption. Check to see the market sentiments and behaviour before exiting. Giving up a market linked plan, when the markets are low is not advisable When you should hold on to the policy Insurance policies, especially unit linked plans, prove to be more rewarding as the years pass on, as by then insurers would have already recovered the expenses on the policy. As the policy matures, the benefits in store are huge. So if you are towards the maturity of your policy with around 3 to 5 years remaining, it is wise to hold on. If you plan to exit an insurance policy and wish to reinvest the proceeds in an alternative investment, make sure your new option would not only earn you superior returns but also has the potential to recover the losses that you have incurred in exiting the insurance policy. Also, do not exit a life insurance policy, if you do not have any other life insurance. Your life should be covered at all times Surrendering Your Life Insurance Policy If you no longer need life insurance or want to cancel for some other reason, you might be thinking about surrendering your permanent life insurance policy and withdrawing the cash value that has accumulated. But before you do it, here are some things you should consider. What is the surrender value?

As your cash value life insurance policy ages, it typically gains surrender value. If you choose to cancel your cash value life insurance policy, this is the amount of money you will receive. Here's how insurance companies calculate the surrender value of your policy:

Current Cash Value + Accumulated Dividends + Unearned Premium - Outstanding Loans and Loan Interest - Surrender Charges = Surrender Value

You may find that your insurance company prints your policy's surrender value on your statement, but more likely you'll need to contact your insurer to obtain this information. Even if your statement provides this information, you may want to check with your insurer for the most recent figures. Why surrender your policy? You had a good reason when you bought your cash value life insurance policy. Now, be sure you have a good reason for getting rid of it. There are many good reasons to think about surrendering your life insurance policy, including: The reason you originally bought the policy no longer exists You can't afford to pay the premiums anymore You need cash, and this is your only source of available funds

Did you buy your policy because you had young children to protect, but now they're grown and on their own? Or did you buy it to protect your home purchase, but you've since paid off your mortgage? If you're thinking about surrendering your policy, make sure that you don't have new reasons to keep the policy in place (e.g., grandchildren). If you cancel the policy and then change your mind, you could end up paying a lot more for a new policy than you were paying before. Typically, the premiums on your cash value policy will remain the same throughout the policy's life. At some point, however, you may find it difficult to meet those payments. Perhaps your income has dropped due to a job loss or recent retirement. Or you may find yourself in need of cash for an emergency or large expenses (e.g., medical bills or college tuition). Before you surrender your policy to come up with the necessary cash, see if you can't find another source. If you're a homeowner, one idea might be to take out a home equity loan. The interest on these loans is tax deductible, and you'll be able to keep your life insurance protection in place. Another option is to ask a family member for a loan. If you choose to ask your family, be sure you're all clear and in agreement on the terms of the loan. Blood may be thicker than water, but money can take a toll on any relationship. You can also take a loan from the life insurance company using your cash value as collateral. Unless this is prohibited in your policy for some reason, the insurance company must grant this loan--no questions asked--and the interest rate may be fixed at a lower rate than your bank is charging. What's more, you never have to repay the loan, as it will be subtracted from the death benefit or future cash surrender value. However, interest on loans from life insurance companies is not tax deductible. Surrender a piece or the whole enchilada? You can choose to surrender your policy in part or in whole, subject to the insurance company's rules. With some types of insurance policies, you simply divide the policy and surrender one portion and keep the other. Your death benefit and cash value are reduced proportionately. Other policies allow for withdrawals of a portion of the cash value, leaving the death benefit more intact (the death benefit will still be reduced by at least the amount of the withdrawal, and probably somewhat more depending on the policy values at the time). One common strategy

is known as surrendering or withdrawing to basis. The basis is the total amount of premiums you've paid on the policy, less any dividends previously paid out. Because you paid your premiums with dollars that were already taxed, surrendering to basis is generally not a taxable event. Amounts you surrender or withdraw over and above your basis will be taxable income to you. Keep in mind, though, that surrendering, withdrawing, or borrowing against your cash value will decrease the death benefit that you leave to your beneficiaries. The other option is to surrender the entire policy and cash out. If you choose this option, be sure that you still have a fluffy financial cushion to protect your loved ones, in case the unexpected should happen. What's it going to cost? You can surrender (cancel) your policy, but surrender fees will likely be charged if you do. These charges will vary depending on how early or late in the life of the policy the cancellation occurs. For example, some policies carry a 15- to 20-year surrender schedule, in which the charges decrease as the years progress and eventually disappear. In addition, when you surrender your policy for cash, the gain on the policy is subject to federal income tax (your gain is the difference between the cash value, less outstanding policy loans and your policy basis). Is surrendering right for you? Whether or not to surrender your life insurance policy is a complicated decision, one that you probably shouldn't make on your own. The best approach is to talk with a trusted professional advisor, such as your insurance agent and financial planner. He or she can help you analyze all of the issues involved and decide if you should surrender the whole policy, surrender part of it, or leave it alone. .. Life Insurance: Surrendering policy? Think again Many are stuck with wrong life insurance plans. Financial planners often advice you to surrender the policy and use the money for better investments. Raj Pradhan finds that is wrong advice in most situations. Find out when and how you should surrender life policies

Many people are unhappy with their life insurance choices. They want to get out of the policy and even whine about having been mis-sold a product. What should they be doing? Open a newspaper, a magazine or watch business channels and you will find many so-called experts casually advising people to surrender their dud insurance policies. Some may suggest that you turn your policy into a paid-up one without even explaining its implications. Exhorting readers or viewers to bite the bullet by ending your insurance policy and showing dreams of investing in better instruments is common. But is it sound advice? Do you really know what surrender value you would get for your policy? Also, after taking a beating on your policy, do you know how much the new option would have to generate to really be a better choice? If not, dont listen to the babble of the experts. Talk is cheap. Following them blindly will surely lead you to disaster. If you have already invested in a traditional policy or a unit-linked insurance plan (ULIP) and are unhappy, think hard before surrendering it. After all, its your hardearned money. Moneylife gets several such queries from readers and, in most cases, they are tempted to surrender the policy because something else appears to be more attractiveequities, real estate or gold/silverdepending on which has run up. You have better options, as this article will explain. For starters, if you have an insurance policy for cum-investment purpose, why not benefit from rupee-cost averaging, disciplined investment and long-term savings? After all, these products have already squeezed the high charges from you in the initial years and surrendering will only benefit the insurance company. Moreover, what happens to the tax benefit you have taken under Section 80C when you surrender the policy? Is the surrender amount taxable? Read on. How did you get stuck with a traditional insurance policy or ULIP in the first place? Listening to experts or biased media? Moneylife had done a product review of Kotak Invest Maxima ULIP (12 January 2012). We wrote: Zero premium allocation charge but hefty policy admin charge. Recently, we came across a review of the same product in another magazine. Its view: One of few products in the market with zero premium allocation charge. The product has 7.2%pa policy admin charge, which is killing. The company is extracting your money one way or the other. In another article, the actuary ofKotak Life Insurance admitted that removal of the premium allocation charges amounts to repackaging. Here are examples of the kind of advice offered by experts for surrendering your

insurance policy and what we think would be the right approach. Traditional products offer low insurance: While this is true, what happens to your investment component when you surrender? It takes a beating. Why not compensate for low insurance by buying a term plan without giving up the existing traditional policy? Traditional products offer low returns: It is true in many cases, but long-term (over 16 years) endowment policies from LIC (Life Insurance Corporation of India) have given decent returns on investment7%-8% tax-free. If you have to exit and get a pittance as surrender value, your new investment has to offer such high returns that it compensates for the loss you incurred with the traditional policy. Can you put down the actual numbers on paper to prove this? Generic advice of surrendering may not benefit your particular investment situation. Traditional products give special surrender value: While this is true for many traditional products, it is not guaranteed. It depends on the insurer. The guaranteed surrender value (GSV) is low which entails losses for you. Moreover, you have to find out what the special surrender value (SSV) really amounts to in your policy. This may depend on how many years your policy has been active, the policy term, the product, the companys performance and so on. Surrender traditional products early or hold them if the term is almost over: For starters, surrendering within three years of a policy will give you nothing. After three years, you get 30% of the premium paid minus first-year premium plus partial bonus. Hoping to make it up with a big gain in a new investment is impossible in most cases. Moreover, traditional products are not like fixed deposits (FDs) where breaking it makes sense early in the term. There are options like negotiating with the insurance company to reduce the policy term, in case you want to get rid of the policy sooner. It does work in many cases, if you just ask. Traditional products have high charges: This is a fact, but once you have bought a policy, you have already gone past the high charges since the charges are frontloaded. Surrendering it will only help the insurance company, not you. If you are facing a financial crisis, partial withdrawal or loan is an option. Convert your traditional policy to paid-up if in the middle of policy term: Have you found out what will be the paid-up value that will be given at policy maturity

or death? Considering the amount of premium paid till now, how much is your rate of return? You need to see the numbers before converting the policy to paid-up. ULIP has exposure to equities and the market is volatile: This was the advice given on a TV business channel which may have left many flabbergasted. How about switching to adebt funds option? Experts are dime a dozen; what do they have to lose with free advice on TV? Nothing. Poor fund performance of ULIP: It is possible that markets are doing much better than your ULIPs performance. What do you do if the fund management is poor? Depending on the number of years in the policy, you may have minimal or no surrender charge. If so, you can discontinue the policy. If the policy surrender charge is high, you can decide whether you want to shift to a debt fund option and hope the fund is better managed. You can make new investments in equity mutual funds to balance your total investment. ULIP does not offer capital guarantee: The equity option will not guarantee capital; it is for the long-term investor with some risk appetite. The debt option of ULIP too will not guarantee capital, but it is unlikely you will have any loss if you remain in the policy over a period. Capital guarantee is offered by traditional products but you will be jumping from the frying pan into the fire. Old ULIP surrender: A well-known financial planning website advised a Moneylifereader to surrender an old ULIP even though the required three premiums were not paid. They ignored the fact that surrender of an old ULIP within the lock-in period may yield next to nothing. Use cover continuance feature of ULIP: The new ULIPs dont offer this feature. If you stop paying premiums after the lock-in period, the policy will be discontinued and funds returned to you. The cover continuance feature was available in old ULIPs wherein you could stop paying after three premiums and continue with the policy. The funds would remain invested in your choice of fund option. The mortality charges will be deducted to maintain the insurance component. It was a great feature, but was done away with in the new ULIPs. This was due to mis-selling by intermediaries. Using cover continuance also means you are not a long-term, disciplined investor interested in rupee-cost averaging of your investment.

 Better product in the market: This is the pitch from intermediaries to churn your portfolio. They egg you on to surrender your policy and to put the proceeds in a new product even if it is not in your interest. Traditional products are front-loaded the intermediaries get instant gratification from the first years commission of the new product. It is a completely wrong advice to boost the agents revenue. Go for term life insurance: It is true that term life insurance is the best insurance you can buy, but is it worth surrendering your policies to buy term life? A Moneylife reader has 22 LIC policies in his family. The total insurance component is still lower than the necessary risk cover for his family. He realises the importance of term life and is now tempted to surrender all his LIC policies and go for term life insurance. Is it really worth the losses, considering that today online term insurance comes at incredibly low premiums? If the policy doesnt meet your objective, it is better to let it lapse even though you stand to lose the premium: This is the advice from an expert in a leading newspaper. It sounds sophisticated like people should buy bonds instead of investing in FDs. What objectives do people really have? They want decent insurance and investment instruments to grow their savings. Its true that some people may have short-term needs, but why did they invest in traditional insurance, which is a long-term product? Most of these products, especially endowment plans, have a loan feature wherein 90% of the surrender value can be taken as loan @9%pa (the current LIC rate) instead of surrendering the policy. Private insurers may charge a higher rate of interest on the loan. Kotak Life is charging between 12%-12.5%pa. According to Girish Malik, vice-president-life insurance, Nandi Insurance Broking and Risk Management Services Pvt Ltd, Taking a loan against an insurance policy is sometimes a deliberate strategy of businessmen. LICs Bima Bachat is a single premium endowment plan with 80C tax savings as an incentive. After taking the tax benefit, businessmen take loan on 63% of the investment @9%, which is a great feature. The GSV is available only after completion of at least one policy year. After completion of one year, you can take loan on 81% of the investment. Stay Married or Divorce? You have to evaluate your situation to figure out if you need to stay married to your insurance policy or take a divorce. Work out your returns. What is really your specific situation? What is the surrender value your policy is offering? What is the

expected rate of return from your existing policy? Does your existing policy offer a loan? How much is the revival period in case you skip premium payment? How many premiums are paid and how many remain? Does it offer a paid-up feature? What is your alternative investment plan? What kind of returns will it give? What are the ratings of new investment and, hence, risks associated with it? Are those assured returns or expected returns? If you give up on your existing insurance policy, you will need some insurance to cover your risk. What would that be?

There are other issues as well. Are you short of funds for investment for getting the 80C rebate? Are you heavily in equity investment and need debt exposure to balance? Do you have an investment option which would fetch you the returns to compensate for the loss due to surrender? What is your tax bracket? Is the existing premium miniscule or hefty? Traditional Plans: Bad Partner, Worse in Divorce Intermediaries get 30%-40% commission in the first year of selling a traditional plan. The unwritten understanding is that they share a good part of what they pocket with the client. That should not be an incentive to buy a traditional plan, but it shows why insurance companies cannot give a decent surrender value on a traditional plan during the initial years of the policy. On the other hand, this is exactly the reason why intermediaries are willing to share the commission. They know you are stuck with the policy. The persistency ratio of insurance policies after two years is hardly 60%, i.e., in two years, the premium on 40% policies remain unpaid. In case you are unable to pay premium due to any financial constraint, traditional plans allow revival of policy usually within five years of first unpaid premium by paying arrears of premium together with the interest and possibly a medical test. The revival period for some traditional plans may be between two and five years. According to Shrigopal Jhunjhunwala, a veteran LIC agent, Many LIC plans allow decrease in policy term. A policy term of 25 years may be reduced to 17 years by paying premium difference along with interest. If the policyholder does not want to pay differential premium, the SA will be appropriately reduced. Some private insurance companies do not allow reduction of policy term. The argument

is that there is not much demand for such a feature. Why cant the policy term be extended? This is because the underwriting was done based on the circumstances prevailing at the time of policy issuance. Let us take the example of an actual policy and see whether the customer benefits by surrendering. LICs endowment plan is a decent traditional plan especially if you take a view of 25 years or more. In this example, we assume policy term of 17 years and that a couple of premiums have been paid. If the customer is now contemplating surrender of the policy and foregoing the couple of premiums and starting a fresh investment in PPF (Public Provident Fund) currently offering 8.6%pa returns, is it a right decision? Look at the risk factor in your plan to be able to compare the two investments. Surrendering your LIC endowment in the example to invest in PPF @8.6%pa does not make sense for a policyholder who is 25 (needs tax-free 8.62%) and is positively illogical for a policyholder aged 42 (needs tax-free 8.53%). Moreover, you can only put maximum of Rs1 lakh per year in PPF and if you already have funds available for it, does it make sense to surrender a traditional policy? Buying a bank FD at 9%pa will not be an option as the post-tax returns will be only 6.3% (assuming you are in the 30% tax bracket). This is why you have to think twice before surrendering your traditional insurance policy. According to Girish Malik, If you are stuck with a toxic traditional product which does not give returns in line with other traditional products in the market, you may have to look for exit. Turning your policy into paid-up will make more sense than just surrendering which only helps the insurance company. If you are bent on surrendering the policy, you need to get a quote for surrender value of the insurance policy before actually giving a go-ahead for surrender. If you are close to the end of policy term, do whatever it takes to complete the policy term. Many traditional products offer final additional bonus (FAB) as an incentive to stay with the policy. You can also take a loan from your PPF account to pay the premium of insurance policy to help in completing the policy term. There may be instances where you need funds due to some financial constraint or say investing in PPF for 80C tax savings. Most traditional products offer a loan feature wherein 90% of surrender value can be taken as loan. In these cases, you can take a loan to put money in PPF.

How much is the actual GSV? This will vary with traditional products and insurance companies. In general, if you dont pay three premiums, you will not get anything back. There are certain exceptions like LIC Shree Policy which will give you the surrender value even after one policy payment. This is an exception and being able to return surrender value at any time also means that the insurance company makes up money somewhere, i.e., higher premium. As per the Insurance Act 1938, after three premium payments, the GSV works out to 30% of the premiums paid minus first year premium. While the policy document may not talk about partial bonus payment during the time of surrender, possibly because the insurer wants to discourage surrender, internal LIC circulars do mention it for many traditional plans. LIC should publicise it instead of keeping it covert. It is called cash value of any existing vested simple reversionary bonus. This is something the media never talks about probably because it is unaware of it. According to LIC sources, Customers do not realise that cash value of bonus (partial bonus) is added in the GSV. It is also considered while coming up with special surrender value (SSV) which is offered in many plans. The customer gets the higher of SSV or GSV. Moreover, the longer you stay with the policy, the higher is the amount of partial bonus added. It means your GSV as well as SSV will start looking better when you stay for a longer period with the policy. For example, if a policyholder takes LICs endowment plan in January 2009 for 20 years with SA of Rs1 lakh, the premium will be Rs4,881pa. After four premium payments, the policyholder would have paid premium of Rs19,524. In this example, the GSV is Rs7,910, even though, going by the actual policy wording the GSV is only Rs4,392. What explains the difference between Rs7,910 and Rs4,392? It is the cash value of existing vested bonus (partial bonus). The SSV offered by LIC is Rs9,099. Do you still want to take a 50% cut in your investment even after taking SSV and expect to make big profits in new investments? According to Vijay Sinha, senior vice president and head, marketing of Tata AIG LifeInsurance, The surrender value (referred to as cash surrender value or SSV) is calculated on the basis of paid-up value and accrued bonuses multiplied by the applicable surrender value factor as per plan/product. The longer the customer stays invested in the policy, the greater is the surrender value factor which results in better SSV.

What are the tax implications of policy surrender? Tax savings on entry: If you do not pay any additional premium after buying a regular premium policy, not only do you not get any surrender value, you will also have to reverse the Section 80C tax savings you have taken. The amount of deduction allowed under Section 80C in earlier years shall be deemed to be income of the customer and liable to tax in the year of surrender of policy. It will be a double whammy for you. According to 80C rules, tax savings will have to be reversed if you do not keep single premium policy in force for two years after the date of commencement of the policy or regular premium policy premiums are not paid for two years. Tax savings on exit: On receipt of surrender or paid-up value, you will not have to pay taxes. This is similar to tax treatment of policy on maturity or death of policyholder. As per the existing rule, exemption of taxes on corpus is allowed as long as insurance component of the policy is five times the premium. Traditional Paid-up: Neither Married nor Divorced According to Vijay Sinha, One should only convert ones traditional life insurance plan into a paid-up one, if one has strong reasons to believe that the originally purchased product is a mismatch for him. The important point is that when the policy is converted to paid-up, your SA has been effectively reduced. It means you have reduced your life insurance protection and you will have to compensate it by buying another life insurancepolicy. One needs to remember that with increase in age, the risk premium increases and one will have to pay more for the same cover as time passes. Hence paid-up or policy surrender are to be done only as a last resort. Many traditional products offer paid-up option in case you want to remain invested after paying three premiums, but do not want to pay future premiums. The paid-up value bears the same ratio to the full SA as the number of premiums actually paid bear to the total number of premiums originally stipulated in the policy. It means that if you pay premium for five years when the policy term is 10 years, the paidup value is half of the original SA. The policy so reduced is free from future premium payment, but is not entitled to the future bonuses. The FAB given at the end of the policy term will not be given for paid-up policies. The existing vested reversionary bonuses, if any, remain

attached to a paid-up policy. This paid-up value along with the vested reversionary bonuses are payable to the policyholder at the end of the policy term or on death, whichever is earlier. Accident benefit and critical illness riders do not acquire any paid-up value. Does it really help to turn your policy into paid-up? For example, in the case of LICsendowment policy, a policyholder of age 25 years with a policy term of 10 years pays a premium of Rs1,03,032 for sum assured of Rs10 lakh. If the policyholder converts the policy to paid-up after paying five premiums, he would have paid Rs5,15,160. The paid-up value will be half the SA, which is Rs5 lakh. The paid-up value along with bonus declared till converting the policy to paid-up will be paid on death or end of policy term. The total bonus based on current bonus rate (of Rs34 per thousand of SA) is Rs1,70,000. The total paid on death or after completing the policy term of 10 years is Rs6,70,000. The bonus amount will depend on the actual declared rate. The return on premium at the end of 10 years is 3.33%. If you had continued premium payment till the end of policy term, the return on premium would have been 4.73%. Paid-up policy is not the best solution, but better than policy surrender which will amount to financial hara-kiri. According to Shrigopal Jhunjhunwala, Why do customers prefer single premium or limited premium payment term of three to five years? This is due to uncertainties in life and especially customers with high-ticket premium are not sure of their capacity to pay premiums regularly over a period of time. People are looking for a back-up plan in case they miss on paying a premium. Most of the LICs traditional products do offer the flexibility of revival within five years of first unpaid premium. SSV, turning policy into paid-up, reducing policy term and so on are some of the exit options. A policy can be split into multiple parts (subject to conditions) and you can continue to pay premium for one or more parts and wait for your financial conditions to improve so that you can revive the remaining policy parts. There are options like loan-cum-revival of policy wherein you can avail of loan to help revive your policy by paying arrears. Every traditional product from LIC and private insurance companies is different. Features offering flexibility of exiting the policy will differ. Soured Marriage for Old ULIPs Surrender Charges: Insurance companies had a dream run in mid-2000 with huge revenues from ULIPs surrendered within the three-year lock-in period. Many of these products had hefty surrender charges if you surrendered within the lock-in

period. For example, Bajaj Allianz New UnitGain ULIP had surrender charge of first years allocated premium, if the regular premium of first three years was unpaid. Some of them, like ICICI Pru LifeTime Super Pension, gave 96% of the fund value after completion of three years, 98% after four years and 100% after five years. At the other extreme, there are a few old ULIPs, which penalise you almost till the end of policy term. They literally want to squeeze you till end of the policy term. Check what surrender value your policy offers and judge whether it is worth surrendering. One Moneylife reader had completed three years of premium payment for Bajaj Allianz New UnitGain ULIP and wanted to surrender. He was deterred by surrender charge formula. [1 - (1/1.06)^N ] * first years annualised premium (where N is 10 years, less the elapsed policy duration in years and a fraction thereof). The policyholder finally decided to keep the policy for 10 years as there is no surrender charge after 10 years. The insurance regulator found another Bajaj Allianz ULIP (Capital Unit Gain) complicated and not customer-friendly. It asked the insurer to withdraw the product. Policy Revival: Because old ULIPs paid next to nothing if you surrendered without paying three premiums, these policies are allowed to be revived within two years of non-payment of premium. You may need to undergo a medical test. Cover Continuance: This is similar to the paid-up concept in a traditional plan, but not exactly the same. It was an excellent feature available in old ULIPs, but was a double-edged sword as it was used for mis-sellingtelling customers only to pay for three years. With the charges front-loaded, it makes sense to continue with the policy beyond the mandatory three years to get the benefits of long-term investment and rupee-cost averaging. Cover continuance does not reduce your sum assured for death benefit, unlike the paid-up concept which proportionately reduces sum assured depending on the number of premiums you paid and the policy term. If you are not satisfied with your old ULIP, you can have a separation without divorcing the policy with cover continuance feature. Under this, if one is not able to pay the premiums any time after the first three years (lock-in period), the policy would not lapse and the life cover continues. The funds invested in equity/debt will continue to remain invested in the policy. The life cover sustains because of the mortality charges that continue

to be deducted from your fund value along with other charges as per the policy contract. It ensures that the sum assured is payable in the event of the policyholders demise, even if all the premiums have not been paid.

New ULIPs Are Easier To Divorce Surrender Charges: In new ULIPs, there are no surrender charges after five years. If the policy is surrendered before the lock-in of five years, the surrender charge will depend on the year of surrender as well as premium amount. In the worst-case scenario, if you surrender after paying only one premium, the maximum surrender charge as per IRDA will be Rs3,000 (premium up to Rs25,000) or Rs6,000 (premium above Rs25,000). Some insurers may charge less. LIC Endowment plus (new ULIP) has surrender charge of Rs2,500 (premium up to Rs25,000) and Rs6000 (premium above Rs25,000). The surrendered amount will be returned only after completion of five years of policy, but you will get 4%pa interest. Policy Revival: The policy wording of LIC Endowment Plus gives details of policy revival which is similar to what other new ULIPs will offer. It says if you fail to pay premiums under the policy within the grace period, a notice shall be sent to you within a period of 15 days from the date of expiry of grace period to exercise one of these options within a period of 30 days: a) revival of the policy, or b) complete withdrawal from the policy. If you do not exercise any option within the stipulated period of 30 days, you will be deemed to have exercised the option of complete withdrawal from the policy. In short, unlike old ULIPs, you do not have the luxury of two years to revive the new ULIP. Cover Continuance: New ULIPs dont offer cover continuance. Premium discontinuance after completion of the fifth year (the new lock-in period) will give the policyholder the option to revive a policy within the eligible period. The other option is a complete withdrawal without any risk cover; you will get fund value. Unlike the old ULIPs, where you can stop premium payment after three years and get cover continuance to keep insurance protection and keep the funds invested, the new ULIPs offer poor options if you stop premium payment after five years.

Is the premium payment term (PPT) in new ULIPs similar to cover continuance? The difference is that in the case of new ULIPs that are offering PPT you will have to declare upfront how many years you wish to pay the premium for. The insurer will accept payment only up to the declared PPT, but allow the policy to remain in force till the end of the policy termas long as premiums till the end of the PPT are paid. The flexibility of cover continuance is offered with PPT in new ULIPs, but the onus is on you to make an informed decision that cannot be changed later. The option to discontinue the policy without any penalty anytime after five years is available for all new ULIPs. The Clock Is Ticking Go through the policy document in detail and understand the fine print. If you are unhappy with anything, cancel the policy within the free-look period. The clock starts ticking from the moment you buy life insurance. You will receive your premium net of charges for stamp duty, medical tests (if applicable) and proportionate risk premium charge to cover you for the time until cancellation. If you have missed the free-look period, complete three premium payments to ensure that you dont lose everything in traditional plans and in many old ULIPs. New ULIPs carry a cap on surrender charges and you will get your discontinued fund along with 4% interest after five years. After completion of three years, a traditional plan acquires paid-up value and old ULIPs offer cover continuance. Remember, a traditional plan offers two to five years for policy revival in case you miss premium payment and old ULIP offers two years for the same. Taking a loan against 90% of a traditional policys surrender value and reduction of policy term are good options, if you need the money. ULIPs may not offer high loan value, but its flexibility beats a traditional policy. Use the switch option from equity to debt, if you are conservative. If you have already purchased a non-toxic traditional or ULIP, stay with it; you will benefit from disciplined savings and rupee-cost averaging. If you are looking for pure risk protection, term life insurance is the best option. It does not offer any maturity or surrender benefit and, hence, there is no question of being stuck with the policy. Make the right choice before buying life insurance. The clock is ticking. Insuring ones life is not optional. Moneylife Survey: 37% Feel Stuck with Their Policies But they have not explored options other than surrenderthe reason for this

article Our survey on surrender of life insurance policy indicates that readers are savvy about wanting sufficient term life insurance, but alas they are stuck with a traditional policy or ULIP. Online term plans are inexpensive and, hence, you dont need to surrender a traditional policy or ULIP to be able to complete your insurance needs. Moneylifes online survey received responses from 617 readers. Almost 80% of the respondents are paying premiums towards traditional policies while 50% pay for ULIPs. It is in line with the penetration of insurance-cumsavings products which are popular with Indians. The trend of buying a term plan, which will give nothing if you survive, is slowly but surely catching on as awareness of risk protection increases. Two out of three respondents were aware of policy revival rules in case of missed premium payment. It is surprising that almost one in four does not know about the switch option in ULIPsto move funds from equity to debt option and vice-versa. Some 37% of the respondents feel they are stuck with life insurance policy and want an exit. This should not happen if a life insurance product is purchased with the right intention of disciplined savings and awareness of returns a product can yield. Unfortunately, the grass is always greener on the other side and the urge to exit can be wrong but overwhelming. The top three reasons for traditional policy surrender are: low bonus or benefits, wanting to get proper insurance through term life and better investment options. Online term life insurance is affordable; hence, do you really need to surrender your policy? The top three reasons for ULIP surrender are: poor fund performance, high charges and wrong selling by agents. Old ULIPs were front-loaded with charges. The new ULIPs spread the charges over the years. In effect, the total charge over five years or more is almost the same and does not really reduce. Misselling by agents with big promises was prevalent in old ULIPs and we hope it has reduced with customer awareness and reduced upfront incentives for agent to push ULIPs. Well, agents can push traditional products to generate high commission and they surely do it. Almost 30% of respondents have already surrendered life insurance policy and, of those who surrendered, 28% did not analyse alternate investment options. It shows that surrender decision is often whimsical and without any sound logic. As much as 57% of the respondents are aware of the surrender value of a traditional policy while almost 50% are aware of surrender charges of old/new ULIPs, which is

encouraging. Of those for whom policy surrender was applicable, more than 50% had not considered the paid-up option for traditional policies, cover continuance for old ULIPs as well as the loan feature for their immediate financial needs. This is not surprising as life insurance policyholders are unaware of the options they have. Our Cover Story will help these investors. How surrender value of an insurance policy is calculated Ashish Gupta, ET Bureau Dec 13, 2009, 06.08am IST Surrender value is the sum of money an insurance company will pay to the policyholder or annuity holder in the event of his policy being voluntarily terminated before its maturity or the insured event occurring. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. This is also known as 'cash value', 'surrender value' and 'policyholder's equity'. Surrender value is the amount payable to the policyholder should he decide to discontinue the policy and encash it. It is payable only after three full years' premiums have been paid to the insurance company. Moreover, if it is a participating policy, the bonus gets attached to it. Surrender of policy is not recommended since the surrender value will always be proportionately lower. .. Foreclosure & Life Insurance Foreclosure proceedings create significant fear and stress for the people involved in losing their homes. In the face of threatening letters and phone calls from a mortgage company intent on getting its money or property, homeowners will benefit from knowing exactly what means are and are not possible by the mortgage company. Understanding more about what banks and mortgage lenders can do to recoup their losses will help you endure foreclosure with less confusion. Foreclosure Basics

If you stop making normal monthly mortgage payments, you default on your loan agreement. After a customary grace period wherein the mortgage lender attempts to get the past due money, formal foreclosure proceedings may begin. This entails the filing of motions with a court describing the manner

in which you breached your loan contract, as well as notification of the lender's intent to take possession of the collateral securing the loan -namely, your house. If an agreement cannot be reached, a judge eventually grants the lender possession of the real estate. Life Insurance Basics

Life insurance products provide monetary benefits to your heirs if you die. The primary purpose of life insurance is to provide income replacement and debt repayment; without your income, your family's financial situation would become untenable because the remaining household income is insufficient to pay all the bills. Your heirs may choose a single lump sum payment of the entire benefit amount, or a stream of payments over a specified period of time.

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Life Insurance Contracts

A life insurance policy is a legal contract between you and the insurance carrier, wherein you promise to pay a specific amount for a specific period and the company promises to pay your chosen beneficiaries a specific benefit if you die within that period. Your mortgage lender has no authority or influence over your life insurance contract and cannot interfere with the fulfillment of the carrier's obligations. Only a judge may have the ability to modify or change your life insurance contract, and such an event could not occur without your knowledge or involvement. The beneficiaries of your life insurance policy are the only ones eligible to receive the proceeds, and only you are in a position to add, remove, or otherwise change the beneficiary list. Unless you specifically list your mortgage company as a primary beneficiary on your life insurance contract, there is no way the lender can take possession of the money after you die. Additionally, nobody can force you to change your beneficiaries against your will.

Beneficiary Designations

Completed Foreclosure

If the foreclosure process on your real estate results in the loss of your property, your life insurance contracts will not be affected. No law or regulation exists that prohibits you from continuing to own or purchase an insurance policy during or after foreclosure. Your life insurance contracts will remain unchanged even if you lose your home. Permanent types of life insurance accumulate equity over time, and such equity can often be withdrawn or borrowed against. The impact of removing cash value from a permanent life insurance policy depends on a variety of factors, including your age, the amount of the withdrawal, the type of policy and the face amount of the coverage. In the midst of foreclosure proceedings, you may consider withdrawing a portion of your life insurance policy's cash value to assist with negotiations.

Cash Value Life Insurance

. Who Pays Insurance on a House in Foreclosure? One of the most overlooked aspects of a house in foreclosure is the responsibilities associated with the maintenance of insurance. The legal responsibilities are defined in the loan documentation, with the likely source of the answer contained in the provisions of the mortgage or deed of trust. Borrower's Responsibilities on Insurance

When the borrower and the lender have an insurable interest on a structure located on land, the mortgage or deed of trust that secures the lender's interest contains a provision defining the borrower's responsibility to procure and maintain insurance. Typical in these documents is a paragraph that will generally state: "Borrower agrees to provide, maintain, and deliver to lender fire, vandalism, and malicious mischief insurance satisfactory to and with loss payable to lender." When a borrower fails to maintain fire insurance on his home, the lender has two courses of action it can take. The first (and unlikely) choice is to ignore the situation. This effectively means that the lender doesn't have the responsibility to purchase replacement insurance or pay the premium on the

Consequences of Failing to Provide Insurance

borrower's insurance. In virtually all instances, recognizing the potential risks associated with its collateral losing value if there was a fire, the lender immediately places insurance on the uninsured structure and bills the borrower for the cost of insurance. The borrower's failure to maintain insurance constitutes a breach of the loan, justifying a lender's actions in commencing or continuing to foreclose. Lender Purchases Insurance

The path normally followed by a lender, when the policy of insurance provided by the borrower lapses for non-payment, is to obtain an insurance policy that protects the lender's interest. The lender can be expected to obtain minimum coverage, meaning that it is sufficient to cover the amount of the loan, insuring casualty losses for fire, vandalism and malicious mischief. In situations when the lender obtains the insurance coverage (referred to "forced placed insurance"), the lender bills the borrower for the cost of obtaining the policy. If the borrower does not pay the invoice, the lender will likely add that unpaid amount to the unpaid principal of the loan and may seek to recover the advance payment by initiating a foreclosure if that becomes necessary. Because lender-obtained insurance is designed to protect the lender, the borrower must recognize that he remains "uninsured" for property such as his furnishings and is also not covered for third-party liability claims that would ordinarily be covered by his home owners insurance policy. Even in situations where the borrower expects to lose his home through the foreclosure process, he should be sure to obtain additional coverage from his insurance company to cover home contents and third-party liability claims.

Who Pays for Insurance Coverage When Lender Procures It?

Borrower Concerns

. REO/Foreclosure Insurance

Fire, floods, vandalism, and other unexpected perils will further decrease your propertys resale potential. Until you can equitably dispose of the real estate, protect it from uninsured hazard loss with van Wagenens REO/Foreclosure Insurance. Coverage is available for residential and commercial properties including those under construction, mobile and manufactured homes. An REO/Foreclosure policy reduces your exposure in several ways: Protects property from uninsured loss Controls costs and optimizes internal resources Provides optional liability coverage Includes wind coverage even in coastal areas and for named storms van Wagenen insures properties that are otherwise uninsurable in standard markets. Coverage is available on a blanket basis or by individual property. Setting up your master portfolio is quick and easy, so you can begin ordering coverage through a user-friendly online program.

Additional Coverage Options: Flood coverage Earthquake coverage in all states except AK and CA Vacant Land Liability coverage General Liability limits up to $1M each occurrence; $2M general aggregate Independent Contractor Liability limits of $50,000 and $100,000 Product Details (Click here): Available Coverage: Residential Properties: All-risk dwelling coverage, including vandalism and malicious mischief, plus the lesser of replacement or cost-to-repair loss settlement provisions. Optional contents/personal property coverage of 50% available if the building is insured. Commercial Properties: Named peril coverage, including vandalism and malicious mischief, plus actual cash value loss settlement provisions. Optional commercial business property coverage may be added for a fee, if the building is insured.

Reinsurance Reinsurance is insurance that is purchased by an insurance company (the "ceding company" or "cedant" or "cedent" under the arrangement) from one or more other insurance companies (the "reinsurer") as a means of risk management, sometimes in practice including tax mitigation and other reasons described below. The ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which thereinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a "reinsurance premium" by the ceding company, which issues insurance policies to its own policyholders. The reinsurer may be either a specialist reinsurance company, which only undertakes reinsurance business, or another insurance company. For example, assume an insurer sells 1000 policies, each with a $1 million policy limit. Theoretically, the insurer could lose $1 million on each policy totaling up to $1 billion. It may be better to pass some risk to a reinsurer as this will reduce the ceding company's exposure to risk. There are two basic methods of reinsurance: Facultative Reinsurance, which is negotiated separately for each insurance contract that is reinsured. Facultative reinsurance is normally purchased by ceding companies for individual risks not covered, or insufficiently covered, by their reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks. Underwriting expenses, and in particular personnel costs, are higher for such business because each risk is individually underwritten and administered. However as they can separately evaluate each risk reinsured, the reinsurer's underwriter can price the contract to more accurately reflect the risks involved. 2. Treaty Reinsurance means that the ceding company and the reinsurer negotiate and execute a reinsurance contract. The reinsurer then covers the specified share of all the insurance policies issued by the ceding company which come within the scope of that contract. The reinsurance contract may oblige the reinsurer to accept reinsurance of all contracts within the scope (known as "obligatory" reinsurance), or it may require the insurer to give the reinsurer the option to reinsure each such contract (known as "facultative-obligatory" or "fac oblig" reinsurance).
1.

There are two main types of treaty reinsurance, proportional and non-proportional, which are detailed below. Under proportional reinsurance, the reinsurer's share of

the risk is defined for each separate policy, while under non-proportional reinsurance the reinsurer's liability is based on the aggregate claims incurred by the ceding office. In the past 30 years there has been a major shift from proportional to non-proportional reinsurance in the property and casualty fields. Functions Almost all insurance companies have a reinsurance program. The ultimate goal of that program is to reduce their exposure to loss by passing part of the risk to loss to a reinsurer or a group of reinsurers. In the USA, insurance, which is regulated at the state level, permits an insurer only to issue policies with a maximum limit of 10% of their surplus (net worth), unless those policies are reinsured. In other jurisdictions allowance is typically made for reinsurance when determining statutory required solvency margins. [edit]Risk transfer With reinsurance, the insurer can issue policies with higher limits than would otherwise be allowed, thus being able to take on more risk because some of that risk is now transferred to the reinsurer. The reason for this is the number of insurers that have suffered significant losses and become financially impaired. Over the years there has been a tendency for reinsurance to become a science rather than an art: thus reinsurers have become much more reliant on actuarial models and on tight review of the companies they are willing to reinsure. They review their financials closely, examine the experience of the proposed business to be reinsured, review the underwriters that will write that business, review their rates, and much more. Almost all reinsurers now visit the insurance company and review underwriting and claim files and more. [edit]Income smoothing Reinsurance can make an insurance company's results more predictable by absorbing larger losses and reducing the amount of capital needed to provide coverage. The risks are diversified, with the reinsurer bearing some of the loss incurred by the insurance company. [edit]Surplus relief An insurance company's writings are limited by its balance sheet (this test is known as the solvency margin). When that limit is reached, an insurercan do one of the following: stop writing new business, increase its capital, or (in the USA) buy "surplus relief".

[edit]Arbitrage The insurance company may be motivated by arbitrage in purchasing reinsurance coverage at a lower rate than they charge the insured for the underlying risk, whatever the class of insurance. In general, the reinsurer may be able to cover the risk at a lower premium than the insurer because: The reinsurer may have some intrinsic cost advantage due to economies of scale or some other efficiency. Reinsurers may operate under weaker regulation than their clients. This enables them to use less capital to cover any risk, and to make less prudent assumptions when valuing the risk. Reinsurers may operate under a more favourable tax regime than their clients. Reinsurers will often have better access to underwriting expertise and to claims experience data, enabling them to assess the risk more accurately and reduce the need for contingency margins in pricing the risk Even if the regulatory standards are the same, the reinsurer may be able to hold smaller actuarial reserves than the cedant if it thinks the premiums charged by the cedant are excessively prudent. The reinsurer may have a more diverse portfolio of assets and especially liabilities than the cedant. This may create opportunities for hedging that the cedant could not exploit alone. Depending on the regulations imposed on the reinsurer, this may mean they can hold fewer assets to cover the risk. The reinsurer may have a greater risk appetite than the insurer.

[edit]Reinsurer's expertise The insurance company may want to avail itself of the expertise of a reinsurer, or the reinsurer's ability to set an appropriate premium, in regard to a specific (specialised) risk. The reinsurer will also wish to apply this expertise to the underwriting in order to protect their own interests. [edit]Creating a manageable and profitable portfolio of insured risks By choosing a particular type of reinsurance method, the insurance company may be able to create a more balanced and heterogenous portfolio of insured risks. This would lend greater predictability to the portfolio results on net basis (after reinsurance) and would be reflected in income smoothing. While income smoothing is one of the objectives of reinsurance arrangements, the mechanism is by way of balancing the portfolio.

[edit]Types [edit]Proportional Under proportional reinsurance, one or more reinsurers take a stated percentage share of each policy that an insurer produces ("writes"). This means that the reinsurer will receive that stated percentage of the premiums and will pay the same percentage of claims. In addition, the reinsurerwill allow a "ceding commission" to the insurer to cover the costs incurred by the insurer (marketing, underwriting, claims etc.). The arrangement may be "quota share" or "surplus reinsurance" (also known as surplus of line or variable quota share treaty) or a combination of the two. Under a quota share arrangement, a fixed percentage (say 75%) of each insurance policy is reinsured. Under a surplus share arrangement, the ceding company decides on a "retention limit" - say $100,000. The ceding company retains the full amount of each risk, with a maximum of $100,000 per policy or per risk, and the balance of the risk is reinsured. The ceding company may seek a quota share arrangement for several reasons. First, they may not have sufficient capital to prudently retain all of the business that it can sell. For example, it may only be able to offer a total of $100 million in coverage, but by reinsuring 75% of it, it can sell four times as much. The ceding company may seek surplus reinsurance simply to limit the losses it might incur from a small number of large claims as a result of random fluctuations in experience. In a 9 line surplus treaty the reinsurer would then accept up to $900,000 (9 lines). So if the insurance company issues a policy for $100,000, they would keep all of the premiums and losses from that policy. If they issue a $200,000 policy, they would give (cede) half of the premiums and losses to the reinsurer (1 line each). The maximum automatic underwriting capacity of the cedant would be $1,000,000 in this example. (Any policy larger than this would require facultative reinsurance.) [edit]Non-proportional Under non-proportional reinsurance the reinsurer only pays out if the total claims suffered by the insurer in a given period exceed a stated amount, which is called the "retention" or "priority". For instance the insurer may be prepared to accept a total loss up to $1 million, and purchases a layer of reinsurance of $4 million in excess of this $1 million. If a loss of $3 million were then to occur, the insurer would bear $1 million of the loss and would recover $2 million from its reinsurer. In this example, the insured also retains any excess of loss over $5 million unless it has purchased a further excess layer of reinsurance.

The main forms of non-proportional reinsurance are excess of loss and stop loss. Excess of loss reinsurance can have three forms - "Per Risk XL" (Working XL), "Per Occurrence or Per Event XL" (Catastrophe or Cat XL), and "Aggregate XL". In per risk, the cedant's insurance policy limits are greater than the reinsurance retention. For example, an insurance company might insure commercial property risks with policy limits up to $10 million, and then buy per risk reinsurance of $5 million in excess of $5 million. In this case a loss of $6 million on that policy will result in the recovery of $1 million from the reinsurer. These contracts usually contain event limits to prevent their misuse as a substitute for Catastrophe XLs. In catastrophe excess of loss, the cedant's retention is usually a multiple of the underlying policy limits, and the reinsurance contract usually contains a two risk warranty (i.e. they are designed to protect the cedant against catastrophic events that involve more than one policy, usually very many policies). For example, an insurance company issues homeowners' policies with limits of up to $500,000 and then buys catastrophe reinsurance of $22,000,000 in excess of $3,000,000. In that case, the insurance company would only recover from reinsurers in the event of multiple policy losses in one event (e.g. hurricane, earthquake, flood). Aggregate XL affords a frequency protection to the reinsured. For instance if the company retains $1 million net any one vessel, $5m annual aggregate limit in excess of $5m annual aggregate deductible, the cover would equate to 5 total losses (or more partial losses)in excess of 5 total losses (or more partial losses). Aggregate covers can also be linked to the cedant's gross premium income during a 12 month period, with limit and deductible expressed as percentages and amounts. Such covers are then known as "Stop Loss" contracts. [edit]Risks attaching basis A basis under which reinsurance is provided for claims arising from policies commencing during the period to which the reinsurance relates. Theinsurer knows there is coverage during the whole policy period even if claims are only discovered or made later on. All claims from cedant underlying policies incepting during the period of the reinsurance contract are covered even if they occur after the expiration date of the reinsurance contract. Any claims from cedant underlying policies incepting outside the period of the reinsurance contract are not covered even if they occur during the period of the reinsurance contract.

[edit]Losses occurring basis A Reinsurance treaty under which all claims occurring during the period of the contract, irrespective of when the underlying policies incepted, are covered. Any claims occurring after the contract expiration date are not covered. As opposed to claims-made or risks attaching contracts. Insurance coverage is provided for losses occurring in the defined period. This is the usual basis of cover for short tail business. [edit]Claims-made basis A policy which covers all claims reported to an insurer within the policy period irrespective of when they occurred. [edit]Contracts Most of the above examples concern reinsurance contracts that cover more than one policy (treaty). Reinsurance can also be purchased on a per policy basis, in which case it is known as facultative reinsurance. Facultative reinsurance can be written on either a quota share or excess of loss basis. Facultative reinsurance is commonly used for large or unusual risks that do not fit within standard reinsurance treaties due to their exclusions. The term of a facultative agreement coincides with the term of the policy. Facultative reinsurance is usually purchased by the insurance underwriter who underwrote the original insurance policy, whereas treaty reinsurance is typically purchased by a senior executive at the insurance company. Reinsurance treaties can either be written on a "continuous" or "term" basis. A continuous contract has no predetermined end date, but generally either party can give 90 days notice to cancel or amend the treaty. A term agreement has a built-in expiration date. It is common for insurers and reinsurers to have long term relationships that span many years. [edit]Fronting Sometimes insurance companies wish to offer insurance in jurisdictions where they are not licensed: for example, an insurer may wish to offer an insurance programme to a multi-national company, to cover property and liability risks in many countries around the world. In such situations, the insurance company may find a local insurance company which is authorised in the relevant country, arrange for the local insurer to issue an insurance policy covering the risks in that country, and enter into a reinsurance contract with the local insurer to transfer the risks. In the event of a loss, the policyholder would claim against the local insurer under the local insurance policy, the local insurer would pay the claim and would claim

reimbursement under the reinsurance contract. Such an arrangement is called "fronting". Fronting is also sometimes used where an insurance buyer requires its insurers to have a certain financial strength rating and the prospective insurer does not satisfy that requirement: the prospective insurer may be able to persuade another insurer, with the requisite credit rating, to provide the coverage to the insurance buyer, and to take out reinsurance in respect of the risk. An insurer which acts as a "fronting insurer" receives a fronting fee for this service to cover administration and the potential default of the reinsurer. The fronting insurer is taking a risk in such transactions, because it has an obligation to pay its insurance claims even if the reinsurer becomes insolvent and fails to reimburse the claims. [edit]Markets Many reinsurance placements are not placed with a single reinsurer but are shared between a number of reinsurers. For example a $30,000,000 excess of $20,000,000 layer may be shared by 30 or more reinsurers. The reinsurer who sets the terms (premium and contract conditions) for the reinsurance contract is called the lead reinsurer; the other companies subscribing to the contract are called following reinsurers. Alternatively, one reinsurer can accept the whole of the reinsurance and then retrocede it (pass it on in a further reinsurance arrangement) to other companies About half of all reinsurance is handled by reinsurance brokers who then place business with reinsurance companies. The other half is with "direct writing" reinsurers who have their own sales staff and deal with the ceding companies directly. In Europe reinsurers write both direct and brokered accounts. Using game-theoretic modeling, Professors Michael R. Powers (Temple University) and Martin Shubik (Yale University) have argued that the number of active reinsurers in a given national market should be approximately equal to the square-root of the number of primary insurers active in the same market. [1] Econometric analysis has provided empirical support for the Powers-Shubik rule.[2] Ceding companies often choose their reinsurers with great care as they are exchanging insurance risk for credit risk. Risk managers monitor reinsurers' financial ratings (S&P, A.M. Best, etc.) and aggregated exposures regularly. [edit]Reinsurers Reinsurer 2011 GWP (US millions)[3]

Munich Re Swiss Re Hannover Re Berkshire Hathaway / General Re Lloyd's SCOR Reinsurance Group of America China Reinsurance Group PartnerRe Korean Reinsurance Company Everest Re Transatlantic Re

$33,719 $28,664 $15,664

$15,000

$13,621 $9,845 $7,704 $6,179 $4,621 $4,551 $4,286 $4,035

Major reinsurance brokers include:

Guy Carpenter Aon Corporation

Willis Re

[edit]Retrocession Reinsurance companies often also purchase reinsurance, a practice known as retrocession. They typically purchase this reinsurance from other reinsurance companies, but may also retrocede to other insurance companies to spread the risk more widely. A company that accepts such retrocession business is a "retrocessionaire". The reinsurance company that buys reinsurance is the "retrocedent". The flow of business and premium is as follows: client --> insurer --> reinsurer --> retrocessionaire. Other terms used for each of these entities in this flow of business would be: client --> cedent --> retrocedent --> retrocessionaire. It is not unusual for a reinsurer to buy reinsurance protection from other reinsurers. For example, a reinsurer that provides proportional, or pro ratareinsurance capacity to insurance companies may wish to protect its own exposure to catastrophes by buying excess of loss protection. Another situation would be that a reinsurer which provides excess of loss reinsurance protection may wish to protect itself against an accumulation of losses in different branches of business which may all become affected by the same catastrophe. This may happen when a windstorm causes damage to property, automobiles, boats, aircraft and loss of life, for example. This process can sometimes continue until the original reinsurance company unknowingly gets some of its own business (and therefore its own liabilities) back. This is known as a "spiral" and was common in some specialty lines of business such as marine and aviation. Sophisticated reinsurance companies are aware of this danger and through careful underwriting attempt to avoid it. In the 1980s, the London market was badly affected by the creation of reinsurance spirals. This resulted in the same loss going around the market thereby artificially inflating market loss figures of big claims (such as the Piper Alpha oil rig). The LMX spiral (as it was called) has been stopped by excluding retrocessional business from reinsurance covers protecting direct insurance accounts. It is important to note that the original insurance company is obliged to pay due claims whether or not the reinsurer reimburses the insurer. Many insurance companies have experienced difficulties by purchasing reinsurance from companies that did not or could not pay their share of the loss. (These unpaid claims are known as uncollectibles.) This is particularly important on long-tail lines of business where the claims may arise many years after the premium is paid.

 Insurance underwriting Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining thepremium that needs to be charged to insure that risk. The function of the underwriter is to protect the company's book of business from risks that they feel will make a loss and issue insurance policies at a premium that is commensurate with the exposure presented by a risk. Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved. For example, in underwriting automobile coverage, an individual's driving record is critical.[citation needed] As part of the underwriting process for life or health insurance, medical underwriting may be used to examine the applicant's health status (other factors may be considered as well, such as age & occupation). The factors that insurers use to classify risks should be objective, clearly related to the likely cost of providing coverage, practical to administer, consistent with applicable law, and designed to protect the long-term viability of the insurance program.[1] The underwriters may either decline the risk or may provide a quotation in which the premiums have been loaded or in which various exclusionshave been stipulated, which restrict the circumstances under which a claim would be paid. Depending on the type of insurance product (line of business), insurance companies use automated underwriting systems to encode these rules, and reduce the amount of manual work in processing quotations and policy issuance. This is especially the case for certain simpler life or personal lines (auto, homeowners) insurance. Some insurance companies, however, rely on agents to underwrite for them. This arrangement allows an insurer to operate in a market closer to its clients without having to establish a physical presence. A Lloyd's Coverholder is one such example in which a Lloyd's Syndicate (an insurer who is a member of Lloyd's of London) delegates its underwriting authority to, hence allowing that syndicate to operate in a region or country as if it is a local insurer. In Hong Kong, where the largest number of Approved Lloyd's Coverholders are domiciled in Asia Pacific, [2] insurers and their potential clients seek a closer way for the Lloyd's market to access the emerging insurance market of Asia Pacific and vice versa.[3]