1. Introduction:
1.1. Group Life insurance was initially first conceived & practised on a large scale in U.S.A. Thereafter it has been spread throughout the world and now it forms a significant portion of the life insurance business as being written in India. It is basically a low-cost insurance protection plan provided by the use of group term insurance plan. A considerable segment of the organised working people availed protection through Group Term Insurance Schemes.
1.2. Group Life Insurance has been defined legally – some 90 years back in American Legal Definition had described as – “Group Life Insurance is that form of life insurance covering not less than fifty employees with or without medical examination, written under a policy issued to the employer, the premium on which is to be paid by the employer or by the employer and employees jointly and insuring only all of his employees or all of any class or classes thereof, determined by conditions pertaining to the employment for amounts of insurance based upon some plan which will preclude individual selection for the benefit of persons other than the employer, provided , however, that when the premium is to be paid by the employer and the employees jointly and the benefits of the policy are offered to all eligible employees, not less than seventy five percent of such employees may be so insured.”
2. What is meant by Group Insurance?
2.1. Group Insurance is a means through which a group of persons who usually have a business or professional relationship to the contract owner are provided insurance coverage under a single contract. Over time, innovative underwriting techniques of group insurers and liberalized regulatory actions have broadened the definition. Group Insurance can be described as an economical way of providing insurance protection against financial losses (such as those caused by death, disability, medical care expenses or retirement) of a group of individuals who are associated with the policyholder by some relationship other than insurance.
2.2. In its broadest concept, group insurance includes a considerable list of insurance coverage –
1. Life Insurance;
2. Health Insurance;
3. Annuities; and
4. Property & casualty Insurances.
2.3. Group policies can be issued where there is some common relationship among the persons to be insured and a central point for the administrative of the insurance scheme. Accordingly, the Group Insurance can only be granted to groups clearly falling under any one of the following categories:
1. Employer-employee relationship including dependents of the employee.
2. Pre-identified segments / groups where the premium is to be paid by the State / Central Governments.
3. Members of Registered Service Clubs.
4. Members of any Registered Co-operative Society.
5. Holders of credit cards of Banks / Diners / Master / Visa, etc. cards.
6. Holders of Deposit Certificates issued by Banks / NBFCs.
7. Shareholders of Banks / Public Limited Companies.
8. Proposals relating to any category other than the above seven categories may also be considered for coverage under group insurance policies provided there are some common relationship among the persons to be covered and the insurer can deal with a central point for the administration of the group insurance scheme. The rationale behind that is to avoid situations where artificial groups may be formed solely for the purpose of obtaining the group discount in premium.
3. Distinguishing characteristics of Group Insurance:
3.1. In comparison with other forms of insurance written by life insurance companies, several distinguishing features are evident and are detailed below:
1. The substitution of group underwriting for individual underwriting;
2. Signing of MOU by both the parties – the insured (i.e. the Administrator) & insurer.
3. The use of master contract;
4. Lower administrative cost;
5. Flexibility in contract design; and
6. Use of experience rating.
4. Salient features of Group Life Insurance Underwriting:
4.1. Group underwriting normally aims to obtain a group of individual lives that will yield a predictable rate of mortality or morbidity. The point is that the group becomes the unit of underwriting, and insurance principles may be applied to it just as in the case of individual.
4.2. In underwriting group insurance, certain important features should be present that either are inherent in the nature of the group itself or may be applied in a positive way to avoid adverse selection. The measures taken in this direction are –
1. Insurance incidental to the Group: The insurance should be incidental to the group – that is the members of the group should have come together for some purpose other than to obtain business. For example – the group insurance furnished to the employees of a given employer must not be the feature that motivates the formation and existence of the group.
2. Automatic determination of benefits: Group Insurance Underwriting commonly requires an automatic basis for determining the amount of benefits on individual life which is beyond the control of the employer or the employees. If the amount of benefits taken were optional, it would be possible to select against the insurer. For e.g., those in poor health would tend to insure heavily and the healthy ones might tend to elect minimum coverage. However, as the group mechanism has evolved, more flexibility has crept in the form of options in excess of basic coverage.
3. Minimum participation by the Group: Another underwriting control is the requirement that substantially all eligible persons in a given group be covered by insurance for the scheme to be effective.
4. Effective Administrative Organisation: A single administrative point / organisation should be able and willing to act on behalf of the insured group. In the usual case, this is the employer. In case of contributory plan, there must be a reasonably simple method, such as payroll deduction by which the master policy owner can collect premium.
5. Critical characteristics of Group Policy:
5.1. Main characteristic of group insurance is the use of a group policy (contract) held by the owner as group policy holder. The master contract is a detailed document setting forth the contractual relationship between the group contract owner and the insurer. The insured persons under the contract are not actually parties to the contract although they may enforce their rights as third-party beneficiaries. In United States the issue whether the participants are “parties to the contract” or merely “third-party beneficiaries” is under litigation.
5.2. Another important characteristic of group insurance is that it is usually lower-cost protection than that is available in individual insurance. The nature of the group approach permits use of mass-distribution and mass-administration that afford economics of operation not available in individual insurance. The premium for the group is also based on an actuarial assessment of the group as a whole. Employer subsidisation of the cost is a beneficial factor in group insurance plan design.
5.3. There is flexibility in group insurance plan. The group insurance plan is an integral part of an employee benefit program and in most cases the group insurance contract can be tailored to meet the objectives of the contract owner as long as the flexibility does not result in adverse direction.
6. Eligible groups to be insured under Group Insurance:
6.1. Various types of groups eligible for group insurance coverage have broadened significantly over the years. This wider eligibility is reflected in both regulations and the underwriting philosophy of group underwriting insurers. Firstly let us describe the four fundamental specific categories of groups being covered in United States as given below:
i. The employees of a single employer comprise the first category. The employer may be a sole proprietorship, a partnership or a corporation.
ii. Debtor – Creditor Groups: Group credit insurance (life and disability income) has grown rapidly in the United States, reflecting a credit-oriented society. The contract owner in these plans is the creditor, such as a bank, a credit union, or any business that has significant accounts receivable, including those that rely on credit card customers.
iii. Labour Union Groups : The contract may be issued to the union itself. The insurance must be for the benefit of persons other than the union or its officials.
iv. Multiple Employers groups such as Negotiated Trusteeships, Voluntary trade Associations, Multiple Employee Trusts (METS), Professional Associations and Credit Groups.
6.2. Numerous other types of groups such as alumni associations, professional associations, veterans’ groups, and savings account depositors may also be eligible for group insurance depending on the underwriting practices of the insurance companies.
7. Current Indian scenario in relation to Group Insurance:
7.1. The contingencies of death, accident and ill health could result in a definite financial hardship to any one at any time. Therefore, group life, group personal accident and group health insurance have become the major consumer product in India in this new age – involving insurers, employer-employees, health care providers, cooperative societies, non-governmental organisations and various other groups.
7.2. In life insurance market in India the common group policies are – Group Savings Linked Policies, Group Superannuation Policy, Group Term Insurance Policy, Group Gratuity Scheme, etc.
8. Different aspects relating to constitution of a group:
8.1. There are various aspects that are connected with the group; the most important one being ‘what shall constitute a “group”? If the regulations were designed to sell health insurance at an institutional level, the definition of a group has been widely missed by both the players as well as their distribution channels. Lack of clear-cut definition of what constitutes a group led to heterogeneous groups being formed just to fulfil legal obligation to avail of the benefits without any commonality of sole purpose is to avail substantial discounts in the premium for health insurance.
This has led group health insurance to be written on grossly inadequate rates and adverse loss ratios. This misuse has also resulted in lack of transparency and unethical insurance activity without accountability on the part of those managing such heterogeneous groups. In such cases, the buyer of the group policy has neither insurable interest nor any sustainable relationship with the members of the group’.
These group schemes thus become an instrument to sidestep the provisions of the Insurance Act and enable persons to sell insurance without being properly regulated and the buyers being misled about the true nature of the contract. The certificate issued by the policy holder and the funding activity carried out by him could misled the consumer into thinking that they are a TPA offering cashless service.
8.2. With a view to rationalizing the approach to be adopted by the insurers in dealing with various groups and keeping in mind the interests of the individual members of a group, the IRDA issued ‘Guidelines on Group Policies’ to be adhered to by all insurers. The guidelines also give us the definition of a Group which incorporates the following aspects:
1. There has to be a commonality of purpose in a group – e.g. employees. Non-employer-employee, group members must authorize the group’s organizer to arrange insurance on their behalf.
2. No group should be formed with the main purpose of availing insurance. Relationship between the members and the policy buyer (group manager) should be other than insurance.
3. Minimum size of the group left to the prudence of the underwriter.
4. Entry into group policy of a member will be from a well-defined date and not merely the date of joining.
9. Marketing of Group Insurance:
9.1. The main features of marketing of Group Insurance Policies are:
1) Insurer may sell group insurance policy either directly or through insurance agent or insurance intermediary.
2) Insurer’s agreement of sale of insurance must be with a person or entity licensed under the Insurance Act only. All arrangements contrary to these guidelines to be terminated forthwith. The Authority may relax this condition in case of sale of micro-insurance product.
3) Insurer using corporate agent for sale should require such corporate agent to file certificate at least once a year confirming compliance of Section 40A,40C and 64 VB of the Insurance Act, 1938, IRDA (Insurance Advertisements & Disclosures) Regulations 2000, IRDA (Protection of Policyholders’ Interest) Regulations 2002.
10. Group Insurance Administration:
10.1. The premium and benefits applicable to each member should be clearly specified in the group policy. Any changes should be in the nature of policy change to be agreed to by the insurer.
10.2. Group discount should not be appropriated as additional remuneration but shall be passed on to the members. It may also be shared in proportion to the premium paid.
10.3. The percentage of commission paid to the agent / corporate agent should be as approved by the Authority (IRDA) or as specified in the Insurance Act, 1938 read with the IRDA Act, 1999 and the Regulations framed there under. Commission should be predetermined and published and not determined on a case to case basis. No other payment to the agent / corporate agent or group manager is permissible.
10.4. Each group insurance policy should clearly refer to a list of persons insured which cannot be subsequently manipulated.
10.5. In non-employer-employee cases, the individual group member would be treated as the insured beneficiary and the group manager will be only the holder of the group policy. The insurer is totally responsible to ensure that the claim payment is made in the name of the insured member. The insurer is also responsible for the certificate of insurance issued by a group organizer or administrator. In such cases it will be prudent to have the certificates with in-built security features and pre-numbered lots.
10.6. The insurer shall be held responsible to the insured person, in respect of the group policy in case of failure of the group organiser or manager to account for the business to the insurer.
11. Advantages of Group Insurance Policies:
11.1. The group insurance mechanism has proved to be a remarkable effective solution to the need for employee benefits. The increasing complexity of industrial / service economics has brought increasingly large numbers of persons together, and the group mechanism has enabled insurance companies to reach vast numbers of individuals within a relatively short period and at low cost. Equally important has been the fact that the employer usually pays a large share of the cost. Under various group insurance schemes, an individual who could otherwise be uninsurable gets the scope of coverage.
12. Distinguishing features of a Group Life Insurance Policy / Scheme:
Group Life Insurance Policies/ Schemes can be invariably distinguished from the individual insurance policies / schemes on the following counts:
12.1. Individual insurance policy / scheme is a contract between an individual person and an insurance company. The decision to insure is voluntary on the part of the life assured. Generally, there are only two parties to an individual contract. But the Group Insurance Policies / Schemes are generally a contract covering several persons under a single contract made at a particular point of time. The insured persons are not actually the parties to the contract since the contract is entered into between the insurer and the administrative group (emerging as the party in the specific case of contract) since the contract is entered between the insurer and a party representing the group of individuals.
The group representative may be an employee (if the Group Insurance is made by the Employer covering their employees), may be one of the trustees (in case the Group Insurance is made for an institution like ‘Nirmal Hridyay’ of Mother Teressa being established in Kolkata, or by a labour union or an association having the administration role of including all the members’ name enrolled at the time of underwriting & issuance of the Group Policy and again at the time of claim the Administrators need to take very active part to receive the claim proceeds on behalf of their members (i.e. to ensure the timely submission of the all claim related papers, duly filled up Claim Form & other necessary documents) – on behalf of the diseased or the victim of any accident suffering fatal damage or grievous heart or any other way as applicable.
Hence, there is no privity of contract or direct contractual obligation between the individuals insured under the policy and the insurer.
12.2. A corollary of the arrangement is that the proposal forming the basis of the Group Insurance Contract is signed by the representative of the insured who may be an employer, etc. and presented to the insurer for consideration. Although the individual to be insured sometimes completes a form giving detailed particulars, it is not having the legal status of a proposal and in group insurance the merit of the individual insured person is not considered – medical examination of the members of the specified Group is not even carried out.
12.3. Another special feature of group insurance is that the consideration of the insured (which is called the premium) is charged generally from year to year according to the ages of the assured in the respective years. This is not so in case of individual Life Policies issued by the insurers. There is a level of premium charged.
12.4. Group Insurance Policy / Scheme are the contracts of continuing nature (similar to individual insurance policy / contract). However, a Group Insurance Contract lasts long beyond the life time of any one individual. New persons are added to the Group (thus the members of that Group are insured with the specific pre-consideration of the eligibility for the membership of the Group thus covered under the Group Policy) from time to time and exit from the Group resulting the termination of life cover for a specific member.
12.5. In an individual scheme of Life Assurance- it is the volition of the proposer to propose and the willingness of the insurer to accept that leads to the conclusion of the contract of assurance. In group Insurance, once the group is accepted for assurance, it is a requirement that all or substantially all eligible persons in a Pre-scheduled (i.e. defined) Group should participate in the scheme. In non-contributory arrangements, all employees or tall employees in a given class must be insured.
12.6. In an individual assurance scheme, a policy evidencing the contract is issued to the Life Assured by the Life Insurers. In a Group Life Insurance Scheme, a master Policy is containing the names of all members of the group covered are issued & handed over to the Group Representative – like, an employer, or trustees, or a trade union leader, or a senior executive of the Employees’ Union / Association.
12.7. In a Group Life Insurance Policy – there is no scope for any assignment or nomination unlike in an individual assurance policy.
12.8. In a Group Life Insurance Policy, the Life Insurer pays the claim money / amount to the Group Representative – like, the employer, etc., and not to the individual claimant whose life was assured or the representative of the victim’s family or his/her authorized nominee.
12.9. In some cases, Insurers issue the Insurance Certificates to individual members of the Group selling out the terms of the (Master) Policy, the Sum to be paid at the death, the conditions (if any – at all required) which apply in the event of the employee leaving the service of that particular employer. These certificates are of no legal value but are issued having an eye on publicity and public relation activities.
12.10. Group Policies are generally contain an option whereby individual employees who leave the service of the Employer of the Group Assured before attaining a specified age of retirement may affect assurance on their own lives under the Insured Company’s ordinary tables without medical examination – but no such choice should be allowed ever for the Individual Life Insurance Policy holder.
13. Insurable Interest applicable for any Group Life Insurance Policy / Scheme:
13.1. Here the law requires that for a valid insurance contract the person on whose behalf the Life Insurance Contract is made must have to have the insurable interest in the subject matter of the contract (i.e. on the life of the proposer – himself / herself, or on the life of his/her spouse, on the dependent children or the dependent parents. Otherwise it will tantamount to wagering contract and hence to be considered as legally void. Such person here is not necessarily the person who is nominal holder of a master policy in case of group Life Insurance Scheme. The Insurance Act, 1938 is silent on what is the effect on a life insurance policy if the person taking out a policy has no insurable interest in the subject matter of the policy. For that, here we need to take a reference to the Indian Contract Act, 1872.
13.2. In case of a Group Insurance Policy / Scheme, generally it is the employer who is taking insurance on the lives of his employees. A master has the insurable interest in the life of his servant to the extent of the values of the services agreed to be rendered; but in these cases of Group Insurance Policies, the beneficiaries under the Policy are the employees themselves or their legal heirs.
13.3. The objectives of a Group Life Insurance Policy is to give a measure of protection to employees as a part of service benefits. When death intercepts an employee’s working life, particularly in the early years of his / her life, the truncated accretions to his credit in the provident fund and the gratuity secured in respect of past service may not measure up to provide adequate financial support to his family. In other words , it enables the concerned employees to ensure the payment of predetermined sum of money to the bereaved family of the employee, if he / she unfortunately dies in harness.
13.4. It is, therefore, observed that the scope of the principle of insurable interest is considerably widened in modern recent times when it has become a tool of socio-economic welfare providing benefit to a segment of population. This principle is applicable and therefore, extended to other types of groups such as creditor-debtor group, Trade unions and associations of persons, etc.
14. Development / Implementation of Group Life Insurance Policy / Scheme:
14.1. In the initial stages bulk of Group Life Insurance business written mainly was “One year renewable Term Assurance Plans”. Both the contracting parties have the option to renew or decline the Group Insurance Scheme. As the name itself had suggested that the plan was a term assurance plan, occasionally Group Life Assurance was given on Endowment Plan / Scheme also.
14.2. Now since the development had taken place in Social Welfare Legislation – some effects have also been enunciated in Group Insurance Policies / Schemes – like the following:
I. After the passage of Payment of Gratuity Act, 1972, there was increasing demand for Group Gratuity Life Assurance Schemes;
II. The introduction of Employees’ Deposit -linked Insurance Scheme 1976 assisted to develop Group Insurance Scheme in lieu of the Employees Deposit Linked Insurance Schemes.
III. Group Life Insurance for non-employee groups like milk-producers, toddy tappers, handloom weavers, beedi rollers, fishermen, taxi drivers, e-rickshaw drivers, etc.
IV. Group Insurance Schemes are also activated based on Superannuation Schemes of different types and varieties.
V. Now the most current & highly utilised Scheme that is affected in the Indian Life Insurance Market is Group Savings Linked Insurance Schemes.
15. Importance of Disclosure of Material Facts in Group Life Insurance Policy / Scheme:
15.1. It is the responsibility of the proposer to voluntarily disclose all material facts relating to the subject matters of insurance and as proposed by him / her for insurance coverage & detailed information being written in the Proposal Form submitted by him/her to the Life Insurer before issuance of the necessary Policy & commencement of the insurance cover begins. It may also been noted that in Group Life Insurance Policies or in case of Superannuation Policies, generally the authorised employees or trustees are the proposers.
15.2. In Group policies the Life Insurers often impose certain conditions on the Group for becoming eligible for the coverage under a scheme and they are –
a) The Group must have been formed and maintained for purposes other than obtaining insurance coverage;
b) There should be a steady stream of new entrants into the Group so as to ensure its continued existence;
c) Amount of insurance should be determined by a method which precludes individual selection;
d) Safeguards need to established to produce a normal distribution of risk and to avoid the inclusion of undue proportion of the total insurance of the Group of unhealthy lives or of lives of advanced ages;
e) There should be a single administrative organisation able and willing to act on behalf of all the insured members of the Group.
15.3. The governing principle that both sides to the Group Life Insurance contract must observe ‘uberrima fides’ in Life Insurance is primarily to prevent any adverse selection against the Life Insurers. When the five conditions (as mentioned under item no.15.2. stated above) operate; the possibility of the selection against the insurer being exercised is drastically reduced. The “Law of Averages” works to the advantage of the insurer in the case of Group Insurance. This enables the insurer to liberally underwrite risks in Group Life Insurance and not to be emphatic about disclosures of material facts. When the employer becomes the proposer, he/she will have little information to disclose and the insurer could ascertain as much information as is needed from the employer, employees and related others. This does not mean that insurer has abandoned his / her right to insist on evidence of health or collect information wherever needed. However, this becomes superfluous in a majority of cases of Group Insurance issued by the life insurers.
16. Benefits in Group Life Insurance Policy / Scheme:
16.1. Continuation of the Insurance Cover: Whenever, an employee is admitted to a Group Life Insurance Scheme the insurance benefits continues so long as the scheme is in force. It is the practice of insurers to give an option to the employers to continue the cover during temporary interruption like strikes, lockout or lay off. The continuation of cover can be further extended by mutual agreement between the employer and the insurer. On the expiration of the continuation period, the premium payments are discontinued and insurance cover is terminated.
16.2. Conversion Option in Group Policy: The Group cover ceases when an employee leaves his employment. However, an insured employee who leaves the employer’s service will have the right to convert his group cover into individual policy without having to produce any medical evidence. The conversion privilege is also given to an insured employee if the master’s contract is terminated or is amended so as to terminate the insurance cover applicable to his category of membership. However, this option is an arrangement between the employer and the Life Insurer and there is also likely some possibility in cases that some of the insurers may or may not like to allow this benefit of conversion depending on their experience & exposure to risk / loss experience.
16.3. Renewals are assured by the employers: In many of the Term Assurance Types of schemes the employer pays the premium without asking for the contributions from the employees. They are called as non-contributing schemes. One year Renewable Term Assurance Scheme is the example of such a non-contributory scheme. There may be an element of pure endowment premium added to the premium charged. Such schemes may be contributory or non-contributory. These schemes generally are renewable every year. There may be new entrants to the Group as well as Exits. Annually, the premium in all such cases needs to be recalculated and the amount collected. In case of ‘Experience Rating’ schemes, allowance may be given for the savings affected during the previous year’s operations, in the premium due.
16.4. Issues relating to Claims’ Settlements: Maturity claims in this Group Life Insurance Schemes pose little problem and the settlement of the claim is a routine kind of affair entailing far less trouble and expenses. Even death claims are settled on production of a death certificate and a statement by the employer or the trustee as the case may be. The payment cheque is immediately issued favouring the employer or the trust and sent along with a form of discharge to be completed. The Life Insurance Company is under no liability to the individual employee member or to his legal heirs. Employer or trustee may allow the nomination facility but this is purely an arrangement between the employer / trustee and the employee member. The ultimate destination of the claim amount is of no concern of the life insurer.
16.5. Releasing of the Disability Benefits: The maturity value type of disability clause provides for the payment of a sum equal to the insurance amount under Group Term, assurance in a lump sum or more often, in monthly instalments. The benefit will be sum payable when the employee is rendered totally and permanently disabled prior to certain age, say sixty years, before his /her retirement. Sometimes a minimum membership period is prescribed; say six months, for qualifying for the benefits. If death occurs before all the instalments shall have been paid, the commuted value of the remaining instalments will be paid to his/her beneficiary. Proof of continued total and permanent disability will be called for at certain stipulated intervals. If the concerned employee returns to work then he will be covered only for a reduced amount equal to the difference between the scheduled amount and the sum of the instalments already paid to the employee.
Extended death benefit type of disability clause provides for the payment of a sum equal to the insured amount during one year after termination of employment provided that the employee had been continuously and totally disabled from the date of termination of employment and death occurred before age of sixty-five.
Under another type of disability benefit, death claim will be paid in respect of death which occurs after termination of employment, regardless of the amount of time that had elapsed since such termination, provided that the insured employee, prior to age sixty (or sixty five – whatever is stipulated in the policy) becomes totally disabled and such disability continues from the date of termination of employment to the date of death. Initially a totally disabled employee is provided a one year extension of his Group Life Assurance Policy.
Another option available to an insured employee or his / her beneficiary in case he / she is deceased is that the amount payable on total and permanent disability can be received on instalment basis rather than in lump sum by the beneficiary or the legal heir.
17. Issues Relating to the Group Super- annuation Life Insurance Schemes:
17.1. In the context of the need for a regular income to support an employee or an individual during his/her retired life, there is a need for pension or annuity which stops only with the individual’s death. Hence, organised retirement benefits have become a part of our service oriented office job. The Group Superannuation Scheme is designed to provide regular income in the form of pension to the employee on his/her retirement from service.
The pension payable on retirement can be a Life Pension guaranteed for a period of 5, 10, 15 or 20 years so that in the event of death soon after retirement, the family will be entitled to the payment of pension during the balance of the guarantee period. Pension is also arranged to be paid throughout the life without any guarantee period with or without return of capital on death. Joint Life Pension Policy (where pension benefits are also available to the Spouse of the concerned employee) can also be provided by the Life Insurers in India.
17.2. In India, different types of Group Life Insurance Policies are designed by the insurers judiciously combining benefits payable on death of an individual and benefits payable on survival to a stipulated future date. In India we have one end a group Life Insurance Scheme as discussed above under which life insurance protection is provided during the entire service period of the employees – at the other end, Group Superannuation Schemes provide retirement pensions by means of deferred and immediate annuities. The legal aspects all that had been discussed till now in respect of Group Life Assurance Schemes with appropriate modifications – all apply to Group Superannuation Schemes too.
17.3. Moreover, Income Tax Act 1961 allows valuable concessions to the employers and the employees on the contribution paid into properly constituted schemes and on the benefits payable through them. These concessions have acted as an incentive to induce modern employers to get attracted, accept and adopt voluntarily – all these welfare schemes as offered by the Indian Life Insurers in the current era. Under retirement benefit schemes, which are recognised by the income-tax authorities, the basic requirement is constitution of an irrevocable trust fund to which the contributions are paid during the active service period of the employees. The contributions paid into the fund are invested by the trustees according to the pattern of investments prescribed by the Income-tax Rules 1962. It is well-recognised principle of taxation that under a retirement benefit scheme, either a tax free build up of retirement provision should be allowed and the emerging benefits taxed or alternatively, if the build-up is taxed, the benefit should be exempt from tax.
17.4. According to this principle, if the contributions and the interest income of the retirement benefit scheme are both relieved of tax, the benefit should emerge in a taxable form. If the benefits are not in a taxable form, the contributions and the interest income of the scheme may be subject to tax. Actually in practice, there may be some variations. They are basically derived from the General Principles of Taxation and deviations from these General Principle are in the nature of exceptions.
17.5. Here, Section 36 (1) (iv) of the Income-tax Act 1961 allows the ordinary annual contribution paid by an employer as a deduction from his income for the purpose of computation of profits and gains of business. As per the notification dated 21.10.1965 – long back the Central Board of Direct Taxes – the deductible allowance in respect of contributions which are not in nature of ordinary annual contributions, is restricted to 80% of amount actually paid by the employer and is allowed in five equal instalments commencing with the assessment year relating to the previous year in which the amount was actually paid.
17.6. Obviously the Employee’s contribution to a Group Life Insurance Scheme is eligible for tax relief under Section 88 of the income tax Act, 1961 together with the premium or policies of life assurance and deferred annuities (which do not provide for cash option) and such other approved contributions.
17.7. In terms of Section 17 (1) (ii) of the Income Tax Act, 1961, all annuities and pensions payable to the employees from approved superannuation funds whether they are life-annuities, guaranteed life-annuities or annuity certain, are all taxable in the hands of the recipients as salary.
17.8. So far as the Gratuity Schemes are concerned – the provisions relating to approval of Gratuity Funds are set in Part C of the IVth Schedule of the Income Tax Act 1961 and Part XIV of the Income Tax Rules 1962. The Income Tax benefit will accrue to the employees’ only if the fund is approved by the Commissioner of Income Tax under Part C referred as above.
18. Conclusion :
Underwriting of group policy is made up of many sub-processes that are dependent on many external and internal entities and functions respectively (e.g. insurance agent / corporate agent, outsourcing personnel who undertake data entry job, the authority who decides about the terms & conditions specifically applicable for group policy to be allowed, etc. and consequently, it brings alongwith it, a lot of challenges. In the process of group insurance underwriting (i.e. assessing, selection and classifying of lives, etc) in an insurance company faces many challenges now-a-days due to stiff and cut-throat competition of our de-tariff market.
Now-a-days lots of challenges are faced in group underwriting because of the following reasons:
1) The legislative and taxation framework and the dynamic regulatory environment make the framing / modification of the underwriting norms definitely challenging.
2) Thin profit margins kept by the insurers to ensure competitive pricing of premium and staying ahead in the product rat-race has created a lot of challenges in executing prudent underwriting and actuarial doctrines in its original form.
3) Socio-economic differences and practices of underwriting group insurance across the globe have resulted in differential practices and processes posing typical underwriting challenges.
4) The ever-growing demands from the group policy prospects for having a cheap product, excellent customer-service coupled with the challenge of maintaining prudent risk management norms too have a direct impact on the underwriting process of these group policies.
5) The dependency on external agencies who assist the insurance sale process (e.g. third party administrators which include diagnostic centres, medical examiners, laboratory personnel and methods used by them in rendering their services, the new business service providers like the data-entry outsourcing agencies, etc. – all pose a great challenge at the risk evaluation & underwriting process. The regulators (IRDA) have recommended certain prudent risk-control measures for insurance business, which would ensure that certain potential risks are either eliminated or to a large extent minimised.
6) Stiff competition amongst the insurers to make their group products easy to market, is necessitating customised underwriting rules to make them customer-friendly. This too poses a challenge at the pricing stage of group product and containment of risks of early claims. Enhancement of non-medical limits may sometimes lead to insuring bad lives at inadequate premium rates. It is good to offer lower premiums to good risks and to charge adequately for sub-standard risks, but offering very high non-medical limits put severe constraints on these risk control mechanism.
7) Automation of the group insurance underwriting process carries an inherent challenge of managing risks through the system, with minimum human intervention in the processes involved in the group policy issuance stage. While automation of underwriting helps in ensuring faster turn-around times and help reduce costs of employing large teams for underwriting large group business volumes, the complexity of underwriting rules for group products based on rule-based criteria could throw up technical errors which may easily pass of validation rules and emanate in the form huge financial risks. Hence, extensive validation tests and reporting along with a close-monitoring of the group underwriting processes is inevitable.
8) Difficulties exist in getting appropriate and accurate documentation on financial or medical facts of the life to be assured under a group policy – specially, thereby, making a fair risk assessment a difficult one. In the absence of a well documented case file with the evidence of how a case was handled in chronological sequence (including the administrators’ conversation) on the Underwriting Review Sheet / Underwriting Work Sheet to justify risk classification, there could be legal disputes, especially in the event of an early claim. Such cases, sometimes, could prove to be potential threats to an insurer, as the decision making bodies like the Ombudsman / courts could hold the insurer liable to pay the benefits to the claimants, as the case documentation on the underwriting sheet may be proved to be inadequate to support such repudiation of a claim.
9) Non-disclosures / misrepresentation of information and facts at the point of group insurance sale (either by the customer / agent / as a nexus in the medical evaluation process), impact the underwriting decision and terms of acceptance of the group insurance policy. This could, in turn result in denial / repudiation of claim benefits at the point of a death claim, based on the extent of non-disclosure and its overall impact on the underwriting decision taken at point of sale of group products.
References: Different contemporary discussions & information as collected & collated from various text materials available online & in hard copies.
