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MBA Notes For Insurance Risk Management
MBA Notes For Insurance Risk Management
Understanding Risk
(Nature and Type of Risk)
Definitions
- Outcome is uncertain
- At least two possible outcomes
- One is unfavourable
Types of Risks
1. Financial and Non Financial Risks
2. Individual and Group Risks
3. Pure and Speculative Risks
4. Static and Dynamic Risks
5. Quantifiable and Non Quantifiable Risks
1. Financial Risks : Exposed to the financial losses from the occurrence of the events
Non Financial Risks: When financial loss does not exists, the situation can be referred to
a non financial risk
2. Group Risks
- affects the economy, macro basis, impersonal in origin
- Affect social segment or entire population
Social insurance Prg. May be undertaken by the govt. to handle fundamental risk.
Individual Risks
3. Pure Risk
Speculative Risk
There is a possibility of gain or loss. These are not insurable. Highly damaging in nature.
Static Risk: More or less predictable and not affected by economic conditions.
Ex: Possibility of loss in business, unemployment due to non professional qualification.
Non Quantifiable Risks: Can’t be measured in financial terms like tension, loss of peace
etc.
It is the process of planning, organizing, directing, and controlling the resources and
activities of an organisation in order to minimize the adverse effects of potential losses at
the least possible cost.
- Survival
- Peace of mind
- Minimise the cost of risk & Higher profit
- No interruption of operations
- Continued growth
- Satisfaction and social responsibility for a good image
1. Risk Identifications
- Key process, identify all the resources like human, financial, material, environmental.
- Potential exposure to loss.
- Risk manager has to develop intelligence network (meeting with employee, analysis of
financial data, previous losses etc.
- identify whether it is pure risk or financial risk.
3. Risk Control
- Third step
- Through elimination or reduction
- Ex: not to build a plant in a earthquake zone.
- Risk that can’t be eliminate, can be reduce through loss prevention programes.
- Ex: Fire exposures can be limited by making no smoking zones and smoking zones,
guards and watch man, spot light, alarm systems.
- Operations of machines: wear hard hats, goggles, gloves etc.
- Financial risk are non insurable but can be minimize by hedge using derivatives
instruments such as futures, options, and SWAP etc.
- Loss control prg. May be seem to be expensive but less costly than the losses that might
occur.
4. Risk Finance.
The term insurance can be defined in both Financial and Legal terms.
Focus on arrangement of funds and redistribution on forms of loss payment. (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.
Focus on legal rights, contractual arrangement, one part agrees to compensate another
party for loss.
Benefits of Insurance
1. Reimbursement of Losses
2. Reduction in Tension and Fear
3. Avenue for Investments (Life Insurance investments offers attractive returns)
4. Prevention of loss
5. Credit Multiplication
6. Costs of Insurance to Socity
Principles of Insurance
Kind of Insurance
Life Insurance
- Liability Insurance – Protects the insured against damage and claims made by a third
part.
Types of Insurance – Automobile insurance, Workers compensation, Aviation insurance,
Liability insurance
Annuities
1. The annuity contract liquidates gradually the accumulated funds whereas the life
insurance contract provides gradual accumulation of funds.
2. The annuity contract is taken for one’s own benefits but life assurance is generally for
benefits of the dependents.
3. In annuity contract generally the payments stops at death whereas in life insurance the
payment is usually given at death.
4. The premium in annuity contract is calculated on the basis of longevity but the
premium of life insurance is based on mortality.
5. Annuity is protection against living too long whereas the life insurance contract is
protection against too short.
- Immediate Annuity
- Deferred Annuity
- Life Annuities
- Guaranteed Minimum Annuities
- Temporary Life Annuity
- Retirement Annuity Policy
Selection of Risk
Purpose of Selection
Cost of Claim
- Forecasting of death is very important
- experience of medical science
- 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. of death from a group of persons of
the same age can be forecasted on the basis of
1. Theory of probability
2. Law of large numbers.
Theory of probability
- Motor insurance claims have become major threat to the survival of the co.
- Most of insurance companies have separate claim department in which they have
- Claim administration
- Hierarchical structure in form of authority (in monetary limit)
- Claim form
- Registration certificate
- Driving License
- Load challan
- Fitness certificate
- Report to police
- Survey report
- In Damage claim, estimate of repairs.
Mediclaim (Hospitalization)
Maturity Claims
Death Claims
If the insured dies before the expiry of the term of the policy, it is called as death claim.
The death of the life assured has to be intimated in writing to the insurer.
In case of claims by death, after receipt of intimation of death, the following documents
are required.
- Policy document
- Deed of assignment / reassignment
- Proof of age, if age is not already admitted
- Certificate of death
- Legal evidence of title if policy is not assign to nominated
- Form of discharge executed and property witnessed.
Statement from the last medical attendant, from hospital, from the person who has
attended the funeral, from employer.
Insurance Underwriting
Insurance underwriters evaluate the risk and exposures of potential clients.
They decide how much coverage the client should receive, how much they should pay for
it, or whether even to accept the risk and insure them. Underwriting involves measuring
risk exposure and determining the premium that needs to be charged to insure that risk.
The function of the underwriter is to acquire or to "write" business that will make the
insurance company money, and to protect the company's book of business from risks that
they feel will make a loss. In simple terms, it is the process of issuing insurance policies.
Classification of risks
- Physical Hazard (Age, Sex, Build, Physical Conditions, Personal History, Family
History)
- Proposal form
- Medical Examination
- Agent or officer report
- Accept as proposed
- Accept with extra premium
- Accept with modify terms
- Accept with specific clause
- Postpone for specific period
- Decline (risk is too heavy to be covered)
- Person who would not have been insured some forty years ago are now insurable
- Collect the information of habit
- Lower premium rate for working women.
In most of the life insurance policies, insurers provide the facility of loans. Loans are
normally up to 80 to 90 % of the surrender value.
Foreclosure
Foreclosure means closure or writing off the policy before its actual maturity.
The principal loan and accumulated interest could become more than the surrender value
at some time. In that case, foreclosure become necessary.