Page 115 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes The relationship of SA with the premium depends on the type of insurance policy. Broadly, life
insurance policies can be divided into traditional ones and Unit-linked Insurance Plans (ULIPs).
In traditional plans, including term policies, SA determines the premium. In a ULIP, however,
where the money of the insured is exposed to equities in addition to debt instruments, the
premium determines SA. The insurer will typically let you choose an amount 5-50 times the
premium as SA.
Sum Insured: The maximum amount that an insurance company will pay out in the event of a
claim.

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Caution SA is a pre-agreed sum that an insurer pays to the nominee if the insured dies. The
Sum Insured (SI), on the other hand, is the compensation paid to the insured for his losses.
So, in case of a claim in a health policy of 5 lakhs, the insurer will pay only for the cost
incurred up to 5 lakhs. In a life cover, the entire SA is paid to the nominee if the insured
dies.

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 the premium that needs to be charged to insure that risk. The function of the
underwriter is to acquire-or to "write"-business that will make the insurance company money,
and to protect the company's book of business from risks that they feel will make a loss. In
simple terms, it is the process of issuing insurance policies.
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. 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.
The underwriters may either decline the risk or may provide a quotation in which the premiums
have been loaded or in which various exclusions have 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.

8.4 Life Insurance

Life insurance is a contract that pledges payment of an amount to the person assured (or his
nominee) on the happening of the event insured against.
The contract is valid for payment of the insured amount during:
1. The date of maturity, or
2. Specified dates at periodic intervals, or
3. Unfortunate death, if it occurs earlier.

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