CMA Final · Risk Management in Banking and Insurance

Life Insurance: formula sheet

Full chapter guide

Key formulas

Insurable interest rule (life): Insurable interest must exist at inception of the policy; Need not exist at the time of the claim. Interest in your own life is unlimited.
Creditor's insurable interest: Maximum cover for a creditor ≈ amount of debt (plus premiums payable); Cover beyond the debt lacks insurable interest. Treat the stated limit as a principle, not a statutory figure.
Nature of the payment: Claim = sum assured (agreed), not actual loss; Life insurance is a contract of assurance, so indemnity, subrogation and contribution do not apply.
Utmost good faith: Material fact not disclosed or misstated ⇒ contract voidable by the insurer; Both parties owe the duty. The test is whether the fact would influence a prudent insurer.
Section 52C, Insurance Act, 1938: Administrator may cancel or vary any contract or agreement (other than a policy) prejudicial to life policyholders, after hearing the persons concerned; Applies only during the Administrator's appointment. A policy cannot be cancelled under it.
Surrender value rule: A life policy acquires surrender value as per the norms specified by the regulations (Section 113(1)); Every policy must contain the Authority-approved formula for guaranteed surrender value (Section 113(2)). Pure term plans usually have none.
Paid-up rule for non-linked plans: Non-linked policy with surrender value does not lapse for non-payment; it is kept in force to the extent of paid-up sum insured plus reversionary bonuses already attached (Section 113(3)); Applies notwithstanding any contrary contract. For linked plans, the policy is kept in force in the manner specified by the regulations.
Exceptions to the paid-up rule: Section 113(4): rule does not apply if (i) paid-up sum insured with attached bonuses, or the annuity, is below the amount the Authority specifies, or (ii) parties agree in writing to another arrangement after default; The written agreement must be made after the default occurs.
Minimum benefits: Insurer pays at least the minimum annuity and other benefits set by regulations, excluding profit or bonus (Section 4); Section 4 does not stop an insurer converting a policy into a paid-up policy of any value or paying a surrender value of any amount.
Risk bearer: Traditional plan: insurer bears investment risk. ULIP: policyholder bears investment risk.; A common comparison point.
Surrender value rule (Sec 113(1)-(2)): Policy acquires surrender value as per regulations; policy must contain the Authority-approved formula for guaranteed surrender value; The exact number comes from the formula in the policy. Do not invent a general percentage.
Paid-up rule for non-linked plans (Sec 113(3)): Policy with surrender value does not lapse; kept in force for paid-up sum insured + reversionary bonuses already attached; The paid-up sum is calculated by the approved formula in the policy. Exceptions: small paid-up amount, or written agreement after default (Sec 113(4)).
Nomination (Sec 39(1)-(2)): Made when effecting the policy or any time before maturity; effective if in the policy text or by endorsement communicated to and registered by the insurer; Can be cancelled or changed by endorsement or will. Insurer is protected for bona fide payment until written notice of change is delivered.
Effect of nomination (Sec 39(6)-(7)): Surviving nominee(s) receive the amount; parents, spouse, children or any of them are beneficially entitled; Beneficial title fails only if proved the policyholder could not have conferred it. Creditors' rights are not destroyed (Sec 39(9)).
Assignment formalities (Sec 38(1), (5)): Endorsement on policy or separate instrument, signed by assignor, attested by at least one witness; written notice to insurer needed to bind it; Assignee cannot sue the insurer until notice and the endorsement or certified copy are delivered. Exception: assignment in favour of the insurer.
Priority of assignments (Sec 38(6)): Priority follows the date on which notice is delivered to the insurer; It is the date of notice, not the date of the instrument. Disputes between assignees go to the Authority.
One-year net (pure) premium: Net premium = q(x) × Sum assured; q(x) is the probability that a life aged x dies within the year. Ignores interest and loading.
Net premium with interest (death paid at year end): Net premium = q(x) × Sum assured ÷ (1 + i); Discounts the expected claim by one year at interest rate i.
Gross premium: Gross premium = Net premium + Loading for expenses, contingencies and profit; Loading may be a percentage of premium or of the sum assured. Read the question.
Valuation surplus: Surplus = Value of assets − Value of liabilities; Only a surplus shown in the valuation balance-sheet can be used for dividends and bonuses (Section 49(1)).
Shareholders' share of surplus (participating policies): Shareholders' share ≤ 10% of surplus, and not above the sum specified by the Authority; Under the second proviso to Section 49(1). In other cases the whole surplus may go to shareholders, again within the sums the Authority specifies.
Debenture payments out of surplus: Payments ≤ 50% of surplus (including interest); interest ≤ 10% of surplus; First proviso to Section 49(1). The 10% interest limit does not apply when the interest is offset against interest credited to the funds in setting the valuation interest basis.
Probability of survival: p(x) = 1 − q(x); Used when you need the chance of living to the end of the year.
Section 14: record of policies: Policyholder name and address + date policy effected + any transfer, assignment or nomination notified; Every insurer must keep this for each policy issued. Electronic form is allowed as the regulations specify.
Section 14: record of claims: Claim + date + claimant name and address + date discharged (or date of rejection and grounds); A rejected claim must show the grounds of rejection.
Section 47: payment into Court (when): Policy maturing for payment + conflicting claims or insufficient proof of title (or other adequate reason) + no satisfactory discharge otherwise → insurer may apply to pay into Court; Applies to a life policy maturing for payment, which covers death claims and maturity claims as the Act uses the word 'maturing'. The Court must be within whose jurisdiction the amount is payable.
Section 47: waiting period: No application before 6 months from maturity by survival or from receipt of notice of death; The Court will not entertain an earlier application.
Section 47: effect: Court receipt = satisfactory discharge to the insurer; The Court invests the amount in Government securities pending disposal and decides all questions on who gets it.
Life Insurance Council (Section 64C(a)): Representative body of insurers carrying on life insurance business in India; The existing Council is deemed constituted as the Council under the Act.
General Insurance Council (Section 64C(b)): Representative body of insurers carrying on general, health insurance business and re-insurance in India; Do not leave out health insurance and re-insurance.
Authority of the Councils (Section 64E): Authority = Executive Committee; Each Council acts through its Executive Committee.
Executive Committee, Life (Section 64F(1)): 4 elected insurer representatives + 1 eminent person + 3 (agents, intermediaries, policyholders) + 1 each from self-help groups and Insurance Co-operative Societies; The Chairperson is one of the four elected representatives. Nominees are named by the Authority; the eminent person is not connected with insurance business.
Executive Committee, General (Section 64F(2)): 4 elected insurer representatives + 1 eminent person + 4 (agents, third party administrators, surveyors and loss assessors, policyholders); The Chairperson is again one of the four elected representatives.
Term of Executive Committee (Section 64H(1)): 3 years from the date of its first meeting; Outgoing members continue until a new Committee is constituted (Section 64H(2)).
Section 64E: authority of the Councils: Authority of Life Insurance Council / General Insurance Council = Executive Committee; Constituted in the manner provided in the Part. The Tariff Committee and other committees were removed from the text in 1968.
Section 64C: nature of the Councils: Life Insurance Council = representative body of life insurers; General Insurance Council = representative body of general, health and re-insurers; Existing Councils are deemed constituted as the Councils under the Act.
Section 64F(1): Life Executive Committee: 4 elected + 1 eminent person (IRDAI nominee) + 3 nominees (agents/intermediaries/policyholders) + 1 self-help groups + 1 Insurance Co-operative Societies; One of the four elected representatives is the Chairperson. If a body fails to elect a member, IRDAI may nominate (Section 64F(3)).
Section 64R(1): general powers of a Council: Appoint staff; decide fee collection; maintain list of member insurers; make bye-laws; Bye-laws cover elections, meetings and quorum, information from insurers, and fees. Under 64R(2) the Executive Committee may be authorised to use clauses (a), (b) and (c).
Section 64F(6): Secretary: Secretary of the Executive Committee is appointed by that Executive Committee; The Secretary exercises powers authorised by the Executive Committee.

Quick revision

Life insurance is a contract: insurer pays on death or maturity, policyholder pays premium.
Know the core principles: insurable interest, utmost good faith and the others in your material.
Term plans give protection; endowment plans combine protection with maturity benefit.
Section 64VB: no risk assumed until premium is received, guaranteed as prescribed, or deposit made in advance.
Section 64VB(4): an agent must deposit collected premium in full, without deducting commission, within twenty-four hours, excluding bank and postal holidays.
Section 64VB(3): refunds go directly to the insured, never credited to the agent's account.
Section 41: no rebate of commission or premium, except as allowed by the insurer's published prospectuses or tables; penalty may extend to ten lakh rupees.
Section 52: no business on the dividing principle; bonuses from periodic actuarial valuation are allowed.
Section 64C: the existing Life Insurance Council and General Insurance Council are deemed constituted under the Act.
Section 64E: the authority of each Council is the Executive Committee.
Section 64F: each Executive Committee has four elected member representatives, and one of them is elected Chairperson.
Underwriting selects and prices risk; claims settlement ends the policy cycle.

Common mistakes

Saying life insurance is a contract of indemnity. Fix: Write that life insurance is a contract of assurance. A fixed sum is paid and actual loss is not measured.
Claiming insurable interest must exist at the time of claim. Fix: For life policies, interest must exist at inception only.
Saying a pure term plan pays a maturity benefit. Fix: Pure term pays only on death within the term. Return of premium variants are a separate feature, so state it explicitly.
Saying the insurer bears investment risk in a ULIP. Fix: In a ULIP the fund value moves with the market, so the policyholder bears the risk.
Saying every policy lapses immediately when a premium is missed. Fix: For a non-linked policy that has acquired surrender value, say it continues for the paid-up sum insured plus attached reversionary bonuses.
Treating the nominee as an absolute owner in every case. Fix: Say a nominee who is a parent, spouse or child is beneficially entitled, unless it is proved the policyholder could not have conferred that title. Creditors' rights remain.
Treating the net premium as the premium the policyholder pays. Fix: Always ask whether the question wants net or gross premium. If gross, add the stated loading.
Ignoring interest discounting when a rate is given. Fix: If a rate is given and the claim is paid at year end, divide by (1 + i). If no rate is given, do not discount.
Saying every early claim must be repudiated. Fix: Investigation is a check. Repudiate only if the investigation shows a valid ground such as material non-disclosure. Otherwise pay.
Forgetting that a rejection needs recorded grounds. Fix: Under Section 14, the claim record must show the date of rejection and the grounds. Mention this in any repudiation answer.

Exam tips

In case-based MCQs, find the single fact that triggers a principle, such as no relationship or a hidden illness.
Always add the timing condition for insurable interest: inception in life, loss in property cover.
When comparing life and general insurance, use at least four points: nature of contract, indemnity, insurable interest timing, and certainty of event.
If section 52C appears, quote the words 'other than a policy' and the need for a hearing.
Do not quote section numbers beyond those you are sure of. Explain the rule in plain words instead.
Practise the one-line definition of each plan. Section A questions often test differences between plans.
In case scenarios, underline the need and budget first, then choose the plan.
Always state who bears the investment risk when comparing ULIP with traditional plans.