RAMAKRISHNA MISSION VIVEKANANDA COLLEGE

DEPARTMENT OF COMMERCE
ASSIGNMENT NO :- 1

TOPIC:- INSURANCE
FUNCTIONS
 PRINCEPLES
 SELLING PROCESS.

NAME :- A MADHUSUDHANAN
DEPT NO :- UCOB1737
CLASS :- 2nd B.COM – “B” SECTION
SUBJECT :- INSURANCE AND RISK MANAGEMENT.
 INSURANCE

MEANING:-
Insurance is an arrangement under which people facing common risk
come together and make their small contributions to the common fund.
Insurance is a contract in which a sum of money is paid by the insured in
consideration of the insurer’s incurring the risk of paying a large sum upon a
given contingency. Insurance is a plan by which large number of person
associate themselves and transfer, to the shoulders of all, risks attached to
individuals.

DEFINITIONS:-
“Insurance is a social device whereby uncertain risks of individuals
maybe combined in a group and thus made more certain; small periodic
contributions by the individuals providing a fund out of which those who suffer
losses may be reimbursed.”
- Reigel. R and Miller .J.S

“Insurance is a co-operative device to spread loss caused by a

particular risk over a number of persons who are exposed to it, who agree to
insure themselves against the risk.”

- Prof. R.S. Sharma.

 FUNCTIONS OF INSURANCE

Insurance performs numerous functions which are beneficial to the

general public, directly or indirectly. As such, functions of insurance can be
classified into following three categories:
(i) Primary functions
(ii) Secondary functions
(iii) Other functions

(i) Primary functions: The main functions which are performed by the
insurance company are as follows:

a).Provides protection: Providing protection to the people against the

probable risk of loss is the main function of insurance. under the contract of
insurance, the insurer guarantees the insured person to indemnify the losses
on the occurrence of uncertain events, in consideration of premium paid by
the insured.

b).Provides certainty: Due to uncertainties, people are apprehensive

about the risk of loss likely to arise in future. Insurance removes the fear from
the minds of people and provide certainty of payments against the uncertainty
of losses. Thus, premium is charged for providing such uncertainty.

c).Distribution of risk: When risk occurs, the loss is shared by all the
persons who are exposed to the risk. The share is obtained from each and
every insured in the form of premium without which the insurer cannot
guarantee protection.

(ii) Secondary functions: Some functions of insurance are categorised as

secondary functions. Such functions are as follows:

a).Prevention of loss: Prevention of loss is by far the best solution to the

problem of risk. By providing better medical facilities, life span can be
prolonged. By using fire resistant materials, automatic sprinkler system, fire
can be prevented. Reduction of losses causes lesser payments to insured and
more savings to the insured, which results in reduction in premium.

b).Provides capital: The insurer renders positive help in the

development of trade, commerce and industries of a country through different
schemes of investments. A countries natural resources can be exploited with
long term and huge amount of investments by the insurance companies.

c).Increases efficiency: insurance eliminates fear in the minds of people

about possible losses likely to arise due to death and destruction of property.
The person, who has taken a policy, can act freely and devote his entire
attention towards achievement of certain goals. It ultimately improves the
individual’s efficiency.

d).Helps in economic process: Insurance plays an important role in the

development of industrial sector and thus helps in the economic development
of country. It develops a sense of security among the industrialists. They know
that in case of happening of an uncertain event, their losses will be
indemnified.

e).Adequate financial cover: The necessity of insurance is largely felt to

give a cover to thee rural areas and to the society and economically backward
classes with a view to reach all insurable persons in the country and provide
them adequate financial cover against death at a reasonable cause.

(iii) Other functions: Apart from primary and secondary functions, the
insurer performs various other functions which are highly beneficial to the
common man, business community and the nation as a whole. A few are given
below:
a).Encourages savings: Life insurance is considered as one of the
important forms of savings. The premium paid by the assured is accumulated
and is returned to him if he survives till the date of maturity. Payment of a life
policy premium becomes a habit and inn effect brings about compulsory
savings.

b). Promotes foreign trade: Foreign trade fully depends on insurance. The
banker will not come forward to discount the marine trade bills unless the
cargo is fully insured. In India, insurance has been made mandatory for foreign
trade. It relieves the entrepreneurs from the uncertainties of foreign trade.

c).Checks inflation: Insurance plays an important role in controlling

inflation. It curbs the circulation of money and saves it from its ill effects.
Compulsory savings in the form of premium reduces the spending volume of
general public and scarce source of production is utilised in a better way by
investing for the national development.

d).Credit facilities: Business people can borrow loans from banks and
other financial institutions by pledging their insurance policies. In case, the
insured trader is unable to pay the loan, the financial institutions can recover
the amount out of the policy’s surrender value.

e).Social security: Insurance gives an instrumental force to fight against

the old age, unemployment, evils of poverty, fateful accidents of person and
property and similar other natural calamities. It has helped society a lot by
designing various types of insurance like Employees state insurance act,
Provident fund act, Workmen’s compensation act etc. It also helps in creating
awareness among the masses about the adoption of techniques for minimising
the happening of controllable uncertain events.
 PRINCIPLES OF INSURANCE

Insurance contract are based on certain fundamental principles. These

principles are common to all type of insurance – life, fire, marine, and
miscellaneous insurance contracts, with the exception of the principle of
indemnity which is not applicable in case of life insurance contract because of
it being a contingent contract.

i) General principles: Since an insurance contract, like any other contract,

is a legally binding, agreement between two or more parties, it must fulfil the
essential requirements of a valid contract, as laid down in the Indian contract
act. These are as follows:

a).Offer and acceptance: The person who wants to take up cover

against particular peril offers his risk through a proposal form to the insurance
company. When the premium is received by the company and cover note or
policy is issued by the company, it signifies the acceptance of the proposal.

b).Consideration: The premium paid is the consideration and on the

receipt of the premium by the insurance company, the contract comes into
force.

c).Consensus Ad idem: There should be a complete and unbiased

agreement between the insurer and the insured regarding the terms of the
contract. The intention of the insured should have been clearly understood by
the insurance company and vice versa.
 d).Capacity of the partners: Both the parties must be legally competent
to enter into an agreement. An agreement with an mentally unsound person is
not a valid contract. So also an agreement with an minor, insolvent, and alien
enemy is not a valid contract.

e).Legal object: The purpose for which the agreement is entered into
should be legal. It should not be against public policy. E.g., Insuring contraband
goods.

ii) Special principles: The following Principles are considered to be the special
and fundamental principles of the insurance.

a).Principle of co-operation: The insurer collects premium from the

insureds in a pool and pays their claims out of the pool. The insurer is an
association of persons who pays the claims out of its pooled money. Thus,
insurance is based on the principle of co-operation.

b).Principle of probability: The occurrence of risk in each type of

insurance is estimated through the theory of probability for which the insurer
follows the theory of large numbers. The insurers collects the data of previous
happenings taking a large number of years into consideration and forms an
idea about the incidence in future.

c).Principle of utmost good faith: Insurance contracts are based upon

mutual trust and confidence between insurer and insured. Utmost good faith
requires each party to tell the other “the truth, the whole truth and nothing
but the truth”. It means that the parties to the contract must make a full
disclosure of all the material facts and information relating to the contract.

d).Principle of insurable interest: For an insurance contract to be valid, the

insured should have an insurable interest in the subject matter of insurance.
The insurable interest is the pecuniary interest whereby the insured is
benefitted by the existence of the subject matter and is prejudiced by the
death or damage of the subject matter. The subject matter of the insurance
may be a property or life or legal liability.

e).Principle of indemnity: The term ‘indemnity’ means making up the loss.

Literally it means “security against damage or loss or compensation for loss”.
All contracts of insurance, except life and personal accident and sickness
insurance, are contract of indemnity.

f).Principle of contribution: Contribution is also a corollary of the principle

of indemnity. This principle applies where there is more than one policy
covering the same subject matter against the same peril for the same period
and for the same insured. In such cases, the insured can make claims under all
policies with different insurers and recover prorate from each.

g).Principle of subrogation: This principle is just corollary of or supplement

to the principle of indemnity. Subrogation means inheriting the rights available
to an individual. The insured after making good the loss, is entitled to all the
rights of insured against third party as regards the subject matter of insurance.

h).Principle of Proximate cause: The term ‘proximate cause’ means the

nearest cause and not the remote one is to be taken note of at the time of
determining the liability of the insurer. The insurer is not liable for the remote
cause even if it is one of the insured perils. Therefore, if the immediate cause is
an insured risk for the occurrence of which the insured is to be paid, the
insurer is liable to make the payment of loss under the policy, otherwise not.
 i).Principle of Warranty: There are certain conditions and promises in
insurance contract which are called warranties. According to Sec. 33(1) of the
Marine Insurance Act, “A warranty is that by which the insured undertakes that
some particular thing shall or shall not be done or that some conditions shall
be fulfilled or whereby he affirms or negatives the existence of particular state
of facts”. A warranty may be
 Express warranty
 Implied warranty.

j).Principle of mitigation of loss: This principle emphasises the duty of the

insured to take all possible steps to minimise the loss or damage to the
property covered by the insurance policy in case of uncertain events. Thus, this
principle aims at making sure that the insured behaves as a prudent person
and does not become careless after taking a policy to cover any risk.

SELLING PROCESS OF INSURANCE POLICY

Selling as a profession refers to the act of inducing a commercial transaction

through inducing the purchase of a product or service, such act being carried
out with the intent of earning remuneration. The salesperson thus seeks to
make a livelihood out of selling. Insurance agents are sales persons who seek
to induce members of the community to buy insurance contacts written by the
insurance company that they represent. The remuneration they enjoy in return
is known as a commission.
Insurance sales

There are two points which distinguish life insurance selling from other
products and industries:

i). Firstly it is said that ‘life insurance is sold, not bought’. In case of many
other products, the prospect has a need for the product and initiates the
enquiry. In the case of life insurance, it is typically the sales person who has to
go to the prospect and induces the need to buy.
ii). The second major difference is that in life insurance, unlike many other
products, one is not selling any tangible product but only an idea – a promise
that would be realised only in the future.
SALES PROCESS:

Selling is both an art and a science. It is an art in the sense that every sales
person brings his own distinct style in the way he communicates, builds
rapport and relations with prospective customers, engages in fact finding and
presents solutions. This brings us to the importance of adhering to a well-
defined sales process with clearly sequenced steps.
Diagrammatic Representation:

Step I: Prospecting (To identify and build up a list of prospects)

Prospects are people to whom we can sell our products. Prospecting is the
process of gathering names of people whom one can approach to secure a
sales interview. Continuous prospecting is absolutely vital to a successful sales
career.

The key to effective prospecting is to target particular markets where we will

be calling on people who have one or more characteristics in common. By
cultivating strong relationships with these people, we can get them interested
in the products we sell immediately, making the process of prospecting much
easier. Let us look at some of these markets.
 a) Immediate group
b) Natural market
c) Centres of influence (COIs)
d) References, introductions and testimonials
e) Other service providers
f) Conducting seminars and events
g) Information pieces, newsletters, blogs and web based networking
h) Cold calling

Step II: The pre-interview approach

Qualifying every prospect in the prospects’ list and getting appointments is the
next step.

"Qualified" prospects are those people

• who can pay for insurance,

• who can pass the company underwriting requirements,
• who have one or more needs for insurance products, and
• who can be approached on a favourable basis

We need to gather enough meaningful information on each name in our

prospect-list before we can call on them. The process is called qualifying the
prospect.

It is important to collect as much relevant information as possible so as to

proactively ensure that one’s efforts are in the desired direction. This also
enables us to convince the prospect that we do possess necessary knowledge
and skills to meet his or her particular needs, thus making a favourable
impression.

Step III: The sales interview: Conducting a need – gap analysis

After being successful in obtaining an interview, it is vital to do it in a

systematic and professional manner. The first step is to make a proper
approach which automatically and smoothly leads to the fact finding part of
the sales interview. The approach basically consists of an introductory
conversation in the course of which we are able to identify one or more needs
of the prospect and get the latter to agree that these are significant needs for
insurance protection. Once there is mutual agreement on these one can move
forward.

Step IV: Designing the solution

After completing the previous steps, we should know enough about the
prospect to design and recommend a solution that is best for him or her at this
point in time given all of his or her financial circumstances. In many cases,
especially if the problems and solutions are of a simple nature, we would be
able to recommend a solution and move on to closing the sale in one
interview.

In other cases, where the situation is more complicated, we may need to

spend some time in our office for developing the proper solution, then return
to the prospect and make our recommendation in a second interview.

Step V: Presenting the solution

The most important point to remember when presenting our solution is to be

thoroughly prepared. Prior to making our proposal we would want to review
the prospect's needs in detail, go over our solution one final time, and plan to
make our presentation so that it will appeal to our prospect's buying motives.
We would also want to anticipate what objections the prospect might raise to
our proposal.

It is necessary to arrange for presenting our proposal to the prospect, at a time

and place that will be free from interruptions and distractions. As we begin
presenting our solution, we must put the prospect at ease while at the same
time making sure that he or she understands that this is a decision-making
session.

Step VI: Handling objections

The list of possible objections is a long one. It ranges from prospect being busy,
not interested, thinks he has all the insurance he needs, already has an agent
he deals with, has no money etc.
Finally there is the prospect who may agree with all that you say and have no
objections, but decides to buy the product solutions from someone else. In all
instances it means that the prospect does not have sufficient information to
help him make the decision to buy from you.

Step VII: Closing the sale

Closing is the process of persuading the prospect to buy now. The key to
successful closing lies in helping the prospect to want to say "yes".

We begin by summarising the presentation, making sure that the prospect

understands exactly what the proposal is, and then leading the prospect into
an affirmative answer. At this point, when we know that the prospect
understands the proposal and is in an affirmative mood, we can conduct a
definite close.

a) Closing methods

i. Implied consent

ii. Offering alternatives

Step VIII: Sales follow-through

Between the time that the application is submitted and the policy is completed
and delivered, the four most important responsibilities of the agent are to see
that:

i). The application is clear, complete and accurate

ii). Being actively involved in making sure that any further investigations
that are required gets completed in a convenient and timely manner
iii). The client's advisors, such as accountants or attorneys, are treated in
the same manner that our client is treated and that we do not invade their
areas of expertise, and
iv). That all questions and requests are promptly followed up

Step IX: Policy delivery

Delivering the policy is an extremely important step in the insurance sales

cycle. It provides the agent with the opportunity to perform four important
functions:

i). To resell and reaffirm the need

ii). To get the client thinking about the next purchase
iii). To get referrals and
iv). To build prestige

Step X: Commitment to service

Service on the part of the agent is an integral element of the sales cycle.
Essential to a commitment to service is a structured program for maintaining
contact with our clients. Such a program could consist of:

a) Conveying clearly

b) Committing to continuous contact

c) Annual service review plan.

Thank you