SUBJECT: RISK MANAGEMENT AND INSURANCE

SUBJECT CODE: 18MBA402

Faculty
Dr.T.Manjunatha
Professor
Dept. of M. B. A
Email: tmmanju87@gmail.com

VISVESVARAYA TECHNOLOGICAL UNIVERSITY

University BDT College of Engineering.
DAVANAGERE–577004, Karnataka

2021
 MBA, IV Semester
Risk Management and Insurance Syllabus
Subject Code: 18MBAFM402 IA Marks: 40
No. of Lecture Hours / Week: 05 Exam Hours :03
Practical Component : 02 Hours / Week Exam marks: 60
Objectives:
• To provide an understanding of different types of risk.
• To provide an understanding of the risk identification and measurement.
• To give an overview of role of Insurance in risk management.
• To comprehend insurance contracts such as Life Insurance,
general insurance and marine insurance.
• To provide an understanding of the management of insurance companies.
Course Outcome:
At the end of the course, the students are able to:
 Understand the process of identifying the risk.
 Recognize the complexities involved in risk identification and measurement
 Be acquainted with the function of Insurance in risk management.
 Be aware of various types of insurance contracts.
 Understand working of insurance companies.
Unit 1: (10 Hours)
Introduction to Risk Management and Risk Identification:
Risk, Risk and Uncertainty, Types of Risk, Burden of Risk, Sources of Risk, Methods of
handling Risk, Degree of Risk, Management of Risk, Risk Management, Risk Management
Process Identification Loss Exposures, Analyzing Loss Exposures, Objectives of Risk
Management, Select the Appropriate Risk Management Technique Implement and Monitor
the Risk Management Program, Risk Management by Individuals and Corporations, Risk
Management Objectives, Need for a Rationale for Risk Management in Organizations,
Understanding the cost of Risk, Individual Risk Management and the Cost of Risk, Risk.
Management and Societal Welfare. Risk Identification, Business Risk Exposures, Individual
Exposures, Exposures of Physical Assets, Exposures of Financial Assets, Exposures of
Human Assets, Exposures to Legal Liability, Exposure to Work, Related Injury, Basic
concepts form probability and Statistics.
Unit 2: (8 Hours)
Risk Measurement, Evaluating the Frequency and Severity of Losses, Risk Control, Risk
Financing Techniques, Risk Management Decision Methods, Pooling Arrangements and
Diversification of Risk, Advanced Issues in Risk Management, the Changing Scope of Risk
Management, Insurance Market Dynamics, Loss Forecasting, Financial Analysis in Risk
Management, Decision Making Other Risk Management Tools
Unit 3: (8 Hours)
Introduction to Insurance
Risk and Insurance, Definition and Basic Characteristics of Insurance, Requirements of an
Insurable Risk,Adverse Selection and Insurance, Insurance vs. Gambling Insurance vs.
Hedging Types of Insurance, Essentials of Insurance Contracts. Indian Insurance Industry,
Historical Framework of Insurance, Insurance sector Reforms in India, Liberalization of
Insurance Markets, Major players of Insurance. Regulation of Insurance, Insurance Act
1938, eligibility,Registration and Capital requirement Investment of assets, Approved
Investments, Licensing of insurance agents IRDA Duties and powers of IRDA,IRDA Act
1999,IRDA regulations for general insurance, reinsurance, life insurance, micro insurance,
licensing of insurance agents, registration of insurance companies and protection of policy
holders interest.
Unit 4: (8 Hours)
Life Insurance
Basics of Life Insurance, Growth of Actuarial Science, Features of Life Insurance, Life
Insurance Contract, Life Insurance Documents, Insurance Premium Calculations. Life
Insurance Classification, Classification on the Basis –Duration, Premium Payment
Participation in Profit, Number of Persons Assured, Payment of Policy Amount, Money
Back Policies, Unit Linked Plans. Annuities, Need of Annuity Contracts, Annuity V/s Life
Insurance, Classification of Annuities.
Unit 5: (12 Hours)
General Insurance, Laws Related to General Insurance, General Insurance Contract,General
Insurance Corporation (GIC) ,Performance Private and Public General insurance companies.
Health Insurance, Individual Medical Expense Insurance – Long Term Care Coverage –
Disability Income Insurance – Medi,claim Policy – Group Medi,claim Policy – Personal
Accident Policy – Child Welfare Policy,Employee Group Insurance – Features of Group
Health Insurance – Group Availability Plan. Fire Insurance, Essentials of Fire Insurance
Contracts, Types of Fire Insurance Policies, Fire Insurance Coverage. Marine Insurance,
Types of Marine Insurance – Marine Insurance principles Important Clauses in Marine
Insurance– Marine Insurance Policies –Marine Risks, Clauses in Marine Policy. Motor
Vehicles Insurance, Need for Motor Insurance, Types of Motor Insurance, Factors to be
considered for Premium Fixing.
Unit 6: (10 Hours)
Management of Insurance Companies Functions and Organization of Insurers, Types of
Insurance Organization, Organizational Structure of Insurance Companies, Functions of
Insurers. Underwriting, Principles of Underwriting, Underwriting in Life Insurance,
Underwriting in nonlife Insurance. Claims Management, Claim Settlement in General
Insurance, Claim Settlement in Life Insurance. Insurance Pricing, Insurance Cost and Fair
Premiums, Expected Claim Costs, Investment Income and the timing of claims Payments,
Administrative Costs, Profit Loading, Capital Shocks and Underwriting Cycles, Price
Regulation. Insurance Marketing: Marketing of Insurance Products, Critical Success factors
for Insurance Players, Marketing Strategies in India.
Practical Component
1. Case studies on risk management and discuss how to analyse the cases and risk
involved and also managing the same
2. Practical questions will be given to measure the risk using some of the statistical tools
3. Students will be asked to take up ony five general insurance policies from a company,
do a basic analysis about their terms and conditions.
4. Students has to take up various schemes of life insurance policies and should
analyses their terms and condition and also taking up a case study and solve
5. students will be asked to make a group and case study will be given and asked for
 analysis of the case facts and figures and come up with the claim settlement
strategies.
6. Students will be assigned in a group to collect various types of insurance policies from
difference service providers and make an analysis of terms and conditions pertaining to
each type insurance
7. Visit the IRDA website and identify the rules and regulations governed by IRDA
with respect to Marketing of insurance in rural markets
Recommended Books:
1. Risk Management and Insurance, Scott E. Harrington, GrEgory R Niehaus, (2007),
Second Edition, Tata McGraw Hill Publishing Company Limited, New Delhi.
2. Introduction to Risk Management and Insurance, Dorfman, Mark S., (2008), 10th
Edition, Prentice Hall India, New Delhi.
3. Principles of Risk Management and Insurance, George E Rejda, (2009), Twelfth
Edition, Pearson, New Delhi.
4. Insurance and Risk Management, P.K. Gupta, (2010), First Edition, Himalaya
Publishing House, Mumbai.
5. Principles and Practice of Insurance, P. Periasamy, (2009), Second Edition,
Himalaya Publishing House, Mumbai.
Reference Books:
6. Risk Management and Insurance, C. Arthur Williams, Jr. Peter Young, Michael
Smith, (2007), Eighth Edition, Tata McGraw Hill Publishing Company Limited,
New Delhi.
7. Risk Management and Insurance, James Trieschmann, Obert Hoyt, David Sommer,
(2008), Twelfth Edition, Cengage Learning, New Delhi.
8. Risk management and Insurance: New Perspective in a Global Economy”, Harold
D. Skipper, W. Jean Kwon, (2008), First Edition, Wiley India, New Delhi.
9. Fundamentals of Risk and Insurance, Emmett J. Vaughan, Therese Vaughan,
(2007), First Edition, Wiley India, New Delhi.
Unit 1
Introduction to Risk Management:
Concept of Risk: Risk Management has recently received increased attention in corporate
sector. Risk means, different things to different people. The experts defines the term ‘risk”
in different ways. To some people it is the chance or possibility of loss but to some others it
may be uncertain situations or deviations or what statisticians call dispersions from the
exportations. However, in most of the terminology the term risk includes exposure to
adverse situations. So “risk” is a condition in which there is a possibility of an adverse
deviation from a desired outcome that is expected or hoped. At its most general level risk is
used to describe any situation where there is uncertainty about what outcome will occur.
Life is obviously risky”.
Risk is an essential part of the business, every business under taking is faced with multitude
of risks, which are, inherent in business and is inevitable. Business decide on making in
general is based on assumptions, exportations estimates and forecasts of future unspecific
events. In business, risks include changing in demand, price falls, change in desire and taste
of consumers, change in market conditions, high competitions, new inventions, fire, natural
calamities, accidents etc.,
So, the Risk Management can be seen as the task of handling and contra thing risks,
requiring management to take preventive and corrective measures. Risk Management
involves identification of risk, evaluation as risk, selecting appropriate device of handling
risk and Executing the diversion to prevent the risks.
Risk and Uncertainty: The concept of risk may also be explained as the possibility of
unfavorable results following any occurrence. Risk, arises due to uncertainties, although
many a times the term uncertainty is confused with risk. Uncertainty refers to a situation
where the outcome or result can only be estimated but cannot be predicted with pre,vision.
Decision under uncertain situations is obviously very difficult and depends not only upon
individual's skills, power of judgment but to a great extent upon luck too. But the risk refers
to the likelihood of occurrence of an event. It is a measure of occurrence with which the
outcome of a chance event can be predicted. Thus, unlike risk, uncertainty is not calculable
and consequently not insurable, although it is uncertainty which is the major cause of risk.
Uncertainty is a state of mind and contains an element of doubt as it is based on lack of
knowledge about what will happen or what will not happen in future. Concept of Risk may
also be distinguished from concept of perils and hazards. Peril means a serious and
immediate danger. It refers to the cause of loss or a happening causing a loss. Hazards on the
other hand refer to the conditions that increase the severity of loss. So, peril is used for loss ,
producing events and hazards for an aggravating factor magnifying the impact of loss.
Importance of Risk Management: Both human and business life is full of risks of various
kinds as consequence of uncertainties surrounding the future. Managing risk is significant in
ensuring social, political and economic development of a country. The importance of risk
Management can be discussed as follows:
1. For developing appropriate business policies and strategies.
2. For effective management of resources
3. For evaluating and appraising events that can have a bearing on the operations of the
business.
4. For developing plant and procedures to minimize handle and manage such
risks ensuring smooth functioning of business.
5. For avoiding costs, disruptions and ineffectiveness thereby ensuring maximization of
stock holders wealth. The significance of risk management lies in the fact that it helps the
business organization to tackle all those risks which can threaten the assets or earning
capacity of the business. So, this brings us to the questions what is meant by risk? What are
the various types of risks, what are the burden of risks or losses and chances of losses, and
what are their causes? The above factors are required to be analyzed and would attempt to
find the answers to those questions in the next sections those we are studying in detail.
Types of Risk and Nature of business
a) Types of Business Risks:
Risk can be classified based on several Dimensions.
1) Financial and Nonfinancial risks
2) Static and Dynamic risks
3) Fundamental and Particular Risks or Group and Individual risk.
4) Pure and speculative risks.
5) Internal and external risks.
 6) Insurable and Non insurable risks.
1. Financial and Nonfinancial Risks: If the risk is concurred with Financial Loss it is
termed as financial risk. Financial risk involves the simultaneous existence of three
important verticals of a risky situation.
a) Someone is adversely affected by happening of an event.
b) The Assets or Income is likely to be exposed to a financial loss from the occurrence of
an event.
c) Partly can cause the loss. Example: Loss occurred in case of
damage of property, theft of property, loss of business.
Financial risk is when output / loss can be measured in monetary term. When the possibility of
financial loss does not exist, the situation can be referred to as non,financial risk in nature for Eg
risk in selection of career, Risk in the choice of course of study etc., they may or may not have
any financial implications. These types of risks are difficult to measure.
2. Static and dynamic risk: Static risks are those risks which would occur irrespective of any
changes in the economy, such risk results in destruction of an asset or change in its
possession. They are a consequence of human factors like, dishonesty of workers, natural
calamities etc. These risks are more or less predictable as they have the tendency to occur at
regular interval of time. Static risks can be insured, Dynamic risks are a course of change in
the economic environment. There are less predictable than static risks, as they do not have a
defined pattern of occurrence. For Eg: price level changes, technology changes, change in
consumer's tastes etc., may cause financial loss to business enterprise.
3. Dynamic risks are not covered by insurance.
Static Risk Vs Dynamic Risk.
Static Risks Dynamic Risks
Loss can be predicted Losses are not easily predictable
These occur even if there is no change in There results from the changes in
economic environment economic environment
These can be covered by Insurance These are not covered by Insurance
These risks do not benefit the society These risks may benefit the society
4. Fundamental and Particular Risks or Group and Individual risk. Fundamental / Group
risks affects the economy or a large section of the population at the macro level. They are
the consequence of risk beyond the control of Individuals who suffer the losses. Thus, it is
society and not an individual who is expected to deal with such risks. They are impersonal in
origin and absent caused by the fault of any particular individual and may be caused by
economic, social cultural political and natural factors. Eg: Earthquake, floods, war, inflation
and unemployment. Particular/ Individual risks are personal in origin they are caused by the
fault of particular individuals. They cause losses only to a few individuals, such risks are
expected to be dealt with by individuals rather than the society for Eg: burning of a house /
factory, bank robbery, burglary, theft are particular risks.
5. Pure and speculative risks. Pure risk refers to a chance of loss without any possibility of
gain to the individual. For Eg, when a fire breaks out, it can any cause loss and no gain same
way where a car is insured against accident, the insurance company is liable to compensate
the loss, if the accident occurs, but if the accident does not occur the insured does not get any
benefit or gain.
In case of speculative risks, it implies a situation which involves not only the chances of loss
but also a possibility of gain as well. For Eg, investment in stock market may bring either gain
or loss to the investor, other examples of speculative risks includes change in demand, price
fluctuations, and change in fashion and tastes and so on.
Differences between Pure and Speculative risks
Pure Risks Speculative Risks
Pure risk may or may not cause Speculative risks may cause
losses, but they never cause gain either loss or gain
Pure risks are generally insured Speculative risks cannot be
insured
Pure risks are inherent in business. Speculative risks are assumed
They by
cannot be avoided. One can at best entrepreneurs in the hope of
try to minimize their adverse making profit.
impact
Pure risk and its Management:
Pure risks may further be classified into following categories
Pure Risks

Personal risks (2) Property Risks (3) Liability risks.

Personal risks are the risks directly affect the earning capacity of individuals. The personal
risk includes, premature death of an earning members or old age, which affects the financial
status of the family / business.
Property risks refers to the risk of having the property damaged or lost because of fire,
flood, earthquake, theft of property etc., losses due to property risks may be direct or indirect.
Direct loss is the physical loss or damage to the property and indirect loss is the financial
loss consequently to the loss of income from, the property. Eg.: A house destroyed due to
earthquake is a direct loss and the rent income earned by the owner is an indirect loss.
Liability risks Refers to the risks arise due to intentional or unintentional injury caused to
the persons or damage to their properties or due to loots or invasion of the rights of others, for
which one is liable to pay damages or compensation, liability generally arises from the legal
provisions.
Internal and External Risks: Internal risks are caused by the internal events associated with
the working of a business enterprise. However, forces belonging to the external
environment, affecting the particular business enterprise cause external risks. Workers strike,
breakdown of machinery, carelessness or dishonesty of employees, disharmony in worker and
Management relationship are examples of the internal risks adversely affecting the working
of an enterprise and likely cause losses. On the other hand, changes in the market conditions
distribution, production, technology and political environment, natural calamities, social
unrest are examples of the external risks which affecting its profit earning capacity. Internal
risks can be controlled with effective Management, but the external risks cannot be
controlled so easily.
Insurable and Non Insurable risks: Insurable risks are pure risks, which can be predicted
and the changes of their occurrence too can be determined. These risks can be shifted
through various types of Insurance policies covering the risk for Eg: Life Insurance, marine
Insurance, fire insurance, vehicle insurance, personal accident insurance, burglary insurance
etc.
Non Insurable risks are those risks which cannot be covered or shifted through insurance.
The occurrence of these risks cannot be determined. These risks are speculative in nature and
cannot be insured for Eg: Changes in demand, changes in supply changes in fashion, price
fluctuations etc.
(B) Nature of Business Risks: The following are the nature of business risks
Risk an essential element of business: Risk is inherent in every business and bearing of risk
is a fundamental condition of business. In fact, profit earning by the businessman is the
reward for undertaking the risk. Business risk is universal and it is inevitable, unavoidable
part of business.
Business risks are caused due to uncertainties: Business decisions are concerned with future
which cannot be predicted with 100% accuracy for Eg: Uncertainties like change in demand
prices, fashion, government plies, technology, and natural calamities cause risks in business.
Business risks vary according to the nature and size of business: All business cannot face the
same type of risk or degree on risk. Generally larger the scale of business activity, greater is
the risk. The level of risk also depends on the nature of the business.
Profit is the reward for risk bearing: No risk, no gain, is a well, known business quote,
Moreover the greater the risk, higher the profit earned by a business man for bearing the risk.
Evaluation of business risk is very difficult: it is extremely difficult to evaluate, measure or
calculate business risk accurately. Business risks arise due to many factors related to the
environment in which the business exists, for Eg: degree of competition, terms of sales,
competence of management etc.
Business risk cannot be eliminated: No business can absolutely avoid risk. But with
effective Management and accuracy in calculating the risk, can minimize the business risk to
a greater extent.
Burden of Risk on society
The presence of risk results in certain undesirable social and economic effects. Risk entails
three major burden on society namely.
Larger Emergency fund requirements: it is prudent to set aside funds for an emergency.
However, in the absence of Insurance Individuals and business firms would have to increase
the size of emergency fund to pay for unexpected losses.
Loss of certain goods and services: A second burden of risk is that society is deprived of
certain goods and services for Eg: Because of the risk of a liability of law suits many
corporations have discontinued manufacturing certain goods.
Worry and fear: A final burden of risk is that worry and tear are present. This mental unrest
and fear caused by risk Eg: parents worry about children's activities.
Sources of Risk or Causes of business risk: There are different type of business risks
which are caused by various factors. These factors are the root cause of business risk. Below
are the sources or causes of business risks.
a. Natural Risk / Natural Causes: Risks caused by the action of nature called natural risk.
Human being have no control over the nature and at the same time it is very difficult to
forecast natural calamities, with certainty for Eg: cyclone, tsunami, famine, earthquake,
excessive heat or cold causes heavy losses to Individuals and business.
b. Political Risk / Political Cause: Political causes include change in government political
stability, changes in Government policies prince regulations, unfavorable economic policies,
affects profit margins of business units.
c. Social Cause: Another source / causes of risk in business is changes in the social
environment and in consumer behaviour for Eg: Change in fashion, change in taste, change
in lifestyle, change in income patterns affects the profit earning ability of business.
d. Economic Cause: There are increase in cost of raw materials, inflation, rate of interest,
reduction in demand, sever competition, trade cycle, etc., are the factors causing business
risks.
e. Managerial Cause: Success or failure of the business depends on the efficiency of
Management, for Eg: Inefficient handling of business, disharmony between workers and
Management.
f. Competitive Cause: Unforeseen increase in the level of competition can threaten not only
the growth and expansion but also survival of business.
g. Technological Cause: Advanced technology may rend the old technology as obsolete
cause’s financial losses for organizations carrying on with old technology.
Methods of handling risk
Risk is a burden not only to an Individual but also to society as a whole. It is important to
examine the causes of risk. Let us look into important techniques of handling the risk. The
following are the major methods of handling risk.
a. Avoiding Risks: One can avoid risk by avoiding the causes of risk. Avoidance of risk is a
preventive method of handling risk, of course “prevention is better than cure”. A person or an
organization may avoid getting involved in the action that may give rise to risks; Risk may
also be avoided by adopting a safer alternative, but it may not always be possible to avoid
risks particularly when no alternatives are available.
b. Reducing Risks: It is not always possible or viable to avoid risks, Loss prevention and
control is a commonly applied method of reducing risks. Actions that reduce the expected
losses by reducing the frequency of losses and / or the acuteness of losses that occur are
termed as Methods of loss control or alternatively methods of risk control for Eg: losses from
thefts, shape lifting etc., can be minimized by giving effective training to the employees and
by employing burglar alarms, night watchman and safety vaults.
c. Shifting Risks or transferring risks: There are several risks which can neither be
avoided not even reduced. However attentive can be made to shift or transfer such risks to
those who are willing to bear the risk, through various methods, such as,
(a)Underwriting: A public co, issuing shares and debentures faces the risk of loss due to
under subscription, of its issues. In case of the first issue made by the public co, it is legally
required to raise the minimum subscription. Failure to do so will lead to winding up of the
company. This risk can be shifted to an underwriter. Underwriting is an agreement entered
into between the promoters of a public co., and underwriters, where by the underwriters
undertake to buy the securities not subscribed to by the public, in consideration of a
specified commission.
(b) Sub Contracting: Long term contracts, requiring specialized services of several experts
involve the risk of increase in prices of inputs. These risks are best tackled through
subcontracting some operations reprocess in contract for Eg: Building contractors generally
engage subcontractors for plumbing work, electric work, wood work etc.
(c)Sharing or spreading risks: Company farm of business ownership and joint ventures are
the typical example of sharing or spreading risks. In the company investments by a large
number of persons is pooled and thereby the risk is spread over a number of shareholders.
Thus, the risk of business loss of the co. is shared by large number of shareholders up to the
extent of shareholding in company’s capital. Joint Ventures are formed between business
allies undertaking technical or financial ventures that involve high degree of risks. The risks
get spread over the partners in the joint venture who share such risks.
(d)Hedging: Hedging is the process of entering simultaneously into two contracts of an
opposite but equivalent nature (one in the spot or cash market and the other in the future
market) to protect against losses due to fluctuations in commodity prices. Risk transfer in
this case is accomplished by buying and settling for future delivery where by the dealer is
protected against the risk of decline or increase in market price of the product between the
time it is bought so the time of selling it. Ways of Hedging are Forward Contract, Future
Contract, Options & Swap.
d. Insurance: Insurance is a social device where by the risks of individual entities are
shifted to or transferred to insurers who agree for a consideration called the premium to
assume to a specified extent, losses suffered by the insured.
e. Risk retention / assuming the risk: Failure of finding any better alternative of handling
the risk may compel the businessman to assume risk, retain risk& live with risk. Risk may
be retained / assumed voluntarily otherwise. In general risk retention or assuming the risk is
appropriate for low severity risks, where potential losses are relatively small for Eg: Owner
may retain the small part of the risk of Damage to the house, (small repairs) or a motorist
may wish to retain the risk of law of severe accident.
f. Financial Risk and its Management: Financial risk is that a company does not have
adequate cash flow to meet financial obligations. In a corporate financing context financial
risk is an additional risk a shareholder bears when a co, uses debt in addition to equity
financing companies that issue more debt instruments would have higher financial risk than
companies financed mostly or entirely by equity.
a) Sources of Financial Risk: An organization may be faced with the following financial
Risks: Risk arising from organizations exposure to changes in market prices viz., interest
rates, exchange rates etc., Risk arising from action of and transactions with other
organizations such as vendors, customers and counters parties in derivative transactions.
Risk arising from internal actions or failures of the organization, particularly people,
processes and system.
b) Classification of Financial Risk:
i. Credit: Credit risk is the risk that a customer counter party, or supplier will fail to meet its
obligations, normally credit risk is faced by lending institutions like Banks, Investors in
Debt, instruments of corporate houses. There are independent agencies that assess the credit
risk in the form of credit rating.
ii. Market: Market risk is the risk that process will move in a way that has negative
consequences for a company. Market risk is the change in value of assets due to changes in
the underlying economic factors such as interest rates, exchange rates, macro, economic
variables, stock prices and commodity prices.
Operational risks are risk with people, processes or systems, practically speaking all
organizations face operational risks, and operational risks may cause losses due to mistakes,
failure to meet regulatory requirements.
iii. Other: Other risks are extensions of the above, mentioned categories viz. Business risk is
the risk that future operating results may not meet expectations and also organizational risk is
the risk that arises from a sadly designed organizational structure or lack of sufficient human
resources.
Risk management and Risk management process

Role of risk Management: The future is largely unknown, most business decision making
takes place on the basis of expectations about the future. Making a decision on the basic of
assumptions, expectations estimates, and forecasts of future events involves taking risks.
Risks has been descried as the “sugar and salt of life”. This implies that risk can have an
upside as well as down side people take risk in order to achieve some goals, they would
otherwise not have reached without taking that risk. On the other hand, risk can mean that
some danger or loss may be involved in carrying out an actively and therefore care has to be
taken to avoid that loss. This is where risk Management is important in that it can used to
protect against loss or damage / danger arising from a risky activity.
Definition: “Risk Management is an integrated process of delineating specific areas or risk,
developing a comprehensive plan, integrating the plan and conducting on going evaluation”.
Risk Management Process: The risk Management process is a systematic approach by
which an organization can identify and manage its exposures to risk, in ways that best fit its
strategic goals. Corporate and non, corporate entities have designed their risk management
programs around the process and it has recently been adopted for use in the enterprise risk
management initiatives of many firms. The risk Management process involves the following
logical steps.
1. Define the objectives of risk management excrete (Goals of Risk management function)
2. Identify the risk exposures/ potential loss Exposures.
3. Evaluating the exposures / analyzing Loss exposures
4. Critical Analysis of risk management alternatives and selecting one of them
5. Implementation and review (Implement techniques and Monitor effectiveness)

Define objectives of risk Management / Goals of Risk Management Function: The first step
in the process is to set the objectives of the risk Management function, so they are consistent
with the strategic goals of the organisation. The objectives of a multinational corporation are
often different from goals of a non,profit charity. Risk Managers across all disciplines
generally share a common goal, i.e., to ensure that the organization will survive if it suffers
significant financial loss. Most risk Managers also strive to minimize the chance that an
unexpected event will disrupt the normal operation of their organizations or impede its
growth once these basis objectives have been satisfied many organizations tailor their risk
management goals to fit their unique characteristics and capabilities. So, the objects of Risk
Management have three elements they are (a) Risk Analysis (b) Risk Control and (c) Risk
Financing.

All three elements of the process have to be continuing reassessment and monitoring of the
results.
Identify potential Loss Exposures (Identify the risk Exposures): After setting its
objectives, the risk management department must next identify are possible Exposures to
loss. The risk / loss, identification requires knowledge of the organization on the market in
which it operates, the legal, social, economic, political and climatic environment in which
does its business, its financial strengths and weakness, its vulnerability to unplanned losses,
the manufacturing processes, and the management, systems and business mechanism by
which it operates. Any failure at this stage to identify risk may cause a major loss for the
organization. It is difficult to summaries the wide variety of loss Exposures, because the risk
Exposures vary dramatically across firms and industries. A common approach to pure risk
identification, identifies four distinct type of risks namely
Property risks, are losses to a firm that results from destruction of or damage to property
including tangible property and intangible property. Liability risks are loss Exposures in the
form of monetary judgments by the negligent acts. Human resources risks are losses incurred
by the firm as a result of death, injury or discontinuation of employment of key employees
Indirect losses are financial losses, due to reduction in revenues due to property or liability
loss. There are various methods of risks identifications like, checklist method, financial
statement method On site inspection, interaction with others, contract analysis, statistical
records of losses etc.,
Evaluation of Risk Exposures and Analyzing Loss Exposures: Risk evaluation breaks
down into two parts the assessment of, the probability of loss occurring and Measuring its
severity. After identifying the loss Exposures or the organization the risk management dept
must next take steps to quantify the financial impact of each aspects. In order to quantify risk
“Value At Risk” is the most popular measure, to forecast the future VAR measures the work
expected loss over a given period under the normal market conditions at a given confidence
level. In its most general form the value at Risk measures the potential loss in value f a risky
asset over a defined period for a given confidence interval. Measuring the severity is
difficult task. The risk Management department does neither know whether the loss will
occur nor does they know the size of the loss if it occurs. Two quantitative measures of the
loss Exposures are especially useful. The frequency of the loss Exposures and the severity of
the loss, the frequency of the loss exposure measures the numbers of losses that might occur
over a given period of time. The severity of the loss is a measure of the size f the loss, if the
loss is assumed to occur. The risk management dept. often will rely on the firm’s prior loss.
Experiences to estimate future loss frequency and severity
Choose/select Risk Management Techniques: (Risk Handling Techniques): The
methods that organizations can choose to deal with their loss Exposures are referred to
collectively as risk handling techniques. A variety of risk handling techniques are available
and management often use more than one to address a specific loss exposure. These
techniques often are categorized into three broad categories, i.e., loss control, loss transfer
and loss financing.
Risk control / Loss control: Risk control covers all those measures aimed at avoiding
eliminating or reducing the changes of loss, producing events, occurring or limiting the
severity of the loss that do happen. Here one is seeking to change the conditions that bring
about loss producing events or increase their severity. Loss control can be exercised into two
ways. (1) One way is to enhance and monitor the less of precautions taken to minimize the
losses due to exposure (2) Secondly to control the minimize the risk operations, internal risk
control techniques include diversification and / or investment in getting information of loss
Exposures so as to control them.
Risk transfer / Loss Transfer: Risk transfer implies that the exposed party transfers whole
or part of losses consequential to risk exposure to another party for a cost. The insurance
contracts fundamentally involve risk transfer. Apart from the insurance, there are certain
other techniques by which the risk may be transferred.
(1) Insurance is a contract of transfer of risk. The insurance co agrees to indemnify the
losses arising out an occurrence pre,determined and charges for this act called as
“premium”. The insurance method of risk transfer is most appropriate, when the severity of
loss is very high
(2) Non insurance transfers: The most common methods are (a) Hold harmless
agreements or indemnity agreements are contractual relationships specifying that all losses
shall be borne by the designated party. Eg: A land lord contracting that all losses shall be
borne by the tenant.
(b) Incorporation is another method for Eg: Proprietorship or partnership can convert
themselves into public companies, to share the loss or liability among shareholders.
Loss Financing/ Risk Financing: When the risk exposure for an organization exceeds the
maximum limit that the organization can bear it becomes necessary to either transfer or
reduce risk. However, this is a cost involved in both of these exercises. It has been
recognized that in the long run, an organization will have to pay for its own losses. The
primary objective of risk financing is to spread more evenly over time cost of risk, in order
to reduce the financial strain and possible insolvency which random convince of large losses
may cause. The secondary objective is to minimize risk costs. Identically an organisation can
finance its risk cost in three ways. Losses may be charged as they occur to current operating
costs or providing may be made for losses, either through the purchase of insurance or
building up a contingency find to which losses can be charged.
When losses occur, they may be financed will loans, which are repaid over the next few
years. Risk financing / loss financing includes the following alternatives
(a) Risk Retention: Risk retention implies that the losses arising due to a risk exposure
shall be retained or assumed by the organization. Risk retention is generally a better decision
for business organisation inherited with the following characteristics
(A) The consequential losses are small and / or
(B) The losses shown as operating expenses can be funded with retained profits.
(b) Self insurance: Self,insurance acts as an alternative to buying insurance in the market or
when part of the claim is not insured in the commercial market. It may be done by keeping
aside funds to meet insurable losses.
Implement and Monitor the Risk Management Program: Risk Management department
in the organisation involves implementing and risk handling methods selected by the firm.
The risk management environment changes rapidly, large organizations constants,
introduces new products or services, acquires or sells operations, and adjust their capital
costs. Markets for insurance and non,insurance techniques also are subject to significant
fluctuations in prices and supply. Changes in insurance and risk management and also can
require quick adjustments in risk management strategy. For all these reasons the organization
must continually monitor and occasionally adjust their firm’s methods of handling risk.
Risk management by individuals and corporations:
Risk Management by Individuals: Risk Management is an indispensable tool since it is
considered as a complex task that requires a lot of analytical skills for its effective risk
Management program. It should be reviewed periodically to analyses whether the objectives
are been met.
Individual risk management refers to the identification of pure risk faced by all individual or
facing and to the selection of most appropriate technique for treating such risk. In order to
reduce risk element certain basic steps have been allowed under individual risk management
process:
Identification of potential loss
Identification of potential loss: The losses identified may be personal risk, property risk,
liability risk. Risks may be losses of carved income to the family because of pre,mature death
of family head or insufficient income and financial assets during retirement or loss of carved
income due to unemployment.
Property risks: May be direct physical damage to personal property like fire flood,
earthquake or theft of valuable like, money, vehicles, etc.,
Liability risks: May be legal liability are in gut of negligent operation, professional activities
etc.
Evaluation of potential losses, in frequency and severity of loss: Estimating the
frequency and severity of potential losses is the most appropriate technique which is used to
deal with the risk loss severity refers is the probable size of losses that may occur.
Selection of appropriate methods for treating losses Exposures: Third step is to select the
most appropriate technique for handling each potential loss. The major methods are loss
control by avoidance, risk retention, non insurance& transfer of risk etc.
Implementation and administration of the risk management programme: The risk
management program must be reviewed periodically to find out deviations. If the deviations
are significant it requires a modification or complete renewal of the whole model to manage
the risk.
Corporate Risk Management (Enterprise Risk Management): Risk Management
approach by business firm differs substantially from individuals. In case of business
organization following process of risk management modeling is generally followed
(1) To analyses the risk profit of the firm and the changes brought by fluctuations in the
factors that influence the cash flows relating to assets and liabilities.
(2) To restructure the factors depending on the nature of risk and organizational strategies to
manage.
(3) To develop a model dynamically in a nature which keep a continuous watch on type of
risk under taken relation to that target.
(4) Comparison of actual work targets calls for correction and application of suitable risk
transformation products.
The process of risk management needs to be aimed not only to meet the requirements of
internal policies and guidelines but also to improve the efficiency as other activities of the
firm. So, the risk management process is dynamic in nature and it gives an opportunity the
management to realign goals, and ensure that the need of the firm and design of the risk
management system fits together.
Risk Management involves the following steps in case of corporation / Enterprises. Define
the objectives of risk management: Different risk situations results in different kind of losses.
Then the risk managers who deals with their risks must have certain objectives like
(1) Identify potential losses
(2) Evaluating the potential loss
(3) Selecting appropriate techniques to control losses
(4) Implementing and reviewing the loss controlling programme.
Need for a rational risk management in an Organisation
As discussed so far, risk management is an integrated process of describing specific areas of
risk developing and comprehensive plan integrating the plan and conducting ongoing
evaluation. It is a process that identifies loss Exposures to be faced by an organization and
select the most appropriate techniques including insurance for meeting such Exposures.
So far Managing the risk there is a need for rational i.e., need for cause of action which
included guidelines and responsibilities.
(1) Guidelines for Risk Management
a) Problems should be kept in perspective
b) Hazards can be controlled they are not a cause for panic
c) Judgment should be based upon knowledge experiment
Encourage all participants in an operation to adopt risks management principles, to manage
risk more effectively. It is more productive to show a mission plainer how he can better
manage risk. Risk Management responsibilities: Managers are for effective management of
risk. Accept or reject risk based upon the benefit to be derived Train and motivate personnel
regarding risk management techniques.
d) Associate risk and develop risk reduction alternative
f) Consistently apply effective risk management concepts and methods to operations and
tasks.
g) Maintain constant awareness of the changing risks associated with the operation or task.
Understanding the cost of risk
The cost of risk has five main components, namely
(1) Expected losses
(2)The cost of loss control
(3) The cost of loss financing
(4) The cost of internal risk reduction and
(5) The cost of any residual uncertainty that remains after loss control.
1. Expected Cost of Losses: The expected cost of losses includes the expected cost of both
direct and indirect losses. Major types of direct losses include the cost of repairing or
replacing damaged assets, the cost of paying workers compensation claims to injured
workers, and the cost of defending against and settling liability claims. Indirect losses
include reduction in net profits that occur as a consequence of direct loss, such as the losses
include reduction in net profits and continuing due to direct damage to physical assets.
2. Cost of loss control: The cost loss control reflects the cost of increased precautions and
limits on risky activity designed to reduce the frequency and severity of accidents, for Eg:
the cost of loss control for the pharmaceutical company would include the cost of testing the
product for safety prior to its introduction and any lost profit from limiting distribution of
the product in order to reduce exposure to lawsuits.
3. Cost of loss financing: The cost of loss financing includes the cost of self,insurance the
loading in insurance premiums, and the transaction costs in arranging negotiating, and
enforcing hedging arrangements and other contractual risk transfers. The cost of
self,insurance includes the cost of maintaining reserve funds to pay losses.
4. Cost of Internal risk reduction method: The cost of internal risk reduction includes
transaction costs, associated with achieving diversification and the cost associated with
managing diversified setoff activities. It also includes the cost of obtaining re analyzing data
and other types of information to obtain more accurate cost forecasts. In some cases, this may
involve paying another firm for this information.
5. Cost of Residual uncertainty: The cost of uncertainty that reminisce., left over once the
firm has selected and implemented loss control loss financing, and internal risk reduction is
called the cost of residual uncertainty, for Eg: residual uncertainty can affect amount of
compensation that investors require to hold a firm’s stock. Residual uncertainty also can
reduce value through its effects, on expected net cash flow for Eg: residual uncertainty might
reduce the price that customers are willing to pay for the firm’s products.
Risk management and social welfare
From a social perspective, the key question is how risk activities and risk management by
individuals and business can best be arranged to minimize the total cost of risk for society.
This cost is the aggregate for all members of society, of the cost of losses, loss control, loss
financing, internal risk reduction, and residual uncertainty. Minimizing the total cost of risk in
society wanted to maximize the value of social resources.
Minimizing the total cost of risk for society produces an effective level of risk. Efficiency
requires individual and businesses to pursue activities until the marginal benefits equals to
marginal cost including risk related costs. While the efficiency benefits and costs of risk
management are often difficult to measure, the efficiency goal is viewed by many economists.
The main reason for this is that maximizing the value of resources by minimizing the cost of
risk makes the total size of the economy as large as possible.
Greater amount of wealth allows greater opportunity for government to transfer income from
parties that are able to pay taxes to parties that need assistance. The goal is to achieve to
right balance between the amount of total wealth and how it is distributed. But if the goal of
making many for shareholders lead to risk management decisions may not necessarily
minimized the total cost of risk to society. In order for business value maximization to
minimize the total cost of risk to society, the business must consider are social costs in its
decisions. In other words, all social costs should be internalized by the business so that it’s
private costs equal to social costs. If the private cost of risk (The cost to the business) differs
from the social cost of risk (the total cost to society) business value maximization generally
will not minimize the total cost of risk to society. A few simple examples should help to
illustrate the increase in the social cost of risk that case when the private cost is less than the
social cost for example, , Assume that these is no government regulations of safety, no
workers compensation law, and no legal liability system that allow persons to recons damages
from business that cause them harm under this assumption, business that seeks to maximize
value to shareholders may not consider possible harm to persons from risks activities. It
would be very likely that many businesses would make decision without fully reflecting
upon their possible harm to “strangers” (persons with no connection to the business).
It is to be noted that major function of liability and work place injury law is to get businesses
to reflect more upon the risk of harm to consumers, workers and other parties in making
their divisions.
Risk Identification
1. Business risk exposure:
The first step in Risk Management process is Risk Identification i.e., the identification of
loss Exposures. There are various methods of identifying Exposures. Loss Exposures can
be identified through analysis of the firm's financial statements, surveys of employees,
discussions with insurance agents, Management consultants. Risk identification requires
 Dr. T. MANJUNATHA

an overall understanding of the business and the specific economic, legal and regulatory
factors that affects the business.
The Business losses may be classified as
1. Property Loss Exposures: The property loss Exposures may be of two type’s viz.,
Direct Losses and Indirect Losses.
a. Direct Losses are those where property is subject to damage or disappearance. The
value of the property exposed to loss is required to be ascertained. Indirect losses are
those, the fund required to replace the uninsured property and the loss business going
incur in case of stoppage of business till the property replaced to restart the business. In
addition to identify what property is expose to loss and potential causes of loss, the firm
must consider how the direct loss to be valued for the purpose of making risk
management decision, several valuation methods are available. Book value (The
purchase price minus accounting Depreciation) is the method commonly used for
financial reporting purposes. However, since book value does not necessarily correspond
to economic value, it generally is not relevant for Risk Management purpose. Market
value is the value that the next highest valued user would pay the property.
Firm,specific Value , is the value of the property to the current owner. Replacement Cost
new , is the cost of replacing the damaged property with new property due to the
economic depreciation of the replacement cost new often will exceed the market value of
the property.
b. Indirect losses also can arise from damage to property that will be repaired or
replaced. In addition, same operating expenses might continue despite the shutdown Eg.
Salary to the administrative staff. These Exposures are known as business Income
Exposures or business interruption Exposures. Firms also may suffer losses after they
resume operation previous customers that have switched to other sources of supply do
not section.
2. Liability Loss Exposures: Business firms face potential legal liability losses as a
result of relationships with many parties including suppliers, customers, employees,
shareholders and public. The settlements, judgements and legal costs associated with
liability suit can impose substantial losses to the firm, Law suits also harm firms, by
damaging their reputation and they may require expenditure to minimize the cost of this
damage for Eg.: In case of liability to customers for injuries arising out of the firm’s
products, the firm may incur product recall expenses and higher marketing costs to
rehabilitate a product.
3. Loss to human Resources: Loss in firm due to worker injuries, disabilities, death,
retirement and turnover can be grouped into two categories. First as a result of
contractual commitments and compulsory benefits, firms often compensate employees
(or their beneficiaries) for injuries, disabilities, death and retirement, secondly worker
injuries disabilities, death, retirement and turnover can cause indirect losses when
production is interrupted and employees cannot be replaced at zero cost with other
employees of the same quality. In some case, firms purchase life insurance to compensate
for the death or disability of important employees.
4. Losses from external Economic forces: The final category of losses arises from
factors that are outside of the firm. Losses can arise because of changes in the price of
inputs and outputs. For Eg.Increase in the price of oil can cause large losses to firms that
use oil in the production process. Large changes in the exchange rate between currencies

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can increase a multinational’s costs or decrease its revenue Eg. An important supplier or
purchaser can go bankrupt, thus increasing cost or decreasing revenue.
Individual risk exposure
The method of identifying Individual risk Exposures is to analyses the sources and uses of
funds in the present and planned for the future. Potential events that cause decreases in the
availability of funds or increases in uses of funds represent risk Exposures.
An important risk for most families is drop in earnings prior to retirement, or due to
death, or disability of a bread earner. The magnitude of this risk depends among other
factors on the number and age of dependents and an alternative source of Income. The
loss due to death or disability can be managed with life and disability insurance. Some
public support often is available in the form of compulsory social insurance and
unemployment. Insurance programs one of the most important sources of risk coverage
for most individuals and families is from medical expenses, some countries rely largely on
the private medical and insurance industry to provide or pay for services and insurance
to deal with medical expense risk. Another major sources of expenses risk are from
personal liability Exposures. Individuals can be sued and held liable for damages inflicted
on others. The main sources of personal liability arise from driving an automobile and
owning property with potential hazards. These risks are typically managed by using loss
control and purchasing liability insurance.
Exposure of physical assets/ property loss exposure
Exposures of Physical Assets or property loss Exposures may be direct physical damage
or indirect losses. Direct physical damage to a home and personal property because of
fire, lighting, windstorm, flood, earthquake etc.
Indirect losses resulting from a direct physical damage loss including extra expenses
required till reconstruction of physical assets. Indirect loss is a financial loss Eg: Addition
Rent Expenses, loss of profit due to stoppage of business, loss of local market etc.
Tangible property refers to physical assets of value to the firm, within this category
building plants, stores / inventory equipment, furniture computers and communication
equipment, vehicle transport equipment.
Exposure of Financial assets
Exposures of Financial Assets refers to many financial risks which are speculative in
nature, where assets are exposed to changes in financial market. Many risks in this
category are attributable to fluctuations in value, as determined by financial markets. For
Eg: Many firms are vulnerable to price risk in the form of adverse changes in interest
rates, foreign currency exchange rates, commodity prices etc., price risk can affect key
input costs the price a firm pay to buy raw materials used in production or operation, or
output costs, the prices at which the firm can sell its goods or services.
Exposure of human assets
Business firm also focus considerable attention minimizing their firm’s exposure to
human resource / Assets risks. Financial losses arising from the loss or injury to
employees and key people associated with the firm. Three aspects of human resources
risks merit particular attention, they are protecting the firm from loss of unique talent
that is difficult to replace, workers compensation Exposures and employees benefit
Exposures.
Loss of key person / Employee who is difficult to replace. Firms often incurs huge
financial losses when a key person unable to complete the job because of sickness, death
or other factors that results in the discontinuation of employment because it is very
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difficult and expensive for the firm to find replacement for key person with senior level
of talent. Larger business firms often are less vulnerable to this risk than small business
firms because they can make plans to replace the lost executive by promoting an internal
subordinate, a process known as succession planning. Hence the Death or disability of key
employees or retirement or job,related injuries or disease experienced by workers are the
human resources losses, which may disrupt the business of the organization.
Exposures to legal liability
Another major area of risk management in business firm is liability risk or risk that a firm
may be legally responsible for the harm that is caused to another person. If a firm’s
actions harm another person the injured party can sue the negligent party for the
damages suffering as result of those actions. So, the firms face potential legal liability
losses as a result of relationship with many parties, including suppliers, customers,
employees, shareholders and public. The settlements, judgements and legal costs associated
with liability suits can impose substantial losses to firms. Lawsuits also may harm firms,
by damaging their reputation and they may require expenditure to minimize the costs of
this damage for Eg: In case of Liability to customers for injuries arising out of the firm’s
products, the firm might incur product recall expenses and higher marketing costs to
rehabilitate a product.
Exposure to work relate injuries
A top priority in all risk management programs is protecting employees from harms,
injuries, a concern based on financial and legal consideration firms are required by law
to provide workers compensation benefits to their employees and to satisfy the statutory
requirements of work place , safety regulations. Workers compensation protection
includes payments to injured workers for medical Expenses, and lost wages they incur as
a result of a work , related injury as well as death benefits to the dependents of a worker
who dies due to injuries suffered on the job. In addition to protecting workers from harm
on the job, some business firms adopt employees benefit programs, through group
insurance arrangements, in addition to compensation benefits.
Basic concepts from probability and statistics:
The application of probability and statistics is crucial in the insurance industry. Insurance
actuaries constantly face a trade off when determining the premium to charge for
coverage. The premium must be good enough to remain competitive with premium
charged by competitor insure actuaries. Actuaries apply statistical analysis to determine
expected loss levels and Expected deviations for these loss levels. Through the application
of the law of large numbers, insurers reduce their, risk of adverse outcomes.
Probability and statistics: To determine expected losses insurance actuaries apply
probability and statistical analysis to given loss situations. The probability of an event is
simply the long run relative frequency of the event, given an infinite number of trials
with no changes in the underlying conditions. The probability of same events can be
determined without experimentation. for Eg: If a "fair" coin is flipped in the air the
probability the coin will came up 'head' is 50 percent, and the probability it will come up
is also 50 percent. Other probability such as the probability of dying during a specified
year or the probability of being involved in an auto accident can be estimated from past
loss data.
A convenient way to summarizing events, and probabilities is through a probability
distribution. A probability distribution lists events, that could occur and the
corresponding probability of each events occurrence. Probability distribution may be
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discrete, earning that only distinct outcomes are possible or continuous, meaning that any
out come over a range of outcomes could occur.
Characteristics of Probability Distributions: In many applications, it is necessary to
compare probability distributions of different random variables. Understanding how
decisions affect probability distributions will lead to better decisions. The problem is that
most probability distributions have many different outcomes and are difficult to compare.
It is therefore common to compare certain key characteristic is of probability
distributions, they are the expected value variance or standard deviation.
Expected Value: The expected value of a probability distribution provides information
about where the outcome tends to occur on average. For Eg: If the expected value of the
business firm’s profit is Rs.10 crores, their profits should be average about Rs.10 crores.
Thus, a distribution with a higher expected value will tend to have a higher outcome of an
average.
To calculate the expected value, you multiply each possible outcome by its probability
and then add up the results. In the coin flipping example there are two possible outcomes
for ‘X’, either Re.1 or Re ,1. The probability of each outcome is 0.50. Therefore, the
expected value of ‘X’ is Re.0
Expected Value of X: (0.50) (Re.1) + (0.50) (Re.,1) = Rs. 0. If one were to play the coin
flipping game many times the average outcome would be approximate Re.0. This does not
imply that the actual value of ’X’ on any single toss will be Re.0. Indeed, the actual
outcome for one toss is never Re.0.
Variance: The variance of a probability distribution provides information about the
likelihood and magnitude by which a particular outcome from the distribution will differ
from the expected value. In other words, variance measures the probable variation on out
comes around the expected value. If a distribution has law variance, then the actual
outcome is likely to be close to the expected value. If the distribution has high variance
then it is more likely than the actual (realized) out come from the distribution will be far
from the expected value. A high variance therefore implies that outcomes are difficult to
predict. For this reason, variance is a commonly used measure of risk.

Unit 2
Risk Measurement
Evaluating the frequency and severity of losses
Frequency: The frequency of loss measures the number of losses in a given period of
time. If historical data exist on a large number of Exposures, then the probability of a
loss per exposure (or expected frequency per exposure) can be estimated by the number of
losses divided by the numbers of Exposures, for Eg: If a company XYZ corp. had 10,000
employees, in each of the past 5 years, and over the 5 years period there were 1,500
workers, workers injured then an estimate of the probability of a particular worker
becoming injured would be 0.03% (1,500 injure is / 50,000 employees) when the
historical data does not exist for a company, frequency of losses could be difficult to
quantify. In this cue industry data might be used or an informed judgement would need
to be made about the frequency of losses.

Severity: The severity of loss measures the magnitude of loss per occurrence, one way to
estimate expected severity is to use the average severity of loss per occurrence during a
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historical period. If the 1,500 workers injuries for XYZ Co. Ltd., costs Rs. 30 lakhs in
total, then the expected severity of worker’s injuries would be estimated as Rs. 2,000
(Rs. 30 lakhs / 1,500) This is on average, each worker injury imposed Rs. 2,000 loss on
the firm. Again, due to the lack of historical data and the frequency of losses adequate
data may not be available to estimate precisely the expected severity per occurrence with
a little effort however risk managers can estimate the range of possible loss severity for a
given exposure.
Expected Loss and Standard Deviation:
When the frequency of losses is uncorrelated with the severity of losses, the expected loss is
simply the product of frequency and severity. Thus, the expected loss per exposure in our
example can be estimated by taking expected loss severity per occurrence times, the expected
frequency per exposure. Expected loss obviously is an important element that affects
business value and insurance pricing. Thus, accurate estimates of expected losses can help
the business firm determine whether insurance will increase firm value. Ideally, many firms
will also estimate the standard deviation of losses for the total loss distribution or losses
indifferent size ranges.
Standard deviation or variance is a measure of probable variation around the expected value
of a probability distribution for a random variable and thus if the risk (unpredictability) of the
variable.

Risk control measures

Risk control is a generic term to describe techniques for reducing the frequency or severity
of losses. Major risk control techniques cover all those measures aimed in avoiding
preventing and reducing the changes of loss producing events.
Avoiding: Avoidance means a certain loss exposure is never or an existing loss exposure
is abandoned, for Eg: flood losses can be avoided by not building a new plant in a flood
plain. A major advantage of avoidance is that the change of loss is reduced to zero, if the
loss exposure is never Avoidance, however disadvantages has also the firm may not be
able to avoid all losses for Eg: A co. may not be able to avoid premature death of a key
executive.
Loss preventing: Loss prevention refers to measures that reduce the frequency of a
particular loss, for Eg: To reduce truck accidents, it includes driver examinations, zero
tolerance for alcohol or drug abuse and strict enforcement of safety rules.
Loss Reduction: Loss reduction refers to measures that reduce the severity of a loss after
it occurs, Eg: Rehabilitation of workers with job related injuries, and limiting the amount
of cash on the premises. Installation of an automatic sprinkler system that promptly
extinguishes fire, segregation of exposure units so that a single loss cannot exposure units
such as having ware houses with damage all different locations. The effective risk control
techniques can significantly reduce, the frequency and severity of claim, especially in
work place safety.
Risk Financing Techniques
Risk Financing refers to techniques that provide for the funding of losses after they occur.
Major risk financing techniques include the following
(a) Retention (b) Non, Insurance Transfers and (c) Commercial Insurance.
a. Retention: Retention means that the firm retains part or all of the losses that can result
from a given loss retention, can be either active or passive. Active risk retention means
that the firm is aware of the loss exposure and plans to retain part of the lessor all of it.
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Passive risk retention however is the failure to identify a loss exposure, failure to act or
forgetting to act. Retention can be effectively used in a risk management program under
the following conditions.
(1) When there is no other method of treatment is available
(2) When the possible loss is not serious and
(3) Losses are highly predictable. Based on the past experience the business firm/risk
manager can estimate a probable range of frequency and severity of actual losses the
following steps involved in retention:
Determining the Retention levels: If retention is, used the risk manage must determine
the firm retention level. A financially strong firm, can have a higher retention level than
one whose financial position is week.
Captive Insurance: Losses can also be paid by a captive insurer, A captive insurer is an
insurer owned by a parent firm for the purpose of insuring the parent firm’s loss
Exposures.
Paying losses: If retention is used the risk management have some method for paying
losses.
They are
Current Net Income: The firm can pay loss out of its current net income and treat losses
as expenses for that year.
From funded reserve: A funded reserve is the setting aside of liquid funds to pay losses.
Unfunded reserve: An unfunded reserve is a Book keeping account that is charged with
actual or expected losses from a given exposure.
Credit line: A credit line can be established with a Bank and borrowed funds may be used
to pay losses as they occur.
Self-insurance Method: Our discussion of retention would not be completed without a
brief discussion of self,insurance. The terms self, Insurance is commonly used by risk
managers to describe aspects of their risk management program. Self,insurance is a
special form of planed retention by which part or all of a given loss exposure is retained
by the firm. A better name for self, insurance is self,funding which expresses more
clearly the idea that losses are funded and paid for by the firm.
Self,insurance is widely used in workers compensation insurance. Self,insurance is also
used by employers to provide group health, vision, and prescription drug benefits to
employees.
Advantages and Disadvantages of Retention:
The major advantages are
Save Money: The firm can save money in long run if its actual losses are less than the
loss
Component in a private insurer’s premium.
Lower Expenses: the services provided by the insurance may be provided by the firm at a
lower cost.
Encourage Loss prevention: Because the exposure is retained there may be a greater
incentive for loss prevention.
The disadvantages are:
Possible Higher losses: The losses retained by the firm may be greater than the loss
allowance in insurance premium that is saved by not purchasing insurance.

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Possible Higher Expenses: Expenses may actually be higher outside experts, such as
safety engineers may have to be hired. Insurers may be able to provide loss control and
claim services less expensively.

Non,Insurance Transfers: Non,Insurance transfers are another risk financing

technique. Non, insurance transfers are methods other than insurance by which a pure risk
and its potential financial consequences are transferred to another party, for Eg. Non
insurance transfers include Contracts, Leases etc., A company contracts with a
construction firm to build a new plant, can specify that the construction firm is
responsible for any damage to the plant while it is being built.
The Advantages of non,insurance transfers are, as below.
The risk Manager can transfer some potential losses that are not commercially insurable.
Non,insurance transfers often cost less than insurance.
The potential loss may be shifted to same one who is in a better position to exercise loss
control.
The disadvantages of non,insurance transfers are
The transfer of potential loss may fail because the contractor’s failure.
If the party to whom the potential loss is transferred is unable to pay the loss the firm is
still responsible for the claim.
Commercial Insurance: Insurance is also used in a risk management program.
Insurance is appropriate for loss Exposures that have a low probability of loss but the
severity of loss is high. If the risk manager uses Insurance to treat certain loss Exposures,
five key areas must be emphasized.
(1) Selection of Insurance coverages. (2)Selection of an insurer. (3)Negotiation terms
(4) Supply of information concerning insurance coverage. (5)Periodic review of the
program.
Selection of Insurance coverages: Firstly, the risk manager must select the insurance
coverages needed. The coverage selected must be appropriate for insuring the major loss
Exposures identified.
Selection of an insurer: Secondly, the risk manager must select an Insurer or several
Insurers. Several important factors come into play here including the financial strength of
the insurer, risk management services, provided by the insurer and the cost and terms of
protection.
Negotiation terms: Thirdly, after the insurer or insurers are selected the terms of the
insurance contract, it must be negotiated. The risk manager and insurer must agree on the
documents that will form the basis of the contract. In any case the various risk
management services, what the insurer will provide must be clearly stated in the
contract.
Supply of information concerning insurance coverage: Fourthly, In addition,
information concerning Insurance coverage's must be supplied (information in writing) to
others in the firm. The firm’s employees must be informed about the insurance coverage.
Periodic review of the program: Finally, the insurance program must be periodically
reviewed. This review is especially important, when the firm has a change in business
operations or is involved in a merger or acquisition of another firm. Even the basic
decision , whether to purchase insurance or retain the risk , must be renewed periodically.
Following are Advantages of Insurance

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The firm will be indemnified after a loss occur uncertainty is reduced, worry and fear are
reduced for managers and employees which should improve performance and
productivity.

Insurer can provide valuable risk management services, such as loss control services, loss
exposure analysis and claim adjusting.
Insurance premium is an allowable expense Income tax.
Following are Disadvantages of Insurance
The payment of premium is a major cost because the premium consists of a component to
pay losses, an amount for expenses, and an allowance for profit.
Premium must be paid in advance, and the opportunity to use the funds is foregone.
The Risk Managers may have less incentive to follow a loss control program, because the
insurer will pay the claim if a loss occurs.

Pooling arrangements and diversification of risks

The most important risk management concept may be the diversification of risk.
Diversification is an essential aspect of insurance and financial markets. Risk manager is
required to analyses diversification of risk and factors influencing the extent to which risk
can be and is diversified. It can be illustrated the diversification in several different
contexts, beginning with a simple pooling arrangement between two people and ending
diversification among thousands of people or business through insurance and financial
markets.
Two persons pooling Arrangement: Suppose Mr. A and Mr. B each are exposed to
possibility of an accident in the coming year. In particular assume that each person has
20% chances of an accident that will cause loss and 80% chance of no accident. Hence
there is a high probability of zero loss and smaller probability of a large loss.
We have to examine what will happen if Mr. A and Mr. B agree to split evenly any
accident costs that the two might occur. That is, they agree to share losses equally, each
paying the average loss. This arrangement is called a pooling arrangement, because Mr. A
and Mr. B are pooling their resources to pay the accident costs that may occur. Eg:

Sl. No. Possible outcome Total Cost (Rs.) Cost paid by each person
(Average loss)
1 Neither ‘A’ nor ‘B’ has an 0 0
accident
2 ‘A’ has an accident but ‘B’ 2,500 1,250
doesn’t
3 ‘B’ has an accident but ‘A’ 2,500 1,250
doesn’t
4 Both ‘A’ and ‘B’ have an 5,000 2.500
accident

Not the pooling arrangement changers the distribution of cost paid by each person, that is
because the costs paid by ’A' now depend on the accident losses incurred by ‘B' and vice
versa specially with pooling the cost paid by each person is the average loss of the two
people. Pooling arrangements provide a major example of how risk is reduced through
diversification. Simply stated diversification means that you “don’t put all your Eggs in
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one basket” by entering into a pooling arrangement ‘A' and ‘B' made their accident costs
for the year equal the average loss for the participants. If they had not entered into
pooling arrangement, their accident costs would equal their own losses. The key point is
that the average loss is much more predictable than each individual loss.
Pooling arrangement with many people or business: Additional risk reduction can be
obtained from pooling by adding people (or businesses) to the arrangement, to illustrate
suppose that Mr ‘C’ has the same probability for accident cost, as Mr. ‘A’ and ‘B’ joins
the pooling arrangement. At the end of the year each person will pay 1/3 of the total
losses (the average loss) the addition of a third person whose losses are independent of
the other two, causes, an additional reduction in the probability of the extreme out comes,
for Ex: In order for Mr. A to pay Rs. 2,500 in accident costs are the three Individuals
average cost is Rs. 833.33
Note that as the numbers of participants in the pooling arrangement increases the
probability of the extreme outcome goes down.
In the extreme i.e., as the numbers of people in the pooling arrangement becomes very
large, the standard deviation of each participant’s cost becomes very close to zero and the
risk thus becomes negligible for each participant. This result, reflects what is known as
the “law of large numbers”.

Pooling arrangements with correlated losses: (Mutually related or connected losses)

since in many instance losses will be positively correlated, we need to examine risk
reduction through pooling in this case. The pooling arrangements, reduces risk for each
participant. The magnitude of risk reduction is lower when losses are positively
correlated than when they are independent (uncorrelated)
Losses are different across many business or individuals may be positively correlated for a
number of reasons. The occurrence of a loss is often due to events that are common to
many people. The earthquakes, hurricanes are examples of events that cause property
losses to many individuals at the same time. Consequently, losses in certain geographical
regions during a given time period are positively correlated similarly since epidemics can
cause medical costs to increase for many people during a given time period, the medical
costs across people can be positively correlated.
How do positive correlated losses affect pooling arrangements? Positively correlated
losses imply that when any person (or business)has a loss, that is greater than expected
loss, then other people (or businesses) also will tend to have losses that are above the
expected loss, vice versa, consequently pooling arrangements do not decrease the
standard deviation of average losses as much when losses are positively correlated.
Stated differently average losses are more difficult to predict when losses are positively
correlated. Later chapters will show that correlation in losses have very important
implications for Risk Management and insurance. We will learn for Eg. how positive
correlation in losses affects business risk, insurance pricing, the types of provisions
included in insurance contract and insurance operations (Eg: reinsurance transactions and
insurances capital structures).
Insurers as managers of Risk Pooling Arrangements: individuals or businesses can
reduce their risk by forming a pooling arrangement. As a result, risk averse individuals
and businesses that value lower risk would have strong incentives to participate in
pooling arrangements, if they could be organized at zero cost. However, risk pooling
arrangements obviously are not cost less to operate. Indeed, the cost of organizing and
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operating pooling arrangements is the main reason why Insurance companies exist and
why most pooling arrangements take place indirectly through Insurance contracts. So,
Insurance contracts are a way of lowering the cost of operating pooling arrangements.
Insurance companies usually do not have the legal right to assess members of the
pooling arrangement (policy holders) for losses that have occurred. Instead policy
holders pay premium, (based on forecast) that is prior to knowing the magnitude of losses
, without giving the insurer the right of assessment of more money is ultimately needed
to pay claim.
More over with a pure assessment system, funds might not be available to pay losses
quickly. The resulting delay in claim payments would be costly to those , participants
who have experienced losses. Finally, assessment impose risk on participants. They do
not know in advance how much they will have to contribute. For these reasons insurers
commonly charge policy holders a fixed advance premium without having the right to
assess policyholders for losses during the coverage period if realized losses for the
insured group turn out I be higher than expected.
Advanced issues in risk management:
Issues discussed here includes the changing scope of risk management, insurance
marketing dynamics, loss forecasting, financial analysis in risk management decision
marketing etc.
A) The Changing scope of risk Management: Traditionally risk Management was
limited in scope to pure loss Exposures, including property risks, liability risks, and
personal risks. An interesting trend emerged in the 1990s, however as many business
firms began to expand the scope of risk management to include speculative financial
risks. Recently some business firms, have gone a step further, expanding their risk
management program to consider all risks faced by an organization.
Financial Risk Management Business firms face a number of speculative financial risks.
Financial risk management refers to the identification, analysis and treatment of
speculative financial risks.
There are three speculative risks they are
Commodity Price Risk: Commodity price risk is the risk of losing money if the price of a
commodity changes, producers, and users of commodities face commodity price risks.
For Eg: Consider an agricultural operation that will have thousands of tons of grain at
harvest time. At harvest the price of the commodity may have increased or decreased,
depending on the supply and demand for grain. Because little storage is available for the
crop the grain must be sold at the current market price, even if the price is low.
Interest rate risk: Financial Institutions are especially liable to interest rate risk. Interest
rate risk is the risk of loss caused by adverse interest rate movements for Eg: consider a
Bank that has sanctioned loan as fixed rate to purchases of a house under 15 to 30 years
mortgage. If interest rate increases on Bank deposits, the Bank must pay higher interest
rate on deposits while the mortgages are locked in at lower interest rate.
Currency Exchange Rate: The currency exchange rate is the value at which one nation's
currency may be converted to another nation's currency. Currency exchange rate risk is
the risk of loss of value caused by changes in the rate at which one nation’s currency
may be converted to another nations currency. For Eg: An Indian company faces
currency exchange rate risk when it agrees to accept a specified amount of foreign
currency in the further as payment for goods sold or work performed.

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Managing Financial Risks: Traditional separation of pure and speculative risks meant,
that different business departments addressed these risks. Pure risks were handled by the
risk managers through risk retention, risk transfer and loss control techniques.
Speculative risks were handled by the finance division through contractual provisions and
capital market instruments, for Ex: the risk managers may be concerned about a large
self,insured property claim. The financial managers may be concerned about losses
caused by adverse changes in the exchange rate. Either loss by itself may not harm the
organization if the company has a strong Balance sheet. The occurrence of both losses
however may damage the business more severely. An integrated risk management
program can be designed to consider both contingencies by including a “Double,trigger
option”.
“Double , Trigger Option” is the provision that provides for payment only if two
specified losses occur. Thus, payments would be made only if a large property claim and a
large exchange rate loss occurred. The cost of such coverage is less than the cost of
treating each risky separately.
Enterprise Risk Management: Encouraged by the success of financial risk
management some organizations are taking the next logical step. Enterprise risk
management is a comprehensive risk management program that addresses, an
organization pure risk, speculative risks, strategic risks, and operational risks. Pure and
speculative risks are already defined. Strategic risk refers to uncertainty regarding the
organization’s goals and objectives and the organization’s strengths weaknesses
opportunities and threats. Operational risks are risks that develop, out of business
operations, including such things as manufacturing products and providing services to
customers. By packaging all of these risks in a single program, the business firm offsets
one risk against another, and in the process reduces its overall risk. As long as risks
combined in the program do not exhibit, perfect positive correlation, the combination of
Exposures reduces risk.
(B) Insurance marketing Dynamics: So far, we have discussed the various methods of
dealing with risk. When property and liability loss Exposures are not eliminated through
risk avoidance, losses that occur, must be financed in some other way. The business firm
must choose between two methods of funding losses, risk retention and risk transfer.
Retained losses can be paid out of current earnings, from loss reserves, by borrowing or
by captive insurance. Company risk transfer shifts the burden of paying for losses to
another party, most often a property and liability insurance company decisions about
whether to retain risks or transfer them are influenced by conditions in the insurance
market place.
Property and liability insurance markets fluctuate between periods of tight underwriting
standards and high premiums called a “hard” insurance market and periods of loose
underwriting standards and low premiums called a “Soft“ Insurance Market‘. Business
firms must consider current premium rates and underwriting standards when making their
retention and transfer divisions. When the market is ‘Soft’ insurance can be purchased at
favourably terms for Eg: lower premium, overage. In a ‘hard market’ more retention is
used because some insurance covers are limited in availability or may not be affordable.
What causes these price fluctuations in property and liability insurance markets? Two
obvious affect property and liability insurance pricing and underwriting, they are
(l) Insurance Industry capacity (2) Investment returns.

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1. Insurance Industry Capacity: In the Insurance industry, capacity refers to the

relative level of surplus. Surplus is the difference between an insurer’s assets and its
liabilities, when the property and casualty Insurance Industry is in a strong surplus
position. Insurers can reduce premium and loosen underwriting standards, because they
have a cushion to draw on if underwriting results prove unfavorable.
External factors such as earthquakes, hurricanes and large liability awards may also
increase the level of claims, reducing surplus for Ex: The world trade Centre disaster
produced loss in insurance industry is called a “CLASH LOSS” clash loss occurs when
several lines of insurance simultaneously experience large losses. The WTC disaster
created large losses for life insurances, health insurances, and property and liability
insurances.
2. Investment returns: Would you sell insurance if for every rupee you collected in
premiums, you expected to pay 78 paise in losses and 30 paise in expenses. That
payment rate would lead to a loss of 8 parse per rupee of premium collected property and
casualty Insurance companies can be often do sell coverage at an expected loss, hoping to
offset underwriting losses with investment income. In reality insurance companies are in
two business i.e., underwriting risks and investing premium. If insurers expect favorable
investment result they can sell their insurance coverages at lower premium rates, hoping
to offset underwriting losses with investment income. This practice is known as “cash
flow underwriting”.

Loss forecasting
The risk manager must also identify the risks the organization faces and then analyse, the
potential frequency and severity of these loss Exposures. Although loss history provides
valuable information, there is no guarantee that future losses will follow past loss trends.
Risk Managers can employ a number of techniques to assist in predicting loss levels
including the following.
(1) Probability Analysis
(2)Regression Analysis
(3)Forecasting based on loss distribution.
1. Probability Analysis: Chances of loss is the probability that an adverse event will
occur. The probability (P) of such an event is equal to the numbers of events likely to
occur (X) divided by the numbers of exposure units (N). Thus Ex: If a vehicle fleet has
500 vehicles and an average 100 vehicles suffer physical damage each year. The
probability that fleet vehicles will be damaged in any given year is;
P (Physical damage) = 100 x 100 = 20%
500 The risk manager must also be concerned with the characteristics of the event being
analyzed, same events are independent events that is the occurrence does not affect the
occurrence of another event for Eg: Assume that a business has production units in
Bombay and Bangalore, and that the probability of a fire at the Bombay plant is 5% and
that the probability of a fire at the Bangalore plant is 4% obviously the occurrence of one
of these events does not influence the occurrence of the other event.
Same events can be classified as dependent events. The occurrence of one event affects
the occurrence of the other. Eg: If two Buildings are located close together and one
building catches fire the probability that the other building also catches fire is higher.
Same events may also be mutually exclusive. Events are mutually exclusive, if the
occurrence of one event precludes the occurrence of the second event, for Eg: If a
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building is destroyed by fire it cannot also be destroyed by flood. Mutually exclusive

probabilities are additive. If the probability that a building will be destroyed by fires 2%
and the probability that the building will be destroyed by flood is 1%, then the probability
the building will be destroyed by either fire flood is
P (fire destroys bldg.) + P (flood destroys bldg.)
= P (fire or flood destroys Bldg.)
= .02 + .01 = .03 or 3%. Mathematically, it looks 3%, But, if the independent events are
not mutually egclusive, then more than one event could occur care must be taken not to
“double count” when determining the probability that at least one event will occur.
Assigning probabilities to individual and joint events, and analyzing the probabilities can
assist the risk Manager in formulating a risk treatment plan.
Regression Analysis: (Measuring relationship between value of one variable with
another variable). Regression analysis is another Method for forecasting losses.
Regression analysis characterized the relationship between two or more variables and then
use this , Characterization to predict values of a variable. It is not difficult to understand
relationship that would be of interest to risk managers in which one variable is dependent
upon another variable. for Eg: the number of workers compensation claims should be
positively related to some variables representing employment i.e., numbers of
employees, payroll, or hours worked like wise we would expect the number 0* physical
damage claim for a fleet of vehicles to increase as the size of the fleet increase or as the
numbers of miles driven each year by fleet vehicles increase.Eg: Relationship between
payroll and number of workers compensation claim.

Year Payroll in Lakh Rs. Workers Compensation claim in %

Lakh Rs.
2001 16.30 2.28 13.98
2002 19.80 2.50 12.62
2003 23.00 2.60 11.30
2004 29.00 3.00 10.34
2005 34.00 3.25 9.55
2006 40.00 4.12 10.30

By substituting the estimated payroll for next year, the Risk Manager estimates workers
compensation claims which will occur in the next year.
Forecasting based on Loss distributions: Another useful tool for the risk Manager is
Loss forecasting based on loss distributions. A loss distribution is a probability
distribution of losses that could occur. Forecasting, by using loss distributions works
well if losses tend to follow a specified , distribution and the sample size is large,
knowing the parameters that specify the loss distribution (for Eg: mean, standard
deviation and frequency of occurrence) enable the risk Manager to estimate the numbers
of events, severity and confidence intervals Many loss distributions can be employed
depending on the pattern of losses.
Financial analysis in risk management decision makings
Risk Managers must make a number of important decisions including whether to retain
or transfer loss Exposures, which insurance coverage bid is best, and whether to invest in
loss control projects. The Risk Managers decisions are based on economics – weighing
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the costs and benefits of a course of action to see whether it is in the economic interest of
the company and its stock holders. Financial Analysis can be applied to assist in risk
Management decision making. To make decisions involving cash flows in different time
periods, the risk managers must employ time value of money analysis
The time value of the Money: The time value of money is required to be considered
because risk management decisions will likely involve cash flows in different time
periods. The time value of money means, that when valuing cash flow in different time
periods, the interest earning capacity of money must be taken into consideration. a Rupee
received today is worth more than a rupee received after one year from today, because the
Rupee received today can be invested immediately to earn interest. Therefore, when
valuing cash flows in different time periods it is important to adjust rupee values to
reflect the earning of interest Eg: Suppose you open a Bank Account and deposited Rs.
100. The value of the account today present value is Rs.100. Further the bank is paying
4% interest compounded annually on your Account. Hence after one year the value of that
Rs. 100/, will be Rs. 104 and compounded for second year the value will be Rs. 108.16
Financial Analysis Applications:
In many instances the time value of money can be applied in risk Management decision
making. Let us consider two applications.
(a) Analyzing Insurance coverage bids.
(b) Loss control Investment decisions.
Analyzing Insurance coverage bids , Assume that Mr. A’ would like to purchase
property Insurance on a building. Mr. A’ is analyzing two insurance coverage bids. The
bids are from comparable Insurance companies and the coverage amount are the same.
The premium however differs. Insures XYZ co. Ltd.’s coverage required annual premium
of Rs. 70,000/, and Insurer ABC Co. Ltd.’s coverage requires an annual premium of Rs.
40,000/,. The Risk Manager will analyses the difference of premium Amount of two
insurers and find out the additional benefits offered by both the cos. However, there is a
wide difference in premium and wise decision is warranted from Risk Manager
Loss , control / Investment Decision: Loss control Investments are undertaken in an
effort to reduce the frequency and severity of losses such investments can be analyzed
from a capital budgeting perspective by employing time value of money analysis. Capital
Budgeting is a Method of determining which capital Investment projects and company
should undertake only those projects that benefits the organization financially should be
accepted.
Other risk management tools
The Decision of advanced risk management topics would not be complete without a brief
discussion of same other risk management tools.
They are
(1)Risk Management Information system(RMIS)
(2)Risk Management Internet and Web Sites.
(3)Risk Maps
(4)Value at Risk (VAR) analysis
(5)Catastrophe Modeling.
Risk Management Information Systems (RMIS)
A key concern for risk Managers is accurate and accessible risk management data. A risk
Management information system is a computerized data base that permits the Risk
Managers to store and analyses Risk Management data and to use such data to predict
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and attempt to control future loss levels. RMIS may be of great assistance to risk
managers in decision making. Such systems are marketed by a number of Vendors or
they may be developed in house. RMIS, have multiple uses, with regard to property
Exposures the data base may include ability of a corporation's properties and
characteristics of those properties, i.e., properly insurance policies, coverage terms, loss
records, log of fleet vehicles, and other data, on the liability side the database may contain
a listing of claims historical claims exposure bases, pay rolls, No. of employees, No. of
fleets and liability insurance coverage & coverage terms.
Risk Management Internets and Web sites: Some risk management department have
established their own websites, which include answers to frequently asked questions
(FAQs) and wealth of other information’s. In addition, some organizations have
expanded the traditional risk management websites into a risk management internet. For
Eg: A software co. that sponsors trade shows at numerous venues each year might use a
risk management internet to make information available to interested parties with in the
company.
Risk Maps: Some organization have developed or developing sophisticated “risk Maps”.
Risk Maps are grids detailing the potential frequency and severity of risks faced by the
organization. Construction of these maps requires risk managers to analyses each risk
that the organization faces before plotting it on the map. The property, liability and
personnel Exposures, Financial risk and other risks that fall under the broad umbrella of
“enterprise risk” may be included on the risk map.
Value at Risk (VR) Analysis: A popular risk assessment technique in financial risk
management is value at risk (VAR) analysis. VAR is the worst probable loss likely to
occur in a given time period under regular market conditions at some level confidence.
The concept is often applied to a portfolio of assets, such as a mutual fund or a pension
fund and is similar to the concept of maximum probable loss in traditional property and
liability risk management.

“Catastrophe” Modelling: (Event causes great damage / suffering) Catastrophe

modelling is a computer,assisted method of estimating losses that could occur as a result
of catastrophic event. The Bulk of those losses are attributed to Earthquake, Tsunami.
Input variables include such factors as , meteorological data, historical losses and value
exposed to loss (Eg. structures, population, business income etc) the output from the
computer analysis is an estimate of likely results from the occurrence of a catastrophic
events.
Catastrophe models are employed by Insurers brakes rating agencies and large companies
with exposure to catastrophic loss.

UNIT 3
Introduction to Insurance
In insurance terms, risk is the chance something harmful or unexpected could happen. This
might involve the loss, theft, or damage of valuable property and belongings, or it may
involve someone being injured. By pricing risk, insurers know how much money they need
to reserve to pay claims.
The essence of Insurance is the elimination of risk and substitution of certainty for
uncertainty. Insurance helps in replacing risk with known costs , the cost of buying and
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maintaining insurance policies. Thus, insurance is not only an important aid to Industry and
Commerce but also provides great benefits to the society as a whole.
Insurance provides protection from the exposure to hazards and the probability of
loss. Risk is defined as the possibility of loss or injury, and insurance is concerned with the
degree of probability of loss or injury. Only pure risks are insurable because they involve
only the chance of loss.
Definition
The term insurance has been defined in both financial and legal sense.
• In Finance Sense: The term insurance may be defined in the financial sense as “A
Social device providing financial compensation for the consequences of adversity, the
payments being made from the accumulated contributions of all parties participating
in the arrangement. “The essence of Insurance thus is Collective, bearing of risks as it
involves pooling of risk.
• In legal Sense: A contract of Insurance may be defined as “A Contract under which
the Insurer (Insurance company) in consideration of a sum of money paid (Premium)
by the Insured (The person whose risk is Insured) agreed to;
• Make good the loss suffered by the insured against a specific risk (for which the
insurance has effect) or
• To pay a prefixed amount to the Insured or his/her beneficiaries on the happening of
specified event.
• The Instrument containing the contract of Insurance is called a “Policy”.
Basic Characteristics of Insurance:
• Based on the proceeding definition, an insurance plan or arrangement typically
include the following characteristics.
1. Pooling of Losses
2. Payment of Fortuitous Losses (unforeseen and unexpected)
3. Risk Transfer
4. Indemnification
1. Pooling of Losses:
Pooling is the spreading of losses incurred by the few over the entire group, so that in the
process, average loss is substituted for actual loss.
• Key mechanism is “law of large number”.
• Future losses are predicted based on law of large number.
Principal of loss pooling “There should be a large number of similar, but not necessarily
identical, exposure units that are subject to the same peril”, which can be concluded as
a. The sharing of losses by the entire group.
b. Prediction of future losses with some accuracy based on the law of large numbers.
Ex: assume that 1,000 farmers in a village of koratagere agree that if any farmer’s home
is damaged or destroyed by a fire, the other members of the group will indemnify the
actual costs of the unlucky farmer who has a loss. Further assume that each home is
worth 200,000 ₹, and, on average, one home burns every year.
 In the absence of insurance, the maximum loss to each farmer is 200,000 ₹, if the
home should burn. With the pooling of loss, the maximum loss for each farmer is
200 ₹ for the actual loss of 200,000 ₹.
 In reality, the actuary seldom knows the true probability and severity of loss.
Therefore, estimates of both the average frequency and the average severity of loss
must be based on previous loss experience (objective risk). As the number of
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exposures increases, the relative variation of actual loss from expected loss will
decline
• Assume two business owners each own an identical storage building valued at
$50,000. Assume there is a 10% chance in any year that each building will be
destroyed by a peril, and that a loss to either building is an independent event. If the
two owners decide to pool their loss agreeing to pay an equal share of any loss that
might occur. Do risk pooling help reduce risk of the two owners?
• From the last problem, if there is another owner joins the pool, what is the level of
risk?
2. Payment of fortuitous losses
• A fortuitous loss is one that is unforeseen and unexpected and occurs as a result of
chance.
• Law of large number is based on the assumption that losses are accidental and occur
randomly
Insurance policies do not cover intentional losses.
3. Risk Transfer
• Risk transfer means that a pure risk is transferred from the insured to the insurer, who
typically is in a stronger financial position to pay the loss than the insured
• Risk Transfer is another essential element of Insurance with the exception of self,
insurance, a true insurance plan always involves risk transfer. Risk transfer means
that a pure risk is transferred from the insured to the insurer, who typically is in a
stranger financial position to pay the loss, than the insured from the view point of the
Individual pure risk that are typically transferred to insurers including the risk of
premature death, poor health, disability destruction and theft of property and personal
liability law suits.
4. Indemnification
• Indemnification means that the insured is restored to his or her approximate financial
position prior to the occurrence of the loss.
• A final characteristic of insurance is indemnification for losses. Indemnification
means that the insured is restored to his approximate financial position prior to the
occurrence of the loss. For Eg: If house burns in fire, the house owner policy will
indemnify the house owners or restores him to his previous position.
Requirements of an insurable risk
Insurer normally insure only pure risk. Not all pure risks are insurable. Six requirements of
an insurable risks.
1. There must be a large number of exposure units.
2. The loss must be accidental and unintentional.
3. The loss must be determinable and measurable.
4. The loss should not be catastrophic.
5. The chance of loss must be calculable.
6. The premium must be economically feasible.
Adverse selection and Insurance
• In the case of insurance, adverse selection is the tendency of those in dangerous jobs
or high-risk lifestyles to purchase products like life insurance. To fight adverse
selection, insurance companies reduce exposure to large claims by limiting coverage
or raising premiums.
• Examples of adverse selection in life insurance include situations where someone
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with a high-risk job, such as a race car driver or someone who works with explosives,
obtain a life insurance policy without the insurance company knowing that they have
a dangerous occupation.
a. Adverse relation can be controlled by careful underwriting.
b. Underwriting refers to the process of selecting and classifying applicants for insurance
c. Applicants who meet the underwriting standards are insured at standard or preferred rates.
d. If the underwriting standards are not met, the insurance is denied or an extra premium
must be paid.
e. Insurers frequently sell insurance to applicants who have a higher than average chance of
loss but such applicants must pay higher premium.
f. Policy provisions are also used to control adverse selection.
g. for Eg: suicide clause in life insurance and the pre,existing condition clause in health
insurance.
Insurance ,Vs, Gambling
• Insurance is often erroneously confused with gambling. But there are two important
differences between them. They are
• Gambling creates a new speculative risk, while insurance is a technique for handling
an already existing pure risk
• If you bet for Rs.5 lakhs on a horse race, a new speculative risk is created but if you
pay Rs.5 lakhs to an insurer for a home owner’s policy that includes coverage for a
fire, the risk is already present. No new risk is created by the transaction
• Secondly the gambling is socially unproductive, because the winner’s gain comes at
the expense of the loser. In contrast Insurance is always socially productive.
• The Insurer and the insured both have a common interest in the prevention of a loss.
Both parties win if the loss does not occur. Moreover, frequent gambling transactions
generally never restore the losers to their former financial position. In contrast
insurance contracts restore the insured, financially in whole or in part if a loss occurs.

Insurance ,Vs, Hedging

• In case of hedging the risk can be transferred to a speculator through purchase of
future contract. An insurance contract however, is not the same thing as hedging.
Although both techniques are similar in that risk is transferred by a contract and no
new risk is created
• There are two important differences between them
Firstly, an Insurance transaction involves the transfer of Insurable risk because the
requirements of an insurable risks generally can be met. However, hedging is a
technique for handling risks that are typically uninsurable, such as protection against
a decline in the price of agricultural products and raw materials.
Secondly, in case of insurance, it can reduce the objective risk of an insurer by
application of the law of large numbers. As the number of exposure units increase the
insurer’s prediction of future losses improves, because the relative variation of actual
loss from expected loss will decline.
• In contrast, hedging typically involves only risk transfer not risk reduction. The risk
of adverse price fluctuations is transferred to speculators who believe they can make a
profit because of superior knowledge of market conditions.
Insurance ,Vs, Assurance
• The two terms assurance and insurance have often been used interchangeably and
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 Dr. T. MANJUNATHA

treated as synonyms, but a fine distinction between the two concepts is required for a
better understanding of the subject insurance.
• Assurance is used in those contacts which guarantee the payment of a certain sum on
the happening of a specified event that is bound to happen soon or later.
• In life policies, there is obsolete certainty regarding the happening of the event and
only uncertainty is about the time of occurrence of event.
• Hence Life polices comes under Assurance.
Types of Insurance
(A)Types of Insurance Contracts &
(B) Classification of Insurance
A) Types of insurance
1. Personal Insurance Contract
2. Property Insurance Contract
3. Liability Insurance Contract
4. Guarantee Insurance Contract
Types of Insurance policies
1. Auto Insurance
2. Health Insurance
3. Disability Insurance
4. Causality Insurance
5. Life Insurance
6. Property Insurance
7. Liability Insurance
8. Credit Insurance
B) Classification of Insurances
Everybody faces risk of various kinds. Different risks cause different types of losses. Risks
may be insurable or non,insurable. Insurance companies offers various kinds of insurance
policies to cover various kinds of risks and providing security against various losses.
Five reasons why you could be turned down for life insurance
a. specific health conditions and illness
b. Hazardous occupation
c. Hazardous extracurricular activities
d. Income limitations
e. Previous declines on life insurance applications
Depending on the subject matter, insurance may be classified into two broad
categories.
1. Life Insurance: Life Insurance is a contract whereby the insurer in consideration of a
premium paid either as lump sum or as periodical instalment, undertakes to pay, either on the
death of the insured or on the expiry of specified number of years, whichever is earlier. An
annuity or a specified amount.
a. Endowment policy
b. ULIPs
c. Money back policy
d. Whole life policy
e. Annuity/ Pension plans
f. Term insurance policy
2. Non,Life Insurance:
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 Dr. T. MANJUNATHA

• Non,life insurance is a contract whereby the Insurer in consideration of a premium

paid by the insured agreed to indemnify him for the financial loss, suffered by him
due to an adverse event, which is covered by the terms of the policy.
• Non,life Insurance may be classified further into general insurance and miscellaneous
Insurance. Again, depending on the subject , matter these are four kinds of general
insurance
a. Fire Insurance: Fire Insurance is a Contract under which the insurer agrees to
indemnify the insured, in return for payment of a premium in lump sum or by
instalments, losses suffered by him due to destruction of or damage to the insured
property, caused by fire during an agreed period of time.
b. Marine Insurance: Marine Insurance is a contract of insurance under which the
insurer undertakes to indemnify the insured in the manner and to the extent thereby
agreed, against marine undertakes to indemnify the insured in the manner and to the
extent thereby agreed, against marine losses, incidental to marine adventure.
For Ex: loss or damage to the ship, cargo, freight, vessels or any other subject of a marine
adventure. Accordingly, there are various types of marine policies, like voyage policies,
valued policies, hull insurance, time policies, cargo insurance freight insurance etc.
c. Health Insurance / Mediclaim Insurance: Under this the expenses related to medical
treatment gets covered on payment on certain premium. As the cost of medical treatments
in India is going up. Accordingly, health insurance is becoming more and more
affordable and essential.
d. Motor Vehicle Insurance: Under this type of Insurance a personal or commercial
vehicle is insured against loss damage to the vehicle due to accident or theft, personal
injury or death of the owner or passenger due to accident or damages payable to third
parties by the owner of the vehicle for accidents
e. Personal Accident Insurance: personal accident insurance a contract under which the
insurer undertakes to pay a specified amount of money on the death or disability of the
Insured on account of the accident.
f) Travel Insurance: This is the insurance offered to cover,up the risk during Foreign
Travel. Examples, loss of baggage, loss of passport, delay in flight, medical emergencies.
As it is extremely difficult to handle the above situation in foreign land, a Travel
Insurance would be very helpful.
Usually when the employees were sent out for a short,term project, overseas, they were
offered Travel Insurance as part of travel kit. It is a way to cover,up risk from both
employer and employee perspective.
g. Home Insurance: This insurance protects the house and/or the contents in it,
depending on the scope of insurance policy opted for.
It secures the home against natural calamities and man,made disasters and threats.
Home insurance provides protection against risks and damages from fire, burglary, theft,
flood, earthquakes etc. covering the physical asset (building structure) and valuables
(contents) in it.
Miscellaneous Insurance
Non,life insurance in addition to general insurance includes other miscellaneous insurance.
They are
a. Crop Insurance: A contract of crop insurance is a contract to provide a measure of
financial support to farmers in the event of a crop failure due to drought or flood.

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 Dr. T. MANJUNATHA

b. Cattle Insurance: Cattle Insurance is a contract of insurance whereby a sum of money is

secured to the Insured in the event of death of animals like, cows, buffaloes, sheep, goats etc.,
c. Cash in Transit Insurance: This type of insurance compensates the insured against loss
of money or cash stolen from the business premises or while it is being carried from or to the
Bank.
d. Fidelity Guarantee Insurance: This is a type of contract of insurance and also a contract
of guarantee to which general principles of insurance apply. Fidelity guarantee does not mean
the guarantee of the employee’s honesty, but it guarantees the employer for any damages or
loss resulting from the employee's dishonesty or disloyalty.
Insurance Sector Reforms in India
The financial reforms paving way to liberalization of the Indian economy in the early 1990s
resulted in the recognition of the Insurance sector as an important part of the overall financial
system. Thus, it was found necessary to bring about appropriate reforms in the Insurance
sector as well.
• In 1993 Malhotra committee led by former finance secretary and RBI governor
R.N.Malhotra was formed to assess the state of Insurance Industry in India and
submit its recommendations.
The Malhotra Committee was formed with the following purpose.
• To propose the structure of the Insurance Industry to evaluate its strengths and
weaknesses with the intention of creating an efficient and feasible Insurance industry
that would offer wide ranging Insurance services, covering a variety of Insurance
products with a high quality of services to the public and operating as an efficient
means for mobilization of financial resources for development of the economy.
• To formulate recommendations for modifying structure of Insurance Industry, for
amending the general policy and framework.
• To make precise proposals regarding life insurance corporation of India and General
Insurance Corporation of India with a view to improve their functioning.
• To make suggestions on regulation and supervision of insurance sector in India.
• To give advice on role and working of surveyors,intermediates, like agents in the
Insurance sector.
• Opening up of the Life Insurance Sector: Globalization. A foregoing comparative
performance analysis of the LIC with the global experience in the insurance industry
has witnessed and compelled to opening up of both the life and non-life insurance
industry for the new private players.
The problems, which are existing in the LIC at present are:
1. Lack of competition in the life insurance industry, which reflects among other things,
insufficient responsiveness to customer needs,
2. High premium cost,
3. Accessible causation of life policies,
4. Huge untapped market,
5. Overstaffing,
6. Growth of restrictive staff practice,
7. Lags in software technology, and
8. Lack of awareness, the monopoly of LIC.
• Keeping its role in view the insurance sector constitutes a very important and vital
financial intermediary for the growth of the economy.
• The negotiations on financial services in the context of General Agreement on Trade
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 Dr. T. MANJUNATHA

in Services (GATS) were concluded in December 1997.

• The largest component of the services sector as included in the financial sector is
insurance.
• To mitigate the non-coverage of both life and non-life insurance problems, on April
1, 1993 the government of India, set up the committee under the 235 Chairmanship of
M. L. Malhotra for the reforms of the insurance sector.
• The committee has identified a number of problems in the insurance sector, and
placed various recommendations in its report for changes in its structure, functioning
and the general policy framework, keeping in mind the reforms under way in other
parts of the financial sector and the economy.
• The committee submitted its report on 1st April 1994, but IRDA bill was accepted in
October 1999 by the Cabinet with FDI limited to 26 per cent. Therefore, since
October 2000 private insurance companies are returning into the insurance sector
The Malhotra committee submitted its report in 1994 recommending the following with
respect to the below:
A) Structure:
a. The Govt. stake in the Insurance companies should brought down to 51%
b. Government should take over the holding of General Insurance Corporation of India
and its subsidiaries in order that, these subsidiaries can act as independent
corporations.
c. All Insurance companies to be given greater autonomy to operate
B) Competition:
1. Private companies with a minimum paid up capital of Rs. 100 crores should be allowed to
enter the Industry.
2. No company should deal with both life and general insurance through a single entity
3. Foreign companies may be allowed to enter the Industry in collaboration with the domestic
companies.
4. Postal life Insurance should be allowed to operate in the rural market.
5. Only one state level life insurance company should be allowed to Operate in each state
6. The Insurance Act should be suitably changed
7. Insurance regulatory body should be set,up
8. Controllers of Insurance (Currently a part of the finance Ministry) should be made
independent.
(C) Investments:
• Mandatory investments of LIC life fund in Govt. securities to be reduced from 75% to
50%.
• GIC and its subsidiaries are not to hold more than 5% in any company (There current
holdings to be brought down to this level over a period of time.)
(D) Customer services:
• LIC should pay interest on delays in payment beyond 30 days
• Insurance companies must be encouraged to setup unit linked pension schemes
• Computerization of operations and updating of technology to be carried out in the
Insurance Industry.
(E) IRDA Bill
The main emphasis in the recommendations made by the committee was on opening up of
the Insurance Industry to competition in order to provide better services at economical rates
to the customers. However, these recommendations also carried a word of caution as any
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 Dr. T. MANJUNATHA

failure on the part of new players could drastically diminish public confidence in the
Industry. Consequently, it was resolved to regulate competition by stipulating the minimum
capital requirement of Rs. 100 crores. Since this sum is rather insignificant for foreign
companies the foreign equity participation was to be restricted to only 40%. In 1999
Insurance Regulation and Development Act was passed allowing the entry of new players /
joint ventures into the insurance business. An independent regulatory body / authority was
setup in order to protect the interest of policy holders and to regulate, promote and ensure
orderly growth of the insurance industry and to propose suitable amendments in the existing
insurance laws.
Liberalization of Insurance Markets
• Liberalization of the insurance sector has contributed towards the economic
development of the country in the following ways:
• The main idea was to make insurance industry vibrant and dynamic so that it can
support the growth process leading to overall economic growth of the country in post
liberalization era. At present the foreign direct investment in insurance sector is
permitted up to 26 per cent of equity.
1. The growth scenario in the insurance sector has created numerous employment
opportunity in the economy. There is an upsurge in the demand for marketing experts,
finance specialists, human resources professionals, statisticians etc. Experts in the new
specialty areas like underwriting claims managements, actuarial management etc., are also
being occupied in the industry.
2. The Indian economy has been witnessing huge inflow of funds since the deregulations of
the Insurance sector. There is a huge influx of foreign players in the insurance sector in India
in the recent past.
3. Insurance related service domains like training, workshops, risk assessment, rating and risk
management too have positively changed, making it possible for the industry to explore new
policy covers. Besides the increase in the insurance players will significantly boost up related
fields like advertising, brand building etc., which in turn would promote the ancillary.
Industries, further the intense competition caused by the presence of innumerable Insurance
companies would compel these companies to follow customer friendly pricing structures that
would foster healthy competition throughout the Insurance Industry.
4. Before deregulation of the insurance industry the purpose of life insurance policies, in
India was merely to seek tax benefits and very little attention was paid to the risk covers. But
now most of the new entrant have shifted the focus from tax benefits to protection.
5. The Developments in the Insurance Industry have created the need for widening the c
channels of distribution of insurance products. The new players have started an extensive
variety of products that calls for need based selling technologies. Banks too have been
involved in the task of distributing Insurance products. The Traditional sales procedures have
been substituted with modern techniques like Bank assurance to sell insurance products to
customers.
6. The need for quicker delivery of Insurance products has provoked the competing insurance
players to follow more sophisticated automated systems.

Major players of Insurance

• Life and Non,life and list of companies operating in India:
• Earlier the Insurance Industry in India consists of only two state owned Insurers,
namely LIC of India and General Insurance (GIC) including its subsidiary companies
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 Dr. T. MANJUNATHA

with Corporation of India effect from December2000, these subsidiaries have been
delinked from parent company and converted into independent insurance companies ,
oriental insurance company ltd., New India Assurance Co. Ltd., National Insurance
Co. Ltd., and United India Insurance Co. Ltd.,
(a) Life Insurances:
As of October 2018, IRDAI has recognized 24 life insurance companies. Following is the list
1 Life Insurance Corporation of India Public Mumbai 1956

2 HDFC Standard Life Insurance Co. Ltd. Private Mumbai 2000

3 Max Life Insurance Co. Ltd. Private Delhi 2000

4 ICICI Prudential Life Insurance Co. Ltd. Private Mumbai 2000

5 Kotak Mahindra Life Insurance Co. Ltd. Private Mumbai 2001

6 Aditya Birla Sun Life Insurance Co. Ltd. Private Mumbai 2000

7 TATA AIA Life Insurance Co. Ltd. Private Mumbai 2001

8 SBI Life Insurance Co. Ltd. Private Mumbai 2001

9 Exide Life Insurance Co. Ltd. Private Bangalore 2001

10 Bajaj Allianz Life Insurance Co. Ltd. Private Pune 2001

11 PNB MetLife India Insurance Co. Ltd. Private Mumbai 2001

12 Reliance Nippon Life Insurance Company Private Mumbai 2001

13 Aviva Life Insurance Company India Ltd. Private Gurugram 2002

14 Sahara India Life Insurance Co. Ltd. Private Lucknow 2004

15 Shriram Life Insurance Co. Ltd. Private Hyderabad 2005

16 Bharti AXA Life Insurance Co. Ltd. Private Mumbai 2008

17 Future Generali India Life Insurance Co. Ltd. Private Mumbai 2007

18 IDBI Federal Life Insurance Co. Ltd. Private Mumbai 2008

Canara HSBC Oriental Bank of Commerce Life

19 Private Gurugram 2008
Insurance Co. Ltd.

20 Aegon Life Insurance Co. Ltd. Private Mumbai 2008

21 Pramerica Life Insurance Co. Ltd. Private Mumbai 2008

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 Dr. T. MANJUNATHA

22 Star Union Dai-Ichi Life Insurance Co. Ltd. Private Mumbai 2008

23 IndiaFirst Life Insurance Co. Ltd. Private Mumbai 2009

24 Edelweiss Tokio Life Insurance Co. Ltd. Private Mumbai 2011

B) Non-life insurance companies: As of October 2018, IRDAI has recognized 34 non-life

insurance companies

1 Acko General Insurance Private Mumbai 2016

2 Aditya Birla Health Insurance Private Mumbai 2015
3 Agriculture Insurance Company of India Public New Delhi 2002
4 Apollo Munich Health Insurance Private Gurgaon 2007
5 Bajaj Allianz General Insurance Private Pune 2001
6 Bharti AXA General Insurance Private Mumbai 2008
7 Cholamandalam MS General Insurance Private Chennai 2001
8 Cigna TTK Private Mumbai 1918
9 DHFL General Insurance Private Mumbai 2016
10 Digit Insurance Private Pune 2017
11 Edelweiss General Insurance Private Mumbai 2017
12 Export Credit Guarantee Corporation of India Private Mumbai 1957
13 Future Generali India Insurance Private Mumbai 2007
14 HDFC ERGO General Insurance Company Private Mumbai 2002
15 ICICI Lombard Private Mumbai 2001
16 IFFCO TOKIO General Insurance Private Gurugram 2000
17 Kotak Mahindra General Insurance Private Mumbai 2015
18 Liberty General Insurance Private Mumbai 2013
19 Magma HDI General Insurance Private Mumbai 2009
20 Max Bupa Health Insurance Private New Delhi 2008
21 National Insurance Company Public Kolkata 1906
22 New India Assurance Public Mumbai 1919
23 Raheja QBE General Insurance Private Mumbai 2007
24 Reliance General Insurance Private Mumbai 2000
25 Reliance Health Insurance Private Mumbai 2017
26 Religare Health Insurance Company Limited Private Gurgaon 2012
27 Royal Sundaram General Insurance Private Chennai 2000
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 Dr. T. MANJUNATHA

28 SBI General Insurance Private Mumbai 2010

29 Shriram General Insurance Private Jaipur 2008
30 Star Health and Allied Insurance Private Chennai 2006
31 Tata AIG General Insurance Private Mumbai 2001
32 The Oriental Insurance Company Public New Delhi 1947
33 United India Insurance Company Public Chennai 1938
34 Universal Sompo General Insurance Company Private Mumbai 2007
Principles of Insurance
The fundamental principles of insurance are explained as follows:
a. Principle of Insurable Interest
b. Principle of utmost good faith
c. Principle of indemnity
d. Principle of subrogation
e. Principle of Contribution
f. Principle of Causa Proximal
g. Principle of Mitigation of Loss
a. Principle of Insurable interest
 Insurable interest means that a person opting for insurance must have monetary
interest in the property, he is going to get insured, and will suffer financial loss on the
occurrence of the insured event.
 For example, it is life in life insurance, factory, machinery, stock, house, building,
etc. in fire insurance, ship, cargo, etc, in marine insurance and so and so forth. But the
subject-matter of an insurance contract is indeed not the property as such but the
insurable interest of a man in that property
 Can I get life insurance on my husband without him knowing?
 It would be nearly impossible to buy life insurance on someone without them
knowing because most insurance companies will require a medical exam
from the insured person.
b. Principle of utmost good faith
• The principle of utmost good faith, uberrimae fade, states that the insurer and the
insured must disclose all material facts before the policy inception. ... In case of non-
disclosure or misrepresentation of material facts, the policy can be considered null
and void.
• It is important to the insurer that they have a full and accurate picture of the risk that
is proposed to them.
• A breach of utmost good faith can be in the form of either a misrepresentation (i.e. the
giving of false information) or a non-disclosure (i.e. failure to give material
information). Alternatively, it can be classified into a fraudulent breach and a non-
fraudulent breach (i.e. a breach committed either innocently or negligently, rather
than fraudulently).
Hindusthan Motors Ltd. v/s National Insurance Co. Ltd. (Flood insurance)
• First fact alleged to be suppressed is of topography. The Defendant Nos. 1 and 2
claim that, the factory of the plaintiff is situate at a low lying area
• Surveyor’s reports state that, the factory of the plaintiff is situate at a low lying area
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 Dr. T. MANJUNATHA

and being susceptible to flooding.

• In the written statement took the point of concealment the labour problem at the
factory during the material point of time as well as the inundation of the factory again
at the material point of time.
• No payment in respect of any premium shall be deemed to be payment to the
Company unless a printed form of receipt for the same signed by an Official or duly
appointed Agent of the Company shall have been given to the Insured.'
• https://www.lawyerservices.in/Hindusthan-Motors-Ltd-Versus-National-Insurance-
Co-Ltd-2014-09-25
c. Principle of indemnity
• The insurance contract should be a contract of indemnity only and nothing more.
• This means that, on the happening of an event insured against, the insured should be
pleased by the insurer in the same monetary position that he occupied immediately
before the event.
• That is under no circumstances the insured is allowed to benefit more than the loss
suffered by him.
d. Principle of subrogation
• Subrogation, in general means the legal rights of one person having indemnified the
other in a contractual obligation to do so, that is to stand in the place of another and
avail all the rights and remedies of the other, whether enforced or not.
• The principle of subrogation entitles the insurance company to step into the shoes of
the insured after indemnifying him for the loss. That is the insurer acquires every
right of the insured after settling the claims of the insured in respect of the covered
loss. A loss may occur accidentally or by the action or negligence of third party.
• For instance, in case of property insurance, the property owner who may have
suffered damage due to the deliberate action of a third party, has a right to take legal
action against the offending third party to recover the 1oss/ damage or proceed under
the insurance policy. However, he can’t have the benefit under both the alternatives.
If the insured opts to recover the loss under the insurance policy, he will legally
surrender his rights against the third parties in favour of the insurers. The insurer will
get the rights which are available to the insured and he cannot be allowed to recover
more than what the insured could have recovered.

f. Principle of Contribution
• The principle of contribution applies in cases of double insurance.
• It implies that when a property is insured for the same risk with two or more insurers,
the different insurers will contribute to the total payment in proportion to the amount
assured by each. This principle of contribution does not apply in case of life
insurance.
• The right of contribution is subject to the following conditions
(1) The same subject matter is insured under different policies,
(2) The policies are in force at the time of loss
(3) The policies cover the same period during which the loss occurred.
g. Principle of Causa Proximal
• According to the principle of causa proxima, the insurer is liable only for those losses
which has been most closely and directly caused by the peril insured against.
• It is the duty of the insured to prove that the loss arose out of the insured peril which
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 Dr. T. MANJUNATHA

is proximate.
• Under this principle the insurers are not liable for remote causes that are not insured
against.
• For Eg: In a marine policy the goods were insured against damage by sea,water some
rats on board made a hole on the bottom of the ship causing sea,water to pour into the
ship and damage the goods. Here the proximate cause of loss is sea water, which is
covered by the policy but the hole made by the rats is a remote cause. Therefore, the
insured cannot recover damages from the insurer.
• https://economictimes.indiatimes.com/wealth/insure/life-insurance/8-major-death-
cases-which-are-not-covered-in-term-life-
insurance/articleshow/70444745.cms?from=mdr
h. Principle of Mitigation of Loss
• On the occurrence of an event covered by the insurance policy it is the duty of the
insured to take all the possible steps to mitigate or minimize the loss to the subject
matter of insurance.
• He is expected to act in the same manner in which, he would have acted in the
absence of the insurance contract
• Otherwise, the insurer can refuse to compensate him for the loss caused due to his
negligence.
• On the other hand, the insured has the right to recover the losses suffered by him in
taking steps to reduce the loss
Essentials of Insurance Contract:
• Insurance contracts other than life insurance are contract of indemnity, under which
the insurer agrees to indemnify the insured for any loss suffered by him on the
happening of the event insured against.
• A contract of life insurance is a contingent agreement.
• The general principles of law as defined in the law of contracts, apply to the contracts
of insurance. Every contract of insurance must fulfil all the requirements of a valid
contract as laid down in the Indian contract Act.
• The contact of insurance in other words must fulfil the essential of a valid agreement.
• There must be valid offer and acceptance and free consent
• The parties must be competent to contract
• The purpose must be legal and there must be lawful consideration (8)Insurance is thus
a cooperative way of spreading risks
• It is the duty of the insured to disclose all material facts concerning the subject matter
of Insurance so that the insurer must be in position to accurately determine the risk
undertaken by him. That is there should be utmost good faith.
• From the social point of view insurance is a device by which the loss is likely to be
caused by an uncertain event is spread over a number of persons who are exposed to
it and who propose to insure themselves against such an event.

Benefits of Insurance
• The following are the benefits of Insurance:
• Shifting of risks: Insurance is a social device whereby individuals and business men
shifts specific risks to the insurer under a contract of insurance.
• Providing pecuniary security: Insurance gives a sense of surety to the policy holder.
In the event of loss or damage to the insured property he is indemnified to the extent
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 Dr. T. MANJUNATHA

of the actual loss and his financial condition remains unaffected by the loss/ damage.
• Improving credit standing: Insurance has the effect of improving credit standing of
business man as the assets which are insured are easily accepted as security for loans
by Banks / Financial Institutions.
• Providing Investment opportunity: A life insurance contract provides not only
protection but also investment opportunity such as pension in old age. In case of life
insurance, the payment is guaranteed along with bonus i.e., guaranteed amount and
bonus.
• Capital formation: Insurance companies mobilize the savings of community through
collection of premium and invest these savings in productive channels. As
institutional investors these companies provide funds for financing economic
development plans.
• Generating employment: With the growth of insurance business the insurance
companies are creating more and more employment opportunities.
• Promoting social welfare: Policies like old,age pension scheme, policies in respect of
education of children or marriage of children, provides a sense of security to the poor
policy holder ensuring social welfare.
Indian Insurance Industry
• The insurance sector in India dates back to 1818 when the first Insurance co. was
established. The Oriental Life Insurance Co. at Calcutta. This was followed in quick
succession with the establishment of Bombay Life Insurance Co. (1823) and Madras
Equitable Life Assurance Society (1829). In the general Insurance business Triton
Insurance Co. (1850) was the first to be established.
• The first attempt at Regulation of the insurance business in India was through the
Indian life Assurance Companies Act in 1912. This was later broad,based and the
Insurance Act came into existence from the year 1928 on words. The Insurance Act
was subsequently reviewed and a comprehensive legislation was enacted called the
Insurance Act 1938.
• The Nationalisation of life insurance business took place in 1957 when 245 Indian
and foreign insurance and provident societies were first amalgamated and then
nationalized. Life Insurance Corporation of India (LIC) came into existence and has
since enjoys a monopoly over the life insurance business in India.
• The milestone in the insurance sector, 1912 on words can be summarized as under.
The Life Insurance sector witnessed the following development.
• 1912 , The Indian life Assurance Companies Act enacted as the first statute to
regulate the life insurance business.
• 1928 , The Indian insurance companies Act enacted to enable the Govt. to collect
statistical information about both life and non,life insurance businesses.
• 1938 , Earlier legislation consolidated and amended to, by the insurance Act with the
objective of protecting the interest of the insuring public.
• 1956 , 245 Indian and Foreign Insure and provident societies taken over by the central
government and nationalized.LIC formed by an Act of parliament viz., LIC Act 1956
with a capital contribution of Rs. 5 Crores from Govt. of India.
Some Important milestones in the General Insurance business in India are:
• 1907 , The Indian Mercantile Insurance Ltd. setup the first company to transact all
classes of general insurance business.
• 1957 , General Insurance Council a wing of the insurance association of India frames
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 Dr. T. MANJUNATHA

a code of conduct for ensuring fair conduct and sound business practices.
• 1968 , The Insurance Act amended to regulate investments and set minimum
solvency margins and the Tariff Advisory Committee setup.
• 1972 , The General Insurance Business (Nationalization) Act nationalised the General
Insurance Business in India with effect from 1 stJanuary 1973.
• 107 Insurance companies amalgamated and grouped into four companies, Viz,
National Insurance Co. Ltd., The New India Assurance Co Ltd., The Oriental
Insurance C. Ltd., and The United India Insurance Co. Ltd. General Insurance
Companies incorporated as companies.
Regulation of Insurance in India
• Insurance Act 1938, Registration & Capital Requirement
• Insurance Act 1938: Insurance Act 1938 primarily govern the conduct of Insurance
business in India. As per the preamble of the Act Insurance Act 1938 is an act to
consolidate and amend the law relating to the business of Insurance, most of the
provisions of the Act, are applicable to all classes of insurance business.
Definitions:
• Life Insurance business is defined in section 2(11) and includes the contract of
insurance upon human life which, include the granting of disability, allowances,
accident benefits, annuities, and superannuation allowances. This business may be
linked or non,linked business or both.
• General Insurance business is defined under section 2 (6,B) that includes the marine,
fire and miscellaneous insurance business whether carried on singly or in
combination with one or more of them, i.e., may be linked insurance business.
• Marine Insurance business includes the business effecting the contract of insurance
upon vessels of any description, including the cargo of freights and other interests
(Section 2.13A)
• Fire Insurance is the insurance which includes the risk insured against the fire and
incidental to fire (Sec 2(6A).
Licensing of Insurance Agents and other Intermediaries
• The authority or an officer authorized by him on his behalf shall in the manner
determined by it and on payment of the prescribed fee, not exceeding Rs. 250/, issue
to any person making any application in the manner determined by the regulations, a
licence to act as an insurance agent for the purpose of soliciting or processing
insurance business.
• A licence issued immediately before the commencement of IRDA Act 1999 shall be
deemed to have been issued in accordance with the regulations which provide for
such licence. A licence issued after the commencement of the IRDA Act 1999 shall
remain in force for a period of three years only from the date of issue but shall may be
renewed for another period of three years at any one time on payment of the
prescribed fee.
• No intermediary or Insurance intermediary shall be paid or contract to be paid by
way of commission fee or as remuneration in any form an amount exceeding 30% of
the premium payable as may be specified by the regulations made by the authority
specified by the regulations made by the authority in respect of any policy or policies
effected through him.
• Further the authority may be the regulations made on this behalf specify the
requirements of capital, form of business and other conditions to act as an
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intermediary or Insurance intermediary.

Duties, Powers& Functions of IRDA
1. Duties of IRDA:
• The primary duty of the IRDA is to regulated promote and ensure orderly, growth and
conduct of the insurance business and reinsurance business.
• It has the duty to scrutinize all existing and new insurance products, rates charged,
terms and conditions offered and act in best interest of consumers.
• Authority has the general duty to protect the interest of policy holders in matters
concerning assignment, nomination settlement of Insurance claim, surrender and
other forms and conditions of contract of Insurance.
• The Authority is duty bound to follow the directions issued by the central Govt. and
report the outcome of the directions.
2. Powers of IRDA
• The Authority has the general supervisory power of Insurance Industry and it has the
administrative powers.
• Powers to appoint the staff and officers required to conduct the business of the
Authority.
• Power to constitute committees of the member and delegate the powers to the
committee.
• Power to issue a certificate of registration, renew, modify, withdraw, suspend or
cancel such registration to the insurer.
• Power to prepare a code of conduct to the agents, surveyors and loss assessors and
other intermediates associated with insurance business.
• Power to call information from insurers, inspect accounts, and other documents
conduct enquiries and investigate including the Audit of the Insurers, intermediaries,
and other organisations, connected with the insurance business.
• It has the power to regulate the margin of solvency, and investment of funds by
Insurance company.
• Power to exercise the powers sanctioned by other insurance laws of the country or by
other notification issued by the central government from time to time.
• It has the powers to make regulations with the consultancy of insurance advisory
committee in the field of financings the service conditions of the members regarding
the meeting and transaction to be carried out by the Advisory Committee in
promoting the insurance business.
Functions of IRDA
1. Ensure orderly growth of insurance industry
2. Protection of interest of policy holders
3. Issue consumer protection guidelines to insurance company
4. Grant, modify, and suspend license for insurance companies
5. Laydown procedure for accounting policies to be adopted by the insurance companies.
6. Inspect and audit of insurance companies and other related agencies.
7. Regulation of capital adequacy, solvency and prudential requirements of insurance.
8. Regulation of product development and their pricing including free pricing of products.
9. Promote and regular self regulating organisation in the insurance industry
10. Re-insurance limit monitoring
11. Monitor investment
12. Vetting of accounting standards, transparency requirement, in reporting
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13. Ensure the health of the industry by preventing sickness through appropriate action.
Insurance Regulatory and Development Authority Act 1999 (IRDA)
The following are salient features of the IRDA Act 1999:
• The insurance sector in India has been thrown open to the private sector. The second
and third schedules of the Act provide for removal of existing corporations (or
companies) to carry out the business of life and general (non,life) insurance in India.
• An Indian insurance company is a company registered under the Companies Act,
1956, in which foreign equity does not exceed 26 per cent of the total equity
shareholding, including the equity shareholding of NRIs, FIIs and OCBs.
• After commencement of an insurance company, the Indian promoters can hold more
than 26 per cent of the total equity holding for a period of ten years, the balance
shares being held by non, promoter Indian shareholders which will not include the
equity of the foreign promoters, and the shareholding of NRIs, FIIs and OCBs.
• After the permissible period of ten years, excess equity above the prescribed level of
26 per cent will be disinvested as per a phased programme to be indicated by IRDA.
The Central Government is empowered to extend the period of ten years in individual
cases and also to provide for higher ceiling on shareholding of Indian promoters in
excess of which disinvestment will be required. On foreign promoters, the maximum
of 26 per cent will always be operational. They will thus be unable to hold any equity
beyond this ceiling at any stage. The Act gives statutory status for the Interim
Insurance Regulatory Authority (IRA) set up by the Central Government through a
Resolution passed in January 1996. All the powers presently exercised under the
Insurance Act, 1938, by the Controller of Insurance (CoI) will be transferred to the
IRDA.
IRDA Regulations for General Insurance& Re,Insurance
• IRDA Regulations for General Insurance
• Various regulations have been framed by IRDA since its inception. These relate to
licencing of insurers, regulation of intermediaries, reporting requirements, business
practices, etc.
• Regulations Framed under Insurance Regulatory and Development Authority Act,
1999 and the Insurance (Amendment) Act, 2002.
• Insurance Regulatory and Development Authority (Actuarial Report and Abstract)
Regulations, 2000.
• Insurance Regulatory and Development Authority (Obligation of insure of Rural or
Social Sectors) Regulation,2000.
• Insurance Regulatory and Development Authority (Insurance Advertisements and
Disclosure) Regulations,2000.
• Insurance Regulatory and Development Authority (Licensing of Insurance Agents)
Regulations, 2000.
• Insurance Regulatory and Development Authority (General Insurance , Reinsurance)
Regulations, 2000.
• Insurance Regulatory and Development Authority (Appointed Actuary) Regulations,
2000.
• Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency
Margin of Insurers) Regulations,2000.
• Insurance Regulatory and Development Authority (Meetings) Regulations, 2000.
• Insurance Regulatory and Development Authority (Registration of Indian Insurance
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Companies) Regulations, 2000.

• Insurance Advisory Committee (Meetings) Regulations, 2000.
• Insurance Regulatory and Development Authority (Investment) Regulations, 2000.
• Insurance Regulatory and Development Authority (Preparation of Financial
Statements and Auditor’s Report of Insurance Companies) Regulations, 2002.
• Insurance Regulatory and Development Authority (Licensing, Professional
Requirements and (ode ‹if Conduct) Regulations, 2000.
• Insurance Regulatory and Development Authority (Conditions of Service of Officers
and Other Employees) Regulations,2000.
• Insurance Regulatory and Development Authority (Life Insurance , Reinsurance)
Regulations, 2000.
• Insurance Regulatory and Development Authority (Investment) (Amendment)
Regulations, 2001.
• Insurance Regulatory and Development Authority (Third Party Administrators —
Health Services) Regulations, 2001.
• Insurance Regulatory and Development Authority (Re,insurance Advisory
Committee) Regulations, 2001.
• Insurance Regulatory and Development Authority (Protection of Policy Holder’s
Interest) Regulations, 2000.
• Insurance Regulatory and Development Authority (Investment) (Amendment)
Regulations, 2002.
• Insurance Regulatory and Development Authority (Assets, Liabilities and Solvency
Margin of Insurers) (Amendment) Regulations, 2002.
• Insurance Regulatory and Development Authority (Licensing of Corporate Agents)
Regulations, 2002.
• Insurance Regulatory and Development Authority (Licensing of Insurance Agents)
(Amendment) Regulations, 2002.
• Insurance Regulatory and Development Authority (Insurance Bookers) Regulations,
2002.
• Insurance Regulatory and Development Authority (Manner of Payment of Premium)
Regulations, 2002.
• Insurance Regulatory and Development Authority (Obligations of Insurers to Rural or
Social Sectors) (Amendment) Regulations, 2002and 2008.
• Insurance Regulatory and Development Authority (Protection of Policyholders
Interest) (Amendment) Regulations, 2002.
• Insurance Regulatory and Development Authority (Qualification of Actuary)
Regulations, 2004.
Re,insurance
• Some times the amount of total risk is so high that it is extremely difficult for one
insurer to bear the liability. In such a case the insurance company may arrange with
another insurer to insure a portion of the insured risk. This arrangement is known as
“re,insurance” is also termed as Insurance of Insurance.
• In other words, in the event of loss, if it is beyond the capacity of the original insurer
to pay, then this reinsurance process is resorted to. The original insurer who transfers
a part of the insurance contract is called the ‘reinsured’ and the second insurer is
called the ‘reinsurer’ of course the reinsured has to pay reinsurance premium for that
portion of the risk which is shifted to the second insurer.
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• for Eg: if the property is insured for Rs. 40 lakhs and the insurer on being satisfied as
to the condition of the property has accepted the risk. Despite the insurance company
is own limit of merely Rs. 25 lakh it may arrange with another co. to reinsure or to
take up the portion of the risk that exceeds its limit of Rs. 25 lakhs, so that if property
destroyed, the original insurance (Insurance co) would pay Rs. 40 lakhs to the
insured, but would recover the amount under the reinsured agreement from the
reinsurer.
Characteristics of Reinsurance
The following are the important characteristics of reinsurance.
• The Purpose of reinsurance is to spread out or share the loss.
• Reinsurance contract is made on the same terms and conditions that govern
the original contract of insurance.
• An original insurer has insurable interest up to the amount of the risk
undertaken by the co. Therefore, the insurer can reinsure the subject matter to
that extent.
• If the original insurance lapses for any reason, reinsurance may also be
terminated.
• On the occurrence of the loss, the original insurer has to pay the assured
amount to the insured and only then the original insurer entitled to claim his /
co share of the liability from the reinsurer.
• In the absence of a legally accepted contract between the original party who
has insured his subject matter and the original insurer, the reinsurers are
obviously discharged.
• The re,insurer is not liable to the original insured in the event of loss as there
is no agreement between the two.
Types of Reinsurance
1. Proportional Reinsurance: under this method of reinsurances co / original insurer (i.e.,
the ceding office) shares the aggregate claim liability with the reinsurer within the scope of
the agreement and respective of the size of the claim. The reinsurer will pay commission or
brokerage to the ceding company or reinsurance broker at a specified percentage of the
premium ceded. The method of proportional reinsurance may be based on
a) Quota Method: under this method the reinsurance co, shares such proportion of every risk
as is stated in the agreement, for Eg reinsurance is arranged on a 50% basis, the reinsurer
accepts half of each risk, obtains half the premiums and bears half the claims while the
leading company handles and holds the balance of 50%.
b) Share Surplus Method: The amount for the reinsurance co, the scope of geographical
area and class of business are all included under the agreement when a risk is proposed the
reinsurance co, has a free choice, within the liability specified in the agreement as to how
much it will retain for its own amount. Thus, the surplus of the risk alone may be reinsured.
2. Non,propositional Reinsurance: In these forms of covers the original insurer and the
reinsurers do not share each loss in fixed propositions and may not share some losses at all.
The original Insurer (The ceding office) will under its retention as a form of first los
insurance, i.e., it will bear all losses
• The non,proportional method of reinsurance may be based on:
a) Excess of loss Method: Under this method the insurer decides the ceiling amount the co,
is prepared to bear on any one loss and seeks reinsurance under an agreement whereby the

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reinsurers will be responsible for the amount of losses above the amount retained by the
direct insurer.
b) Excess of loss ratio method: It does not deal with individual risks or individual events,
but is designed to prevent vide fluctuations of the net claims ratio of a particular account over
one financial year compared with another. The reinsurance is intended to protect the co. from
an abnormal experience and not just the normal year to year fluctuating.
c) Pool Method: under this method the members cos. accepts to pool together all their
business to a leading office and this leading office will make the payment of claim. The loss /
profit shall be distributed according to their share in business.
d) Treaty Method: Under this method there is an agreement between the insurer and
reinsurer or number of reinsurers where by each reinsurer is bound to accept fixed share of
every risk coming within the scope of agreement.

Life Insurance, Micro Insurance, Licensing of Insurance Agents

• Life Insurance ,A life insurance policy is a contract with an insurance company. In

exchange for premium payments, the insurance company provides a lump,sum
payment, known as a death benefit, to beneficiaries upon the insured's death.
Typically, life insurance is chosen based on the needs and goals of the owner.
• Micro Insurance , Micro insurance is the use of insurance as an economic tool at the
'Micro'level of society. It refers to providing insurance cover for micro entrepreneurs,
small and landless farmers, women and low,income people through recognized,
semiformal and informal institutions. The schemes that are launched in this
connection are
• The Personal Accident Insurance Scheme (PAIS) which is being provided along with
the Kisan Credit Card (KCC) and
• Rashtriya Krishi Bima Yojana (RKBY) for insuring crops he insurer gives the

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reinsurer a portion of premium it collects from the insured and in return is covered for
losses above a particular limit.
Registration of Insurance Companies
• Requirement of New company: No person shall after commencement of IRDA
Act 1999 being to carry on any class of Insurance business in India and no insurer
carrying on any class of insurance business in India shall after the expiry of three
months from the commencement of this Act continue to carry on any such business
unless he has obtained from the Authority a certificate of registration for the
particular class of insurance business.
• Two Stage Licensing Process:
Stage , 1: Requisition for Registration
Stage – 2: Application for Registration
Stage , 1: Requisition for Registration
• An application has to be made to the Authority with all the prescribed disclosure
norms. Some of the important items cover;
• Promoters background, financial strength shareholder's agreement and reasons for
entering the sector.
• Director’s background.
• Capital structure, initial and future.
• Financial projection for 5 years
• Rural and social sector strategy.
• There is no provision for appeal in the event of a second rejection. A revised
application is permissible by the applicant company only after 2 years with an
auditioning condition that this will be with a new set of promoters or a different class
of Insurance business.
Stage – 2: Application for Registration
• After the requisition is granted by the authority, the applicant is required to make an
application for registration. Information to be disclosed includes
• 1) Proof of paid up capital of Rs. 100 crores. 2) Proof of Deposit.
• Marketing and Distribution information including Market Research, product
information, sales promotion, Customers service.
• Operations , Information should cover underwriting, information technology, Internal
controls, Personnel Management.
• Investment , Information on investment policy strategy and ground level
arrangements. 6) Reinsurance , Information on approach and Terms.
Licencing Criteria
some of the important parameters includes,
• Promoter and Directors background.
• Promoter financial strength.
• Volume of business and earning prospects.
• Rural and social sector focus.
• Product of profit and
• Capital structure
• Actuarial and professional expertise
• Infrastructure
• Public interest.
Role of Insurance Companies in Economic Development of India
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1. Saving and Insurance

2. Capital Formation and Insurance
3. Obligation to Rural and Social Sector
4. Insurance as financial intermediary
5. Promotes Trade and Commerce
6. Facilitates efficient capital allocation
7. Encouraging Financial Stability and Reducing Anxiety
8. Reducing Burden on Govt. Exchequer
https://accountlearning.com/role-insurance-companies-economic-development-india/

Market Size
• Government's policy of insuring the uninsured has gradually pushed insurance
penetration in the country and proliferation of insurance schemes.
• Gross direct premiums of non-life insurers in India reached US$ 13.66 billion in
FY20 (up to September 2019), gross direct premiums reached Rs 410.71 billion (US$
5.87 billion), showing a year-on-year growth rate of 14.47 per cent. Overall insurance
penetration (premiums as per cent of GDP) in India reached 3.69 per cent in 2017
from 2.71 per cent in 2001.
• In FY19, premium from new life insurance business increased 10.73 per cent year-on-
year to Rs 2.15 trillion (US$ 30.7 billion). In FY20 (till July 2019), gross direct
premiums of non-life insurers reached US$ 5.7 billion, showing a year-on-year
growth rate of 16.65 per cent.
• The market share of private sector companies in the non-life insurance market rose
from 13.12 per cent in FY03 to 55.70 per cent in FY20 (up to April 2019).
Government Initiatives
• The Government of India has taken a number of initiatives to boost the insurance
industry. Some of them are as follows:
• As per Union Budget 2019-20, 100 per cent foreign direct investment (FDI) permitted
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for insurance intermediaries.

• In September 2018, National Health Protection Scheme was launched under
Ayushman Bharat to provide coverage of up to Rs 500,000 (US$ 7,723) to more than
100 million vulnerable families. The scheme is expected to increase penetration of
health insurance in India from 34 per cent to 50 per cent.
• Over 47.9 million famers were benefitted under Pradhan Mantri Fasal Bima Yojana
(PMFBY) in 2017-18.
• The Insurance Regulatory and Development Authority of India (IRDAI) plans to
issue redesigned initial public offering (IPO) guidelines for insurance companies in
India, which are to looking to divest equity through the IPO route.
• IRDAI has allowed insurers to invest up to 10 per cent in additional tier 1 (AT1)
bonds that are issued by banks to augment their tier 1 capital, in order to expand the
pool of eligible investors for the banks.
Road Ahead
• The future looks promising for the life insurance industry with several changes in
regulatory framework which will lead to further change in the way the industry
conducts its business and engages with its customers.
• The overall insurance industry is expected to reach US$ 280 billion by 2020. Life
insurance industry in the country is expected grow by 12-15 per cent annually for the
next three to five years.
• Demographic factors such as growing middle class, young insurable population and
growing awareness of the need for protection and retirement planning will support the
growth of Indian life insurance.
Conclusion
India’s insurable population is anticipated to touch 750 million in 2020, with life expectancy
reaching 74 years. Furthermore, life insurance is projected to comprise 35 per cent of total
savings by the end of this decade, as against 26 per cent in 2009-10.
Insurance: On the other hand, envisages the happening of certain events, which are not surely
expected but which may happen or may not happen. Here insurance is the contract of
indemnity and insurer compensate the insured if loss suffered due to happening of some
events like, fire, accident, Marine Insurance etc., The time and loss caused by the occurrence
of the event is uncertain. Insurance refers to those risks which are contingent in nature as fire,
accident marine etc.

UNIT 4
LIFE INSURANCE
Meaning and Definition
• Life insurance, usually referred to as ‘Life Assurance’ insures the insured against the
happening of certain event. I.e. death through the time when it may happen is
uncertain.
• Section 2 of the Indian insurance act, 1938 has defined life insurance as “Life
insurance is the business of effecting contracts upon human life”.
Growth of Actuarial Science
• The basic requirement of the science of life insurance is precise knowledge about the
rate at which members of a group where die at a given age and from year to year.

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• Actuarial science applies mathematical and statistical methods to finance and

insurance, particularly to the assessment of risk.
• It includes a number of interrelating discipline, in particular the mathematics of
probability and statistics.
• There are 3 premium elements in life insurance rate making
1. Mortality: the amount charged every year by the insurer to provide the life cover to
the policy holder on the life of the insured.
2. Interest: represents the truth that money has a time value. It multiplies with time. The
value of a rupee held today is worth more than what it will be 1 year from now.
3. Net premium: while designing each product and setting its premium, the life insurer
has to make sure that the products estimated total premium with investments earnings
are likely to exceed its expected total cost of benefits and expenses.
Premium involves following two steps:
a. Net single premium: it is the sum of the present values of all expected benefits.
b. Net level annual premium: it is a set of level premium payments having an actuarial
present value equal to the net single premium.
Features of Life Insurance
1. Elements of a valid contract
2. Insurable interest
3. Utmost good faith
4. Warranties
5. Assignment and nomination
6. Certainty of the event
7. Premium
8. Terms of policy
Life Insurance Contract
It is a legally enforceable agreement, therefore it is important to read and comprehend
its terms and conditions. The provision of life insurance contract:
1. Entire- contact clause
2. Ownership clause
3. Beneficiary clause
4. Incontestable clause
5. Misstatement –of- age clause
6. Grace period
7. Reinstatement clause
8. Suicide clause
Life Insurance Documents
• A document issued by an insurance company/ broker that is used to verify the
existence of insurance coverage under specific conditions granted to listed
individuals.
• The various document are as follows
1. Proposal form
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2. First premium receipt

3. Policy bond
4. Alterations and endorsement
5. Reminding notice
6. Other documents: NRI
Insurance Premium Calculation
• Meaning of premium: the premium is the price paid for the risk undertaken by
insurer. Legally speaking, it is the consideration that moves from the proposal to the
insurer in exchange for there promise to pay the sum assured on the happening of the
contingent event.
• In calculating premium the following variable are considered
1. Term and plan
2. Riders
3. Extras
4. Sum assured
5. Mode of payments
Life Insurance Classification
1. Classification based on time
a. Whole life: whole term, limited term, convertible
b. Term plans: limited, convertible, renewable.
c. Endowment plans: pure, joint, double, anticipated.
2. Classification based on premium
a. Single premium policy
b. Level premium policy
3. Classification based on claim payment
a. Fixed sum policy
b. Annuity policies
4. Classification based on number of persons assured
a. Single life
b. Multiple life
5. Classification based on participation in profit
a. With profit policies
b. Without profit policies
Premium Payment
1. Single premium policy: it is useful to those who desire to provide the whole premium
in one installment the time of taking policy.
2. Level premium policy: premiums are paid regularly for a selected term. It is useful to
those who having regular earnings
Participation in Profits: Participating refers to the policies, which are entitled for getting the
benefits of bonus. Bonus is the share of the profit of the insurance company earned during a
particular financial year. Policies issued on the basis of participation in profits are discussed
below:

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1. With profit policies/participating policies: Participating policy holders are entitled to get
the share of profits or bonus facilities as per the terms and condition of the corporation.
Whole Life Policy (WLP): Features of WLP
a. It provides insurance coverage
b. Premium will never increase
c. Death benefits are guaranteed
d. Policy holder can surrender the policy at any time in the future and the current cash
value of the policy will be returned to him
e. The participating whole life insurance policy has the opportunity to earn dividends.
2. Without profit policies/non participating policies: under this policy, sum assured will
become payable without any paid up facilities to the insured at the end of the selected term.
Endowment Insurance(EI): Features of EI
a. It provides life insurance protection together under this policy
b. Bonus for the full time is payable on the date of maturity
c. Premium can be limited to short term
d. Premium cease on death or on expiry of term which is earlier
e. This policy is suitable for the people of all age groups.
f. The sum assured is payable either on survival to the term or death occurring within
the term
Number of Persons
1. Single life policy: it covers the risk on one individual. it may be issued on one’s own
life or on another’s life.
2. Multiple life policies: it may be joint life policies; joint life policy covers the risks of
more than two individuals.
Payment of Policy Amount
1. Money back policy: These policies are structured to provide sums required as
anticipated expenses (marriage, education) over a stipulated period of time.
Features of MBP
a. It is the policy where lump sum amounts are paid to the life assured.
b. This is a participating traditional plan.
c.Simple money back plan with bonus option.
d.Premium needs to be paid for a period of 15 years only while the policy continues for a
period of 20 years.
e.If the Life Insurance is alive at the end of the 5th ,10th and 15th years, 20% of the basic
sum assured in paid as Survival benefit and the policy continues.
f.The rest of the 40% of the basic sum Assured is paid on survival at the end of the policy
tenure along with the accrued bonuses.
g. If the life insured dies within the policy tenure, the entire Sum Assured + accrued Bonuses
would be paid to the nominee as Death Benefit.
Unit linked insurance plans (ULIPs): is one in which the customer is provided with a life
insurance cover and the premium paid is invested in either debt or equity products or
combination of the two.
Features:-
a. Premium paid can be single, regular or variable. The risk covers increase or decrease.
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b. Investment can be made in gilt funds, balanced fund, money market, growth funds or
bonds
c. The policy holder can switch between schemes
d. Maturity benefit is the net asset value of its units
e. ULIPs are exempted by tax
f. Provides capital appreciation
g. Investors gets an option to choose among debt, balanced and equity funds.
Types of ULIPs
a. Pension plan: come with two variations –with and without life cover-and are meant
for people who want to generate returns for their sunset years.
b. Children plans: are aimed at taking care of their educational and other needs.
c. Group linked plans: apart from unit linked plans for individuals, group unit liked
plans are also available in the market.
d. Capital guarantee plans: the plan promises policy holder that at least the premium
paid will be returned at maturity.

Annuities: Meaning: is a contract that provides an income for a specified period of time.
Annuities schemes are those wherein policy holders regular contribution over a period of
time accumulate to form corpus with an insurer.
Needs of Annuities
1. Investors are their tax deferred status
2. There high rate of return
3. Faster growth to savings that they offer
4. The security of the investment

Annuity V/S Life Insurance

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Annuity Life insurance
An annuity is a contract between insurer Life insurance is a contract between insurer
and an insurance company in which insurer and policy holder in which insurer guarantees
make a lump sum or series payments to payment of a death benefit to named
insurance company, these accumulated beneficiaries when the insured dies.
funds are later repaid to you either for fixed
term, say 5 to 10 years or for the rest part
of your life.
It Provide steady income until death of the It Provides a benefit upon death of the
annuitant. insured.
It Pays a living benefit. It Pays a death benefit.

It is taken for one’s own benefit. It is generally for benefits of the dependents.
It protect against living too long. It protects against premature death.
Premium is calculated on the basis of Premium is based on the mortality of the
longevity of the annuitant. policy holder.

It liquidates an estate. It creates an estate.

Claims Settlement in life insurance

1. Notice of death
2. Death certificate
3. Prove of life
4. Proof of premium payment
Classifications of Annuities
1. Immediate: provides income for a guaranteed period of time. Payments begin within
one year of purchase.
2. Deferred: in the case of the deferred annuity, the payments to the annuitant start after
a certain deferment period.
3. Fixed: assures minimum rate of return.
4. Variable : offers a Varity of investments fund accounts portfolios, including growth-
oriented portfolios that can help you keep up with inflation

UNIT 5
GENERAL INSURANCE
General insurance is a contract whereby, upon periodic payment of a sum of money called
premium, the insurer undertake to compensate the insured in the event of any specified loss
or damage suffered by the latter, is known as general insurance.
Main Provisions of GIC Act 1972
1. Acquiring company: means any Indian insurance company and, where a scheme has
been framed involving the merger of one Indian insurance company in another or the
amalgamation of two or more such companies, means the Indian insurance company in
which any other company has been merged or the company which has been formed as a
result of the amalgamation;
2. Appointed day: means such day not being a day later than the 2nd day of January, 1973,
as the Central Government may, by notification, appoint;
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3. Companies Act: means the Companies Act, 1956 (1 of 1956);

4. Corporation: means the General Insurance Corporation of India formed under section 9;
5. Existing insurer: means every insurer the management of whose undertaking has vested
in the Central Government under section 3 of the General Insurance (Emergency
Provisions) Act, 1971 (17 of 1971), and includes the undertaking of the Life Insurance
Corporation in so far as it relates to the general insurance business carried on by it;
6. Foreign insurer: means an existing insurer incorporated under the law of any country
outside India;
7. General insurance business: means fire, marine or miscellaneous insurance business,
whether carried on singly or in combination with one or more of them, but does not
include capital redemption business and annuity certain business;
8. Government company: means a Government company as defined in section 617 of the
Companies Act;
9. Indian insurance company: means an existing insurer having a share capital who is a
company within the meaning of the Companies Act;
10. Insurance Act: means the Insurance Act, 1938 (4 of 1938);
11. Life Insurance Corporation: means the Life Insurance Corporation of India established
under the Life Insurance Corporation Act, 1956 (31 of 1956);
12. Notification: means a notification published in the Official Gazette; 4
13. Prescribed: means prescribed by rules made under this act;
14. Scheme: means the scheme framed under section 16 1[and also includes a scheme
framed under section 17A];
General Insurance Contract: The insurance, like any other contract, is governed by the
general principles of the law or contract as describe in Indian contract act, the essential
elements of a contract including insurance contract are:
1. Offer and acceptance
2. Consideration
3. Agreement between the parties
4. Capacity of the parties to contract
5. Legality of the contract
G I C: The government nationalized the general insurance business in 1972. one hundred
and seven insurers , including branches of foreign companies operating in India, where
amalgamated and grouped into 4 companies, namely
1. The national insurance company limited
2. The new India assurance company limited
3. The oriental insurance company limited
4. The united India assurance company limited
Objectives
1. To provide need- based and low-cost general insurance cover to the rural population
2. To administer a crop insurance scheme for the benefits of farmers
3. To develop and introduce covers with social security benefits
To develop a marketing network throughout the country and to promote balanced regional
development and make insurance available to the masses
Functions
GIC functions
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 Carrying on of any part of the general insurance, if it thinks it is desirable to do so..

 Rendering efficient services to policy holders of general insurance.
 Advising the acquiring companies in the matter of controlling their expenses
including the payment of commission and other expenses.
 Advising the acquiring companies in the matter of investing their fund.
 Issuing directives to the acquiring companies in relation to the conduct of general
insurance business.
National Insurance Corporation Ltd (NICL) functions
 It was a state owned general insurance corporation.
 Established on 06-december-1906, its head quarter situated in Kolkata.
 To provide insurance cover to the government / semi government organizations at
economical cost.
 To reduce outflow of foreign exchange by reducing dependence on reinsurance
abroad.
 To make significant contributions to public exchequer by payment of taxes and
dividends.
New India Assurance Company Ltd (NIACL) functions
 It involves handling of all the legal affairs of the company.
 It would be to monitor the insurance of insurance policies.
 It would also involve setting up and settlement of insurance claims.
 Prepare legal documents for various processes and provide assistance in the legal
issues of the company.
 Monitoring the errors.
Oriental Insurance Company Ltd (OICL) functions
 It was incorporated on 12-september-1947 as government owned non-life insurance
company.
 It was established a completely owned subsidiary of oriental government security life
assurance co limited to execute its parent bodies general insurance operations.
 Compulsory investment of life fund to the extent of 55% in government approved
securities.
 Consulting a department of insurance to supervises and controls a insurance business.
 Insurance sector was thrown open to private sector.
United India Assurance Company Limited (UIACL) functions
 Trusted brand admired by all stake holders.
 The best-in-class customer service provider leveraging technology & multiple
channels.
 The provider of a broad range of innovative products to meet the needs of all
customer segments.
 Great place to work with highly motivated and empowered employees.
 Recognized for its contribution to the society.
 To function on sound business principles.
 To help minimize national waste and to help develop the Indian economy.
Overall functions of GIC
1. The carrying on of any part of general insurance business as deemed desirable
2. Aiding , assisting and advising the companies in the matter of setting up of standards
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3. Advising and acquiring companies in the matter of controlling the expenses including
the payments of commission and other expenses
4. Advising the acquiring in the matter of investment of funds
Performance Private and Public General Insurance Company
• The industry has some way to go in terms of performance against 3 key objectives
1. Providing universal access and coverage
2. Delivering returns to share holders
3. Customer experience and loyalty
Health Insurance:
Meaning: is a safeguard against raising medical cost. A health insurance policy is a contract
between an insurer and an individual or group, in which the insurer agrees to provide
specified health insurance at an agreed –upon price (premium).
Features of Health Insurance
1. The policy should provide for reimbursement of hospitalization / domiciliary
hospitalization expenses for illness / diseases suffered or accidental injury sustained
during the policy period. Reimbursement is allowed only when treatment is taken in
a hospital or nursing home which satisfies the criteria specified in the policy.
2. Pre and Post Hospitalization coverage: - pre and post hospitalization expenses are
those which are accounted before and after hospitalization. The cover of every policy
differs in terms of the days, where pre-hospitalization is generally counted fore 30
days before hospitalization and post -hospitalization is counted 60 days after. It is not
fixed so figuring out a policy, which offers you a maximum number of days of this
cover.
3. Co- payment Discount:-. Co-payment means mutual payment where the insurance
company and insured share some percentage of the total claim amount. The
percentage is decided earlier. This process might reduce your premium, but it is
necessary to see if you can pay your part of money during costly treatments. Wisely
choose this option or else just in return of cheaper plan you might suffer later.
4. Network Hospital: - Network hospitals are the panel hospitals where for any
treatment you don’t need to pay the bills rather you can enjoy cashless facility where
there is no fuse of filling for reimbursement. All the treatment charges are settled
directly between the hospital and the insurer. It is always good to go for health
insurance plans with a large number of network hospitals in your area so that you can
approach any of them easily.
5. Pre- existing conditions: - A pre- existing condition is a health problem that existed
before you applied for your health insurance policy. Examples include heart diseases,
high blood pressure, asthama or even something as minor as a previous accident
injury. Check with your health insurance provider for their list of pre- existing
conditions, as they wouldn’t be covered for 48 months after you purchase the first
policy.
6. The policy does not cover some disease not cover some diseases i.e, Asthama,
Bronchitis, chronic Nephrities Diarrehea, and caugh and cold, all psychosomatic
Disorders Pyrexia of unknown origin for less than 10 days, Tonsillities and upper
respiratory Tract infection including Laryngitis and pharyngitis, Arthritis, Gout and
Rheumatism.

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Classification of Health Insurance Policy

(a) Floater Health Insurance Policy: It means that a single sum insured will be available
for all family members. For example, a family consists of self, spouse and two children
purchases health insurance of Rs 1.00 lakh. Under the floater policy, any family member can
avail the medical claim of Rs 1.00 lakh. The coverage and other terms & conditions are the
same as are explained above in para 5.1 to 5.3. The premium will be applicable to the highest
aged member of the family.
(b)Critical Illness Insurance Policy: Critical illness insurance or critical illness cover is an
insurance product, where the insurer is contracted to typically make a lump sum cash
payment if the policyholder is diagnosed with one of the critical illnesses listed in the
insurance policy. The policy may also be structured to pay out regular income and the
payment may also be on the policyholder undergoing a surgical procedure, for example,
having a heart bypass operation. The contract terms contain specific rules that define when a
diagnosis of a critical illness is considered valid. It may state that the diagnosis need be made
by a physician who specializes in that illness or condition, or it may name specific tests, e.g.
EKG changes of myocardial infarction, that confirm the diagnosis.
(c) Group Health Insurance Policy: The Group Health Insurance Policy is available to any
Group / Association / Institution / Corporate body of more provided it has a central
administration point and subject to a minimum number of persons to be covered. The group
policy is issued in the name of the Group / Association / Institution / Corporate Body (called
insured) with a schedule of names of the members including his/her eligible family members
(called insured persons) forming part of the policy. The details of insured person is required
to furnish a complete list of Insured Persons in the prescribed format according to sum
insured. Any additions and deletions during the currency of the policy should be intimated to
the company in the same format.
However, such additions and deletions will be incorporated in the policy from the first day of
the following month subject to pro-rata premium adjustment. No change of sum insured for
any insured person will be permitted during the currency of the policy.
No refund of premium is allowed for deletion of insured person if he or she has recovered a
claim under the policy. The coverage under the policy is the same as under Individual
Mediclaim
Policy with the following features:-
a) Cumulative bonus and Health Check up expense are not payable.
b) Group discount in the premium is available
c) Renewal premium is subject to claims made during the previous policy.
d) Maternity benefit extension is available at extra premium.
Option for maternity benefits has to be exercised at the inception of the policy period and no
refund is allowable in case of insured cancellation of this option during currency of the
policy. A waiting period of 9 months is applicable for payment of any claim relating to
normal delivery or caesarean section or abdominal operation for extra uterine pregnancy.
The waiting period may be relaxed only in case of delivery , miscarriage, or abortion induced
By accident or other medical emergency. Claim in respect of delivery for only first two
children will be considered in respect of any one insured person. Those insured persons who
already have two or more living children will not be eligible for this benefit. Expenses
incurred in connection with voluntary medical termination of pregnancy during the first 12
weeks from the date of conception are not covered.
(d) Overseas Medical Policy: This policy was originally introduced in 1984 to provide for
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payment of medical expenses in respect of illness suffered or accident sustained by Indian

residents during their overseas trips for official or holiday purpose. The insurance scheme,
since 1984 has been modified from time to time to provide for additional benefits such as in-
flight personal accident, loss of passport etc.In 1991, Employment and Study Policy was
introduced. This policy is meant for Indian citizens temporarily working or studying abroad.
Eligibility:
(a) Indian Residents undertaking bonafide trips abroad for:
(i) Business and official purposes.
(ii) Holiday purpose
(iii) Accompanying spouse and children of the person who is going abroad will be
treated as going under holiday travel.
Fire Insurance
Fire insurance is a device to compensate for the loss consequent upon destruction by fire.
Thus, the fire insurance company shifts the burden of fire losses from their actual victims
over to all the members of the society. Section 2 of the Insurance Act 1938 defines fire
insurance as ‘’the business of effecting, otherwise than incidentally to some other class of
insurance business, contract of insurance against loss by or incidental to fire or other
occurrence customarily included among the risks insured against in fire insurance policies.’’
Essential of Fire Insurance Contract
1. Written contract
2. Two parties
3. Period of insurance
4. Only protection element
5. Use of word insurance
6. Indemnity contract
7. Utmost good faith
8. Period
9. Insurable interest
10. Proximate cause of damage
11. Subrogation and contribution
12. No surrender value
13. Actionable claim
Types of Fire Insurance
1. Valued policy
2. Specific policy
3. Floating policy
4. Average policy
5. Declaration policy
6. Adjustable policy
7. Reinstatement policy
8. Comprehensive policy
9. Consequential loss policy
Fire Insurance Coverage
The risks covered are as follows
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1. Fire
2. Lightning
3. Explosion/implosion
4. Aircraft damage
5. Riot, strike, malicious and terrorism damage
6. Strom, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation
7. Impact damage
8. Subsidence and land slide including rock slide
9. Bursting and/or overflowing of water tanks
10. Missile testing operation
11. Leakage from automatic sprinkler
12. Bush fire
Marine Insurance
Meaning: it is a contract under which, the insurer undertakes to indemnify the insured in the
manner and to extent thereby agreed, against marine losses, incidental to marine adventures.
Definition: According to Helsbry ‘’it is contract whereby the insurer undertake to indemnify
the assured in the manner and to extent thereby agreed against marine losses, that is to say
loss incidental to marine adventure.
Marine Insurance Principles
The marine insurance has the following essential features which are also called fundamental
principles of marine insurance:
1. Fundamental of a general contract
2. Insurable interest
3. Utmost good faith
4. Proximate cause
5. Warranties
6. Doctrine of subrogation
7. Contribution
8. Doctrine of indemnity
Important Clause
1. Lot of not lot
2. Name of the ship and master
3. Valuation clause
4. Parties
5. Description of the voyage or duration of the risk
6. Sea perils insured against
7. Receipt of premium and the rate charge
8. Memorandum
Marine Insurance Policy
1. Voyage policy
2. Time policy
3. Mixed policy

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4. Valued policy
5. Open on unvalued policy
6. Floating policy
7. Honor policy
8. Builders risk policy
9. Port risk policy
Clauses of Marine Risk
1. Waiver clause
2. Valuation clause
3. Lost and not lost clause
4. Running down clause
5. At and from clause
6. Labor clause
7. Inchmaree clause: damage happened in ship
8. Warehouse clause
9. Jettison clause: all interested parties collectively compensate the loss by owners
10. Barratry clause :this cover losses incurred by the ship owner
Motor Vehicle Insurance
Meaning: Motor insurance is the insurance for motor vehicles, there are various risks which
are related with the loss /damage to motor vehicle like theft , fire or any accidental damage.
Need For Motor Insurance:
1. Footpaths
2. Drunken driving
3. Reckless driving
4. Theft
5. Fire
6. Flood
7. Earthquake
Types of Motor Insurance
A. Based on the coverage
1. Third party liability insurance:
Third party insurance is essentially a form of liability insurance purchased by an insured
from an insurer for protection against the claims of another. The first party is responsible for
their damages or losses. Regardless of the coves of those damages.
2.Comprehensive insurance:
This type of insurance policy cover third –party liability and the expenses incurred by the
policy holder in the event of damage or theft of the insured vehicle.
3.Liability insurance :
It provides the insured party with protection against claims resulting from injuries and
damage to people or property. Liability insurance policies cover both legal costs and payouts
for which the insured party would be responsibel if found legally liable.
B. Based on the purpose of use
1. private motor insurance:

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This type of insurance policy is purchased by owners of two wheelers. Who intend to use the
vehicle for private purposes.
2. Commercial motor insurance:
This is an insurance policy that prevents a business from suffering financial loss from
damages to the commercial vehicle. It offers third party liability protection and accident
covers for the driver of the vehicle.

Factors to be considered for Premium Fixing

Premium is essential consideration while availing motor insurance. It differs across insurers
and depend on multiple factors. As a vehicle owner, ti’s important for you to know what goes
into calculating motor insurance premium and this article tells you the factors that influence
it.
1. Insured declared value
2.Engine size
3.Purpose of vehicle
4.Geographical location
5.Add-on covers
Insured declared value (IDV)
Insured declared value refers to the market value of your vehicle. Thus, the more expensive it
is, greater is the premium amount. When you buy a new vehicle, its market value is high. In
such a scenario, the premiums are higher.Also, note that vehicles of premium brands
command a higher premium. Additionally, if you have any accessories such as an imported
music system installed in your vehicle, it adds to the vehicle’s IDV, thus increasing the
premium.
Engine size
The size of engine, measured in cubic capacity, fitted in your vehicle plays an important role
in determining insurance premiums. Vehicles with a bigger engine size command higher
premium than those with lower ones. This is because big engine vehicles are expensive and
are more prone to accidents. All of these increase premiums drastically.
Purpose of vehicle
It is another essential factor which influences more insurance premiums. If you intend to use
the vehicle for commercial purposes, you need to shell out a higher premium. This is because
the vehicle, in this case, is a source of income. On the other hand, if you intend to use the
vehicle for personal purposes, insurance companies charge lower premiums.
Geographical location
It may come as a surprise, but motor insurance premiums are heavily influenced by where
you live.
That for premium calculation India is divided into two zones
1. Zone A and
2. Zone B.
While Zone A comprises prominent metros including Kolkata, Chennai, New Delhi,
Mumbai, Bengaluru, Hyderabad, Pune and Ahmedabad, Zone B covers the rest of India.
Generally, motor insurance premiums are higher if you happen to be resident of Zone A
which experiences dense traffic, thus increasing chances of accidents. Also, if you happen to
be an urban resident, you might need to shell out a higher premium as your vehicle is
exposed to more risks.
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Add-on covers
There are several add-ons that you can opt for along with your motor insurance plan such as
zero depreciation cover, engine cover, lock and key replacement cover, etc. The premium
amount is directly proportional to the number of add-ons opted for. It means higher the
number of add-ons, greater is the premium.
With insurers embracing technology at a rapid pace, motor insurance premium also takes into
account your driving behaviour. A responsible on-road behaviour goes a long way in
reducing the premium amount in the long run.

Unit 6
Management of Insurance Company
Insurance provides protection against financial losses resulting from a variety of perils or
calamities. By purchasing insurance policies, individuals and organization can get
reimbursement of losses arising from accidents, theft of property, disability or death.
Functions and Organization of Insurers
1. Actuarial
2. Underwriting
3. Sales and marketing
4. Accounting
5. Investing and financing
6. Legal
7. Claims
8. Other departments
Types of Insurance Organization
1. On the basis of their risk coverage
a. Life
b. Property
c. Health
2. On the basis of their agency system
a. Exclusive agency
b. Independent agency
3. On the basis of registration
a. Domestic
b. Foreign
c. Alien
d. Authorized
4. On the basis of their formation from legal point of view
a. Stock company
5. On the basis of service offered
a. Monoline
b. Multiple line
Organizational Structure of Insurance Company
1. Board Of Directors
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2. Local board of directors

3. Company secretary
4. General manager
5. Management services
6. Personnel
7. Investment
8. Head office
9. Regional office
Underwriting: Meaning: is a process of choosing who and what the insurance company
decides to insure. this is based on risk assessment.

Principles of Underwriting
1. To select the applicants according to the company underwriting principles
2. To balance the rate classification effectively
3. To charge equitable rates to the policy owners
Underwriting In Life Insurance
Life insurance has its fundamentals on the risk factor. the factor that are taken into
consideration while underwriting are:
1. Age
2. Health condition
3. Income
4. Health history
5. Occupation
6. Habits
Underwriting in Non Life Insurance
1. Application containing the insurer statements
2. Information from the agent
3. Prior experiences
4. Inspection
Claims Management: Meaning: involves not only claims processing but goes on to cover
the entire gamut of claims management.-strategic role, cost monitoring role, service aspect as
also the role of people handling the claim
Claim Settlement in Life Insurance
1. Maturity claim
2. Death claim
Critical aspects in claims handling in life insurance:
1. Trusteeship element in the claims function
2. Documentation
3. Interpretation of the contract
4. Investigation
5. Fraud
Claim Settlement in General Insurance

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The guidelines described are more of a general nature, and it is many a times there that some
of the guidelines laid down cannot in practice be complied with due to particular
circumstance of state:
1. Appointment of surveyor
2. Appointment of investigator
3. Processing of claims
4. Co-insurance
5. Close proximity cases
6. Rectification of policy after a loss
7. Repudiation of claims
8. Re-opening of claim files
Insurance Pricing and Fair Premium
Meaning: is commonly based on real probabilities p, i.e probabilities reflecting the actual
likelihood of loss event.

Meaning Of Insurance Cost (Premium)

The premium is the price paid for the risk undertaken by the insurers.
1. The IRDA notification stipulates that when insurers wish to introduce a product, they
should mention in the application clearly the pricing assumptions.
2. In the case of ULIPs expenses /charges relating to allocation, fund management,
administration, switching off, and withdrawals also have to be started.
Expected Claim Costs
Meaning: insurers need to charge enough in premiums to cover what they expect to pay in
clients, if the firm had 0.1probability of incurring a property loss of $400, the expected loss
would be $40(0.1*$400).
The important implication is that change in the environment that increases the probability of
an insured loss or the magnitude of an insured loss would increase expected claim costs and
thus increase the insurance premium in a competitive market.
Investment Income and Timing of Claims Payment
1. Income generated by the investment of assets.
2. Insurance have two sources of income,
a. underwriting(premium less claims and expenses)
b. Investment income
3. The latter can offset underwriting operations, which are frequently unprofitable.
4. Claim payment relates to the payments made by the insurer to the policy holder or is
nominee on happening of the event as mentioned in the schedule of the policy document.
5. As per the regulation 8 of the IRDA (policy holder interest)regulations 2002, the insurer is
require to settle a claim within 30 day of receipt of all document including clarification
sought by the insurer.
Administrative Costs
1. An insurer has marketing, underwriting, claims processing, and management costs.
2. The premium that an insurer charges must cover this administrative cost, for property
and liability insurance, the administrative costa can be 30%to 50 % of the premium,
depending on the type of insurance
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3. Putting it all together, insurers must charge premiums that are sufficient to cover the
present value of there expected claims cost, capital costs and administrative cost.
Profit Loading
1. Is simply an amount added (by the insurance company or insurer) plan insurance
premium to cover business expenses and contingencies including cost capital.
2. Profit loading is also known as expense loading or simply loading
3. Contingencies are simply those loses which are connected with uncertain events and
are payable only if those contingencies are fulfilled.
4. If insurance company only demands the premium which is the total of possible claims
that can be made by the insure under the insurance contract(also known as pure
premium than insurance company will have no benefits in conducting insurance
business.
Capital Shocks
1. Economic models of premium volatility have generally focused on the potential
effects of industry-wide shocks to capital
2. This capital shocks models basically assume that industry supply depends on the
amount of insurer capital and that industry supply is upward sloping in the short run
because the stock of capital is costly to increase due to the costs of raising new
capital.
Underwriting Cycle
1. The traditional view of underwriting cycles by insurance industry analyst is that supply
expands when expectations of profits are favorable , that competition than drives prices down
to the point where underwriting losses deplete capital, and that supply ultimately contracts in
response to unfavorable profit expectations or to avert financial collapse.
Price Regulation
1. Insurance markets generally are subject to substantial government regulations and
supervision encompassing licensing of insurers, agents and brokers, solvency and
capital standards, rates and policy forms , sales and claims practices and requirement
to issue coverage.
2. Rate regulation can affect an insurer’s average rate level in a given period.
Insurance Marketing
Insurance marketing is basically just the marketing of insurance product, marketing of this
sort is an important tool when its come to the business of insurance, the marketing of
insurance readily happens in the life insurance as well as non life insurance.
Marketing of Insurance Products
The following concept of insurance marketing
1. It is a managerial process
2. It is conceptualization of marketing principles
3. It is process of formulating the marketing mix.
4. It is a device to make possible customer-orientation
5. It is an attempt to help profit maximization
6. It is another name for marketing professionally
7. It is even a social process that paves avenues for social transformation
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8. It is to make possible product attractiveness

9. It is to energize the process of up gradation
Critical Success Factors for Insurance Players
1. Change in the attitude of the population
2. Open and transparent environment created under the IRDA
3. Well-established distribution network
4. Trained professionals to build and sell the product
5. Rationale approach to the investment criteria
6. Stringent accounting practice to prevent failures amongst the insurers
7. Level playing field at all stages of development in the sector for all the players
Marketing Strategies in India
1. Innovation
2. Product/service differentiation
3. Advertising and sales promotion
4. Technology
5. Customer relationship management
6. Distribution channels

Question Paper of 18MBA FM402 Risk Management and Insurance

1. a. Define risk management?
b. Illustrate business risk exposure?
c. Describe the classification of life insurance.
2. a. Mention the elements of risk control.
b. Explain types of unit linked insurance plans.
c. Design the risk management decision method.
3. a. Define insurance.
b. Differentiate between insurance and hedging.
c. Describe the objectives of risk financing techniques.
4. a. Mention the objectives of risk management.
b. Describe severity of losses.
c. Illustrate methods of handling business risk.
5. a. Mention the classification of annuities.
b. Explain the basic characteristics of insurance.
c. Design methods of handling risk.
6. a. Define risk identification.
b. Differentiate between annuity and life insurance.
c. Elucidate the insurance regulatory development and authority regulations for life
insurance.
7. a. Mention the types of motor insurance.
b. Describe the classification of health insurance.
c. Explain types of risk.
8. Case study

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The Bus for school Company provides school bus transportation to public schools in London.
The company owns 50 buses that are garaged in four different boroughs and it provides
school bus service to over 20 public schools. The firm faces competition from two large bus
companies that operate in the same area. Public school boards generally award contracts to
the lowest bidder, but the level of service and overall performance are also considered.
a. Briefly describe the steps in the risk management process that should be followed by the
risk manager of Bus for school.
b. Identify the major loss exposures faced by Bus for school.
c. Describe several sources of funds for paying losses if retention is used in the risk
management program.
d. Identify other departments in Bus for school that would also be involved in the risk
management program.

Answer Scheme of 18MBA FM402 Risk Management and Insurance

1.a. Risk management may be defined as the process of planning, organizing, directing and
controlling the resources and activities of an organization to minimize the adverse effects of
potential losses at the least possible cost.
b. Business risk exposure
i. property loss exposure
ii. Liability losses
iii. Losses to human resource
iv. Losses from external economic forces
c. Classification of life insurance
i. Classification based on time
ii classification based on premium
iii classification based on claim payment
iv. Classification based on number of persons assured
v. classification based on participation in profit.
2.a. Elements of risk control
i. Mitigate rate
ii. Plan for emergency
iii. Measure and control
b. Types of unit linked insurance plans
i. Pension plan
ii. Children plan
iii.Group linked plans
iv. Capital guarantee plans
c. Risk management decision control
i. Risk transfer
ii. Corporations
iii.Risk assumption
iv.Contractual agreements
v.Risk avoidance
3. a. Insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who
agree to indemnify insured for such losses, to provide other pecuniary benefits on their
occurrence, or to render services connected with risk.
b. Insurance and Hedging
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Insurance Hedging
Insurance is a risk management strategy one Hedging is an investment strategy one can
can use to cover the risk of loss from theft, use from losses and increase the potential
fire, car etc. gains market
Insurance transaction reduce risk Hedging typically involves only risk
transfer, not reduction
Insurance is win-win transaction Hedging is win-lose transaction
An insurance transaction involves the transfer Hedging is a technique for handling risks
of insurable risk that a typically uninsurable
c. Objectives of risk financing techniques
i. Spread more evenly over time cost of risk in order to reduce the financial strain
ii. Minimize risk cost
4.a. Risk management objectives
i. Achieve and maintain a reduced cost of risk (both insurance and self-insurance)
without placing the Institute in a position of risk exposure that could have a
significant impact on its financial security and its Mission.
ii. Evaluate and assess all risks of loss and need for insurance related to the specific
performance objective.
iii. Modify or eliminate identifiable conditions and practices which may cause loss
whenever possible
iv. Purchased insurance coverage
b. Severity of losses
i. An actuarial method for determining the expected number of claims that an insurer
will receive during a given time period, and how much the average claim will cost.
ii. Frequency-severity method uses historical data to estimate the average number of
claims and the average cost of each claim.
iii.The method multiplies the average number of claims by the average cost of a
claim.Insurers use sophisticated models to determine the likelihood that they will have to pay
out a claim.
iv.Ideally, the insurer would prefer receiving premiums for underwriting new insurance
policies without ever having to pay out a claim, but this is a very unlikely scenario
v. Insurers develop estimates as to how many claims they may expect to see and how
expensive the claims will be based on the types of policies they provide to policyholders.
vi.The frequency-severity method is one option that insurers use to develop models.
vii. Frequency refers to the number of claims that an insurer expects to see. High frequency
means that a large number of claims is expected to come in.
viii. Severity refers to the cost of a claim, with high severity claims being more expensive
than average estimates and low severity claims being less expensive than the average.
ix. The average cost of claims may be estimated based off of historical cost figures. Because
the frequency-severity method looks at past years in determining average costs for future
years it is less influenced by more volatile recent periods.
c. Methods to Handle Business Risks The main strategies that you will be working with are
as follows:
a. Avoidance
b. Risk Control
c. Risk Transfer
d. Loss Reduction
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e. Segregation of Exposures
f. Duplication of Resources
g. Self-Retention
5. a. Classification of annuities
i. Immediate guaranteed
ii. Deferred
iii. F
Annuity Life insurance
i
An xannuity is a contract between Life insurance is a contract between insurer
insurer
e and an insurance company in and policy holder in which insurer guarantees
whichd insurer make a lump sum or payment of a death benefit to named
iv. series
V payments to insurance beneficiaries when the insured dies.
company,
a these accumulated funds
are rlater repaid to you either for
fixedi term, say 5 to 10 years or for
the rest
a part of your life.
It Provide
b steady income until death It Provides a benefit upon death of the
of the
l annuitant. insured.
It Pays
e a living benefit. It Pays a death benefit.
b
. It is taken for one’s own benefit. It is generally for benefits of the dependents.
It protect against living too long. It protects against premature death.
B
a Premium is calculated on the basis Premium is based on the mortality of the
s
i of longevity of the annuitant. policy holder.
c
It liquidates an estate. It creates an estate.
c
haracteristics of insurance
i. It is a contract for compensating losses.
ii. Premium is charged for Insurance Contract.
iii. The payment of Insured as per terms of agreement in the event of loss. It is a
contract of good faith.
iv. It is a contract for mutual benefit.
v. It is a future contract for compensating losses.
vi. It is an instrument of distributing the loss of few among many.
vii. The occurrence of the loss must be accidental.
viii. Insurance must be consistent with public policy.
c. Methods of handling risk i. loss control ii. loss financing iii Internal risk reduction
6 a. Risk identification: it is a process of determining risks that could potentially
prevent the program, enterprise, or investment from achieving its objectives. It
includes documenting and communicating the concern.
b. Annuity and life insurance.
c. Insurance regulatory development and authority regulations for life insurance.
i. composite
ii. Agent commission
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iii. IRDA policy quota

iv.IRDA training requirement
v.ULIPs regulations
7. a. Types of motor insurance
i. Liability insurance
ii. Third party policy
iii. Package policy
b. Classification of health insurance
i. Individual medical expense insurance
ii. Group health insurance
c. Types of risk
i. Systematic risk
ii. Unsystematic risk
8. Case study
a. Process
i. Identify loss exposure
ii. Measure and analyse the loss exposure
iii. Select the appropriate combination of techniques for treating the loss exposure
iv. Implement and monitor the risk management program.

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