GENERAL INSURANCE_ LINES OF BUSINESS

Non-life insurance products are bifurcated into three major categories –

Fire, Marine and Miscellaneous

Fire Insurance
Fire insurance policies provide cover for financial losses due to damage to
property arising out of fire, explosions etc. Fire policies may also cover damage
through impact of vehicles, riots, typhoons, cyclones, strike or other malicious
acts etc.

Marine insurance is further classified into marine cargo insurance and

marine hull insurance

Aviation insurance covers air craft, aerospace,cargo and people,crew and

aviation risks apart from air port,service quality,failure, toursim etc.

Motor insurance may cover damage to vehicles, injury or death of persons

and damage to property belonging to third parties.

Personal Accident policies cover death or disablement arising out of

accidents of any kind (caused by external, violent and visible means).

Healthcare policies are available in three variants: individual health policy,

group health insurance policy and family floater policy

Miscellaneous category includes motor, health, personal accident, liability

insurance Industrial risks and various other products.

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Risk identification and analysis

Marine Insurance Lines

Motor insurance
It deals with insurance of motorised vehicles on road, whether
used for private comfort or public service, whether carrying passengers or
goods.
As per Motor Vehicles Act, every vehicle plying on Indian roads should
be insured for Liability to Third Parties including property damage.
Motor insurance may cover:
a. damage to vehicles;
b. injury or death of persons; and
c. damage to property belonging to third parties.
Premium will depend on specifications of vehicle as well as on usage.
Restrictions may relate to:
a. areas in which the vehicle may be used
b. the nature of usage (private or public usage)
c. adherence to laws (relating to driver needing a licence, permitted load) etc.
(Premium does not depend on this factor)

Third party insurance, also called Liability Only policies, is compulsory under
the law.

Personal Accident -policies cover death or disablement arising out of accidents

of any kind (caused by external, violent and visible means).

In the case of personal accident policies, there is no need for assessment of risk,
except on the factor of occupation.
The conditions are standard.
The policy can also cover consequential costs medical care and loss of income
due to disability leading to absence from workplace.

Health Insurance
In the Indian market, health insurance premium has been steadily increasing
over the years (and now it is next to motor premium), comprising 22% of the
Gross Direct Premium Income of General Insurers.
Healthcare policies are available in three variants:
1. Individual Policy: this type of health insurance policy caters to the medical
needs of only one individual.
For example, Ram has taken a health insurance policy from Company ABC
for a sum insured of Rs. 2,00,000 by paying a premium of Rs. 4,000. Under
this policy, Ram will be covered against expenses for any illness (covered as
per the policy terms) which requires him to be hospitalised, up to a limit of
Rs. 2,00,000 in that particular year.
2. Family Floater Policy: this type of health insurance policy caters to the
medical needs of a family. In family floater policies, normally insurance
companies allow coverage for up to two adults and two children in a family.
The sum insured can be shared by the family members covered in the policy.
There are no fixed proportions in which the sum insured is shared by the
family members.

Group Policy: this type of health insurance policy caters to the medical
needs of a group of people brought together for a common objective or
purpose.
As per General Insurance Corporation Directives, the group should
have a common purpose other than insurance.
The principle of ‘All or None’ applies. That is, if the group needs to be covered,
all the members of the group are to be covered. No selection will be allowed.
For example, Company XYZ has taken a group health insurance policy from
insurance Company ABC for all their employees. This policy will take care
of medical needs of the employees of Company XYZ up to a fixed amount,
say Rs 2,00,000/-, provided, all the employees are included. The sum
insured covered may differ; but every employee needs to be covered.
Liability Insurance
Liability insurance provides indemnity (protection against financial loss payable
under law) for injuries to third parties or their property.

The policy covers indemnity for professionals providing services such as

doctors, lawyers, accountants, engineers, etc.
These professionals run the risk of being charged with negligence and
subsequent liability for damages.

Liability Insurance can be broadly categorised into –

Public Liability, (Industrial and Non-Industrial) ,
Product Liability, Professional Indemnity, and
Errors & Omissions Policy.

While the first three cover death/disablement due to the insured’s negligence,

Errors & Omissions policies

cover financial loss due to negligent actions of professionals like Chartered
Accountants, Surgeons, Engineers etc.

Miscellaneous Insurance
a. Fidelity Guarantee: fidelity guarantee covers risks related to
dishonesty, fraud and embezzlement by employees etc. and
protects employers from loss of cash and securities.

b. Overseas Medical Insurance: the policy covers medical

expenses incurred while travelling abroad.

c. Hospital bills are paid by the insurer’s representatives directly.

The policy also covers loss of baggage or passport during
overseas travel. This policy is meant for Indian residents
travelling abroad for specified purposes like business, studies,
holiday or employment.
d. Workmen’s Compensation Insurance: this covers the
compensation that is to be paid by the employer to the
employee for death or disablement or injuries, as per the
 Workmen’s Compensation Act 1926, for accidents while at
work.
e. Engineering Insurance: this includes several kinds of risk
covers like risk cover for contractors in civil engineering
projects, erection of electrical plants, breakdown of machinery
and its consequential loss of profits etc.
Delay in Start Up of Projects is also covered in this sub branch
of miscellaneous insurance.
f. Boiler and Pressure Plant: these policies cover damage (other
than by fire) caused by explosions (boilers or pressure plants) to
the plant, to surrounding property of the insured and to third
parties. (This is part of Engineering Insurance)
g. Aviation Insurance: it covers damage to aircraft and liabilities
to freight, passengers and third parties. Aviation insurance
contracts are finalised after considerable negotiation on
premium rates and are reinsured.

h. . Industrial All Risks, Oil and Gas, Satellite:

These are specialized insurances
Industrial All Risks policy is a package policy, which covers
fire, burglary, machinery breakdown, business interruption or a
combination of these.
i. Other miscellaneous insurances: these include burglary,
loss of baggage during travel, householder effects, shopkeeper’s
business, bankers’ indemnity, horses, bees, cattle, poultry,
plantations etc.
Crop Insurance
Commodities warehouse loss

Event insurances and other specialised insurances like identity

theft cover (loss of credit card, pan card etc. and losses thereof
are being given today.
Innovative Plans
The insurance industry is constantly evolving and coming out with
new products to cater to the ever changing needs of the society.
Some health insurance companies have come out with lifelong
renewal health insurance plans
Indian Insurance Market
 The Law of large numbers in mathematics states that the sample
mean acquired from a set of values has a higher chance of being
closer to the actual mean when the sample set of values is larger.
The more the number of trials, the greater the chance of arriving at
an accurate value.

Therefore, one can reveal true potential and accurate characteristics

if they take a larger group of samples. In other words, each
additional trail will increase the chances of arriving at the exact
expected value. Accordingly, the Law of large numbers has a wide
range of applications in real life.

Table of contents

• What is the Law of Large Numbers?

o Law of Large Numbers Explained
o Law of Large Numbers in Statistics
o Law of Large Numbers Examples
▪ Example #1
▪ Example #2
o Law of Large Numbers in Insurance
o Frequently Asked Questions
• The Law of large numbers states that the larger the sample, the
more likely the sample mean will be closer to the distribution mean.
• This is especially useful for approximating huge calculations and
enhancing the chances of accuracy in a given setting. Obtaining a
figure closer to the actual mean or average improves the data’s
reliability and can assist one in making important decisions.
• A person can apply it to a range of businesses, including estimating
the premium to be set in the insurance industry, forecasting growth
forecasts in a corporation, and determining demographic
characteristics in statistics, among others.

Law of Large Numbers Explained

The Law of large numbers or “the Golden Theorem” or “Bernoulli’s

theorem” was curated by Jacob Bernoulli, a Swiss mathematician.
The theorem later became known as “The Law of large numbers.” It
states that an unknown proportion can reach a degree of accuracy
through an appropriate number of trials.
The theorem is usually used to optimize sample sizes and
approximate calculations that are complicated.
It is of two types- the strong Law of large numbers and the weak
Law of large numbers.
The Weak Law of large numbers reveals that if there is a set of
independent and identically distributed random variables, the
sample mean will converge in probability towards the actual mean.

If the sample means must meet the distribution mean, evaluation

can use a large sample set of values.

But the strong Law states that the sample mean and distribution
mean will converge closer to the actual value.

The Weak Law and the strong Law of large numbers are quite
different from each other and their function differs.
The Law, however, differs from the “gamblers fallacy“, which is a
thought process where people predict a certain set of events
happening based on the previous set of circumstances. Say, in a
situation of 50 events of flipping a coin, there have already been 20
heads. The person will expect the rest of the events to result in tails
as there had been an upstart of heads way ahead.

The Law of large numbers does not support the theory of events
suddenly developing bias towards a particular event.

Law of Large Numbers in Statistics

The Law of large numbers can be particularly useful in the case

of statistics.
For example, suppose we need to determine a village’s average age.
Let’s say that particular village has around 1000 people. If we take the ages of five
people, i.e., 20,30,40,50, and 60, the sum of all the numbers is 200. Taking the
average, 200/5 ( number of total values taken), gives us the mean value of 40.
Therefore, the average age of that group is 40. This small sample of 5 people is far
too small to represent a sample of 1000 people. When there is a large sample of
ages, the values vary. Let’s say the average age of 10 people now is 50. There is an
obvious shift of value from the previous value of 40. This higher value shift will have
greater chances of being near the value of the actual average age of the village’s
population.

Statistics uses similar applications of the Law to find the population, life
expectancy, and literacy ratios of a nation etc.

Law of Large Numbers Examples

Example 1
Suppose there is a competition for flipping coins between two persons, A and B. The
person who gets the most number of tails is the winner. However, they are yet to
determine the number of times they are allowed to flip a coin. Initially, in the event of
flipping a coin, the probability is 1/2. i.e., for each flip, the chance of landing a tail is
0.5. Suppose they flip the coin 20-30 times and there were tails only seven times.
Flipping it ten more times can move the score to 9 tails. The more one flips the coin,
the greater the chances of arriving at the proportion of the decided ratio, i.e., 0.5.
Example 2
Suppose Sam is an investor and there are three famous companies- “ABC,” “CDE,”
and “EFG.” He decides to invest in a company that has the potential to increase its
market value by 50% in a short period. Say ABC is valued at $40 million, CDE has $80
million, and EFG has only $4 million. So looking at them, we know 50% for ABC will
be $20 Million extra; for CDE, it will be $40 Million. And for EFG, it will be a $2 Million
market value increase. So looking at it, EFG needs only a small amount to grow, and
Sam can choose EFG according to the growth prediction he made.
Law of Large Numbers in Insurance

The Law of large numbers helps insurance companies reduce the risk of loss by
pooling information on a large number of people.
Let’s take the example of a car insurance company ABC Ltd.
The company collects data from people of all ages to gather information on their age
and the number of accidents caused.
This will help determine what premium to charge for a particular part in that age
group.
For example, if the accidents are caused mostly by people aged 25, then people
belonging to that category will be charged higher.
Charging higher premiums for that particular age group can help recover losses due
to accidents caused by them.
These companies arrive at such a conclusion after following many people’s details,
like a small sample of people may not contain the required age groups and reveal
any important information.
The insurance field uses similar applications in house insurance, health insurance,
and other vehicle insurances.

How does one use the Law of large numbers in insurance?

This particular technique can be used in various industries, such as determining the
premium to be set in the insurance industry, predicting growth forecasts in a
corporation, and so on.

What is the weak and strong Law of large numbers?

The Weak Law of large numbers definition states that if a set of independent and
identically distributed random variables exists, the sample mean will converge
towards the actual mean. Sample mean tends to population mean.

The sample mean can be brought closer to the distribution mean by using a large
sample set of values.

The strong Law of large numbers definition, on the other hand, states that the
sample mean and distribution mean will converge closer to the true value.

Why is the Law of large numbers useful?

The Law is particularly effective for approximating large calculations and increasing
the likelihood of accuracy in a situation.
 Getting a figure closer to the real mean or average increases the data’s reliability and
can help one make key decisions

Central limit theorem -is a statistical theory which states that when the large
sample size has a finite variance, the samples will be normally distributed and the
mean of samples will be approximately equal to the mean of the whole population.

Descriptive statistics
Descriptive statistics refers to the analysis of data. Sample data is summarized using
charts, tables, and graphs. Quantitative analysis is difficult when the population is
large. Therefore, a small data sample is interpreted.

• Descriptive statistics refers to the collection, representation, and formation of data. It

is used for summarizing data set characteristics.
• It is classified into three types—frequency distribution, central tendency, and
variability.
• Descriptive analysis is widely applied in different fields for data representation and
analysis.
• Descriptive statistics and inferential statistics are significant components of
quantitative research.

Descriptive Statistics vs Inferential Statistics

The two statistical approaches differ in the following ways:

• Descriptive statistics summarizes raw data information in a tabular format to test the
hypothesis. In contrast, inferential statistics makes inferences based on collected
data.
• Descriptive analysis is used for the organization and presentation of data in a
meaningful manner. Inferential statistics, on the other hand, compares data, runs
hypotheses, and makes predictions.
• Descriptive analysis merely depicts a situation. Inferential statistics ventures further; it
is used to make conclusions.
• Researchers use inferential statistics to predict possibilities, probabilities, and the
occurrence of events.
• Characteristically, descriptive analyses consider small data. Inferential statistics is
used to apply the findings to the whole population.
• For description, researchers use charts, graphs, and tables. In inferential statistics,
researchers use probability to draw conclusions.

C. SUBRAMANYAM
Senior Faculty and Trainer for Financial Engineering(FRM),
Fellow program of Insurance Institute of India and Actuarial Exams(CAS)
riskprofessionals.academy@gmail.com