INSURANCE AND RISK MANAGEMENT (IRM) EXAMINATION

Paper 2 :: TECHNICAL ASPECTS OF INSURANCE

SUGGESTED ANSWERS–NOVEMBER, 2015 EXAM

Disclaimer
The suggested answers contained in this publication constitute ideal answers for various
questions. They do not constitute the basis for the evaluation of the candidate’s answers in
DIRM examinations. These suggested answers are arranged by the Committee on Banking,
Insurance and Pension with a view to assist the candidates pursuing the DIRM Course for
their preparation for the Technical Examinations. While due care has been taken in
preparation of the answers, if any errors & omission is noticed, the same may be brought to
the notice of the Secretary, Committee on Banking, Insurance and Pension. The Council and
Committee on Banking, Insurance and Pension of the Institute are not responsible in any way
for correctness or otherwise of the answers published hereinunder.

Answer all Questions

Max. Marks: 100
1. State whether the following statements are True or False.
(i) In term assurance plans, sum insured is paid after specified period in case of
survival.
(ii) The objective of workers compensation is to protect workers from any disease.
(iii) An annuity certain is an annuity whose payments are not contingent on the
annuitant being alive.
(iv) In an insurance business, the actual profit can be determined as the company is
to meet future liabilities and has to receive future premiums.
(v) Accumulation period is not applicable in immediate annuity.
(vi) Janashree Bhima Yojana was introduced for poor people.
(vii) Pricing risk means risk arising out of interest rate movements.
(viii) There is no requirement for proposal form in case of Marine insurance.
(ix) Damages due to earthquake are excluded from the normal property insurance.
(x) Goods damaged due to movement of the ship are covered by insurance.
(xi) Particular charges are not included in particular average.
(xii) Under a personal accident insurance policy, the medical expenses incurred for
treatment of injuries from such an accident are reimbursed to a certain extent
without payment of additional premium.
 (xiii) To lodge a claim under burglary policy, forceful; entry has to be established.
(xiv) Under baggage insurance policy, jewellery and valuables are also covered.
(xv) In the case of erection all risk insurance policy, period of cover shall not be
extended beyond four weeks once the trial run has been done.

Answer :-

(i) FALSE
(ii) FALSE
(iii) TRUE
(iv) FALSE
(v) TRUE
(vi) FALSE
(vii) FALSE
(viii) TRUE
(ix) TRUE
(x) FALSE
(xi) TRUE
(xii) FALSE
(xiii) TRUE
(xiv) FALSE
(XV) TRUE

2. Chooses the accurate or near accurate answer to the following statements:

(i) Human life Value forms the economic foundation of :
(a) Property Insurance (b) Life Insurance
(c) Health Insurance (d) Liability Insurance

(ii) Underwriting can be termed as assumption of :

(a) Income (b) Liability
© Rate (d) None of the above

(iii) Rate of premiums for without profit policies, when compared with that of
with-profit policies. Will be:
(a) Lower (b) Higher
© Same (d) None of the above

(iv) Unemployment insurance is a component of:

(a) E.S.I. Act
(b) social Security Act
© Workers’ Compensation Act
(d) None of the above

(v) Gerontology means scientific

 (a) study of life style (b) Study of genes
© Study of old age (d) study of income

(vi) A broker represents

(a) Insurers (b) agents
© Clients (d) None of the above

(vii) A person may be registered as insurer by IRDA, provided that it is:

(a) Partnership Firm
(b) Company
© Cooperative Society
(d) Indian Insurance Company or Insurance Cooperative Society

(viii) Coastal shipment policy under marine business can be issued only in
(a) Foreign Currency
(b) Indian currency
© Indian currency and foreign currency
(d) None of the above

(ix) Subrogation means : rights are transferable to

(a) Policyholder (b) Broker
© Agent (d) Insurer

(x) Solatium Scheme was for the payment of compensation to the victims of :
(a) Hit and Run accidents (b) Train Accidents
© Earthquake (d) Sexual harassment

Answer:-

1  b
2  b
3  a
4  b
5  c
6  c
7  d
8  b
9  d
10  a

3. Fill in the blanks with appropriate numbers, words or phrases:

 (i) If there is a need to modify the terms and conditions of an insurance policy, it
is done by setting out the alteration in a memorandum. This memorandum is
called ______.
(ii) The most commonly adopted form of risk transfer is ______.
(iii) There are non-participating plans in which the policyholder does not receive a
share of the _____ of the insurer.
(iv) In France more than 50 percent of life insurance is sold through______, Post
office or the Treasury.
(v) The mathematical estimation of the risks involved in life insurance is based on
the laws of _______.
(vi) ‘_______’ means the copy of a will certified under the seal of a court of
competent jurisdiction with a grant of administration to the estate of the
testator.
(vii) It is not the latest, but the direct, dominant, operative and efficient cause that
must be regarded as _______.
(viii) _______inspection report for property insurance, consists of a physical
assessment of the building or plant to be insured.
(ix) _______hazards refer to the defects that exist in a person’s character that may
increase the frequency or the severity of loss.
(x) (Burning cost ) Pure premium is that part of the gross rate, which is utilized to
pay losses and adjustment expenses. It is calculated by dividing the amount of
incurred losses and loss-adjustment expenses by the number of _____units.
(xi) A cover not is an ______of insurance.
(xii) The “______” is a document mentioning all the essential information needed
for assessing the risk proposed.
(xiii) ECGC means_____ ____ ______ ____ Ltd.
(xiv) An individual must be at least _____ years of age to act as an insurance agent
in India.
(xv) Accounting Standard ______ : Segment reporting - shall apply irrespective of
whether the securities of the insurer are traded publicly or not.

Answer:-

(i) endorsement;
(ii) insurance;
(iii) surplus {or profit};
(iv) bancassurance;
(v) probability;
(vi) Probate;
(vii) proximate;
(viii) pre-insurance;
(ix) moral;
(x) exposure;
(xi) evidence;
 (xii) Slip;
(xiii) Export Credit Guarantee Corporation;
(xiv) 18;
(xv) 17.

4. (a) Write distinguishing characteristics of insurance contracts.

(b) What are implications of concealment, non-disclosure or misrepresentation by
the insured?

Answer 4(a):-

(1) Insurance contract is characterized as one of adhesion – terms and provisions

are fixed by one party {the insurer} and, with minor exceptions, must be
accepted or rejected en totale by the other party {Prospective policyowner}.

(2) Insurance contract is also conditional- insurer’s obligation to pay a claim

depends upon the performance of certain acts, such as payment of premiums
and furnishing proof of death. {this is designed to protect insurer from moral
hazard}

(3) Insurance contract is unilateral in nature – only one party, the insurer, gives a
legally enforceable promise.

(4) Insurance contract is an aleatory contract - involves the element of chance, and
one party may receive more in value than the other.

Answer4(b):- Implications of concealment, non disclosure or misrepresentation by the insured:

It may turn out from the representations furnished by the customer that the details are
incomplete or any important information is concealed or is misleading.

In such circumstances it is the choice of the insurer whether to:

Incorporate the required changes in the contract and charge a different premium.

Accept the policy and pay compensation especially if the facts have negligible
importance.

Avoid any obligation on its part as per the policy.

It has to be proved by the insurer that the non-disclosure or misrepresentation was

intentional on the part of the insured to commit fraud and deceive the insurer before it
can stop payment of compensation. As per section 45 of the Insurance act the insurance
 company can resort to this stance before the passage of two years after which it cannot
take such recourse.

Non-disclosure may be unintentional on the part of the insured. Even so such a contract
is rendered voidable at the insurers option and it can refuse any compensation.

Any concealment of material facts is considered intentional. In this case also the policy is
considered void.

Suppose a person discovers that he has cancer, which is in its last stages and is hopeless
to go for medical treatment. Immediately he buys a life Insurance policy where he
conceals this fact from the insurers. He dies four months after buying the policy. The
insurance company can contest the claim for payment of policy proceeds to his
beneficiary on the ground that a vital fact material to the contract was concealed.

5. (a) Describe the three broad categories of agency building distribution.

(b) A trader has stocks stored in five godowns, viz,. A,B,C,D and E. The premium
chargeable at different locations is given below:

Locations Rate of premium

per’ 000. Rs.
A 1.25
B 1.75
C 1.60
D 2.00
E 2.20

The sum assured under the policy is Rs. 15 lakhs.

Calculate the premium payable under the policy.

Answer 5(a): Three broad categories of distribution channels:

Marketing intermediaries
Includes agents and brokers. They sell insurance products, on a face to face basis with
customers for a commission on each sale.

Financial institutions
Include commercial banks, investment banks, thrifts, credit unions, mutual fund
organizations and other insurers sell insurer’s products.

Direct response
No face-to-face contact is involved, with the customer responding to some type of
solicitation directly from the insurer, such as through the mail, television, or telephone.
Answer5(b): Sum assured Rs. 15 Lacs

The premium varies depending on the location of the godown.

In such circumstances, the insurer will charge premium which is the highest.

Since in this case, the highest is Rs. 2.20 per thousand, the premium payable will
15,00,000
be X 2.20 = Rs. 3,300
1000

On this, there will be a loading of 50% since the goods are located in godowns
more than three in number. Hence the surcharge will be 1650.

The total premium payable will be Rs. 4950.

After, de-tariffing in 2008, the insurers have been allowed to offer a maximum
discount of 51.25% on applicable rates.

Depending on the relationship existing between the insured and the insurers, a
discount upto a maximum of Rs. 2536 is possible in this case.

6. (a) List the objectives of underwriting.

(b) List the stages of underwriting process.
(c ) What information is assimilated about the applicant?

Answer 6(a): Objectives of underwriting.

 Producing a large volume of premium income that is sufficient to maintain
and enlarge the insurance company’s operations and to achieve a better
spread of the risk portfolio;
 Earning a reasonable amount of profit on insurance operations;
 Maintaining a profitable book of business (by ensuring underwriting profits)-
that contains all the policies that the insurer has in force;
 More spread – across the profile and geography.

Answer6(b): Stages of underwriting process:

The underwriting process follows a series of stages, at the end of which the
status of risk is decided. It is only after the risk has been weighed and all
possible alternatives evaluated that the final underwriting is done. When a
proposal for insurance is received, the underwriter has four possible courses of
action:
 Accept the risk at standard rates
 Charge extra premium depending on the risk factor
 Impose special conditions
 Reject the risk.
Answer6(c ): The following information is assimilated about the applicant:
The underwriter obtains this information from a wide variety of sources. The
most important sources are:
 The application or the proposal form: It contains specific information about the
applicant. For example, in Motor insurance, information regarding the age of
the vehicle, weight, purpose/usage, past claims history etc., will be given.

 The agent’s report: the agent does an evaluation of the prospective insured.
The agent must have first hand knowledge about the applicant’s operations and
reputation. It is the agent’s responsibility to screen the applicant initially
according to the company’s specified requirements.

 Government records: these records include information from civil and criminal
courts, property tax records, bankruptcy filings etc. These may be referred to if
required.

7. What are the advantages of IT system in claim management?

Answer 7. 1. Elimination of duplication: once all the details regarding the insurance
policies issued are entered into the electronic data entry systems, the
data can be stored and becomes available to multi-use. Thus it
eliminates duplication of both the data and the effort.

2. Reduced paper work: in such a system the files are created electronically.
Supporting documents, images of damages and reports of loss assessors
can also be stored electronically. This eliminates the necessity to
maintain a number of files manually and expedite the settlement process.

3. Electronically communicated information leads to quicker

communication of the origination of risk, the occurrence of loss etc.

4. Electronic authorization, accompanied by payments made through

central settlement system results in expediting the claims payment.

5. The use of electronic funds transfer. This leads to faster settlement of

claims.

6. It helps in reducing administration costs. As paper work decreases the

need to maintain piles of stationery decreases.
 7. Faster agreement of valid claims and faster settlement of claims leads to
a greater satisfaction of the insured. This adds to the goodwill of the
insurer.

8. An automated check against fraudulent, exaggerated and repeated

claims.

9. Expediting payments to be made to brokers, intermediaries, loss

adjusters, etc.

10. Information on fingertips for decision making purpose is available.

8. X is the owner of a motor car. He wants to dispose of the car through the
process of auctioning and hands over the car to an approved auctioneer
indicating that he expects a minimum price of Rs. 5,00,000.

The car is put to auction but the best price offered at the auction is Rs.
3,00,000. The car is not sold. However, the manager of the auctioneer states
that he has a private offer of Rs. 5,00,000 for the car. The car, however, is
offered by the manager in his name for sale through a different firm of
auctioneers and is sold by the manager for Rs. 4,00,000. Since the buyer does
not pay this sum, the car gets unsold again and again and finally lands with one
S.
In all the processes, X has not been paid by the auctioneer He sues the
auctioneer for payment of Rs 5,00,000 which is the reserved price. Failing to
receive this amount and also being not in a position to get the possession of
the car, X sues the insurance company for the loss.

Is the insurance company liable under a motor policy? Decide.

Answer No.8

X apparently has a comprehensive Motor Policy which remains valid throughout the
period the events have happened.

The car is handed to a reputed auctioneer for sale at a reserved price but does not
manage to get sold. The subsequent acts of the auctioneer in arranging for a private
sale etc., are all in the course of manager’s conduct.

X is not in position to recover the money for which the car was sold without his
knowledge and exceeding his authority (by his auctioneer). Since all reasonable steps
taken by him for recovery are not successful, he will be entitled to the loss suffered
 by him to be compensated. The insurer will be liable under the motor policy. This is
the principle laid in the decision in Webster Vs. General Accident Fire and Life
Assurance Corporation Ltd.

9. (a) Define the terms: principal, accumulated amount and interest rate.

(b) For a given interest rate of 10% p.a. effective, find the amount of
investment made by A on 1 Jan., 2015 if he receives Rs. 1.000 on 1st Jan.
of every year for 10 years, the first payment on 1 Jan., 2016, and the last
payment on Ist Jan., 2025.

(c ) Ajay owns a restaurant which he bought three years ago for Rs. 2,00,000.
He had taken a fire insurance cover (at the written down value of the
property) of Rs. 1,60,000. The restaurant was destroyed in a fire accident
and the loss was calculated at Rs. 90,000.

What will be the compensation that the insurance company will pay to Ajay?
Discuss.

Answer 9(a): Principal: It is the initial amount or the amount invested. It is denoted by A

Accumulated Amount: This is the sum that is accumulated by the end of a

stipulated time period. It is represented by S

Interest Rate : It is the rate charged on the principal. It is denoted by i

(b) Amount Invested = 1000 x(v+V2+………+v10)at rate i =0.10.
Where v =1/(1.10).
= 1000x6.144 =6144

(c ) This is an under insurance of the property, against its value of Rs. 2 Lacs, it had
been insured for Rs. 1,60,000

Hence the claim to be admitted by the insurance company will be

1,60,000
X 90,000 = Rs. 72,000
2,00,000