In the life insurance industry we deal with a large number of forms and documents. These are required for the purpose of bringing clarity in the relationship between the insured and the insurer. In this chapter, we shall deal with the various documents that are involved at the proposal stage and their significance. The documents we shall consider include
i. Prospectus
ii. Proposal form
iii. Agent’s report
iv. Medical examiner’s report
v. Moral hazard report
vi. Age proof
vii. Know Your Customer (KYC) documents
A. Life insurance – Proposal stage documentation
1. Prospectus
A prospectus is a formal legal document used by insurance companies that provides details about the product.
A prospectus should contain all facts that are necessary for a prospective policyholder to make an informed decision regarding purchase of a policy.
The prospectus used by a life insurance company should state the following, under each of its plans of insurance:
i. The terms and conditions
ii. Scope of benefits – guaranteed and non-guaranteed
iii. The entitlements
iv. The exceptions
v. Whether the plan is participative or non-participative
The prospectus is like an introductory document which helps the prospective policyholder to get familiar with the company’s products.
2. Proposal form
The insurance policy is a legal contract between insurer and the policyholder. As is required for any contract, it has a proposal and its acceptance. The application document used for making the proposal is commonly known as the ‘proposal form’. All the facts stated in the proposal form become binding on both the parties and failure to appreciate its contents can lead to adverse consequences in the event of claim settlement.
The proposal form has been defined under IRDA (Protection of Policyholders’ Interests) Regulations, 2002 as:
“It means a form to be filled in by the proposer for insurance for furnishing all material information required by the insurer in respect of a risk, in order to enable the insurer to decide whether to accept or decline, to undertake the risk, and in the event of acceptance of the risk, to determine the rates, terms and conditions of a cover to be granted.”
While the IRDA defined the proposal form, the design and content of the form was left open to the discretion of the insurance company. However based on the feedback received from policyholders, intermediaries, ombudsmen and insurance companies, the IRDA felt it necessary to standardise the form and content of the proposal form.
The IRDA has issued the IRDA (Standard Proposal Form for Life Insurance) Regulations, 2013. While the IRDA has prescribed the design and content, it has provided flexibility to the insurance companies for seeking additional information. The proposal form carries detailed instructions not only for the proposer and the proposed life insured but also to the intermediary who solicits the policy and assists in filling up the form.
3. Agent’s report
The agent is the primary underwriter. All material facts and particulars about the policyholder, relevant to risk assessment, need to be revealed by the agent in his / her report. Matters of health, habits, occupation, income and family details need to be mentioned in the report.
4. Medical examiner’s report
In many cases, the life to be insured has to be medically examined by a doctor who is empaneled by the insurance company. Details pertaining to physical features like height, weight, blood pressure, cardiac status etc. are recorded and mentioned by the doctor in his report called the medical examiner’s report.
We must note that many proposals are underwritten and accepted for insurance without calling for a medical examination. They are known as non–medical cases. The medical examiner’s report is required typically when the proposal cannot be considered under non-medical underwriting because the sum proposed or the age of the proposed life is high or there are certain characteristics which are revealed in the proposal, which call for examination and report by a medical examiner.
The underwriter of the insurance company thereby gets an account of the current health position of the life to be insured.
5. Moral hazard report
Life insurance is a contract between an individual and an insurance company that pays a stated amount of money if the covered person passes away during the term of the policy. When you purchase life insurance, you must go through several underwriting procedures including filling out an application and submitting to a physical exam. One factor impacting the risk, which underwriters look out for, is termed as moral hazard.
Moral hazard is the likelihood that a client's behaviour might change as a result of purchasing a life insurance policy and such a change would increase the chance of a loss.
John Doe recently purchased a life insurance policy. He then decided to go on a skiing expedition at a site which was touted to be one of the most dangerous skiing places on earth. In the past he had refused to undertake such expeditions.
Life insurance companies seek to guard against the possibility of individuals seeking to make a profit from the purchase of life insurance through actions like ending one’s own life or the life of another. Life insurance underwriters would thus look for any factors which might suggest such hazard.
For this purpose, the company may require that a moral hazard report has to be submitted by an official of the insurance company. Before completion of the report the reporting official should satisfy himself regarding the identity of the proposer. He should meet him preferably at his residence before completing the report. The reporting official should make independent enquiries about the life to be assureds’ health and habits, occupation, income, social background and financial position etc.
6. Age Proof
We have already seen that the risk of mortality in life insurance increases with age. Hence age is a factor that insurance companies use to determine the risk profile of the life to be insured. Accordingly a premium is charged for each age group. Verification of correct age by examination of an appropriate document of evidence of age thus assumes significance in life insurance.
Valid age proofs may be standard or non-standard.
a) Standard age proofs
Some documents considered as standard age proofs are:
• School or college certificate
• Birth certificate extracted from municipal records
• Passport
• PAN card
• Service register
• Certificate of baptism
• Certified extract from a family bible if it contains the date of birth
• Identity card in case of defence personnel
• Marriage certificate issued by a Roman Catholic church
b) Non-standard age proofs
When standard age proofs like the above are not available, the life insurer may allow submission of a non-standard age proof. Some documents considered as non-standard age proofs are:
• Horoscope
• Ration card
• An affidavit by way of self-declaration
• Certificate from village panchayat
7. Anti-Money Laundering (AML)
Money laundering is the process of bringing illegal money into an economy by hiding its illegal origin so that it appears to be legally acquired. The Government of India launched the PMLA ,2002 to rein in money-laundering activities.
The Prevention of Money Laundering Act (PMLA), 2002 came into effect from
2005 to control money laundering activities and to provide for confiscation
of property derived from money-laundering.It mentions money laundering as an offense which is punishable by rigorous imprisonment from three to seven years and fine upto Rs 5 lakhs.
Each insurer is required to have an AML policy and accordingly file a copy with
IRDA. The AML program should include:
i. Internal policies, procedures and controls
ii. Appointment of a principal compliance officer
iii. Recruitment and training of agents on AML measures
iv. Internal audit/control
8. Know Your Customer (KYC)
Know your customer is the process used by a business to verify the identity of their clients.Banks and insurers are increasingly demanding their customers provide detailed information to prevent identity theft,
financial fraud and money laundering.
The objective of KYC guidelines is to prevent financial institutions from being used by criminal elements for money laundering activities.
Insurers, hence, need to determine the true identity of their customers. Agents should ensure that proposers submit the proposal form along with the following as part of the KYC procedure:
i. Photographs
ii. Age proof
iii. Proof of address – driving license, passport, telephone bill, electricity bill, bank passbook etc.
iv. Proof of identity – driving license, passport, voter ID card, PAN card, etc.
v. Income proof documents in case of high-value transactions
9. Free-look period
Suppose a person has purchased a new life insurance policy and received the policy document and, on examining the same, finds that the terms and conditions are not what he/she wanted.
What can he/she do?
IRDA has built into its regulations a consumer-friendly provision that takes care of this problem. It has provided for what is termed as a “free look period’ or as “cooling period.”
During this period, if the policyholder has bought a policy and does not want it, he/she can return it and get a refund subject to the following conditions:
i. He/she can exercise this option within 15 days of receiving the policy document
ii. He/she has to communicate to the company in writing
iii. The premium refund will be adjusted for proportionate risk premium for the period on cover, expenses incurred by the insurer on medical examination and stamp duty charges This free look period is available to life insurance policy holders as a privilege. They can exercise this choice during a period of fifteen days from the date of receipt of the policy document by the policyholder.
During the period, if the policyholder has bought a policy and does not want it, he / she can return it and get a refund.
I. Free evaluation
II. Free look
III. Cancellation
IV. Free trial
• Prospectus is a formal legal document used by insurance companies that provides details about the product.
• The application document used for making the proposal is commonly known as the ‘proposal form’.
• Matters of health, habits and occupation, income and family details need to be mentioned by the agent in the agent’s report.
• Details pertaining to physical features like height, weight, blood pressure, cardiac status etc. are recorded and mentioned by the doctor in his/ her report called the medical examiner’s report.
• Moral hazard is the likelihood that a client's behaviour might change as a result of purchasing a life insurance policy and such a change would increase the chance of a loss.
• Some documents considered as standard age proofs include school or college certificate, birth certificate extracted from municipal records etc.
• Each insurer is required to have an AML policy and accordingly file a copy with IRDA. The AML program should include internal policies, procedures and controls and appointment of a principal compliance officer.
• Insurers need to determine the true identity of their customers. KYC documents like address proof, PAN card and photographs etc. need to be collected as a part of the KYC procedure.
1. Prospectus
2. Proposal form
3. Moral hazard
4. Standard and non-standard age proofs
5. Anti-money laundering
6. Know Your Customer (KYC)
7. Free-look period