34 In India, the premium is collected by insurance companies in advance at the time of admission of the member to the group. A fund is created from the premiums collected and is used to settle claims of members who suffer losses. The maximum amount that a person can receive is known as the sum assured (SA). ee There are 500 cars in a city. It is expected that, on an average, 1% of the cars or 5 cars, may meet with an accident in a year. The economic value of the loss suffered by the owner of each car is taken to be Rs. 10,000. Let us see how the premium will be calculated in the above scenario. Total number of cars 500 ] Economic value of each car Rs. 10,000 Number of cars expected to meet with an | 5 accident Total expected loss Rs. 10,000 * 5 = Rs.50,000 Number of car owners among whom the | 500 loss is to be distributed | Loss that each car owner has to bear Rs. 50,000 / 500 = Rs. 100 Premium to be charged per car owner Rs. 100 All the 500 car owners can come together and contribute / share Rs.100 each and build a common fund of Rs.50,000. This common fund of Rs.50,000 can be used to pay Rs. 10,000 to each of the car owners whose car meets with an accident. In this way the loss of 5 car owners can be equally distributed among all the 500 car owners. The share (premium) of each car owner comes to Rs. 100. nny In a village, there are 1000 houses, each valued at Rs. 10,000. It is expected that on an average, 10 houses may catch fire ina year. Let us see how the premium will be calculated in the above scenario.35 Total number of houses 1000 Value of each house Rs. 10,000 Number of houses expected to catch fire | 19 ina year ; Rs. 10,000 * 10 = Rs. | Total expected loss 1,00,000 Number of houses among which the loss is to be distributed oe Loss that each house has to bear prc bape ti Premium to be charged per house Rs. 100 All the 1000 owners can come together and contribute / share Rs. 100 each and build a common fund of Rs.1,00,000. This common fund of Rs 1,00,000 can be used to pay Rs.10,000 to each of the 10 owners whose houses get destroyed due to fire. In this way, the loss of the 10 owners can be equally shared by all the 1000 owners, The share of each owner comes to Rs. 100 which works out to 1% of the house value (Rs. 10,000). This is the same as the probability of risk which is 1% (10 houses burnt out of 1000 houses). The contribution / share of Rs.100 per house owner would be the premium and that would be fixed at 1% (probability of risk) of the insurance cover (which is equal to the value of the asset). Diagram 3: How fire insurance works Insurance ‘Company House owners Contributing Claim Settlement Premium36 In the above example, let us assume that there are 1000 houses, but of different values. In that case the share of each house owner would be 1% of the value of the house. If the assumption was that 20 (2%) out of the 1000 houses are likely to get damaged, the share would be 2% (probability of risk) of the value of the house. The probability of risk would depend upon factors such as the nature of construction of the house (concrete or thatch work), its location (residential, commercial or industrial area), goods stored, ownership of vehicles, nature of use and so on. The risk is measured in terms of Percentages and the share would be equal to that same percentage. Similarly, in the case of human beings, the premium will be influenced by the following factors: For people belonging to a given age bracket say 31 ~ 40 years, the higher the age, the higher will be the premium. Given that all other factors are same in this age bracket, ee the premium for the person aged 31 years will be the lowest and the premium for the person aged 40 years will be the highest. Insurance companies may charge different premiums for Sex males and femaies based on their exposure to risks in their workplaces and longevity. People who are in professions where the risk is more than other normal professions -for example, people working in Profession | underground mines and explosives factories are exposed to higher risks than people in other professions, such as the IT industry. People who consume tobacco and alcohol or smoke will be charged higher premiums compared to other people. People in good health will be charged lower premiums than people suffering from some diseases, disorders and disabilities. If there is a family history of ailments like diabetes, cancer, heart problems etc. then the person may be charged a higher premium as compared to others. Habits Health Family History39 4. Discuss the different classes of insurance. [Learning Outcome d] Diagram 4: Classes of insurance eae Bante Marine clad Insurance business is broadly classified into life insurance and general insurance, Miscellaneous 1. Life Insurance Ii insurance deals with covering the lives of human beings. In life insurance, the asset in question is the ‘economic value’ of the person, A person's earning capacity depends on his skills, knowledge, ability and other factors, The family, Employer and indirectly the users of products created by this asset (humen beings) enjoy value and benefits. A human life is an income generating asset. But this asset can be lost through unexpected, early death or made non-functional through illnesses or dis accidents. Death is certain, but its fanug is uncertain. If death occurs very early in the career, insurance contributes Just as dying early is a problem, living too long can also be a problem.40 Based on his expenses in the retirement year and factoring the rise in future inflation and based on the life expectancy (for example 80 years) the person may have made financial arrangements for the next 20 years. But if the person lives too long, in this case beyond 80 years, then he will run out of financial resources Life insurance can help in safeguarding people against such risks of longevity in the form of pension plans. 2. General Insurance Non life insurance or general insurance deals with covering non-human objects like animals, agricultural crops, goods, factories, cars etc. In some countries non- life insurance is also known as Property and Casualty Insurance. Non-life insurance also covers losses through individual behaviours like fraud, burglary, non-fulfilment of promises (in the case of repayment of mortgage joans) and negligence by professionals in their service. General insurance policies are mostly for one year and are renewable. General insurance business is further divided into 3 categories: > Fire Insurance > Marine Insurance $ Miscellaneous(motor insurance, engineering, liability, burglary, fidelity. health, personal accident) Fire insurance deals with all fire related risks and will include damage due to riots, malicious acts, typhoons, cyclones, earthquakes and consequential expenditures related to these events. Marine insurance deals with goods being transported by sea, air, rail or road as well as all marine related risks. Apart from fire insurance and marine insurance all other businesses are included in the miscellaneous class. These include motor insurance, engineering, liability, burglary, fidelity, health, personal accident etc. ‘Accidents and illnesses to human beings are covered in health (non-life) insurance in India, But these are covered in life insurance in many countries. In India accidents and some critical illnesses are covered in life insurance only as additional cover (tiders) along with the main life insurance policy. In India, insurance on life of a person for death by accident only is treated as non-life insurance. Neen