The Sunday Mail
‘Paid Up Policy’
Definition: Life insurance policies usually last the insured’s lifetime, but some policies can be paid up completely till a specified age. A life insurance policy in which if all the premium payments are complete and the insured is free of all payment obligations, the policy stays intact until insured’s death or termination of the policy is called paid-up policy.
Description: Paid-up policy falls into the category of traditional insurance plans. The sum assured is limited to the paid-up value. It is calculated as the ratio of number of premiums paid to the total number of premiums that were supposed to be paid according to the policy multiplied by the sum assured at maturity.
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‘Insurability’
Definition: The characteristic of being acceptable for insurance is called insurability.
Description: Insurability of an individual or object is ascertained depending upon the norms and policies of the insurance company. The various factors that are taken into consideration include risk profile, life expectancy, proneness to disease, injury or accidents, etc.
In case of discovery of a very low insurability, the application is said to be uninsurable. This is especially important for the health of the insurance business in the long term as this mitigates the risk of loss associated with adverse selection.
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‘Life Assured’
Definition: Life assured or insured is the person(s) whose life is covered in the insurance contract.
Description: In the event of a contingency, the insured can claim the amount or in the event of the death of the assured, the nominee will receive the insurance amount.
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‘First Unpaid Premium’
Definition: First time default on premium payments by a policy holder is termed as First Unpaid Premium.
Description: With each premium payment a receipt is issued which indicates the next due date of premium payment. If the premium is not paid, this date becomes the date of first unpaid premium.
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Underwriting Risk’
Definition: Underwriting risk refers to the potential loss to an insurer emanating from faulty underwriting. The same may affect the solvency and profitability of the insurer in an adverse manner.
Description: Underwriting is a critical risk mitigation mechanism adopted in the insurance industry. The process helps in deciding the appropriate premium for an insured.
The underwriter needs to match the premium received with the claims paid with an eye on profitability.
In the event of a dichotomy between the two, with the premium received not sufficient enough to cover the claims, the insurer is confronted with the probability of loss.
The premium charged by the insurer must incorporate the risk premium that covers not only the claims but also the capital requirements, also called the solvency requirements. In the event that the matching is not done in a pragmatic manner, the underwriting risk arises.
