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Kotreshwar, “Risk Management – Insurance and Derivatives, Himalaya Publishing House Understanding Risk (Nature and Type of Risk) Definitions - Risk is a condition in which there is a possibility that something unpleasant or dangerous might happen. - Exposure to adverse situations or chances of happening of unhappening things. - Dispersion or deviations from the expectations. - Chances or possibility of loss or uncertain situations. Major Elements of Risks - Outcome is uncertain - At least two possible outcomes - One is unfavourable Loss and Chances of Loss Loss: Portion of the expired cost Chances of Loss (in Insurance) : Probability of Loss The whole game of Insurance Business is based on probability of loss. If insurer estimates correctly, he wins else close the business. Probability of loss is based on 2 elements - Perils: Immediate causes of loss (Ex: Losses by fire) - Hazards : Conditions that increase the severity of loss (Ex: stocking of crackers) Hazards has two types – Physical Hazard – like parking of vehicle without lock etc. – Intangible Hazard – it is attitude and culture and more is psychological It has again three types: - Moral Hazard –Fraud – putting fire in loss making unit - Indifference Hazard – carelessness - Societal Hazard – Legal problems like construction of shop or flats at parking area.
Types of Risks
Speculative Risk There is a possibility of gain or loss. to handle fundamental risk. Unemployment. . Individual Risks These risk are confined to individual identities or small group Ex: Theft. It has inherent advantages to the economy or socity. Natural Calamities. Risk Factor: Macro Economic. macro basis. Dynamic Risk: Resulting from the changes in the economy or environment. 3. income level. Fire etc. Individual and Group Risks 3.1. Social insurance Prg. Floods. the situation can be referred to a non financial risk 2. Political. Pure and Speculative Risks 4. 11th September event etc. Static and Dynamic Risks 5. Robbery. May be undertaken by the govt. Group Risks . These risks are insurable. Financial Risks : Exposed to the financial losses from the occurrence of the events Non Financial Risks: When financial loss does not exists. Wars. Financial and Non Financial Risks 2. Some of these are insurable Fire insurance may be bought by an individual to prevent against the adverse consequences of fire. These are not insurable. Ex: invest in a stock market or loss. Ex: Earthquakes. technology. Highly damaging in nature. Pure Risk There is a possibility of loss or no loss. inflation. Quantifiable and Non Quantifiable Risks 1.affects the economy. There is no gain to individual or organisition.Affect social segment or entire population Risk factors: Socio economic. 4. impersonal in origin .
Continued growth .Satisfaction and social responsibility for a good image Risk Management Process: Consist of certain logical steps: 1. Quantifiable Risks: Which can be measured in financial terms. Risk Management Objectives: . 5. Risk Management Concept It is the common function of general management It is the process of planning. Non Quantifiable Risks: Can’t be measured in financial terms like tension.Peace of mind . unemployment due to non professional qualification. organizing.Minimise the cost of risk & Higher profit . Ex: Possibility of loss in business. and controlling the resources and activities of an organisation in order to minimize the adverse effects of potential losses at the least possible cost.No interruption of operations .Difficult to quantify and these are not insurable. Risk Identifications . directing. loss of peace etc.Survival . Static Risk: More or less predictable and not affected by economic conditions.
. 4. goggles.Some other greek tools: Beta. May be seem to be expensive but less costly than the losses that might occur.identify whether it is pure risk or financial risk. Risk Measurements and Evaluations . Financial conditions. . 2. . analysis of financial data.Loss control prg. Theta.Crucial step in risk management.Computer base data and tools are required. 2. need of organisation.Property loss or liability loss . spot light. Gamma.Ex: not to build a plant in a earthquake zone.Third step . material. can be reduce through loss prevention programes. .Risk that can’t be eliminate. . . Availability of funds.Operations of machines: wear hard hats. 3. . . Risk Finance. gloves etc.In order to project the frequency and severity of future losses.Financial risk are non insurable but can be minimize by hedge using derivatives instruments such as futures.How much of pure risk should the company retained and how much should it transfer to an insurer. Nature of risk. financial. options. . 3. .Key process. Risk Control . Delta . .. guards and watch man. identify all the resources like human.Through elimination or reduction .Ex: Fire exposures can be limited by making no smoking zones and smoking zones.Useful tools: Probability and standard deviation . previous losses etc. alarm systems.Value at risk (VAR) . . 4. . environmental.Risk finance depending on 1. and SWAP etc.Risk manager has to develop intelligence network (meeting with employee.Potential exposure to loss.
(Sources and uses of funds) Legal Term: Insurance is a contract by which one party in consideration of the price paid to him proportionate to the risk provides security to the other party that he shall not suffer any loss by the happening of certain events. Avenue for Investments (Life Insurance investments offers attractive returns) 4. Focus on arrangement of funds and redistribution on forms of loss payment. contractual arrangement. Prevention of loss .Introduction to Insurance The term insurance can be defined in both Financial and Legal terms. Insured or Beneficiary. Focus on legal rights. one part agrees to compensate another party for loss. which permits statistical prediction of losses and provides for payment of loss from funds contributed by all members who transferred risk. Policy Benefits of Insurance 1. Reduction in Tension and Fear 3. Reimbursement of Losses 2. Premium. Terminologies related to insurance Insurer. Benefit (Sum of money). Financial Term: Insurance is a social device in which a group of individual (Insured) transfer risk to another party (Insurer) in order to combine loss experience.
Ulip – Unit link plans and investments in stock market Non Life Insurance .Utmost Good Faith .Property Insurance – Risk against fire. Commercial Insurance .Liability Insurance – Protects the insured against damage and claims made by a third . Domestic cover.Insurable Interest Kind of Insurance Life Insurance .Determinable Probability Distribution .Premium should be Economically Feasible Principles of Insurance .Indemnity (reimbursement of loss) . Credit Multiplication 6. Costs of Insurance to Socity Elements of an Insurable Risk . marine.Term Insurance – (Pure risk coverage plans) . Business Insurance.Endowment – Sum assured amount will be payable on maturity or Death. which ever is earlier) .Random loss . of Exposure units .Moneyback – Money will be back in various installments .Pension – Cover risk of old age .Subrogation (To substitute) .5.Large no.Define and Measurable (Calculable ) Loss .Contribution . theft and byrglary Types of Insurance – Home Insurance.
No. In annuity contract generally the payments stops at death whereas in life insurance the payment is usually given at death.part. 4. Personal accident. Aviation insurance.Single Life Annuity .Immediate Annuity . .Insurer undertakes to pay certain level sums periodically up to death or expiry of the term. Types of Insurance – Automobile insurance. Annuities Annuities are periodical payments against some exchange of money or premium payments for remain life of a person for a specified period. Annuity is protection against living too long whereas the life insurance contract is protection against too short. Difference between Annuities and Life Insurance 1. Workers compensation. medical examination is necessary. Group accident etc. The annuity contract liquidates gradually the accumulated funds whereas the life insurance contract provides gradual accumulation of funds. The premium in annuity contract is calculated on the basis of longevity but the premium of life insurance is based on mortality.Multiple Life Annuity Classification of annuity according to Mode of Premium . however evidence of age is essential at the time of proposal.Receiver is call annuitant . Liability insurance . 2.Deferred Annuity Classification of annuity according to number of lives . 5.In early death insurer does not suffer much loss. Classification of annuity according to commencement of income . 3. The annuity contract is taken for one’s own benefits but life assurance is generally for benefits of the dependents. Types of Insurance –Medi claim policy. .Health Insurance – It covers the person( insured) medical expenses incurred.
chemical industry.Personal History – health record. .The Inspection report – Independent agency .Economical Status . Weight. of risk) .Age (Minimum and maximum) .Drivers job.Single Premium Annuities Classification of annuity according to the disposition of proceeds .Agent’s report .Medical examination .. habits.Classification of Risk and Determination of Premium .Nationality Sources of Risk Information .Build ( Heights.Private friends report .Rate of premium (Amt. Chest.The proposal form . Factors Affecting Risk . etc.Retirement Annuity Policy Selection of Risk Purpose of Selection . etc.Defence Services .Physical condition – Medical examination .Neighbors and Business Associates Measurement of Risk . .Life Annuities .Present Habits .) .Guaranteed Minimum Annuities .Proposal should be accepted or not . income.Level Premium Annuities . occupations etc.Family Physician Report .Residence – good climate .Temporary Life Annuity .Avoid adverse selections.Family History .Gender .Occupation.
Theory of probability 2.0000006 Law of Large Numbers . Law of large numbers.000 persons Probability of death of a person who is of 40 years can be expressed as 2/10. Theory of probability .VALUE OF SERVICE (Utility of insurance to each can’t be determined.Cost of claim .Simple Probability – Mutually exclusive event known as simple probability Ex: At the age of 40 years.COST OF SERVICE .Expenses of business + small profit (No loss.02% or . Age 40 . . of units .Cost of Administration (Fixed and recurring) Cost of Claim .Experience of past record Can we calculate the time of death on the basis of experience of past death record? Ans: Death of one life can not be forecasted but no.The large no. Higher premium will not attract business. of death from a group of persons of the same age can be forecasted on the basis of 1. no gain) .probability .Accuracy of data .000 = .Compound Probability – Multiplication is applied when the probability of the combined happening of two or more independent events.experience of medical science . Ex. 2 persons die out of 10.Certainty – occurrence of death is 100% ( occurrence of any event) .0003 .0003 = .Forecasting of death is very important . .probability .0002 Age 42 .0002 of units.Purpose: Fixation of premium .0002 x .
Correctly assume the claim files a. Claim with fraud attitude b. fairness.Speed.Motor insurance claims have become major threat to the survival of the co.Claim mgt is related to efficiency of the organisation . . level of service are related to claim management .Hierarchical structure in form of authority (in monetary limit) Claim Settlement procedures in general insurance .result in cash outflow . . Claims filed due to incorrect interpretations of clauses in the policy documents.Most of insurance companies have separate claim department in which they have .Goodwill of the organisation .Claim administration .Claim Management . courtesy.It affects the customer satisfaction .
Load challan . conditions and warranties. and discharge card . Complete claim form along with an estimate of the loss has to be submitted 3.Fitness certificate .000 under section 64 UM of insurance act) 5. Mediclaim (Hospitalization) .Bills. Loss or damage should be reported to insurer immediately 2. receipts.Photographs .Establishment of liability .Admissibility of the claim .Indication of the cause of loss .In Damage claim.Police reports . .Copies of the Policy complete with terms.Driving License . .Cash memos from hospital . Inspection to the damaged items to assess the loss 4.Assessment of loss .Report to police .Receipts and pathological test reports . estimate of repairs.Confirmation of compliance of policy terms.Fire Brigade report Motor Insurance Claims .Survey report . .Claim form duly completed by the insured. conditions and warranties.Bills from chemist .Surgeon bill and receipt. specialist licensed surveyor will deputed in case of major loss (loss more than Rs.1. Fire Insurance Claim . Investigation that loss or damage has occurred or not due to an insured peril.Claim form . 20.Survey report should include .Registration certificate . Claim Management in Life Insurance .Duly completed claim form .
Insurance Underwriting Insurance underwriters evaluate the risk and exposures of potential clients. . from employer.Form of discharge executed and property witnessed. from the person who has attended the funeral.Endowment polices including money back policies.Policy must be in force at the time of claim .Policy document . They decide how much coverage the client should receive. Maturity Claims . If the claim has occurred with 3 years. how much they should pay for it.Insured must be covered by the policy . and to protect the company's book of business from risks that they feel will make a loss. from hospital. the following documents are required.Document required – Policy document. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. In simple terms. after receipt of intimation of death. Age proof.Legal evidence of title if policy is not assign to nominated . In case of claims by death.Proof of age. it is called as death claim. .The claim is covered by the policy .Life insurance claim can be categorized as 1.Payable sum assured and bonuses .Deed of assignment / reassignment . Statement from the last medical attendant.A scrutiny from legal angle. it is the process of issuing insurance policies. or whether even to accept the risk and insure them.Nothing was outstanding to the insurer at the time of claim . Deed of assignment. Discharge form. The function of the underwriter is to acquire or to "write" business that will make the insurance company money. .Certificate of death . Death Claims If the insured dies before the expiry of the term of the policy. Death Claim Certain features are common to life insurance claim. Maturity claims 2. The death of the life assured has to be intimated in writing to the insurer. if age is not already admitted .
Lower premium rate for working women.Occupational Hazard (Nature of Job) .Collect the information of habit .Moral hazard (Intentions of the proposer) Data for underwriting .Classification of risks . Family History) . Build.Agent or officer report Decision may be one the following . Personal History. Foreclosure .Proposal form .Accept with extra premium .Person who would not have been insured some forty years ago are now insurable .Physical Hazard (Age. Physical Conditions.Decline (risk is too heavy to be covered) Recent Trends (Constantly under review) .Postpone for specific period . Sex.Accept as proposed . A policyholder can surrender the life insurance policy at any time before it becomes a claim. The amount payable on surrender is called the surrender value or cash value.Accept with modify terms . Loans are normally up to 80 to 90 % of the surrender value.Medical Examination . by the policyholder. In most of the life insurance policies.Accept with specific clause . The surrender value is usually a percentage of the premium paid. Surrenders and loans Surrender is a voluntary termination of the contract. insurers provide the facility of loans.
. foreclosure become necessary. The principal loan and accumulated interest could become more than the surrender value at some time.Foreclosure means closure or writing off the policy before its actual maturity. In that case.
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