Life Insurance – Underwriting – Insurance Law and Practice Important Questions
Question 1.
Describe the rules of interpretation of a policy.
Answer:
Like any other contract, disputes do arise in Insurance contracts, regarding liability, quantum, extent and duration of cover, especially in cases where the insurer may have earlier repudiated the claim. It follows consequently, that interpretation of the policy document, is of paramount importance even at the time of inception and during the currency of the policy and not only in a court of law.
In case of any difficulty in understanding the language or rules of the contract, the policy document being a standard document, drafted by the insurer, the benefit of doubt is always in favour of the insured, as a principle of natural justice.
This is as per the doctrine of contra preferentum rule which states that where the contractual language is capable of alternative interpretations, it will be construed or translated in favour of the insured, who accepts the standard contract.
Consequently, the following rules for interpretation of the policy are applied:
- Printed and written portion of the policy is to be construed together as far as possible.
- In case of contradiction, the written portion over-rides the printed portion.
- The policy is to be interpreted as a whole.
- The words in the policy are to be given their plain, ordinary and popular meaning.
- Technical words are to be given their strict technical meaning.
- The ordinary rules of grammar shall apply.
Question 2.
Write a short note on objective of underwriting.
Answer:
Main Objectives of Underwriting:
- To reduce the possibility of adverse selection against the insurer.
- Prudent underwriting reduces the chances of Physical. Moral, and Morale hazards.
- Underwriting helps in determining the expected loss potential of the proposed insured and selecting a price in line with this expected loss.
Question 3.
What do you mean by underwriting? Explain the process of underwriting In insurance.
Answer:
Underwriting Process:
The underwriting process follows a series of stages, at the end of which the status of a 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.
There are different types of hazards which can influence his decision to accept or reject a risk:
(i) Physical hazards:
These are hazards that affect the physical characteristics of whatever is being insured. For example, a building made of wood represents a higher level of physical hazard than one made of brick.
(ii) Moral hazards:
These hazards refer to the defects that exist in a person’s character that may increase the frequency or the severity of loss. Such a character may tend to increase the loss for the company.
(iii) Financial hazards:
If the value of the risk is beyond the capacity of the insurer he may reject the risk, or share the same.