Master of Business Administration - Semester 4 Subject Code – MF0009 Subject Name – Insurance and Risk Management Assignment Set

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Q.1 Explain the steps involved in risk management process? Ans. Steps in Risk Management Process 1 Identifying Potential Losses (a) Property loss exposures • Building, plants, other structures • Furniture, equipment, supplies • Electronic Data Processing (EDP) equipment; computer software (b) Liability loss exposures • Defective products • Environmental pollution (land, water, air, noise) • Sexual harassment of employees, discrimination against employees, wrongful termination (c) Business income loss exposures • Loss of income from a covered loss • Continuing expenses after a loss • Extra expenses (d) Human resources loss exposures • Death or disability of key employees • Retirement or unemployment • Job-related injuries or disease experienced by workers (e) Crime loss exposures • Hold-ups, robberies, burglaries • Employee theft and dishonesty • Fraud and embezzlement (f) Employee benefit loss exposures · Fairly to comply with Government regulations · Violation of fiduciary responsibilities · Group life and health and retirement plan exposures (g) Foreign loss exposure • Plants, business property, inventory • Foreign currency risks • Kidnapping of key personnel 2 Evaluating Potential Losses: The second step in the risk management process is to evaluate and measure the impact of losses on the firm. This step involves an estimation of the potential frequency and severity of loss. Loss frequency refers to the probable number of losses that may occur during some given time period. Loss severity refers to the probable size of the losses that may occur. Once the Risk Manager estimates the frequency and severity of loss for each type of loss exposure, the various loss exposures can be ranked according to their relative importance. For example, a loss exposure with the potential for bankrupting the firm is much more important in a risk management

their potential impact on the firm must be given high priority. In addition. 3 Selecting the Appropriate Techniques for Treating Loss Exposures: The third step in the risk management process is to select the most appropriate techniques for treating loss exposures. Loss prevention refers to measures that reduce the frequency of a particular loss. For example. zero tolerance for alcohol or drug abuse. Although the Risk Manager must consider both loss frequency and loss severity. if a plant is totally destroyed in a flood. (i) Retention: Retention means that the firm retains part or all of the losses that can result from a given loss. such as physical damage losses to cars and trucks. The Risk Manager also estimates that a flood causing more than Rs. or an existing loss exposure is abandoned. Thus. the maximum possible loss is Rs. a Risk Manager may fail to identify all company assets that could be damaged in an earthquake. The maximum probable loss is the worst loss that is likely to happen. Retention can be either active or passive. certain losses. The maximum possible loss is the worst loss that could possibly happen to the firm during its lifetime. (ii) Non-insurance Transfers: Non-insurance transfers are another type of risk financing technique. demolition costs.10 million. however. are usually relatively small. Major risk-financing techniques include retention. severity is more important.10 million. however. Thus. (b) Risk Financing:Risk financing refers to techniques that provide for the funding of losses after they occur. Many Risk Managers use a combination of techniques for treating each loss exposure. such as automobile collision losses to a fleet of company cars. For example. However. i) Avoidance: Avoidance means a certain loss exposure is never acquired. Therefore. for this Risk Manager. Active risk retention means that the firm is aware of the loss exposure and plans to retain part or all of it. ii) Loss Control: Loss control has two dimensions – Loss prevention and loss reduction. In contrast. Passive retention. is the failure to identify a loss exposure. debris removal. measures that reduce truck accidents include driver examinations. Risk financing refers to techniques that provide for the funding of accidental losses after they control. or combination of techniques. the Risk Manager estimates that replacement cost. (a) Risk Control: Risk control encompasses techniques that prevent losses from occurring or reduce the severity of a loss after it occurs. and other costs will total Rs. The Risk Manager may choose to ignore events that occur so infrequently. flood losses can be avoided by not building a new plant in a flood plain. and can be predicted with greater accuracy. For example. occur with greater frequency. If the annual loss experience of a certain type of exposure fluctuates widely. Catastrophic losses are difficult to predict because they occur infrequently. placement of warning labels on dangerous products. These techniques can be classified broadly as either risk control or risk financing. For example. if certain losses occur regularly and are fairly predictable they can be budgeted out of a firm’s income and treated as a normal operating expense.programme than an exposure with a small loss potential. an entirely different approach is required. the relative frequency and severity of each loss exposure must be estimated so that the Risk Manager can select the most appropriate technique. . Both the maximum possible loss and maximum probable loss must be estimated. and institution of quality control checks. and strict enforcement of safety rules.8 million of damage to the plant is so unlikely that such a flood would not occur more than once in 50 years. for handling each exposure. failure to act. Measures that reduce lawsuits by the consumer of a defective product include installation of safety features on hazardous products. because a single catastrophic loss could wipe out the firm. the maximum probable loss is Rs. the Risk Manager must also consider all losses that can result from a single event. A pharmaceutical firm that markets a drug with dangerous side effects can withdraw the drug from the market. non-insurance transfers and commercial insurance. Major risk control techniques include avoidance and loss control.8 million. Risk control refers to techniques that reduce the frequency and severity of accidental losses. For example.

It also educates top-level executives with regard to the risk management process. • Finance. and the company’s hiring. Loss records must also be examined to detect any changes in frequency and severity. we have discussed three of the four steps in the risk management process. (c) Periodic Review and Evaluation: To be effective. Selection of an insurer . safety programmes. Finally. If the Risk Manager uses insurance to treat certain loss exposures. Insurance is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is high. five key areas must be emphasized. promotion. Other functional departments within the firm are extremely important in identifying pure loss exposures and methods for treating these exposures. the risk management programme will be failure. Dissemination of information concerning insurance coverages . Selection of insurance coverages . a company’s contract with a construction firm to build a new plant can specify that the construction firm is responsible for any damage to the plant while it is being built. Negotiation of terms . • Production. is held legally liable if the publisher is sued for plagiarism. Effective safety programmes in the plant can reduce injuries and accidents. the risk management programme must be periodically reviewed and evaluated to determine whether the objectives are being attained. and dismissal policies. Indeed. Internal accounting controls can reduce employee fraud and theft of cash. They are as follows: . Examples of non-insurance transfers include contracts. a publishing firm may insert a hold-harmless clause in a contract. and hold-harmless agreements. This statement outlines the risk management objectives of the firm. risk management costs. This list indicates how the risk management process involves the entire firm. the Risk Manager must determine whether the firm’s overall risk management policies are being carried out and whether the Risk Manager is receiving the total co-operation of the other departments in carrying out the risk management functions. Or a firm may insert a hold-harmless clause in a contract. The fourth step is implementation and administration of the risk management programme. leases. pension programmes. by which one party assumes legal liability on behalf of another party. For example. gives the Risk Manager greater authority in the firm. Safe distribution procedures can prevent accidents.Non-insurance transfers are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. Quality control can prevent the production of defective goods and liability lawsuits. • Marketing. Thus. This step begins with a policy statement. A firm’s computer lease can specify that maintenance. Periodic review of the programme 4 Implementing and administering the Risk Management Programme: At this point. (b) Co-operative with other Departments:The Risk Manager does not work alone. and provides standards for judging the Risk Manager’s performance. • Human resources. . by which the author. This department may be responsible for employee benefit programmes. as well as company policy with respect to treatment of loss exposures. Accurate packaging can prevent liability lawsuits. Information can be provided showing how losses can disrupt profits and cash flow. safety programmes. and any physical damage loss to the computer are the responsibilities of the computer firm. (a) Risk Management Policy Statement:A risk management policy statement is necessary to have an effective risk management programme. (c) Insurance: Commercial insurance is also used in a risk management programme. In particular. without the active co-operation of the other department. These departments can co-operate in the risk management process in the following ways: • Accounting. and not the publisher. and the effect that losses will have on the firm’s balance sheet and profit and loss statement. and loss-prevention programmes must be carefully monitored. repairs.

sickness. 1991 The Bhopal Gas Tragedy of 1984. It not only serves the ends of individuals. medical care. Relevance of Insurance as Social Security United Nations Declaration of Human Rights 1948 provides: “Every one has a right to adequate standard of living for health and well being of himself and his family. or other lack of livelihood in circumstances beyond his control. and 5. are yet to get adequate relief and continue to suffer. a) Social Security to Individuals i) Insurance Provides Security and Safety: ii) Insurance Offers Peace of Mind: iii) Insurance Protects Mortgaged Property: iv) Insurance Eliminates Dependency: v) Life Insurance Encourages Saving: vi) Life Insurance Provides Profitable Investment: vii) Life Insurance Fulfils the needs of a Person: The needs of a person are divided into: 1. 4. 23 years later.2 Discuss the relevance of insurance as social security. widowhood. Special needs. including flood. but also tends to spread through and renovate modern social order. Old-age needs. Insurance is one of the tools to achieve this aim. The victims even now. necessary social services and the right to security in the event of unemployment. there is a tendency to provide some social security by the State under some schemes where members are required to contribute. which resulted in many deaths and caused untold suffering to lakhs of people. industries involved in handling of hazardous substances to insure against any untoward happening so that immediate succour help is made available to the victims from the Insurance companies. 3. . or of special groups of individuals. b) Social Security to Business:T i) Uncertainty of Business and Losses if Reduced: ii) Business Efficiency Increases with Insurance: iii) Key Man Indemnification: iv) Enhancement of Credit: v) Business Continuation: The latest development in Insurance industry on social security : *Public Liability Act. To recap the incident. In capitalistic society too. companies. prompted the enactment of this legislation.” Under a socialistic system the responsibility of full security would be placed upon the state to find resources for providing social security. disability. Bring out the latest development in Insurance industry on social security. housing. The path of insurance has been evolved to look after the interests of people from uncertainty by providing certainty of compensation at a given contingency. Re-adjustment needs. The society provides instruments which can be used in securing this aim.Q. poisonous gas escaped from the manufacturing plant of Union Carbide. The Public Liability Act now makes it compulsory for all individuals. 2. Family needs. The insurance principles prove to be more useful in modern affairs. clothing. Ans. The clean-up needs. leading to one of the worst industrial disasters of recent times.

sponsored schemes.p.for belongings shall be paid.e. for women (Raj Rajeshwari Mahila Kalyan Yojna). Q. The promisor in such a contract is called indemnifier while the promisee who is to be protected is called the indemnity holder or indemnified. of India are: i) Personal Accident Social Security Scheme (PASSS) This Act was introduced in 1985 for the benefit of poor families (i. or by the conduct of any other person is called contract of indemnity.000/. The premium is borne by the Central Government..A contract of indemnity may be express or implied. 2. Some of the schemes introduced by the Govt. whose annual income does not exceed Rs. indemnifier and indemnified. for the benefits of the common people. The scheme provides that in case of destruction of hut due to fire. is subject to all the rules of contract. It is undesirable that an insured should make a profit out of an event like a fire or a motor accident because if he makes a profit there may be more fires and more vehicle accidents. for the benefit of very poor families (i. In addition to the above schemes. The premium is low and 50 per cent subsidy in premium is allowed to small & marginal farmers which are shared by the Central and State Government. legality of object etc. pests and diseases.A contract of indemnity is enforceable only when the promisee suffers a loss the happening of which . 7.200 per year). ii) National Agricultural Insurance Scheme (NAIS) or the Rashtriya Krishi Bima Yojna (RKBY) This Act was introduced in 1999 with the objective of providing insurance coverage and financial support to farmers in the event of failure of crops as a result of calamities.000/.e. the insurance sector acts as a tool for implementation of social security measures. Contract of Indemnity Contract of Indemnity Contract of indemnity is a special type of contract wherein one person promises the loss of other party.800/.This contract being a species of contract. Contract of Indemnity b. COPRA . the Government has also introduced insurance at subsidized rates for farmers (Cattle Insurance).a.). for the girl child (Bhagyashree Child Welfare Policy) and Gramin Personal Accident Policy etc.for hut and Rs. All this show how through legislations or through Govt. Definition of Indemnity A Contract by which one party promises to save the other from any loss caused to him by the conduct of the promisor himself. iii) Hut Insurance Scheme This scheme was introduced in 1988.” Indemnity thus prevents the insured from recovering more than the amount of his pecuniary loss. Essentials of a Contract of Indemnity 1. 3.There must be two parties in a contract of indemnity viz. 4. compensation of Rs.Other than passing legislations to improve social security the Government also initiated certain schemes under which insurance is provided to the economically and socially backward people and workers of the unorganized sector at highly subsidized rates. 3. the event of death due to an accident of any person in the age group of 18 to 60 who is the earning member of the poor family. In Insurance the word indemnity is defined as “financial compensation sufficient to place the insured in the same financial position after a loss as he enjoyed immediately before the loss occurred. a. whose income does not exceed Rs. such as free consent. 500/. 1986 Ans. The scheme provided for a payment of Rs. The premium is borne by the Central Government and the expenses for implementation of the scheme by the State Government.3 Write short notes on: a. 4.

standard and priceof goods so as to protect the consumer against unfair trade unknown and against which the indemnity holder was promised to be protected. purity. potency. The provisions of the Act are compensatory in nature. •The right to consumer education . 1986 The Consumer Protection Act (COPRA) applies to all goods and services unless specifically exempted byCentral Government. quantity. 5.It enshrines the following rights of the consumers: •The right to be protected against the marketing of goods which are hazardous of life and property.Consideration in the case of contract of indemnity is essential to enable the indemnity holder to make claim to be compensated. •The right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers. •The right to be heard and to be assured that consumer’s interest will receive dueconsideration at appropriate forum. COPRA . •The right to be informed about the quality. b.

X42 should think about both the effect on the chance of loss due to burglary and the fact that the cost of its crime insurance may be . In analyzing the likely cost and benefits of loss control alternatives. After carefully considering its goals and priorities as well as the possible and probable losses associated with the properties. 2 Implementing Appropriate Loss Control Measures In case of risks that a business or individual cannot or does not wish to avoid. it should be recognized that loss control will always be used in conjunction with either risk retention or risk transfer. either the remaining risk will be retained or it will be transferred to another party. In analyzing this situation. For example. Included in the estate are an apartment complex in Delhi and some undeveloped land near a hazardous waste site in Mumbai.Master of Business Administration . Both properties present substantial risks. because it is located in a high-crime neighbourhood. SEWA which operates several shelters to feed and house homeless persons. By doing so. even if substantial funds are spent to reduce loss frequency and severity. Thus. however. But the organization will not likely be interested in keeping these properties and actively managing the risks inherent in them. Consider the plight of the not-for-profit organization. The steps involved in risk management techniques1 Avoiding Risks If Possible Risks that can be eliminated without an adverse effect on the goals of an individual or business probably should be avoided. X42 store is concerned about burglars breaking into its building. SEWA may decide that the best solution is to sell the real estate and use the cash to finance its other activities. X42 is considering installing a high-power security and alarm system.2 Q. A wealthy patron dies. This phenomenon is true whether it is specifically planned or happens by default. To help protect itself. the organization will avoid several risks present in the said properties. leaving the entire estate to SEWA. Therefore.Semester 4 Subject Code – MF0009 Subject Name – Insurance and Risk Management Assignment Set. some risks that easily could be avoided may inadvertently be retained. part of the cost/benefit analysis regarding potential loss control is recognition of the likely effects on the transfer or retention of the risk existing after loss control measures are implemented. some risk will still be present. whether SEWA is aware of them or not. Without a systematic identification of pure risk exposures. That is. In fact. objective risk may actually increase when actions are taken that decrease the chance of loss.1 Explain the steps involved in Risk Management Technique Ans. considerationshould be given to available loss control measures.

risk retention and risk transfer often will both be used. insurance. have emerged as viable sources for the distribution of insurance products. Bancassuranceencompasses terms such as ‘Allfinanz’ (in German). bancassurance tries to exploit synergies between both the insurance companies and banks. have dominated the study and literature on bancassurance. the evolution of bancassurance as a concept and its practical implementation in various parts of the world. banks. To further complicate the decision-making process.. banks can maximise distribution of products to a captive customer base. loss control decisions should be made as part of an overall risk management plan that also considers the techniques of risk retention and risk transfer. This expansion has relied mostly on . Bancassurance if taken in right spirit and implemented properly can be win-win situation for all the participants viz. This concept gained currency in the growing global insurance industry and its search for new channels of distribution. It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. legislative hurdles. In markets where it is firmly established bancassurance channels can take an impressive market share of new life business – around 55% in France and between 20% and 30% in many other European countries.lowered if it installs a reliable system. Latest development in the banking Industry for promoting banassurance products: Bancassurance has developed in parallel to the dramatic expansion of the world’s life insurance market since the mid-1980s. and the mindset of persons involved in this activity. have thrown up a number of opportunities and challenges. insurers and the customer. lending and investment products. To put in simple terms. Bancassurance – a term coined by combining the two words ‘bank’ and ‘insurance’ (in French) – connotes distribution of insurance products through banking channels. “What is the appropriate mix between these two techniques?” Q. social and cultural ramifications interacting on each other. By offering a holistic financial services package. with the relevant question being. Ans. However. Bancassurance is the distribution of insurance products through the bank’s distribution channel.2 Explain the concept of banassurance and bring out the latest development in the banking Industry for promoting banassurance products. The Concept of Bancassurance: Bancassurance is a concept that has rewritten the way in which insurance products are distributed in many parts of the world and has the potential to do the same in many other markets. 3 Selecting the Optimal Mix of Risk Retention and Risk Transfer As stated. with their geographical spread and penetration in terms of customer reach of all segments. Aspects such as the most suited model for a given country with its economic. Hence. encompassing banking. ‘Integrated Financial Services’ and ‘Assurebanking’. X42 may purchase less insurance and engage in relatively more risk retention following the loss control measures.

Spain and Portugal. The relationship between the bank and the insurer may also be complemented by a more or less significant shareholding or cross-shareholding. the relationship between the bank and the insurer is sometimes reinforced by a strategic shareholding. as well as for property and casualty insurance. While they also have expanded very significantly in the life insurance business.mentioned categories: “Partnerships”. traditional insurers have kept their market leadership. the bank also benefits from the joint venture’s profitability through dividends paid. This joint venture distributes its products only through the network of its banking parent(s). there is no dedicated legal entity to underwrite this business. The joint venture typically pays distribution commissions to the bank. which are in turn offset by entry and management fees charges to policyholders. In addition. In addition. “Joint ventures” or “captives”. through a banking channel. it may also be a way for the bank to create competition among various insurance providers to attract clients by adding value to its distribution capabilities. often 100%. these legal structures fall into three main above. In some cases. the business logic for creating a joint venture is a recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers with an intention to build up expertise in this area. As in the case of the partnership model. bancassurance has been far more successful selling savings-type products than risky products such as those relating to longevity or disability. Belgium. the insurance company typically pays distribution commission to the bank. The business logic for such a model is the recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers while being unable or unwilling to develop such expertise internally. In addition. (c) The Captive Model: According to this model. which are in turn offset by entry and management fees charged to . an insurance company markets its products almost exclusively through the distribution channel of its banking parent. The captive insurance company typically pays distribution commissions to the bank. Typically. a significant portion of which are very close to traditional banking products such as fixed-income securities or mutual funds. which is in practice directly accounted for on the insurer’s balance sheet. the joint venture is granted exclusive access to market insurance products through the bank’s network. though not exclusively. (a)The Partnership Model: In this model. European wide. (b) The Joint Venture Model: This business model relies on a more or less balanced shareholding between one or several banks and an insurance group in a joint venture insurance company.savings-type insurance products. the insurance company distributes its products partly. which is in turn offset by entry and management fees charged to policyholders. In such cases. it has been at a slower pace than bancassurance institutions. A range of bancassurance business models exists and this affects the type of legal structures used. the ownership by the bank in the insurer is typically very high. Nevertheless. For these kind of risky products. which have benefited from the recycling of savings deposits into life products in several countries. This has notably been the case in France. Under this model.

3 Detail the future growth and opportunities of Indian Insurance Industry Ans.2% change over the previous year). As far as the number of new policies sold is concerned. This huge gap from the global bench mark is itself lucrative. which is very less in comparison of USA where premium per capita is 1381 and premium as percentage of GDP is 480. which were just above 10crores at the end of FT 2000. the logic for the captive business model is the recognition by the bank of a real need to be in a position not only to offer (mostly life) insurance products to its customers but also to keep the full know-how and profitability of the business inhouse. it is very important that the bank management has sufficient understanding of the insurance business. Government of India is going to make insurance mandatory. Nevertheless. branch offices. There was a growth of above 738% in the total premium collections since the entry of private players in the year 2000. the bank also benefits from the insurer’s profitability through dividends paid.2%. While nationalized general insurance companies and LIC of India have done a commendable job in extending their services throughout the country but the choices available to the insuring public are inadequate in terms of services. The following table portrays the picture of life insurance business during the past decade. Renewal Premium. the figure tripled from 1.21 lakh crores as against Rs. Of course.22% of the insurable population has been tapped so far. In addition. 2009. the total premium collected by the insurers increased by over 10% and crossed the whopping figure of Rs. The interim .09 crore policies during FY 2009. The continuous growth witnessed in this parameter after the enactment of IRDA Act was reversed for the first time during 2008-09. However. Number of in force policies. Together with banking services. 1972.2.01 lakh crores during the previous year. products and prices the untapped potential in quite large. employees or agents. The Malhotra Committee. The industry is not just growing in terms of number of insurers.2. 1999 and other related Acts. There was about 10 fold increase in the new business life insurance premium collected over a period of 9 years. premium per capita is only 2and premium as percentage of GDP is 0. the rate of growth was slower at 10. Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of 15-20 per cent annum. 1. estimated that in life insurance. There was a phenomenal growth inthe New Business Premium. Opportunities i) Untapped Market New comers will get the benefit of untapped market. the number of policies increased marginally by about 1 lakh (0.55%. The insurance captive becomes an important tool of the bank’s marketing policy and is a separate legal entity only due to regulatory constraints. 1956 and General Insurance Business (Nationalisation) Act. The growth is also reflected in the business figures. registering a growth of 186%. 1938.2% compared to 29% growth witnessed during the previous year. ii) Mandatory Insurance In disaster-prone areas. crossed 29 crores as at 31st March. In India. it contributes to about 7 per cent to the country's GDP. Although the growth in total life premium continued during 2008-09. Q.policyholders. This indicates that the fallout of sub-prime crisis was visible in terms of the new business procured by the Indian life insurers. when the New Business Premium declined by 7. which went into various aspects of India’s insurance industry. Insurance is a federal subject in India and Insurance industry in India is governed by Insurance Act. When compared to the partnership model or a joint venture. Total Premium Income as well as the number of policies sold. Insurance Regulatory and Development Authority (IRDA) Act.69 crore policies in FY 2000 to 5. the Life Insurance Corporation Act.

has proposed mandatory insurance of life and property by people residing in disaster-prone are as such as coastal belts. Competition will compel the players to bring new and innovative product. They will succeed in this sector because they have data base of customers. iii) More Products Offered A state monopoly has little incentive to offer a wide range of products. iv) Growth of Economy With allowing of holding of equity shares by foreign company either itself or through its subsidiary company or nominee not exceeding 26% of paid up capital of Indian Insurance Company. It can be seen by a lack of certain products from LIC’s portfolio and lack of extensive categorization in several GIC products such as health insurance. . a good network of branches besides synergy benefits. various joint ventures between foreign investors and Indian partners will be operated resulting into supplementing domestic savings and economic progress of the of the high-powered committee set up by the Centre for disaster management. sites near nuclear. v) Opportunity for Banks Banks with their wide area network with branches in all the parts of the country will have very good opportunity to enter the insurance business. trained staff. vi) Better Customer Services It would result in better customer services and help improve the variety and price of insurance products. wider choice of prices and quality service to consumers. flood. More competition in this business will spur firms to offer several new products and more complex and extensive risk categorization.prone areas. chemical and hazardous industries and thickly populated areas.