There are two main classes of risk:
1. Uninsurable Risk. 2. Insurable Risk. (1). Uninsurable Risk- It refers to
those risk where the mortality rate is so high as to make the premium for the
assured completely prohibitive. Proposals for such proposals are altogether
rejected by the insurer. In other words, proposals received from persons who
are suffering from cancer or serious heart ailment or tuberculosis of the last
stage where the death is sure to happen in the near future would be the
uninsurable risk. (2). Insurable Risk- An insurable risk is one which can be
insured on standard terms and conditions or otherwise. Such risks can further
be divided into two categories: (a) Standard Risk- It is also known as normal
or average risk. It refers to insurable lives which include not only the
persons who are 100% healthy, but will also include some persons who have a
history of minor illness or have some minor physical defects which will not
appreciably affect longevity. Since this group consists of persons of both
higher degree of risk and lower degree fo risk within a specified range, the rates of premium are
uniform for all forming part of the standard group. (b) Sub-standard Risk- It
is also known as “under average risk”, ‘impaired life’ or ‘C-category life’
risk. It refers to those risks which do not meet the standards set for
insurance at regular rates and are below standard at ‘mortality risks’. In
fact, these risks are neither so good as in the standard category nor are they
so bad to be rejected outright. These risks carry a degree of risk above the
maximum limit of the standard class and are usually insured for an additional
amount of premium, because the mortality rates are higher than assumed while
calculating the premiums.
INVESTMENT OF
FUNDS- The life fund represents the accumulated liabilities of the insurance
company towards policyholders and is to be kept as trust money. The company
invests it to earn the assumed interest. The supreme consideration in the
investment of life fund is to preserve the interest of the policyholders.
Principles of Investment- The following are the basic principles or canons of
investment policy for an insurer: (I) Safety and Security- The primary purpose
of investment of life fund is not to earn profits, as the insurer is merely a
trustee, but to maintain complete security. Therefore, the securities in which
it may be invested should never at any time fall in their face value. According
to statutory guidelines (amended), the insurer is required to invest the life
fund in the following manner: At least 25% in Government securities; Another
25% either in Government securities or other approved securities; (II)
Liquidity- The life fund should be invested in such a way that they may be
readily convertible whenever claims are payable. To ensure the proper degree of
liquidity, investments are so made that the maturities will occur at intervals
adjusted to meet the needs of maturing policies. As a provision against sudden
demand for surrender values or policy loans, the insurer may keep a part of the
fund in cash or in such securities which can be realized quickly and without.
This could be used to meet a sudden contingency or to avail of an exceptional
investment opportunity. (III) Profitability-
The insurer must earn at least the
assumed rate of interest otherwise there will be a loss. The investments should
be made in such securities which can yield the highest return but not at the
cost of safety. It has been realized that safety and profitability are apposed
to each other and so a fair and balanced policy of investment should be
observed. (IV) Diversification- The investment of the funds should be
diversified. It means spreading over investments among different classes of
securities so that risks and returns are adjusted. The diversification can be
according to time factor. It provides maximum security and yields an
efficient rate of return. So the
principle of “not having all one’s eggs in one basket” should be adopted. (V)
Aid to Life Business- The funds should be invested in those projects or
activities which may provide more and more employment opportunities and may
also increase the standard of living of the people, so that the insurer can get
the benefits of the lower mortality rate and increase in new business.
VALUATION- The term ‘valuation’ has been defined as a periodical examination of
the financial position of an insurance company meant to judge the adequacy of
the insurance fund and to calculate its profit or loss. It is used for
comparing the actual results of mortality experienced, interest earned and
expenses incurred with the predetermined figures. It also helps in the
calculation of any surplus which might be available for distribution as
profits. According to Section 28 of the Life Insurance Act 1956, 95% of the
profit of life insurance must be distributed to the policyholders by way of
‘Bonus’ on with profit policies and the remaining 5% has to be utilized for
such purpose as the Government may determine. The valuation process: The Valuation
process involves the following steps- (I) Calculation of Net Liability- In life
insurance, the claim must arise either on the death of the assured or expiry of
the policy period. The difference between the present value of the future
premiums to be received and the present value fo future liability on all
policies in force is to be taken as “Net liability” for life insurance
companies. The calculation of net liability on all outstanding policies is done
by experts called ‘actuaries’. The LIC of India makes the valuation of its net
liability every two years. The process by which net liability is determined by
an actuary is called actuarial valuation. (II) Calculation of Life Assurance
Fund
The difference in Life Revenue account is to be taken as closing balance
of the Life Assurance Fund. In other words, the excess of income over
expenditure of a life insurance business during the current year is merged into
reserve called Life Assurance Fund. (III) Calculation of Surplus or Deficiency-
The final stage in the valuation process is ascertainment of surplus or
deficiency. The comparison of net liability with life assurance fund will
reveal surplus or deficiency. If the former is less than the latter one,
surplus is created and when the former is more than the latter, deficiency is
arrived