MODULE – 1

BASIC PRINCIPLES OF INSURANCE

Meaning of Insurance

Insurance is such a method which provides security and protection against financial loss up to some limit.
Premium: Shifting the risk to insurer in consideration of a nominal cost called premium.
Insurance is a co-operative device for spreading over the loss suffered by one or more, caused by a particular
risk, over a large number of persons who agree to share the loss collectively.

Definition of Insurance (Functional Definition)

According to Thomson, “Insurance as a plan which a large number of people associated themselves and
transfer risks attached to individuals.”
According to William, “The collective bearing of risk is insurance.”

Legal Definition
According to Justice Jindal, “Insurance is a contract in which sum of money is paid by the assured in
consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.”

Features of Insurance
The basic purpose of insurance is to transfer the loss of person the insurance company which can easily spread
it over a large member of policy holders.
Insurance contract in which terms and conditions of insurance mentioned is called Insurance Policy.
• Offer & Acceptance: In a valid insurance contract, there should be a lawful offer by applicant and
lawful acceptance of same by insurer.
• Lawful Object: In Insurance, object should be legal otherwise it is invalid. Ex – If the insurance
policy taken for purpose of murder will be unlawful.
• Contract: Insurance is a contract between insurer and the insured in which insured makes a valid offer
and insurer accepts that.
• Consideration: It is an essential element, insurance is a contract by which one party in a consideration
called premium takes over a particular risk of other party.
• Co-operative Device: In insurance, a large no. of people associated and transfer their individual risks
to association.
• Protection of financial risks: Insurance lovers only such risks which can be measured in money
terms (financial loss or risk).
• Good faith: Both parties must have good faith in insurance policy same mind and same understanding
at the time of entering into contract.
• Certainty and contingency: Life insurance contract is a contract of certainty because death or expiry
of term of policy will certainly occur so the payment is certain.
• Insurance is not gambling: It is not gambling because the insurer is assured to get his loss
indemnified only event of occurrence of uncertain event as stipulated in contract of insurance.
• Insurance can’t be named as charity: It can’t be treated as charity because charity is given without
consideration, but insurance is not possible without premium.
• Insurance provides safety and security to policy holders; it guarantees the payments of loss.

FUNCTIONS OF INSURANCE
Insurance performs a variety of functions which are advantageous to common people.

A. Primary Functions
1. It provides certainty – Reduce risk or uncertainties of events

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2. It distributes risk – It is based on co-operation, insurance is a means of distributing losses of any uncertain
events among persons.
3. It provides security – In the insurance company guarantees the insured person compensate or indemnity the
loss on occurrence of an uncertain event.

B. Secondary Function
1. It provides capital – A scare source of production, first it reduces financial risk and losses by provides core
capital investment.
2. It increases efficiency – By reducing risk or fear of losses, it leads to increase efficiency in business, and it
provides security in business community.
3. It helps in judging in viability or major projects – Generally conducts as an investigation of asset or
project as whole a view to judge the profitability of project.
4. Insurance helps in loss reduction – Insurance Company also advise the various methods and techniques
which help in reducing risk.
Ex – In fire insurance, stress is laid on preventing hire by using fire-fighting means.

C. Other Functions
1. Economic development – Insurance sector as acts as source of funds, provides capital, social security and
protecting the society from damage.
2. Expansion of foreign trade – Insurance provides to international traders, shippers and banking which are
main functionaries.
3. It provides funds of invest – Insurance company collect funds by way of premium and employ or invest it
profitability in the industrial development of country.
4. Encouraging saving – Insurance is considered to be a better alternative techniques or making saving.
5. It checks inflation – It curbs the circulation of money and saves it from its ill effects.
6. Social securities
7. Credit facilities – Businessman are in a position to raise loans and get credit facilities from financial
institutions.

IMPORTANCE OF INSURANCE

Insurance is very important for modern age. Human needs are numerous, once the needs for food, clothing and
shelter are satisfied, more wants come to surface.
Insurance is a social device,
• It reduces the cost of life
• It accumulates funds to meet individual losses

A. Importance to an Individual

1. Insurance provides security and safety.

2. It provides peace of mind – By providing financial protection and promise to compensate loss.
3. It eliminates dependency – During dependency, life insurance funds provide regular source of income to
family after death. As such insurance assists the family and adequate funds provided.
4. It serves as a source of saving – Life insurance plays a role to plan individual’s savings by investing in
various insurance plans.
5. It protects mortgaged property – Middle class family acquire house by borrowing money from insurance
companies. It helps an individual to keep assets of family
6. Life insurance fulfills other needs:
• Family need
• Old age need
• Re-adjustment need
• Income for widow and widower

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B. Importance to Business

1. Financial help – Provides financial assistance to business enterprise, by granting loans and advance to
business.
2. Reduce uncertainty of business losses – By acquiring a policy, the owner of business reduces business loss
such as damage by fire, theft and accidents.
3. It improves efficiency – Due to uncertainty about future is a handicap to economic progress, so by taking
insurance policy, it gives freedom from unnecessary worries.
4. Grant of credit facilities – An entrepreneur can obtain credit by pledging the policy as collateral securities
for loan.
5. Employee’s security – Insurance provides adequate provisions for grant of social security and welfare
measures such as employee state insurance, life policies.

C. Importance to the society

1. Protection to society wealth
2. Economic growth of the country
3. Standard living (due to high return)
4. Social security benefits
5. Equitable distribution of loss
6. Removal of social evils
7. Accelerate the production cycle
8. Reduction in inflation – Insurance reduces the inflationary pressure by extracting money in supply to
amount of premium collected.

PRINCIPLES OF INTEREST

A. Indemnity
Indemnity means that the insured person is placed financially in the same position as he was before the loss.
The principles of indemnity also applies to all contracts of insurance except life insurance where
• Loss suffered by insured can be measured in monetary terms
The measure of indemnity is decided at the time of entering into contract itself in events of insured:
• Prove that he has sustained a monetary loss
• Prove the extent and value of his loss
Features
1. All contracts of insurance, except life insurance and personal accident insurance are contracts of
indemnity.
2. There exists indirect relationship between principle of indemnity and principle of insurable interest,
because insured has to prove amount of actual loss.
3. The amount of compensation shall never exceed the amount of actual loss or value of policy.
4. Valued policies are not covered under scope of principle of indemnity.

Methods of Indemnity

A. Cash payment: It’s the claim of insurance in easiest and common method. After receiving the claim form,
make analysis of the surveyor’s report, and evaluate the amount of actual loss to be compensated.

B. Repairs: The subject matter may be partially damaged or not fully destroyed in such case, the insurer
instead of cash payment prefers to settle claim of damage to get repair.
Ex – motor vehicle insurance, machine and building insurance

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C. Replacement: In case of fully destroyed or loss, there is no chance of repair, the insurer many arrange
replacement.
Ex – Theft or burglary insurance.
D. Reinvestment: It is a rarely used method, where subject is destroyed is placed in its former position or
condition as it existed just before loss.
Ex – Destroyed by fire

Principle of Indemnity and Fire Insurance

Fire insurance contract is of indemnity where insured can’t claim anything more than value of goods lost or
damaged by fire.
Generally the amount of indemnity or compensation is the market value of property at the time as on date of
loss.
• Insurer can be indemnified only up to actual loss.
• Sum of indemnity can never exceed the value of policy taken out

Amount of Indemnity = Actual loss x Value of policy

Value of Subject

PRINCIPLE OF INSURABLE INTEREST

The principle of insurable interest is a pre-condition for a valid contract of insurance. The person getting an
insurance policy must have an insurable interest in the subject matter to be insured.
The insured must positively stand benefited financially due to existence or continuance of life.
Ex – An employer has insurable interest in lives of his employees. A banker has an insurable interest in
properties mortgaged to it against a loan.

Importance
If the insurer has not insurable interest in property insured, the contract of insurance would amount to a
gambling or speculative contract.
Most clear and common case of existence of insurable interest is ownership of property being insured.

Essentials
1. Subject matter of insurance must be certain. There must exist some property, rights, interest, like or
potentially liability.
2. The insured must bear a legal relationship to subject matter or he must be owner. He stands to benefit by
safety.
3. The insured must be owner or may posses the legal rights or interest in subject matter to be insured.

Obligation to insure:
• By statue
• By contract
• By custom

Option to insure:
• Owner
• Mortgages
• Lessors
• Tenants

PRINCIPLE OF GOOD FAITH

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Under the contract of insurance, the insured’s duty is bound to disclose all material facts relating to the risk to
be covered. Without good faith, it shall be null and void.
Materiality of Facts
A material fact is a fact which would influence the mind of prudent underwriter in deciding whether to accept
a risk for insurance and on what terms. Examples:
• Motor – details of young drivers
• Household – details of commercial use of private dwelling
• Commercials – previous hazards / loss
• Life – details of heart disease

Ubereimae Fidei
It means the contracts which require absolute and utmost good faith on part of all the parties concerned with
the contract.

Material Information
Material information which enables the insurance company to decide
• Whether to accept or not to accept any risk
• If accepted, at what rate of premium and on what terms of and conditions.
The legal binding applies to insured, who is in possession of all material facts relating to subject matter.

Duty of Disclosure
Duty of disclosure applies to both proposer and insurer. Duty of disclosure operates at inception,
• Until the data cover is confirmed by insurers renewal
• Up to the renewal date mid term alternation
• Until the insurer confirm cover in respect of alternation.

Principle of Subrogation
Subrogation is, “Transfer of rights and remedies of insured to the insurer who has indemnified the insured in
respect of loss.”
Ex – Insurer of an importer of electrical goods receives a claim in respect of a faulty toaster. The insurer pays
the claim but takes over insured’s right to claim back against manufacturer.
Subrogation rights only apply where there is a “legal liability”

CLASSIFICATION OF INSURANCE
A. Personal Insurance
• Life Insurance
• Health Insurance
B. Property Insurance
• Rural Insurance
• Theft Insurance
• Machinery Insurance
• Motor Insurance
C. General Insurance
• Fire Insurance
• Marine Insurance
D. Liability Insurance
• Re – insurance
• Workmen compensation Insurance
• Public liability Insurance
E. Social Insurance
• Accident Insurance
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 • Sickness Insurance
• Old age Insurance
• Unemployment Insurance

LIFE INSURANCE

According to Insurance Act, 1938, “Life insurance is the business effecting contracts of insurance upon human
life including only contract where payment of money is assured on death except death by accident on
happening of any contingency dependent on human life.”

Nature of Life Insurance

Life Insurance is concerned with hazards that stand across the life of every person that of living to old age
without visible means of support.

A. Family protection: In event of death of insured who is also an earner of the family due to his
disability to do work by sickness. Life insurance gives protection family by giving financial help.
B. Source of investment: In it, there is a compulsion to pay regular premium otherwise the policy will
expiry of before maturity. Though it is beneficial for policy holder as well as country.
C. Helpful at the time of cessation earnings: When the insured is not for earning more, insurer is very
helpful. Ex – Pension plan policy
D. Standard of living: It helps the person who is rendered destitute through misfortune.
E. Social security benefits: Insurance fulfills certain needs for which state might have to provide.
Provision for old age, sickness and disability persons is general……..
F. Accelerate the production cycle
G. Control on inflation

Characteristics of Life Insurance

A. Offer and acceptance: Life insurance contract is also an outcome of an offer made by insured and its
acceptance by insurer.
B. Maturity value: Life insurance is not based on contract of indemnity. Life insurance payment is must
on maturity.
C. Payment of premium: In life insurance, insured is under an obligation to pay amount periodically till
the death of insured or expiry of the period of policy.
D. Insurable interest: The person taking a life insurance must have a pecuniary insurable interest in life
of insured person at the time of taking policy.
• A husband in the life of his life and vice versa
• His own life
• A father of his son, if he is depended on his son.
E. Financial protection: It protects to claimants in case of death of insured before maturity. It gives a lot
through financial protection.
F. Habit of saving: Under it, the insured has to pay a premium compulsory. At initial stage it seems to
be forced saving but later on it becomes the habit of saving.
G. Cover other risks: Incase of total disability, medical expenses, retirement or economic death risks
have been covered by life insurance.
H. Relief: It relieves the insured from the world of risks and uncertainties which may occur after or
before death of insured.
I. Suitable for raising loan
J. Meet various needs: To meet specific needs. Ex – children’s education, medical needs and marriage
provisions.

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Advantages of Life Insurance
• Superior saving plan
• Encourage saving habits
• Suitable for raising loans
• Protection against creditors
• Tax relief
• Estate duty
• Economic duty
• Investment element
• Helpful to govt. (long term funds)
• Money when needed to satisfy various needs

LIFE INSURANCE CONTRACTS

Life insurance is a contract between insurer and insured. In this, the insurer in consideration of a premium
undertakes to pay a certain sum of money either on death of insured or on expiry of certain period, whichever
is earlier.

Features of Life Insurance Contracts

i. Nature of general contract – Policy of life insurance is evidence of legal contract
ii. Offer and acceptance
iii. Competency of parties – Both offeror and acceptor must be competent to contract
iv. Free consent – Without coercion, undue influence, fraud, misrepresentation
v. Good faith
vi. Certainty

Life Insurance Agreement contain Special Provisions

• Name of the insurer
• Name of the party who wants to insure
• Description of risks
• The amount of premium
• Term of insurance
• Sum assured

PRINCIPLE OF LIFE INSURANCE CONTRACT

There is no principle of indemnity.

1. Principle of insurable interest: The person getting a life insurance policy must have an insurable interest.
• A person has an unlimited insurable interest in his own life.
• A husband in life of his wife and vice-versa
• A father in life of his son and vice-versa
• A creditor in life of debtor to extent of amount
• A partner for his co-partner

2. Principle of utmost good faith: Life insurance requires that the principle of utmost good faith should be by
both parties. The insured and insurer must be at same mind and understanding before entering into a contract.
Generally a printed form (questionnaire) is supplied to insured for answer the questions:
• Name, address, occupation
• Date of birth, height, weight
• Facts about life and habits
• Family history (health of each member)

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 • Information about the health of proposer
• Nature of income of proposer
The facts that don’t affect the policy:
• Disclosure in regard to universal facts
• Facts which reduce risk of insurer
• Facts which waived by insurer

PROCEDURE OF LIFE INSURANCE POLICY

Life insurance business was nationalized on 19 th Jan 1956.

1. Filing up a proposal form: The person who wants to take policy must fill up the form which provided by
authorized agent. The form varies a type of questionnaire like name, address, occupation and date of birth etc.

2. Proof of Age: Proof of age is required with proposal form. A copy of school certificate or certified copies in
birth register of municipal committee.

3. Medical examination: The proposer must go through a check up. A copy of medical report is required.
4. Acceptance of proposal
5. Payment of first premium: The insured deposits the first premium amount and corporation becomes liable
from the day on which it is paid.

TYPE OF LIFE INSURANCE POLICY

1. Endowment Assurance: Under endowment plan, the insurer offers the payment of sum assured either at
end of specific period to policy holder or if he dies before period then to his nominee or assignee. It provides
both protection and investment to insured. It is a kind of compulsory saving plan.

Advantages:
• Incentive to save
• Helpful for old age
Examples:
• Jeevan Shree
• Policy without profit
• Endowment policy with profit
• Jeevan Mitra
• Bima Kiran
• Jeevan Anha

2. Whole life policies: The whole life policy is one which is taken to cover the entire or whole period of life of
assured.
• Single premium whole life policy (premium paid in single installment)
• Ordinary whole life policy (paid throughout life time)
• Limited premium whole life policy
Advantages
• Permanent Protection
• Cheapest policy
Disadvantages
• Limited premium

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Money back policy:
• Jeevan Sanchaya
• Jeevan surakshya
Pension
• Jeevan Dhara
• Jeevan Suraksha with life cover
Child insurance policy
• Jeevan Kishore
• Bal Vidya

GENERAL INSURANCE
Fire Insurance
• Royal Sundram Alliance
• Reliance General Insurance Company
• TATA AIG General Insurance Company
• Bajaj Allianz GIC
• HDFC – Chubb GIC

Meaning & Definition of Fire Insurance

A Fire insurance is an agreement between insurer and insured, under which the insurer agrees to indemnify the
loss caused by fire to the insured, in consideration of certain payment, called premium.
According to V.R. Bhusan, “It may be defined as an agreement where by one party, in return for a
consideration, undertakes to indemnify the other against financial loss due to fire.”

Characteristics

A. Loss by Fire
In fire insurance it means, hostile fire which is destructive in nature but not the cooking fire. Hostile fire is
uncontrollable. It generates heat and lights both which happens accidental not intentional. Through policy the
insured claim for loss.

B. Loss of lightning of clouds

It is discharge of atmosphere electricity when cloud passes speedily. It is also covered by fire insurance policy.
C. Saving of property
It also undertakes to make good the loss resulting from insured property from complete destruction by fire.

Importance of Fire Insurance

• It is very important in business environment. Business properties like factories, godowns, semi-
finished goods, finished goods are exposed to fire risks. The fire destroys all properties which results
in a great loss.
• It is important foe general public. Fire insurance companies stimulate installation of protective device
by granting loans.

FIRE INSURANCE CONTRACT

It is a contract of indemnity according to which the insurer promises to indemnity to insured for losses arising
out of fire. In consideration the insurer charges some premium.
• The policy is taken a definite period (1 year), if there is no loss in this year, the company don’t pay
anything. (In case of loss, the insurance company should pay only the amount of loss not the full
amount.)
• There should be accidental fire (hostile fire)
• Fire should be actual not through cooking

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 PRINCIPLES OF FIRE INSURANCE CONTARCT

1. Principle of insurable interest: The insured must have insurable interest in the property which he wants to
insurer. It means to some pecuniary interest in subject matter of contract.
• The owner of the property
• A partner has an equitable interest in firm’s property
• A creditor in the property which he has lien for debt
• A baille can insure any bailed property.

2. Principle of good faith: It is a condition of fire insurance; both parties have good faith towards each other.
It is the duty of insured that he should make clear all points so that the insurer may correctly estimate the risk.
• The insurer must disclose all facts of policy of proposer.
• Construction and description of building
• Situation of building
• Particular of occupier (office, resident, shop, godown)
• Previous loss suffered
• Previous lodged claim and settlement

3. Principle of Indemnity: It is one underwriter’s promise to indemnify the insured in case of any loss by fire
by insurer. The compensation payable to insurer is to be measured in terms of money.
Amount of indemnity = Actual loss x Value of policy
Value of subject matter

Characteristics of Fire Insurance

1. The insured can’t claim anything more than value of goods lost or damaged by fire.
2. It is issued for a lawful consideration (premium)
3. The insured must have insurable interest in properties insured against fire, when the policy is takes and
loss occurs.
4. Definite period for only one year and shorter period.
5. Loss must by fire or ignition.
6. Claim may be settled in cash or reinstating the loss goods.

Need of Fire Insurance

1. To give financial help
2. To compensate loss of profits after fire
3. To give mental security
4. Distribution of risk

Kinds of Fire Insurance Policy

Fire insurance is a co-operative device to share the loss due to fire. It distributes risk as well as loss of few
persons over a large number of persons.

A. Valued Policy: The value of property to be insured is determined at the time of taking policy. The
insurer paid the amount of value of property declared in policy. Incase of total loss, will have to pay
the amount of actual value or market value at the time of loss. The amount payable may be high or
loss according to market.
B. Valuable Policy: The claim amount is bases on market price of damaged property not at agreed price
fixed at the time of taking policy. Principle of indemnity followed strictly.
C. Specific Policy: The insurer undertakes to insure for a definite amount. In case at of loss, the
company pays full amount of actual loss, it doesn’t exceed the specific sum. Example – If a person
taken a policy of Rs. 10,000 against a property Rs.15,000. His loss is Rs. 7,000. He can realize the loss

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 of Rs. 7,000, if his loss Rs 10,000 only then full amount can be received, if the loss excess than only
Rs10,000 can be recovered.
D. Stock declaration policy: The insured takes out insurance for maximum amount of stock that he
considers would be at risk during the period of policy.
• Give better protection when stock fluctuates.
• Premium is linked with risk but not sum assured
E. Floating policy: It is taken to cover the risk of goods lying at various places at the time fire the
estimated value of goods is calculated and losses are indemnified.
F. Comprehensive policy: This may be issued to cover up all risks, fire, lightening, explosion, strikes.
This is also known as all risk policy. It is beneficial to insurer because of higher premium.
G. Replacement policy: It provides that compensation will be according to replacement price. The new
asset should be similar that which has been lost.
• Compensation amount depends upon market price of new asset.
• Old property replaced by new one

PROCEDURE OF FIRE INSURANCE POLICY

1. Proposal form (details of property, insurer must have good faith in disclosing all facts)
2. Prove of respectability (insurer needs a proof of integrity and honesty)
3. Assessing of proposal (on receipt, underwriter assess the possible loss)
4. Acceptance (insurer accepts the form from insured after satisfaction all terms.
5. Cover note (interim protection note) – it is issued immediately, the policy is sent later on. Risk will
commence only when premium has paid.
6. Insurance policy: This is a document in which all terms and conditions regarding insurance are mentioned (1
year)

MARINE INSURANCE

Marine insurance is concerned with the overseas trade conducted through sea routes. Marine insurance covers
a large number risk including sinking, burning of ship, accident, jettison, piracy, causing to losses to ship and
cargo and many perils of sea.
According to Marine Insurance Act, “A contact of marine insurance is where by the insurer undertakes to
indemnity the assured in a manner and extent there by agreed, against marine losses.”
1. Marine Insurance has 2 main branches
i. Ocean Marine Insurance
ii. Transportation Insurance
Marine Insurance classified into 3 parts:
A. Cargo Insurance: The insurance which is related for safety of goods is known as cargo insurance.
Generally goods are insured according to their value but sometimes some percentage of profit is included in
value
• Special policy (related with shipment)
• Open cargo policy (covers all shipments made by an exporter over a long period of time)
• Floating policy (It is like open cargo but differs in paying of premium. Future shipment is estimated
and premium is deposited)

B. Haul Insurance: The ship is insured against the perils of sea such as collisions against rock, burning of
ship.

C. Freight Insurance: The freight may be paid advance or at arrival of goods. The company will not get
freight is the goods are not delivered safely.

PRINCIPLE OF MARINE INSURANCE

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1. Principle of insurable interest
• The owners of goods in his goods
• The owner of ship in his ship
• The master and crew of ship in respect to wages
• The ship company in its freight
• The travelers in luggage
2. Principle of good faith: The contact is based on good faith on part of insurer and insured. The insured
should disclose all material information relating to insurance before insurer. It must have same mind and same
understating.

3. Principle of indemnity: The insurance company compensates loss but allows no profit out of it. The
insured will be get compensation only to the limit of loss suffered. Compensation is made only in cash not to
replace the cargo or the ship.

MARINE POLICY
1. Voyage policy:
This is issued to cover the risk from the port of departure up to port of destination, no matter time it will take.
It’s taken for cargo. It’s not fit for haul insurance as a ship does not follow any particular route.

2. Time policy:
The insurance is affected for a specified period of time only from 10:30 AM of Jan 2001 to 10:30 AM 2002
3. Mixed policy: Combined of voyage and time policy. It is for a particular route for a fixed period.
4. Cargo policy: It is taken by insured for shipment of particular cargo only. Premium is fixed by underwriter
by value of cargo.
5. Composite policy: The policy may be undertaken by more than one underwriter.

MARINE INSURANCE CLAUSE

1. Valuation clause
2. Labor clause
3. Warehouse clause
4. Touch and stay clause
5. Waiver clause
6. Memorandum clause

MISCELLANEOUS INSURANCE
1. Rain insurance: Heavily rain causes disturbance in holding fairs, sports and match shows (claim of loss)
2. Plate Glass insurance: Large selling organizations, offices, houses, shops, showrooms are decorated with
plate glass. Risk of break down it is insured. Through cash or replace the broken glass into new.
3. Cycle Rickshaw insurance
4. Television insurance policy
5. Mobile insurance policy (12 month duration policy)

HEALTH AND MEDICAL INSURANCE

Health insurance is a safeguard against rising medical cost. A health insurance policy is a contract between an
insurer and individual or group, in which the insurer agrees to provide specified health insurance at an agreed
price.
• Environmental pollution is causing serious health problems.
• Poison gases, nuclear waste
• A person may face serious financial or monetary problem for medical treatment or hospitalization.
o Hospital insurance
o Medical cover
Ex –
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 • Medi claim policy
• Personal accident
• Group accident
• Jan Arogya Bima Policy
• Bhabishya Arogya Policy

HEALTH INSURANC SCHEMES

1. Govt. or state based system: Primary health centers, community health centers, managed by central and
state govt. These facilities given to all population with nominal charges,
Along with village health workers, maternal, child health programmes, disease prevention programmes carried
out by central health care system.
Central Govt. Health Scheme in 1954
2. Market based systems: GIC medi-claim introduced in 1986. Anyone in age of 5 to 80 years can take the
policy.
• Provides cover, which take care of medical expenses from illness
• Domiciliary hospitalization is also covered
Benefits
1. Reimbursement of medical expenses
2. Discount on premium is allowed on family package
A. Jeevan Asha: Open ended scheme, many surgical procedure, and exclusive double accident
benefit.
Surgical procedure: Nervous system, respiratory
B. Asha deep: Cancer, paralytic stroke, kidney surgery
3. Employee managed system: In defense, educational institute, universities also provide medical service to
their employees
4. NGO systems: Health facility also provided by charity and non-govt organization
• Child in need institute
• SEWA
NGO having potential to generate awareness with health insurance

PROPERTY RELATED INSURANCE

Property insurance is also a contract of indemnity where by the insurer, in consideration of a periodical
payment, undertakes to indemnify insured against financial loss being damaged or destroyed.
Personal and business property insurance covers risk against fire, marine, theft and burglary.
• Home insurance or Domestic cover
• Business insurance
• Commercial insurance
Rural insurance
As per IRDA rules, it is compulsory for insurer to provide specific percentage of insurance to person in rural
sector, workers are in unorganized and informal sector.

A. Crop insurance: Numerous uncertainties prevail between sowing of seeds and selling in market. Natural
calamities like storm, wind, excessive rains, hail storm, excessive cold may give high amount of loss to farmer.
The farmer should take a policy on related to crop to claiming his loss through uncertain events.
• Cattle insurance: This policy provides compensation, if death of cows, buffalo, bulls due to accident,
diseases or surgical operation.
• Sheep and goat insurance
• Poultry insurance: Poultry means layers, boilers. It provides compensation against death of birds due
to accident, disease occurring during the period.
• Honey Bee policy

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 • Agriculture pumping set policy
• Animal driven cart insurance policy

B. Motor vehicle insurance: According to this provision of Motor Vehicle Act 1956, every motor vehicle
owner is to keep motor vehicle insurance policy and the defaulter is liable to be punished. Due to road
accidents it is very helpful to be a policy holder.
C. Burglary insurance: The whole world is exposed to the risk of robbery, theft, house breaking causing loss
to human lives. Under that the insurance company agrees to indemnify the financial losses caused doe to theft,
burglary, house breaking.

D. Baggage insurance policy: This policy includes, covers the risk of theft, misplacement, robbery of
traveler’s baggage, briefcase during the period of journey from one place to another.

LIABILITY INSURANCE

Re-insurance
Re-insurance is an arrangement whereby an insurer has accepted an insurance transfer as a part of the risk to
another insurer so that his liability on any risk.
Definition: When an insurer transfer a part of risk on a particular policy by insuring it with some other is called
re-insurance.
Characteristics
• It secures the risk of liability of direct insurance only
• The principles of an insurance are equally applicable on re-insurance contract (good faith, indemnity,
insurable interest)
• The contract of re-insurance is subject to all conditions in originally policy and re-insurer is entitles to
all benefits.
• Re-insurance comes to an end when original contract comes to an end.
• Re-insurance can be re-stored in all types of insurance

Objectives
• Wider distribution of risk to secure full advantage of law
• Limitation of liability of insurer within financial capacity
• Equal distribution of risk
• A safeguard against certain uncertainties [flood, riots, wars]

Reason of Re-insurance
• Transfer of risk
• Expansion of business
• Increase in profit [Re-insurer receives adequate premium to underwrite risks and save cost of issuing
policy]
• Goodwill [several companies involve for operation against a partial risk. Better goodwill results in
better profit.]

Principle of Re-insurance
• Good faith
• Indemnity
• Insurable interest
• Cause proxima
• Subrogation
Rights of Re-insurer
• Re-insurer has entitled to get a proportionate share of premium original insurer.

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 • Re-insurer can get benefit or terms and conditions of original policy.
• Original company must disclose all material facts to re-insurer
• Re-insurer company is entitled to right to subrogation
Liability of re-insurer
Re-insurer is liable to pay proportionate share of loss to original insurer in case of partial loss.
• Nature and site of concern
• Location
• Financial status
• Experience

METHODS OF RE-INSURANCE

1. Facultative re-insurance: Such insurance is the outcome of re-insurance of particular risk by agreement
entered with other insurer.
2. Treaty re-insurance: The insurance agrees to accept a certain proportion of all risk over and above a
certain limit underwritten by an insurer.
Advantages of Re-insurance
• It increases business
• Best distribution of risk
• It enhance insurer’s goodwill
• Stability in premium rates
• Stability in profits of insurance companies
• It curbs competition
• It protects insurer’s interest
• Advantage to insured

CRITICAL ILLNESS INSURANCE

It is an insurance product under which the insurer is contracted to make a lump sum cash payment if the
insured is diagnosed with critical illness covered in policy.
It launched on 6 October 1983in South Africa under the name dread disease insurance.
• Blindness
• Deafness
• Kidney failure
• Paralysis or limb
• Terminal illness

Need for critical illness

It provides financial protection to individuals on treatment of an illness. The money received as should be
used:
• Pay recuperation aids
• Cost of care and treatment
• Pay debts off
• Change in life style

MARKETING OF INSURANCE PRODUCTS

Marketing of insurance product is:
• Convergence of financial services
• Rise of commerce
• Emergence of new distribution channel
Issues in insurance market

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 • Insurance is unpatented, subjective, requires prior experience
• Service can’t be inventoried
Success Factors
• Change in attitude of population
• Open environment, transparent
• Well-established distribution network
• Trained professional to sell products
• Rational approach to investment criteria.

UNIT – 2
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA)

IRDA Act, 1999 was enacted to protect the interests of insurance policy holders and regulate, promote and
ensure growth of insurance business in India.
According to IRDA Act, 1999 was finally passed in December 1999 to establish IRDA authority.
Objectives
1. Autonomous authority [protect the interest of policy holders]
2. Growth and development [to regulate, promote insurance]
3. Proper regulation of insurance sector
4. Protection of interests of policy holders [It aims to ensure that insurance customers receive precise,
clear and correct information about service]
5. To promote clean and orderly conduct of insurance business.

ESTABLISHMENT AND INCORPORATION OF IRDA

IRDA authority name to have perpetual succession, a common seal and hold powers to acquire hold and
dispose both movable and immovable property.
The head office of IRDA shall be at such place as central govt may decide time to time.

Composition of Authority
IRDA authority shall consist of following members.
• A chairperson
• Maximum whole time members = 5
• Maximum part time members = 4

Qualification of Members
The members of the authority should be persons of ability, integrity and standing who have knowledge or
experience in life insurance, general insurance, finance, economic law and accountancy.
All these members are appointed by central govt. Chairperson, whole time members, part time members are
appointed by central govt.

Tenure of Office of Chairperson and other members

According to Sec 5, all members hold office for a term of 5 years from the date of assuming office and shall be
eligible for re-appointment.
• Age of Chairperson with in the limit of 65 years and age of whole members with in 62 years.
• A member may relinquish his office by giving a notice to govt not less than 3 months.

Removal from office

• A member who is an insolvent
• He has been physically or mentally incapable
• He has convicted in any offence
• He ahs act against the public interest

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Administrative powers of Chairperson
The chairperson shall have the powers of general super-intendance and direction in respect of all
administrative of authority.

Meetings
According sec 10, it explains that the authority shall meet at such time and places observe such rules and
procedure relating to transaction of business.
• Chairperson of IRDA be the chairman, in his absence the members decide who will be the in charge
of this meeting.
• All matters lay before any meeting shall be decided by voting by the present members. Incase of
equality of votes the chairperson have right to cast a second vote.

Duties, Powers, Functions of Authority

• To set norms [to set capital adequacy, solvency margins, provision of law]
• Grant of registration [to examine applications for registration to transacting insurance business]
• Protection of consumer interest [to set standard for insurance product. There should be a system of fire
and use for insurance product]
• Ceiling for expenses
• Performance and quality [to monitor the performance as well as quality of re-insurance]
• Technical reserves [to insure reserves for company]
• Asset management [to review insurer’s asset distribution to monitor with prescribed norms and
patterns of investment]
• Account [to ensure high standard of accounting and transparent Balance Sheet of company]
• Consumer Grievances [where necessity act as ‘dispute resolution’]
• Annual report [to prepare and publish an annual report of insurance industry]

Other powers and functions of Authority

i. Registration of Certificate [issue the applicant a certificate of registration, renew, modify withdraw]
ii. Protection of policy holder’s interest [nomination by policy holder, insurable interest, settlement of
insurance claim]
iii. Agents and other intermediaries [specify requisite qualification, code of conduct and practical training
for intermediaries.]
iv. Efficiency [promoting efficiency in insurance business.]
v. Professionalization [promoting and regulating professional organization connected with insurance]
vi. Enquiries and investigation [calling for information from undertaking inspection, inquiries and
investigation.]
vii. Books of Account [Specify the forms and manner in which books shall be maintained]
viii. Margin of solvency [Regulating & maintaining solvency]
ix. Dispute settlement [Adjudication of disputes between insurer & insured]
x. Coverage of Rural and Social sector

IRDA & Expectations from INDIAN INSURANCE COMPANY

A) Administration by 3rd party administration. [Main motto is sack of Business consideration, TPA also
licensed to enter into such agreements to ensure survival in view of reluctance by insurance companies
and utilize them ]

B) IRDA requires security cover for needy.

C) IRDA favors participation of long term players in Broking [In view that sustainable growth of
insurance industry in country]

D) Private life insurance player to capture more share

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 REGISTRATION OF INSURERS

Any certificate of registration obtained immediately before the commencement of IRDA 1999.

Application of Registration

1. The receipt showing payment of fee as may be determined by regulation which shall not exceed Rs. 50,000
for each class of business.

2. The authority shall give preference to register the applicant and grant him a certificate of registration., If
applicant agrees all the terms and condition.

REGISTRATION PROCEDURE

1. A certificated copy of memorandum and article of association if the applicant is a company.

• A certificated copy of memorandum and article of association if the applicant is a company.

• A certificated copy of partnership if applicant is a firm.

• If then applicant is non resident then,

 A copy of charter, status deed of settlement of memorandum & articles.

 A list of directors, if the insurer is a company.

 Name and address of Indian representative

 Full address of principal office in India.

2. Name, address and occupation of director / partner of company firm and address of principal office.

3. Prescribed fee, every insurer shall deposit in cash.

 Life insurance, 1% of his total gross premium written in India in any financial year after 31 st
day of March, not exceeding rupees (10 crore)

 General insurance, 3% of his total gross premium not exceeding from (10 crore)

 Re-insurance Business [20 crore]

 Marine insurance [1 lakh only]

4. A declaration verified by an affidavit from principal officers.

5. A certified copy of prospects & standard policy forms of insurer.

 Statement of assured rate, advantage, terms and conditions.

6. Deposit of Rs.50000.
7. Financial condition & general character of management.

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CANCELLATION OF REGISTRATION
1. If the insurer makes a default in complying with any issue or order made.

2. If the insurer makes a default in complying with, acts in contravention.

3. Insurer becomes insolvent.

4. Insurer become physically & mentally disorder.

Duplicate Certificate

On payment of fee, not exceeds Rs.5000 a duplicate certificate is issued.

IRDA & INSURANCE INTERMEDEARIES

1. Insurance agents

2. Brokers

3. Surveyors & Loss assessors

4. TPA

5. Corporate Agents

1. Insurance agents: The business of insurance company through an individual who is an agent.

An agent is a person licensed by IRDA to do business. Agents are not regular employees of insurer, they work
on commission basis.

Every business is carry forward by an authorized agent of IRDA.

Licensing of Agents by Authority

For licensing the agent has to submit an application along with specific fees. For this he must fulfill the
necessary terms and conditions, qualification by IRDA.
The insurance products are selling through the persons who have been issued the license to act as an agent.
1. Application for a license/Renewal of license (Form IRDA Agents-VA)

2. Individual insurance agent’s identity card (Form IRDA Agents-VZ )

The license may act as an agent for life insurer, General Insurer, Composite insurance agent.

DEFINITIONS

1. Approval institutions, institution engaged in education and training particularly in areas of insurance
sales, service and marketing.

2. Authority means “IRDA established under provision of Sec 3”.

3. Composite insurance agent means “An insurance agent who holds a license to act as an agent of life
insurer and also a general insurer”.

4. Corporate Agent means “Other than an individual as specified”.

5. Person means
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  An individual

 A firm

 A company

6. License means “A certificate which gives authorized proof”.

7. Proposal form means “An application for purchase of an insurance product which shall on basis of
insurance company”.

8. Prospect means “A potential purchaser of an insurance product”.

Qualification of An Agent

1. At least 18 years old.

2. Have passed 12th standard, if he is appointed in a place with population of 5000.

3. Have undergone practical training in an approved institute.

4. Have qualified the examination conducted by insurance institute of India.

Disqualification

1. A Minor.

2. An unsound mind by court.

3. Guilty, Criminal, Breach of trust, Cheating, Forgery.

Validity of License

The license validated only for 3 years after commencement of IRDA Act, 1999.
 The license can be renewal; the application of renewal of license reaches the issuing authority
at least 30days before expiry.

 It can be renewed for again 3 years at any one time on payment of the fee only 250
[Determined by Authority].

Practical Training

The applicant should go through, 100 hours practical training from an approved institution in life or general
insurance business [Composite insurance agent-150 hours, Insurance agent-100 hours]

CODE OF CONDUCT OF AN INSURANCE AGENT

1. Every insurance agent, identify himself & also the company.

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 2. Disclose his license to the prospect on demand.

3. Disclose the scale of commission in respect to insurance product offered to sale.

4. Indicate the premium to be charged by insurer for product.

5. Explain to the prospect, the nature of information required in the proposal form.

6. Inform promptly the prospects about the acceptance or rejection of proposal by insurer.

7. Advice every insurance policy holders to effect of nomination or assignment or change of address.

2. Surveyors & Loss Assessors

Insurance surveyors are as insurance intermediaries are related only to non-insurance business.
 Their main function is to survey and access mishappening and evaluate the financial loss to insurance
companies.

 Surveyors serve a link between the insurer and insured. His job is to calculate the actual loss and avoid
false claims filed by the insured.

Duties of Surveyors

 Investigate and confirm the cause of loss.

 Advice the insured to take good care of salvage.

 Assess the quantum of loss.

Licensing of Surveyors & Loss Assessors

 Every person who intends to act as a surveyor after expiry of a period of 1 year from commencement
of IRDA shall make an application to authority within time.

 Every surveyors and loss assessor shall comply with code of conduct in respect of their duties,
responsibilities, and professional requirement.

Qualification
1. Fellowship (IISA),Mumbai

2. A degree, diploma in architecture of a recognized university.

3. Associate ship of institute of chartered accountants.

4. A degree or diploma in naval architecture.

INDIAN INSTITUTE OF INSURANCE SURVEYORS & LOSS ASSESOERS [REGISTERED

OFFICE AT HYDEREBAD]

The license should be given by satisfying authority itself with completion of all respects by applicant.
 Satisfy all applicable requirements of Sec 64 and Rule 56A.

 Possess additional technical qualifications.

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  Has furnished evidence of payment of fees of granting.

 Has undergone a period of practical training not exceeding 12 months.

After satisfying the authority, the license should be given, valid for a period of 5 years from the date of issue.
Renewal of License
 For renewal of license of license, shall apply to authority at least 30 days before the expiry period.

 Along with renewal fees of Rs.200.

A license not so renewed can be revalidated only as a fresh case.

Cancellation of License
Where an applicant does not satisfy the provisions of the act and regulations, authority may reject the
application for grant of license & refund to applicant not more than 60% fee received.

Categories of Surveyors
1. Professional qualification

2. Training undergone

3. Experience as a surveyor & assessor

The above categorization is done & reviewed from time to time on basis of point system evolved by authority.
The category like:
• Category A
• Category B
• Category C

Code of Conduct For Surveyors

1. Behave ethically& with integrity in professional pursuits. [More honesty, fair dealings & truthfulness].

2. Strive for objectivity in professional & judgment.

3. Conduct himself with courtesy & consideration to all people with whom he comes in contact.

4. Not perform survey works in areas.

5. Carryout his professional work with due diligence, care and skill and proper regard to technical
standard.

6. Keep himself updated with all developments, maintain proper record for work done.

7. Encourage and assist his colleagues to obtain professional qualifications.

8. Disclose to all parties concerned his appointment where acceptance of such an agreement may
materially prejudice.

9. Maintain and register of survey work, containing relevant information.

Function of Surveyors

1. Check the admissibility of loss.

2. Investigating &managing losses arising from any contingency.

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 3. To conduct himself with professional code of conduct while discharging the service.

4. Conduct inspection, Re-investigation.

5. Comment about salvage realization.

6. Recommend about party payment[account payment]

7. Initiate immediate measures to protect damage property.

8. Checking the ownership insurable interest indemnity proofs.

9. Perform balancing act or to represent the best interest of all parties in event of a claim and determine
liability of insurer.

RULES AND ETHICS GOVERNING INSURANCE PRACTISE

An insurance agent as a professional has to study and enhance his specialized knowledge.
 Personal development and growth capable of being measured in case of an agent, partly by business
that is done.

 It is also measured by improvement in effort that gets a sale and reputation that the person enjoys the
market.

Characteristics of Good Ethical Behaviour

1. Placing the best interest of client above one’s own direct or indirect benefits.

2. Holding the confidence and considering and considering as privileged, all business and personal
information pertaining to client’s affairs.

3. Making full and adequate disclosure of all facts to enable client make decision.

IRDA has explained Rules & Code of conduct for Agents

1. An insurance agent is in a position of trust on his assurance the policy holders entrust their small
savings to an insurer.

2. Code of ethics spelt out by IRDA in Agents regulation and referred to earlier, is directed towards
ethical behavior.

Things go wrong when Agent becomes concern with commission that he will earn from policy.
3. Agents don’t reveal vital information in proposal form [Doing harm].

4. Serious concerns are voiced due to improper behavior increasing.

Some biggest companies found to have cheated through false accounts & funds of bank have misused to
bolster the greed of friends.

Professional Ethics can be compromised

1. Having to chase between 2 plans, one giving much less commission.

2. Temptation to recommend discontinue of an existing policy& takeout new one.

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Code of Conduct For Advertisement

Methods of publicity adopted by some companies for securing large business.

 The advertising standard council of India adopted a code of conduct in 1985 as a matter of self-
regulation.

Advertisement boost the viewers to buy insurance product

1. Building corporate image of insurer

 Financially strong insurance company

 Responsible social organization

2. Serving as reminder to existing policy holders.

 Intimate change of address

 Pay premium timely

 Make nomination

CODE OF CONDUCT OF IRDA TO ADVERTISING

Insurance Advertisements & Disclosure Regulation 2000
1. Ensure the statements not misleading

2. Contractual benefits bound to provide and non-contractual which may be provided.

3. Ensure that advertisement not restrict to policies of one insurer.

4. Obey the law[contain nothing which omits the law ]

5. Ensure the advertisement contain nothing in breach of law.

6. Ensure that advertisements aren’t so framed as to abuse the trust of clients.

Spoken Advertisement

In life insurance, a “word” of mouth has proved the most powerful medium of publicity.

 A satisfied claimant would be favorable word-of mouth publicity medium. (Credibility for both agent
& insurer)

Protection of Policy Holders Interest

Customers expect full information from those who provide service. According to Consumer Protection Act,
stating a principle which every salesman practice and is consistent with utmost good faith in insurance.

An agent is required to solicit & procure new life insurance business with the interest of policyholders.
1. Contract prospects for life insurance, study their needs & persuade them to buy.

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 2. Complete all related formalities, including filing proposal form, collecting premium, arranging
medical exam, collecting proofs.

A) Recognition & Respect

Recognition is felt by customer when his feelings & requirements are understood and not ignored.
 The customer feels being respected when his thoughts and ideas are said to be valid.

B) Responsiveness
When the customer finds that the serviced provider is willing to help him.

C) Ease of assess
It happens when the customer gains a confidence of reaching the service provider without any hassle of
loosing time, energy & money.
 Keep in touch with policyholder to make sure the renewal premium are paid at time.

 Ensure that nominations are made.

 Assist in settlement of claim by helping claimants to complete necessary formalities.

Customer satisfaction is more important

1) Product selling becomes high due to customer satisfaction.

2) Remaining continuously in touch with customer reassures him at every opportunity that he didn’t
make any mistake.

MODULE 3
RISK MANAGEMENT TECHNIQUE & PROCESS

Risk means exposure to danger. A dictionary defines risk is as hazard, chance of bad consequences, and
exposure to mischance.
 According to MacMillan, Risk refers to the possibility that something unpleasant or dangerous
might happen.

 According to A.H.WILLET, Risk is an objectified uncertainty regarding the occurrence of an

undesirable event.

 Risk may be defined as combination of hazards measured by probability.

“Risk is a condition in which there is a possibility of an adverse deviation from desired outcome that is
expected or hoped.”

Characteristics of Risk:
1. Perils of Hazards: Which causes loss such as fire, storm, theft, accidents etc. (Ex-A motorcar
without breaks)

2. Uncertainty of Events: Out of control.

3. Insurance And Risks: Risk is the basis of insurance.

25
Causes of Risk:
1) Natural forces, such as flood, storms, earthquakes etc.

• Geographical changes in earth.

• Seasonal changes in excessive heat in summer, snowfall, heavy rains.

• Natural calamities such as storm, dusty winds.

2) Unnatural forces

• Human forces such as tendency of customers, lockouts, strike.

• Economic forces (Ex-Trade cycle, Changes in demand & supply)

Risk Vs Uncertainty
1) Uncertainty is occurrence of an event which can’t be guessed.

2) Uncertainty is opposite to certainty, which is a confliction about a particular situation.

3) Uncertainty refers to a situation where the outcome is not certain or unknown.

RISK

1) Pure Risk: Risk is said to be pure, when it is causal, uncertain and non-speculative.

2) Calculable Risk: Risks are capable of being measured quantitatively, only quantitative risks are
insurable.

3) Monetary Risk: Risk is insurable which are capable of being compensated in monetary terms only.

4) Real Risk: These aren’t imaginary. (Ex-Theft, Dacoit, Death, Fire)

CLASSIFICATION OF RISK

A. SPECULATIVE RISKS: A risk is said to be speculative when there is a possibility of profit or loss.

Ex - Market changes in price causing profit or losses.

Generally introducing a new product in market is speculative.

Speculative risks are those where there is a possibility of gain or loss.

Ex - Investment in Stock market.

B. PURE RISKS: Pure risks are those which cause loss or no loss.

Ex - Fire, Accidents, Theft, Death

If risk occurs (1) Directly affect the financial position of firm. (2) No chance of gain.

A particular risk may be speculative may be speculative as well as pure.

Ex - Risk of loss of property by fire is a pure risk for property owner and also speculative risk for insurer who
insures the property able to active all profit.

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 CLASSIFICATION OF PURE RISK

1. PERSONAL RISK: These risks are directly affecting an individual. They involve the possibility of
complete loss or reduction of income.

a) Premature Death: It is defined as Death of a head of family who is main Bread earner.

These may include dependants to support a mort age, to be paid off, or children to educate. The condition
becomes worse if surviving family member having insufficient amount of replacement income.

i. Human life value of the person is lost forever.

ii. Additional expenses may be incurred of financial expenses medical bills.

iii. Finally certain non economic costs are also incurred including emotional grief.

b) Dependent old Age: Risk is insufficient income during retirement, when people retire, they lose their
earnings.

• This lost income also reduce standard of living which again trouble.

c) Sickness or Disability: Poor health is another important risk. It includes both payment of bills of illness and
loss of earned income. Cost of major surgery.

d) Unemployment: Unemployment causes financial insecurity in at least 3 ways.

• Worker looses their income.

• Due to economic condition the workers may be work only part time.

B. PROPERTY RISK: These risks are highly visible and easy to identify. Anyone who owns property faces
property risks because such possessions can be destroyed or stolen. These involve 2 types of loss:

i. Direct loss: It is simplest to understand. If a house is destroyed by fire, the owner looses the value of
house.

• Losing the value of building itself, the primary owner no longer has a place to live and during the
time required to rebuild the house, it is likely that owner will incur additional expenses living
somewhere.

C. LIABILITY RISK: These are the risks arising out of injury to the persons or damages to their property
through carelessness.

Liability Risk generally arises from the law.

Ex- Failure of a contractor to complete a construction project as scheduled or failure of debtors to make
payment.

27
Risks arising from failure of others

When another person agrees to perform a service for you, he or she undergoes an obligation. There may be
occur financial loss.

METHODS OF HANDLING PURE RISK

1.Avoidance[Avoid the risk or circumstances]

Ex - Never visit border across at time of war.

2. Loss prevention [Reduce loss frequency]

Ex-Not smoke in filling station, drivers are trained before driving vehicle.

3. Loss reduction [Lower loss severity]

Ex-Deployment of fire fighting equipment, first aid box

4.Contractual agreement [Insurance, Derivatives etc.]

5. Corporatizing [Partnership firm]

RULES OF RISK MANAGEMENT

“Risk management is an integrated process of delineating specific areas or risk, developing a comprehensive
plan, integrating plan, conducting on going evaluation.”
Risk management is a scientific approach aims at reduction and eliminating of pure risk.

Risk management seeks to make the best decision about how to deal with a particular risk.

Control of Specific risk

Speculative risks can be controlled by adopting modern management techniques, market research, forecasting
government policies.

A producer who manufactures more than one type of goods is in a better position to face losses caused by
uncertain market conditions.

Ex-Joint stock companies & large partnership firms

Each speculative risk needs different areas of knowledge & skills need be tackled.

Control of Pure risk

i. Locate source of risks: Causes of risk traced out.

Outcomes of an accident, violence, theft, and flood may involve financial loss.

ii. Site and number of loss: Historical data enable to decide in advance how many losses will occur in
future.

iii. Selection of suitable method of handling risk: Various techniques are available to handle risk such as
avoidance, assumption, reduction, transfer of risk. Appropriate technique should be used.

iv. Implementing the selected method: To cover the risk an appropriate method is selected and then it is
implemented after taking into consideration.

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 Ex - Cost of insurance, record keeping, repairs and renewals amount of periodical premium, financial
condition.

v. Feedback or evaluation of methods results: A certain intervals evaluation of outcomes of method

adopted must be done in order to check its implementation.

RISK MANAGEMENT TECHNIQUES

Risk is the occurrence of an uncertain event which causes loss.

A) Avoidance of risk: Avoidance is perhaps the simplest method of handling risks. It involves such
activities which involve zero point risk such as ceasing to continue the activity.

Ex-When a person buys a motor car, he assumes risk of accident & liability to pay compensation to 3 rd
party

B) Risk reduction or Prevention: It includes all those methods which are employed to reduce either the
possibility of loss creating events to minimize such events.

Ex-In order to prevent fire, the use of fire proof building materials, use of fireworks, installation of fire
fighting apparatus.

C) Assumption of Risk: The best way of handling risk is to retain risks with self.

• It is the easiest and cheapest way of dealing with relatively small losses by creating some
contingent reserves or funds to meet the losses.

• Assumption of risk may either be deliberate decision or failure to predict that risk well in
advance.

D)Transfer of risk: Risks may be transferred in 2 ways

• A firm may transfer the activity which is risky like stock market either by hedging and
subcontracting.

• By making contractual arrangements to transfer responsibility for any loss which are outcomes
of uncertain events.

E) Insurance: The basic objective of insurance is to transfer the risk of a person to insurance company
which can easily spread over a large number of persons insuring similar risks.

Insurance is a means of shifting such risks to insurer in consideration of a nominal cost called
premium.

F) Management of Risk And Risk Research: In large organization secure the service of risk manager
who are well equipped with capability to analyze & forecast the risk and take preventive measures.

Ex-A company planning to market a new product may seek to reduce the risk of marketing by
conducting market research.

HAZARD

Hazard is a condition that increases the occurrence of loss.

Ex - Perils may be flood cyclone, fire or earthquakes.

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 A. Physical hazard: Generally human beings have no or very little control & their occurrence is
accidental by nature.

B. Moral hazard: These are man made hazards and it depends upon human behavior. Human being having
full control over hazards.

RISK MANAGEMENT PROCESS

“Risk management is a process that identifies loss exposures faced by an organization and selects the most
appropriate techniques for treating such exposures.”

Elements of risk management:

1. Risk analysis

2. Risk control

3. Risk financing

A. Corporate Risk Management: Concerned with possible reduction in business value from any source.
B. Personal Risk Management: It is concerned with allocation of scarce resources in same optimal manner &
use of techniques.

RISK MANAGEMENT PROCESS

• Identify risk management goals

• Gather relevant & comprehensive data
• Analyze risk exposures faced by client
• Construct a risk management plan
• Monitoring the plan

RISK MANAGEMENT

The primary objective of risk management is to preserve the operating effectiveness of organization.
1. Economical: Cost of risk is kept within reasonable bounds. It involves an analysis of cost of safety
programs, insurance premium paid.

2. Reduction of Anxiety: Certain loss exposures can cause greater worry & anxiety for risk manager.

Ex-Lawsuit from a defective product can cause greater anxiety and fear than a small loss from a minor
fire.

3. Compliance With Govt. Regulations: Govt. Regulations may require a firm to install safety device to
protect workers from harm, to dispose of hazardous waste material property and to label consumer
protection properly.

4. Social Responsibility: A severe loss can adversely affect employees, suppliers, creditors and the
society in general.

5. Survival: After a loss occurs, the firm should be able to resume at least partial operations within
reasonable time period.

6. Continued Growth of Firm: A company is supposed to grow by developing new products and
markets or by acquiring or merging with other companies.

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 7. Stability of Earnings: Examining of the form can be maintained if the firm continues to operate.
[Incurs additional expenses]

8. To Continue Operation: The ability to operate after a loss is extremely important.

Ex-Banks, Dairies, Railways must continue to operate after a loss

GATHER RELEVANT AND COMPREHENSIVE DATA

Recognition and identification of sources of loss from unexpected event is one of the major tasks of risk
manager.
1. Loss exposure to business income

• Additional expenses to mitigate the loss.

• Loss of income during dislocation period.

2. Properly loss exposure

• Furniture

• Building, Plant & Machinery

• Computer software

3. Liability loss exposures

• Environmental pollution

• From defective products

• From company vehicles

4. Human resources loss exposures

• Workers job related injuries

• Unemployment

• Death

5. Crime less exposures

• Employee theft and dishonesty

TOOLS/TECHNIQUES FOR PERCEPTION OF RISK

A Risk manager has several sources of information for identification of potential loss exposures.

a) Use of Questionnaires And Checklists: These are framed to help Risk manager to identify major or
minor loss exposures.

• Ex-What are the chances of an earthquake destroying machinery?

b) Insurance policy checklists: Such checklists include a catalogue of various policies or type of
insurance. The Risk manager simply consults such a list, picking out those policies applicable to firm.

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 c) Financial statement method: Detail exam of each asset & liability item may produce information
relating to risk of loss that might be overlooked.

• Analysis of such composition, Risk of loss from foreign shares, sales on credit.

d) Onsite inspection method: Regular visits on site, Regular inspection of plant and operations can
identify major loss exposures.

e) Flow Chart method: It is a pictorial representation. It shows flow of production & delivery can reveal
production bottlenecks.

f) Statistical records of losses: Detailed records of losses incurred, loss reimbursed by insurance, loss
frequency. Causes of loss and other type of information provide the Risk manager with a tool for estimating
future loses in firm.

ANALYSE RISK EXPOSURES FACED BY CLIENT

Monitoring of risk reduction measures is possible only if information is available regarding frequency and
service of losses.
Once the risks have been initiated, the Risk manager must evaluate them. Risk evaluation involves an
estimation of potential frequency and severity of loss.
1. Loss frequency refers to probable number losses that may occur during some given time period.

2. Loss severity refers to probable site of losses that occur.

Risk manager select most appropriate technique or combination of techniques for handling each exposure.

A PRIORITY RANKING BASED ON SEVERITY

The severity of loss measures the magnitude of loss per occurrence. One method to estimate expected severity
of loss is to use the average.
i. Critical risk: Loss exposures which cause bankruptcy of firm are considered.[High magnitude]

ii. Important risk: Loss exposures which don’t cause bankruptcy of firm but require the firm to borrow
continue operation.

iii.Unimportant risk: Loss exposures are considered which can be arranged out of firm’s current income
of current assets undue financial strain.

Frequency and Priority Ranking

Potential severity is most important factor in ranking exposures estimate of frequency may be useful in
differentiating long exposures with equal potential severity.
1. NIL: In the option of Risk manager, Event is probably not going to happen.

2. Slight: Event is possible but it hasn’t happened & unlikely to happen in future.

3. Moderate: Event is occasionally happened.

THE EXPECTED UTILITY APPROACH

Severity of possible losses can be analyzed by what has been termed the expected utility approach utility
approach to movement.

A.Risk Profile: The first step in utilizing to determine loss severity is to identify measurement attitudes
towards loss.

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• The risk neutral person.

• The person who is Risk - Lover.

• The person who is Risk - Averter.

CONSTRUCT A RISK MANAGEMENT PLAN

Risk manager construct a plan, generally risk manager must take a leading role in planning, organizing and
controlling of activities that are directed at preventing loss.
Ex: Employee driver education may be aimed mainly at reducing of frequency of accidents, emergency first
aid services and enforcement speed laws may be emphasized.

Risk Management
Plan

Internal Risk
Loss Control Risk Financing
reduction

Retention & Self

Risk Avoidance Diversification
Insurance

Investment in
Loss Prevention Insurance
Information

Non-Insurance
Loss Reduction
Risk Transfer
LOSS CONTROL
By implementing a risk management plan, one can control over loss.

1. Risk avoidance: Technically a voidance takes place when discussions are made that prevent risk. It means a
certain loss exposure is never acquired or an existing is abandoned.

Ex- Earthquake losses can be avoided by not building a new plant in earthquake prone area.

Not visit border areas at the time of war.

Advantages

• Chances of loss are reduced to zero.

• If an existing loss exposure is abandoned is a bounded, the chance of loss is reduced or eliminated.
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 Disadvantages
• The firm may not able to avoid all losses. Ex- a Company may not able to promote death of a key
executive.

• It may not be feasible or practical avoid the exposure. Ex-Paint factory can avoid losses from
production of paint

SYSTEM SAFETY
Under this, a safety engineer considers the plant as a total system rather than concerning on a special loss.
Under this, a risk manager can achieve better control over future legal liability suits against the firm.
LEVELS OF SAFETY
1. Federal Govt.

2. State & Local Govt.

3. Private Insurers

4. Firms

RISK FINANCING
It refers to techniques that provide for funding of losses after they occur.
Retention
Risk retention is generally a deliberate decision for business organization intended to following:
• Consequence losses are small.

• Losses are shown as operating expenses.

Reasons of Retention
1. Consequence losses are small

2. Only possible method

3. Highly predictable loss

Advantage
I. Saves transaction cost

II. Accurate predictions

III. Saves money

IV. Minimize disputes

Disadvantages
• Possibility of more loss

• Expensive

• Loss in tax advantage

Self Insurance
Self Insurance is self funding, which expresses more clearly the idea that losses are funded and paid for the
firm.
Objectives
• Economical

• Improvement in claim handling

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 • Improvement in quality of services

• Improve loss control

Limitations
• Efficiency in administration of plans may not equal.

• It is not recommended, if rate of return on net worth is relatively high with in firm.

• It is not easy to apply to group life, health plans.

CAPTIVE INSURANCE COMPANIES

A captive is an entity created & controlled by a parent whose main purpose is to provide insurance to its
corporate owner.
• Pure Captive: Owned only by one parent such as corporation to provide insurance cover to itself.

• Group Insurance: Owned by several parents to provide and to cover collective risks.

Reasons
1. Stability in earnings

2. Economy in scale

3. Lower cost

4. To avoid income tax

5. Formation of a profit center

TRANSFER OF RISK
It implies that exposed party transfers whose or part of losses consequent to risk exposure to another party for
a cost.

A. Insurance Transfer: Insurance is appropriate for loss exposures that have a low probability of loss but for
which severity of loss is high.

Limits

i. Accidental

ii. Not catastrophic

iii. Measurable

Benefits

i. Indemnification

ii. Uncertainty is reduced

iii. Tax benefits

iv. Continuous business

B. Non- Insurance Transfer:

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 Hold harmless agreements

Incorporation

Hedging (Buy and sell future contracts in hope of profit)

Diversification

Guarantee & Warranties (Contract to perform promise)

Advantage
1. Cost in case of non-insurance is less

2. Potential loss may be shifted to someone who can better exercise loss control

Disadvantage
It doesn’t give discounts.

Implementing &Monitoring
1. Risk management policy [Provides guidelines for programming and layout constrains to action]
2. Co-operative with other depts. [Risk manager must co-operative with other depts. In order to discharge his
liabilities]

Implement on sectors
• Production

• Marketing

• Finance

• Personnel

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 MODULE 4
UNDERWRITING
Underwriting is the insurance function that is responsible for accessing and classifying the degree of risk, a
proposed insured or group presents and making a decision concerning coverage of that risk.

Conceptual part of Underwriting

A) Selection: It is a process in which an insurer evaluates individual application for insurance in order to
determine the degree of risk.
B) Classification: It is the process of assigning a proposed insured to a group of insured of same expected loss
probabilities.
GUIDELINES FOR UNDERWRITING
The process of underwriting starts with a clear statement of underwriting policy
1) Acceptance of normal risk irrespective of sum insured
2) Acceptance of normal risk up to specified sum insured
3) Acceptance of normal class of business with approval of controlling office.
4) Acceptance of risk with prior approval for continuing office
5) Acceptance of risks subject to safeguards
6) Procedural matter

Acceptance subjects to controlling office approval

Acceptance of controlling office is required for acceptance of certain classes of business.
• Aviation
• Product liability
• Special contingency
• Medical specialist
• Medical expenses and hospitalization insurance
• Baker’s indemnity
• Blood stock insurance

Acceptance of extra hazards risks declined risk

• Complete proposal form
• Risk inspection report
• Other premium income report from same client and agent
• Post loss expenses
• Acceptance of proposal

Extra-hazards risks are normally to be declined; hence these risks are called “Declined risk”.
Examples: Fire- Ammunition work, Celluloid factories, Explosive factories, match factories.
Marine: Bulk cargo on under than F.P.A., cement in bags, peck cargo on wider than F.P.A., oil

Acceptance of Risk to Underwriting Safeguard

1. Fire: Underlying operating office provide for certain measure for divisional office to under write risk.
1. Specify the acceptable type of risk

2. Underwriter is satisfied about normal hazard

3. His previous loss expenses

4. Policy may be granted to clients, whose amounts are regularly audited

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 2. Motor: It comes from one class of vehicle to another. Older vehicles are usually refused but accepted
subject to inspection. Certain type of vehicles may be covered only for third party risk. Example - military
disposal vehicles.

3. Marine:

• Cement pipes and sheets (breakage is excluded)

• Transformers (excess in posed on leakage)
• Refrigerators and AC (risk of detaining and scratching)
• Cargo in paper bags(teaming and bursting of bags)

NEW BUSINESS PROCEDURE

The procedure dealing with acceptance of business and issue of documents such as cover notes and polices.

ISSUE OF PROCEDURE

1. Policy: When complete of risk are available the policy is prepared and stamped in accordance with the
Indian stamp Act. Policy number is entered is cover note.

2. Marine: (Policy &bills), in addition to Policies, Premium bills serially number are issued.

3. Motor: (Policy and certificate).In addition to Policy, a certificate or document issued by Motor Vehicle
Act1939 for evidence of legal liabilities.

PRINCIPLES OF UNDERWRITTING

1. Selection Of Insured And Underwriting Standard

Objective is to minimize adverse selection against insured. It refers to a tendency of with a higher than average
chances of loss of standard rates underwriting should select only those insured whose actual loss expectancy
will not exceed.
• Standard non smokers
• Preferred non smokers
2. Proper Balance Within Each Rate Classification

In life insurance prospective insured can be classified on standard, preferred, substandard. As such a proper
balancing in each date classification made to achieve company’s profitability.
Preferred risk classification includes those whose mortality experience.

3. Balance with Each Other

Maintenance of each class is very difficult for the company. Home office underwriter are tempted because
agency pressure.

4. Equity among Policy Owners

Equitable rates should be changed, that each group of policy holders should pay in its own way, items of losses
and expenses

5. Social Acceptability
Social insurance, coverage & participation have become mandatory → adverse selection → persistency.
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 UNDERWRITTING IN LIFE INSURANCE
The underwriting process for life insurance involves:
• Performing field underwriting.
• Receiving the application in office.
• Gathering additional information.
• Underwriting decision.
STEPS
1. Receiving proposal or application
2. Medical report
3. Underwriting review
4. Policy writing.

UNDERWRITTING IN NON LIFE INSURANSE

The underwriting if non life insurance such as, commercials, business, insurance is complicated and involves
task.
Commercial insurance ranges from small shops and factories to large Multinational Corporation. It has many
operations in many countries.
Information related to insurance hazards are made available

 Application on proposed from insurer’s statements

 Information from Agent or Broker
 Prior experienced on past history

SOURCES OF UNDERWRITTING INFORTATION

In property insurance, both physical characteristics of property and personal characteristics of applicant must
be classified such as present financial condition, past record, living habits.
Under file and health insurance, information relating to age, sex, physical condition, personal history, family
history, alcohol drugs usage

 Application: Detailed information required in application. Individual’s age, gender, weight,

occupation, family health history.

 Information from the Agent: Exposures referred to as accommodation risks, because they accepted
to accommodate a valued client or agent.

 Inspection report: Such report can provide information bearing on insurability of proposed insured.
Such report are prepared by specified inspection companies that collect and sell information about
individual’s history, financial situation, character, mode of living.

 Physical examination: Physicians selected by insurance companies supply the insurer with medical
reports after physical information. Example: In workers compensation insurance, an inspection may
reveal unsafe working condition such as dangerous machineries.

 Physical examination and physical repots:

 Medical Information Bureau (MIS)

Which maintains centralized files on physical condition of applicants who have applied for life
insurance in member companies?
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  Industry sponsored data base: In India, FICCI, OSCHAN, Trade union, IBA & state level traders.

ANNUTIES

Annuity may be defined as the payment of amounts periodically during the time of annuitant in consideration
of payment of a reed sum to insurance company

Features of Annuity Contract

• It is a contract between insurer and annuitant.
• The annuitant deposits a lump sum in once or more establishment
• Insurer agrees to pay a fixed regular amount as an annuity .the return may be monthly,
quarterly, half yearly or annually.
Advantage of Annuity Contract
• Annuities are useful to those persons who don’t have departments or don’t want to leave anything for
others but want to use accumulated saving during lifetime.
• Annuity for life is nothing but a pure endowment, as it paid any death; it appears a time a pension.

TYPE OF ANNUITIES

A) According to the number of lives covered

1) Single life annuities: It is covered under the classification according to number of lives covered. Only one
single person is contracted. This plan helps who want to enjoy of saving during life time

2) Multiple life annuities: More than one life is contracted. It is of two types.
• Joint life annuity, payment of annuity stops at first, death
• Last survivor annuity, payment continuous up to death at last person of group.
3) According to method of payment or premium
• Single premium plan: Single installment of premium
• Level premium plan: Deposit same amount periodically in equal installments.
4) According to commencement of income

• Immediate annuity: It commence immediately after the end of first income period. Example. If the
annuity is to be paid annually then first installment will be paid at expire of one year.
• Preferred annuity: The payment of annuity starts after expiry of certain period or attainment of
specific age. Premium may be paid by installment or by a single payment.
• Annuity due: The payment of installment starts from the time of entering into contract. Premium is
paid in single amount but can be paid in installment as incase of deferred annuity.
5) According to the disposition of proceeds

• Life annuity: It offers regular income to annuity holder throughout lives no. amount is paid after
his death to his nominates. If the annuity holder dies before receiving full amount, it is beneficial
to company.

• Guaranteed payment annuity: Payment up to a period is guaranteed by insurer. If amount dies

before specified period, annuity will continue up to expire period.
• Immediate guaranteed payment annuity
• Deferred guaranteed annuity

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 BANCASSURANCE

It is a partnership between a life insurance company and a banking institution. The main tenants of
bancassurance’s trusting relationship with customer, branch name recognition, customer profitability, cash
management relationship with cooperation.

Banks are acting as agents for insurance companies to offer the insurance products to their customer. It
brings a new source of income inform of service charge. The banking sector reforms are aimed to making the
bank sound and competitive. Banks can bring insurance service to poor people at minimum cost.

In 1991, financial sector reforms in mutual funds and banking sectors allowed FDI and FII.

EMERGING TRENDS

The financial sector is witnessing a rapid convergence of banking securities dealing. Banks are strongly feeling
the needs to provide a host of financial service as one stop shopping to customers to retain.

The name has come for the industry to gradually more from traditional individual agents towards new
distribution channels, with a shift in creating awareness.

INTEGRATION OF INSURANCE AND BANKING INDUSTRY

• It provides insurance and banking products and services through a common distribution channel and
for same client.
• It refers to selling of insurance policies through a banks distribution channel.

Guidelines of RBI for bank

1) Any schedule commercial banks permitted to undertake business

2) Banks which satisfy the eligibility criteria
• Net worth of bank should not less than 500 crore.
• Level of NVP should be responsible
• CRAR of bank not be less than 10%.
3) In case of foreign partner contribute 26%....with approval of IRDA.
4) All banks entering into insurance business will be required to obtain prior approval or reserve bank

PENSION SCHEME
It is a plan, an investment scheme that is made either in single lump sum payment or installment paid area a
certain number of years in return for a specific sum. Pension plans bought to generate income during one’s
Retired life.
In-India (3-catgory)
• Covers every citizen of country through a standardized, start pension system which offers basic
coverage & focuses on reducing property.
• It is a mandatory occupational pension system where employees and employer contribute towards
their pension.
• It is voluntary, private funded system, including individual saving plan.
CIVIL SERVANT’S PENSION (CSP)

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It is run on the basic of pay-as -you-go system, for employees of central government who were recruited up to
31st December, 2003 and employees of govt recruited up to effective date mentioned in notification.

EMPLOYEES PENION SCHEM (EPS)

It is based on a contribution rate of 8 .33% from employee to which government makes an additional
contribution of 1.16%. In case of death of a member the scheme provides for a pension to spouse.
Voluntary pension like, LIC and mutual fund offers these plans.

NEW PENSION SCHEM

NPS was made on 22dec 2003. It is based on principles of defining up front the liabilities of government,
giving choice to subscribers.

A.FREEDOM 58: It is a unit-linked pension plan from Birla sun life insurance, which connects cash benefits
with retirement age. Minimum and maximum entry is 18 and 80 years.
• A policy without life cover (no mortality charge)
• Accumulation phase (insured has to decide annual premium and investment age with five fund option)
• Vesting age (insurer cap tax free lump sum with drawl at vesting age)
B. LIC’s Jeevan Nidhi: Scheme is with profits deferred plan. It provides a risk cover during the deferment
period may be started at 40 years.
• Guaranteed additions
• Participation in profits
• Benefit on vesting
• Annuity option
 Annuity for life
 Annuity with return of
purchase price on death
 Increasing annuity
C. LIC’s New Jeevan:
It allows the policy holder to make provision for regular income.
• Premiums (Payable years, half years, quarterly, monthly or salary deduction)
• Tax benefits
• Bonuses (get shares of profit in form of bonuses)
D. LIC’s New Jeevan Suraksha:
Allow the policy holder for regular income after the selected term
• Premium (Premium may be paid in one lump sum (Single Premium)
• Tax benefits
• Bonuses(Final bonus may also payable provide policy)
•
ULIP (Unit-linked Insurance Plan):
These policies are called “With Profits” policy, because investment gains are distributed to policy holder in
form of a bonus announced every year.
ULIP serves the James function of providing insurance protection against death and provision of long term
saving but they are structured differently.
• An equity (growth) fund
• Balance fund
• A fund which is invested in bonds
Arguments in favour of ULIP
• Investors know exactly what is happening to his money. It allows the investor to choose the asset in to
which he wants his fund invested.
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 • Transparency makes the ULIP more comprehensive and insurance company to ensure holder don’t
lose money in bad year ULIP offer flexibly.

ULIP: Procedure for claim settlement:-

It means that an insured agrees to collect a certain amount of money cover a certain period of time as result of
personal injury.
Some time an insured encounters a financial burden and needs the money immediately for emergency medical
expenses to make an investment.
Insured can sell of their settlement in exchange of liquid cash. The procedure basically entails his claim
adjuster to complete the estimate at time of inspection.

ADVANCE CLAIM

When an insured has a loss of significant site, such as foods, tornado, wild fire, an advance of premium
settlement is issued by company.

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