CHAPTER 10 GROUP INSURANCES

1. CHAPTER 10 GROUP INSURANCES

2. Group Insurance—An Introduction • Provides Insurance Cover to large number of individuals. • Single policy known as Master policy. • Contract is between the Insurer and Representative of group. • May be Employer—Employee Group. • May be Association—member group. • May be Creditor—Debtor Group.

3. Example for Groups • For employer—employee group : • LIC and its employees. • For Creditor—debtor group: • Bank and persons who have taken housing loan from the bank (insurance cover will be limited to outstanding loan). • For Association—Member Group : • National Federation of Insurance Field Workers of India (NFIFWI) and its members. A Group Insurance scheme is there for them.

4. Group Insurance History • Development since early 1960’s • Originally confined to Employer—Employee Groups only. • Homogeneous Attributes (Common Characteristics) like similar Profession, members of Co-op. Society, etc. • Number of people covered Growing at a faster rate than conventional. • Easy to reach larger numbers.

5. Group Insurance—A Social Security Instrument • Social Security concern of Govt.’s . • Govt.’s provide medical care, entire living expenses, unemployment allowances. • Cost of these increasing & it is convenient to use Insurance Co’s . • Insurer—Natural Instrument to take over because of powerful social dimension of insurance business.

6. Social Welfare in India • Comparatively at elementary level. • LIC provides small amounts of insurance cover to Landless Agri. Labourers , handloom workers, rickshaw pullers, Village artisans.

7. What is Group Insurance? • Insurance Cover to large number of individuals under single ‘Master Policy’. • Contract between Insurer and body representing individuals—employer or association. • The body is policy holder and the individuals are beneficiaries. • Amount & terms of Insurance negotiated by policy holder not beneficiaries. • Benefits apply uniformly on determined bases to all individuals.

8. What is Group Insurance (cont’d)? • Premium will be paid by Policy holder . • He may or may not collect the same from individuals. ( contributory or non-contributory). • If individuals are contributing it may be full or partial. • In many employer schemes, entire premium paid by employer. • If premium paid by employee, it may be by salary deductions also.

9. Group Insurance Vs. Salary Savings Schemes • Ownership of the policy is with employer and not the employee • Extent of Cover and terms are determined by the employer and not by any individual. In a salary savings scheme policy the ownership remains with the policy holder and the life cover and terms are decided between him and insurer.

10. Group Insurance—Advantages • Number of persons and a single contract, administrative costs are very low. • Coverage not a choice of individual concerned, so no adverse selection. • Rules of medical examination are very liberal.

11. Essential Features—Group Insurance • Group not formed for purpose of taking advantage of GI scheme. • Entry into and exit from the group for reasons other than Insurance cover. • There will be a minimum members at the outset, say 25. Many cases it will be in hundreds. • Beneficiary not to choose Insurance cover • Amount determined by some criteria and applied uniformly to all members.

12. Essential Features—Group Insurance(cont’d) • Cover may depend on (a) Age(b) Rank(c) Income(d) Years of membership. • If cover depends on Age or Rank, then all persons of same age or rank will get same Insurance cover. • If cover depends on Income, cover can be fixed multiple of income. • Income depending on output may be suitable for deciding insurance cover for farmers, milkmen, beedi worker, etc.

13. Essential Features—Group Insurances (cont’d) • Inclusion of new members, members have no choice. • Members fulfilling specified criteria should compulsorily join the group. • At introduction of scheme, existing members will be given a choice, to be made within a specified period, which will be final. • Individual lives not separately assessed for risk. Underwriting group as a whole.

14. Essential Features—Group Insurance (Cont’d) • Premium will change from year to year. • Reason new entrants and exits. Exits may be due to death, resignation, etc. • Amount of cover also vary because of age, income, rank ,etc. of members. • Premium may change due to mortality rate (number of deaths) in the group. • If experience is better than expected benefit passed on to policy holder by way of reduction in prem. (Profit sharing)

15. Various Group Insurance Schemes • One Year Renewable Group Term Insurance Scheme (OYRGTIS) is one of earliest schemes. • Insurance cover on life of members is for specific amount, payable on death. • Simplest and cheapest of all schemes. • Particularly beneficial to young, whose gratuity and Provident Fund Accumulation will be negligible. • Also helpful to cover loan amount under hire-purchase/mortgage (Amount of cover equal to outstanding loan).

16. Various Group Insurance Schemes (cont’d) (GSLI) • Group Savings-Linked Insurance Scheme (GSLI) offered to employers for benefits of the employees. • Contribution consists of two elements—savings element and premium amount for a term insurance cover. • Savings element earns interest at a stated rate and will be paid on death, resignation or retirement of the employee.

17. Example for GSLI • LIC and its employees have a GSLI scheme. • If contribution is Rs.100, then Rs.65 goes to savings and Rs.35 goes to the term insurance premium. • In case of death, the insurance amount along with accumulated saving amount will be paid to claimant. • In case of retirement, the accumulated savings portion will be paid to the employee.

18. Various Group Insurance Schemes (cont’d) (GGS) • Group Gratuity Schemes are also offered to employers and is related to gratuity. • Gratuity is amount paid by the employer to employees on retirement or death of employee, after a long service. • Payment of Gratuity compulsory due to Payment of Gratuity Act, 1972. • Amount of gratuity is linked to number of years of service and salary drawn during the last few years of service.

19. Various Group Insurance Schemes (cont’d) (GGS) • Group Gratuity Scheme provides two advantages. • (i) Guarantees a certain amount of Gratuity, which would be more than what the rules provide, particularly for those who die young with less service. • (ii) It is easier to fund the gratuity liability of the employer. • Actuarial advice is available from the Insurer about adequacy of the funds.

20. Various Group Insurance Schemes (cont’d) (GGS) • In the absence of GG Scheme employer has three way to pay his gratuity liability. i) Pay as and when due, not a prudent business practice as amount can vary from year to year based on age profile of his employees . ii) Create internal reserve. Better method, but reserve funds may be used for other purpose in case of business emergency. iii) Set up a gratuity fund and create a trust to administer the funds.

21. Various Group Insurance Schemes (cont’d) (GGS) • Difference between employer setting up fund and creating trust and Group Gratuity Scheme with insurer is that (a) Trustees hand over funds to the insurer who has better capabilities of managing the funds. (b) There will be an insurance cover to provide additional funds for those who die young.

22. Example For Group Gratuity Scheme • An employer enters into gratuity scheme with an Insurer. The fund is handed over to the Insurer for management. • The Insurer carries out valuation every year to assess liability of the employer towards past and future service gratuity of his employees and requests for payment of Contribution. • The Insurer will pay claims of gratuity for death, retirement and resignation of the employees on behalf of employer. • There will be a insurance cover also on the life of members.

23. Various Group Insurance Schemes (cont’d) (GSS) • Group Superannuation Schemes are also offered to employers and helps employer in payment of pensions to employees. • Need for Pension has grown with increasing longevity of people. • Lump sum benefits like Gratuity and PF may be inadequate for longer life span. • Group Superannuation Schemes are intended to help employers administer pension funds.

24. Various Group Insurance Schemes (cont’d) (GSS) • Employer can manage Pension liabilities in different ways as that of Gratuity. • Advantages of Group Scheme offered by insurer are (a) easier administration (b) Availability of Actuarial and Investment Expertise. (c) Better benefits for those who die young may be provided.

25. Various Group Insurance Schemes (cont’d) (GSS) • Scheme can be managed in two ways (i) Fix the contribution from the employer as a percentage of salary. Benefit available to the employees would be equal to what this contribution can buy. (ii) Benefit to be given to employees is fixed and appropriate contribution is collected. Normally benefit will be fixed to a fixed proportion of final salary drawn.

26. Example For Superannuation Scheme • An employer enters into Group Super-annuation scheme with an insurer for benefit of employees and creates a trust and hands over funds to the insurer. • Every year contribution in respect of member will be paid to the Insurer, who will accumulate it at an interest rate. • As and when pension liability becomes due insurer starts paying pension on agreed terms. • There will a nominal insurance cover, which will be used for pension for dependent in case of death of member.

27. Various Group Insurance Schemes Special Schemes—EDLI • Employee’s Deposit Linked Insurance (EDLI) scheme is applicable to all establishments and undertakings contributing towards PF under Employees PF and Misc. Provisions Act, 1952, with effect from 1.8.1976 unless exempted under Sec.17(2A) of the Act. • The scheme provides insurance cover to an employee linked to his balance in PF account, subject to a maximum of Rs.35000.

28. Various Group Insurance Schemes Special Schemes—EDLI • The Act empowers Central Provident Fund Commissioner to exempt an employer from EDLI, if he opts for GI scheme of LIC, which is more beneficial to the employees. • Insurance cover ranges from Rs.11000 to Rs.37000. • Premium depends on Average age, Occupation & size of the group. • Advantages of low premium & easy settlement of claims, compared to PF.

29. Various Group Insurance Schemes Special Schemes—Social Security • Group Insurance—Convenient medium for Govt. for its social security goals. • L.I.C has LALGI (Landless Agricultural Labourers Scheme on behalf of Govt. • It provides term insurance cover of Rs.2000 each to families of landless agricultural labourers, who do not own land and do not have any inheritable rights to agri. Land. • Entire cost is borne by the Govt.

30. Various Group Insurance Schemes Special Schemes—GLES • Amendments to Companies Act, in 1988 and accounting standards require employers to fund the liability in respect of leave encashment facility. • LIC’s scheme enables funding (including Medical Leave). • Provides additionally an insurance cover ranging from Rs.5000 to Rs.25000 payable to beneficiaries of employees who die while in service.

31. Retirement Schemes • Pensions paid by Central & State Govt’s have increased from about Rs.12000 Cr. in 1996 to about Rs.46000 Cr. in 2002. • Apart from increase in wage rates and inflation, a major contributory factor is increase in life spans. • Average expectation of life has gone up from 53 in 1980 to 63 by the year 2000. • Employers, including Government, find it difficult to bear the increasing burden of retired employees.

32. Retirement Schemes (cont’d) • Employers purchase annuities from a life insurer as and when they have to release pensions. • Insurer pays the annuities directly to pensioners. • Benefits tailored to requirements of employer and pensioners. • Purchase price decided by employer, based on policies and terms of employment. • Given purchase price various options for disbursement of annuity can be there.

33. Retirement Schemes (cont’d) • Variations would be, when to begin and when it should end. • It could end on death of pensioner or continue as long as spouse is alive. • These options are left to preference of the pensioner. • Voluntary Retirement Schemes—employee receive substantial amounts from the employer. • Group Insurance schemes channelise such funds to steady & assured flow of income.

34. Health Insurances • Health Insurance, according to laws in India, is part of non-life business. • Life insurers don’t cater to insurance relating to sickness, except to a limited extent as rider to individual policies. • Cannot become a subject matter of Group Insurance policy in India. • If law changes in conformity with provisions in other countries, life insurers will find big scope for a new line of business, in individual & group policies.

35. Agent Role in Group Insurance • Group Insurance has developed in India since the 1960s. • Number of lives covered is not much lower than individual policies. • Scope for this business is very vast. • Practicable method to extend the benefits of insurance to large number of people. • Corporates benefit from insurer’s expertise. • Agents conversant with principles under-lying group insurance might be able to innovate new ideas and develop schemes.

36. THANK YOUM. J. MALIKS.B.A.836 B.O.AHMEDABAD D.O.09879094925lic.malik@gmail.com

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