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Unit 4 of 4 · B.Com Sem 6

Unit 4: Regulatory framework & premium computation

Risk Management and Insurance notes · PTU syllabus (BCOP 622-18)

3 min read4 topics10 exam questions
On this page
  1. Unit summary
  2. IRDA Act, 1999: composition and role of IRDAI
  3. Control of malpractices and negligence
  4. Computation of insurance premium
  5. Loss assessment, loss control and exclusion of perils
  6. Key terms
  7. Quick revision
  8. Important questions

Unit summary

Regulation keeps insurers solvent and fair, and pricing must match premiums to risk. This unit covers the role, powers and functions of IRDAI, its composition and the IRDA Act 1999, control of malpractices and negligence, computation of insurance premium, loss assessment and control, and exclusion of perils.

After this unit you can

  • Explain the composition, powers and functions of IRDAI under the IRDA Act, 1999
  • Explain how IRDAI controls malpractices and negligence
  • Compute insurance premiums for life and general insurance
  • Explain loss assessment, loss control and exclusion of perils

PTU syllabus topics

  • Role
  • power and functions of the IRDA
  • composition and the IRDA Act 1999
  • control of malpractices and negligence
  • computation of insurance premium
  • loss assessment and control
  • exclusion of perils
Key formulasPremium basics

  • Pure premium

    Expected losses / number of exposures

  • Gross premium

    Pure premium + expenses + profit margin

  • Loss ratio

    Claims paid / premium earned × 100

1

Topic 1

IRDA Act, 1999: composition and role of IRDAI

  • Enacted on the recommendation of the Malhotra Committee (1994); IRDA constituted in April 2000; headquarters Hyderabad.
  • Composition (Section 4): Chairperson, not more than five whole-time members and not more than four part-time members, appointed by the Central Government from persons with ability, integrity and standing in life insurance, general insurance, actuarial science, finance, economics, law, accountancy or administration. Term — 5 years (age limits 65 for chairperson, 62 for members).
  • Duty (Section 14): regulate, promote and ensure orderly growth of insurance and reinsurance business.
ClassificationPowers and functions of IRDAI
IRDAI

  • Registration

    Grant, renew, suspend, cancel registration of insurers

  • Policyholder protection

    Claim settlement, nomination, surrender value, grievance redressal

  • Intermediaries

    Licensing and code of conduct for agents, brokers, surveyors, TPAs

  • Financial regulation

    Solvency margins, investments, accounts, actuarial reports

  • Rural and social obligations

    Minimum business in rural and social sectors

  • Inspection and investigation

    Call for information, audits, inquiries

  • Adjudication

    Disputes between insurers and intermediaries

  • Regulation-making

    Under Sections 26 and 114A of the Insurance Act

2

Topic 2

Control of malpractices and negligence

  • Malpractices: mis-selling, misrepresentation of returns, rebating (sharing commission with customers), forged documents, fraudulent claims, unfair claim rejection, excessive commissions, data misuse, unauthorised intermediaries.
  • IRDAI's controls:
  • Code of conduct for agents, brokers and insurers; licence suspension or cancellation.
  • Penalties under the Insurance Act (up to ₹1 crore per violation for insurers; Section 102 onwards).
  • Disclosure norms: benefit illustrations, key feature documents, customer information sheet (health).
  • Free-look period (30 days), cooling-off and proper KYC.
  • Anti-fraud framework (insurers must have fraud monitoring units).
  • Grievance redressal: insurer's grievance officer → Bima Bharosa portal → Insurance Ombudsman (up to ₹50 lakh) → consumer commissions.
  • Negligence by intermediaries or surveyors — liability for damages, regulatory action; professional indemnity insurance required for brokers.
3

Topic 3

Computation of insurance premium

Life insurance premium

Key formulasLife premium components

  • Net premium

    Present value of expected claims (from mortality tables) discounted at an assumed interest rate

  • Gross (office) premium

    Net premium + loading for expenses, contingencies, bonus (for with-profit)

  • Natural premium

    Cost of insurance for one year at the current age (rises with age)

  • Level premium

    Constant premium over the term; early overpayment builds a reserve

Example

Term cover ₹10,00,000 for one year at age 30; mortality rate 1.2 per 1,000; interest 6%. Net premium = 10,00,000 × 0.0012 ÷ 1.06 ≈ ₹1,132; with 30% loading for expenses → gross premium ≈ ₹1,472.

  • Factors: age, sum assured, term, gender, health, smoking, occupation, plan type, riders, mode of payment.

General insurance premium

Key formulasGeneral premium

  • Pure premium

    Expected losses ÷ Exposure units (frequency × severity)

  • Gross premium

    Pure premium ÷ (1 − Expense loading ratio)

  • Loss ratio

    Incurred claims ÷ Earned premium

  • Combined ratio

    Loss ratio + Expense ratio

Example

Expected claims ₹6,00,000 for 1,000 cars → pure premium ₹600. With an expense loading of 25% of gross premium, gross premium = 600 ÷ 0.75 = ₹800 per car.

  • Rating methods: class (manual) rating, merit rating — schedule rating, experience rating (no-claim bonus), retrospective rating; judgement rating for unique risks.
  • Motor own-damage premium: IDV (insured declared value) × rate (by vehicle cubic capacity, zone, age) − NCB + add-ons; third-party premium fixed by IRDAI/government.
  • Fire premium: sum insured × rate based on occupancy, construction, protection, hazard; discounts for safety measures.
4

Topic 4

Loss assessment, loss control and exclusion of perils

Loss assessment

ProcessClaim and loss assessment process
  1. 1

    Intimation of loss to insurer

  2. 2

    Appointment of surveyor

  3. 3

    Survey

    Verify cause, extent, policy coverage, proximate cause

  4. 4

    Quantify loss

    Cost of repair or replacement; depreciation; salvage

  5. 5

    Apply policy terms

    Sum insured, average clause (under-insurance), deductibles

  6. 6

    Settlement or repudiation with reasons

Key formulasAverage clause

  • Claim payable

    Loss × Sum insured ÷ Value of property at the time of loss

Example

Stock worth ₹10 lakh insured for ₹6 lakh; loss ₹2 lakh. Claim = 2,00,000 × 6 ÷ 10 = ₹1,20,000 — under-insurance makes the insured bear part of the loss.

Loss control

  • Pre-loss: safety measures, fire protection, security, training, maintenance, risk inspections; post-loss: salvage, emergency response, business continuity plans.
  • Insurers reward loss control through discounts and no-claim bonuses.

Exclusion of perils

  • Why exclusions: uninsurable risks (wear and tear, gradual deterioration), catastrophic risks (war, nuclear), moral hazard (wilful acts), coverage provided elsewhere, to keep premiums affordable.
ClassificationCommon exclusions
Exclusions

  • Standard

    War, invasion, nuclear risks, wilful misconduct

  • Property

    Wear and tear, gradual deterioration, consequential loss (unless covered)

  • Life

    Suicide within 12 months of policy (80% of premiums refunded)

  • Health

    Pre-existing diseases during the waiting period, cosmetic surgery, self-inflicted injury

  • Motor

    Driving under influence, without a valid licence, outside geographical area, mechanical breakdown

  • Marine

    Delay, inherent vice, insufficient packing

  • Exclusions can sometimes be bought back as add-ons (earthquake, terrorism, flood).

Exam tip

In claims questions, check the three filters in order — Is the peril covered? Is it excluded? Has the insured complied with conditions?

Key terms

IRDA Act, 1999
Law establishing the insurance regulator
Gross premium
Net premium plus loadings for expenses and contingencies
Loss ratio
Incurred claims as a proportion of earned premium
Average clause
Proportionate claim reduction for under-insurance
Exclusion
Peril or situation not covered by the policy

Quick revision

  • IRDAI: chairperson + 5 whole-time + 4 part-time members; Hyderabad.
  • Functions: registration, protection, intermediaries, solvency, investments, rural obligations.
  • Malpractice controls: codes, penalties, disclosures, free-look, ombudsman.
  • Premium: net premium + loadings; general — pure premium ÷ (1 − expense ratio).
  • Loss assessment with the average clause; standard exclusions.

Important exam questions

Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).

Short-answer questions

  1. Q1.What is the composition of IRDAI?
  2. Q2.State four functions of IRDAI.
  3. Q3.What is a gross premium?
  4. Q4.What is the loss ratio?
  5. Q5.What is an average clause?
  6. Q6.Why do insurance policies contain exclusions?

Long-answer questions

  1. Q1.Explain the composition, powers and functions of IRDAI under the IRDA Act, 1999.
  2. Q2.Explain how IRDAI controls malpractices and negligence in insurance.
  3. Q3.Explain the computation of insurance premiums with examples.
  4. Q4.Explain loss assessment, loss control and exclusion of perils.

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