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Published by garima bhatngar
sem 4 finance
sem 4 finance

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Published by: garima bhatngar on Mar 07, 2013
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Q1. Explain the different types of pure risk and the difference between pure andspeculative risk.
Pure risk is broadly classified into the following four categories:
Property risk 
 This is a risk to a person in possession of the property which faces loss because of some unforeseenevents. Property includes both movable and immovable possessions. Movable assets are personal assetslike personal computer, any appliance. Immovable assets are land, building which suffers loss due tonatural calamities. Property risk is further divided into direct and indirect loss.
Direct loss
A direct loss is defined as a physical damage due to a given calamity or peril in adirect way. For example, if an office building is damaged by fire, the damage incurred in thedirect way is the direct loss.
Indirect loss
The additional expense incurred due to the destruction of the property is theindirect loss. Thus in addition to the physical damage after a fire, the office would lose profits for several months because of reconstruction. The loss of profits is a consequential loss as aconsequence of the damage incurred.
Personal risk 
Personal risks are risks that directly affect the individual‟s income. This may either be loss of earned
income or extra expenditure or depletion of financial assets. There are four major types of personal risks:
Risk of premature death.
Risk of insufficient income during old age.
Risk of poor health.
Risk of unemployment.
Liability risk 
 This risk arises to a person when there is a possibility of an unintentional damage caused by him to
another person because of negligence. Therefore this risk arises when one‟s activity causes adversity to
another person. For example, construction of factories or dams which results in dislocating number of villagers. This risk arises due to government regulations and acts. It is quite different from the other risks
as there is no maximum upper limit to the amount of the loss. A lien can be placed on one‟s income and
financial assets to satisfy legal judgment and the cost of legal defense could be huge.
Loss of income risk 
This risk is due to an indirect loss from a certain given risk. For example if a firm is not able to operatedue to legal issues or destruction by peril, it takes time to resume its normal operations. Therefore in this period, production stoppage will lead to loss of income
The distinguishing characteristics of pure and speculative risks which is of importance to insurersare the following:
The contract of insurance is usually applicable only to pure risks but not to speculative risks.Insurance is meant to assure us against losses that arise as pure risk, but not to outcomes that leadto both loss and gain. Moreover a particular type of risk may appear speculative for the insurancecompany but a pure risk for the organization.
The law of large numbers is easily applicable to pure risks than to speculative risks. The law isimportant to insurers since it predicts future loss experience. An exception is the example of gambling, where the casino operators apply the law of large numbers in a most efficient way.
Speculative risk may profit the society even if a loss occurs. It carries some inherent advantagesto the economy. For example speculative activity in the stock market may lead to more efficientallocation of capital. The same does not apply to pure risk. A fire, flood, earthquake cannot benefit the society.
Since pure risk is usually insurable, the discussion on risk is skewed towards pure risks only.
Q2. What are voluntary and involuntary insurances?
Insurance coverage‟s are classified as voluntary and involuntary.
Voluntary insurance is an optional insurance which is taken by an individual or a company by their ownwish. Private insurance is usually a voluntary insurance which includes automobile insurance, workers
compensation insurance etc. Only 3% of India‟s population is covered under voluntary health insurance
and there is scope for expansion.Involuntary insurance comes under public sector where the individual is liable to take up insurance bylaw. It is usually taken for social development, unemployment or for the protection of particular class of  people in the society.
Q3. Explain the steps in underwriting process.
The underwriting of life-insurance falls under a category that is different from all other forms of insurances. When the underwriter measures risk at beginning, the company assures a cover for 30 years or throughout life. Life assurance underwriting must consider factors, like, medical history, family details,
occupational hazards, and person‟s lifestyle.
 The underwriting process for life insurance involves the following steps:1) Execution of field underwriting.2) Renewing the application in the office.3) Gathering additional information, if required.4) Taking and underwriting decisions.Additional information is always essential for the underwriter in order to take a decision. This additional
information may be in the form of questionnaires, a detail medical report from proposal‟s own doctor 
Attendant‟s Report), and an examination by an independent doctor (Medical Examiner‟s report).
 The general steps followed by Underwriters are:
Getting applications
-The application for insurance is the main source of insurability information thatthe underwriter of the life insurance company evaluates first. Applications are generally collected by thefield officers, the agents. A typical life insurance consists of:º
General information
The general information consists of general aspects like name, age, address, dateof birth, sex, income, marital status and occupation of the applicant. It also includes the details of requested insurance cover like type of policy, amount of insurance, name and relationship of the nominee,other insurance policies that the customer owns and the pending insurance applications as on date.º
Medical information
The medical information consists of consumer‟s health condition and several
queries about health history and family history. The medical section of the application is comprehensiveand it is mandatory to fill it completely with relevant information. Information is also collected through amedical examination, depending on age and face value of the policy.2)
The medical report
An average medical test is compulsory (which is free of cost to the applicantexcept in case of revivals). Depending on the information filed in the application, an insurance companymay ask the physician of the consumer for further information. Gathering information is a standardmethod used in all domestic insurance companies. Basically, life insurance companies have severalsources of medical and financial information to assist them in the underwriting process. These include personal medical records and physicians, the medical information department, inspection reports andcredit records.3)
Underwriting review
After collecting all the relevant information about the applicant, anunderwriter from the insurance company evaluates the information. During this evaluation, theunderwriter will organise the risk offered to the company and also determines the premium for the policydepending upon the primary and secondary factors influencing the premium. The premium rates are set by
the company‟s registrars depending upon the applicants risk profil
e. During each step of the underwriting process, the life insurance agent usually provides details, and is well-informed about the insured status inthe process. If the applicant offers more risk than the insurance company standards, then the underwriter rejects the application.4)
Policy writing
A special department writes the policy, whose main function is to issue writtencontracts according to the instructions from the underwriting departments. A register must be maintainedas most policies are long-term. Insurance companies generally use computerised systems to maintain therecords of the customers, premium payments, and they to verify that all the requirements of underwritinghave been met
Q4. Describe factors affecting claim management, and the importance of time element inclaims payment.
The factors that affect claim settlement are:
The risk and cause of event covered in the policy.
The cause of event is directly related to the loss, a remote cause cannot be placed in thesettlement.
The policy should be valid on the date of event.
If conditions and warranties are not fulfilled according to the cover of the policy, the cover of insurance does not come into effect even though premium is paid.
The loss occurred should not be intentional in order to make profit.

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