Unit 4: Insurance pricing and financial planning

• Life insurers collect long-term funds — invest under Section 27A of the Insurance Act and IRDAI (Investment) Regulations: at least 50% of life funds in government and approved securities (central government securities at least 25%), not more than 15% in infrastructure and housing beyond limits, exposure limits per company and group, prudent asset–liability matching.
• General insurers: shorter liabilities — more in liquid assets; at least 30% in government securities.
• Objectives: safety, liquidity, yield, matching liabilities, social and infrastructure investment.

• Under the new regime, 80C/80D deductions are not available, but Section 10(10D) exemption on proceeds still applies.
• GST: individual life and health insurance policies are exempt from GST from 22 September 2025.

Life insurance premium

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

General insurance premium

• 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.

• Riders: add-on benefits for extra premium — accidental death benefit, critical illness, waiver of premium, disability, term rider; IRDAI caps rider premium (health riders 100% of base premium, others 30%).
• Bonuses (with-profit policies): simple reversionary bonus (declared per ₹1,000 sum assured each year), compound reversionary bonus, terminal bonus (on maturity/death), interim bonus; cash bonus in some plans.

• Lapse and revival: policies lapse after the grace period; revival within 5 years with arrears and interest; non-forfeiture provisions protect paid-up value after 2–3 years' premiums.

• Key terms: sum assured/insured, premium, policy term, maturity, nominee, assignment, grace period (30 days for non-monthly premiums, 15 days for monthly), lapse and revival, free-look period (30 days for new life and health policies), exclusions, deductibles, waiting period, co-payment, no-claim bonus.

Reinsurance is insurance for insurers — an insurer (ceding company) transfers part of the risk it has underwritten to another insurer (reinsurer) for a share of the premium.

Importance

• Enables insurers to accept large risks (aviation, refineries) beyond their capacity.
• Stabilises results and protects against catastrophes (earthquakes, floods).
• Improves solvency and capacity to write more business.
• Provides technical expertise in pricing and underwriting.
• GIC Re (General Insurance Corporation of India) is the national reinsurer; obligatory cession (now 4%) to GIC Re; foreign reinsurers operate branches in India.

• Meaning: distribution of insurance products through banks' branches and channels (as corporate agents or brokers).
• Models: referral, corporate agency (most common in India), integrated (insurer subsidiaries of banks — SBI Life, HDFC Life, ICICI Prudential).
• IRDAI rules: a corporate agent may tie up with up to nine insurers in each category (life, general, health); open architecture.
• Benefits: wider reach, lower distribution costs, one-stop service, fee income for banks. Concerns: mis-selling and forced bundling with loans — regulators emphasise suitability and customer consent.