INSURANCE AND RISK

Benazir Imam Majumder

Assistant Professor
Department of Banking and Insurance
Faculty of Business Studies
University of Dhaka
Risk
 In Insurance Risk is-
 A probability or threat of damage, injury, liability, loss, or any other
negative occurrence that is caused by external or internal
vulnerabilities, and that may be avoided through preemptive action.
 Risk is uncertainty as to the occurrence of an economic loss.
 Risk is the possibility of an unfortunate occurrence.
 Risk is a chance of loss.
 Risk is a combination of hazards.

 Insurance provides protection from the exposures to hazards and

the probability of loss. Risk is defined as the possibility of loss or
injury, and insurance is concerned with the degree of probability
of loss or injury.
 Risk = Possibility of loss
 Insurance = Probability of loss
Objective Risk Vs. Subjective Risk
 Objective Risk:
 It is the probable variation of actual loss from expected loss.
 Objective risk will reduce as the number of exposure increases. Objective
risk is more precisely observable and therefore measurable .
 For Example: A property insurer has 10,000 houses insured over a long
period and on average 1% or 100 houses, burn each year. It would be rare to
burn 100 houses each year. In some years, as few as 90 houses may burn; in
other years, as many as 110 houses may burn. Thus there is a variation of 10
houses from the expected number of 100, or a variation of 10%
{(10/100)x100 = 10%}.
 Subjective Risk:
 Subjective risk refers to the mental state of an individual who experiences
doubt or worry as to the outcome of a given event. It is essentially the
psychological uncertainty that arises from an individual‟s mental attitude or
state of mind.
 For Example: A person who has consumed a large amount of alcohol at a
party and intends to drive home may be uncertain whether he will arrive
home safely without being arrested by the police for drunk driving. This
mental uncertainty is an instance of subjective risk.
Chance of Loss
 Chance of loss:
 Chance of loss is the probability that an event causes a
loss will occur.
 Chance of Loss =Expected or Actual Loss / Number of
Possible Losses
 Because the chance of loss is only an average, actual
losses may differ significantly from expected losses,
especially for small samples, but as the sample size
increases, actual and expected losses will tend to
converge.
 Probability has both objective and subjective aspects.
Objective Probability vs. Subjective Probability
 Objective Probability:
 Long term relative frequency of an event based on the assumptions
of an infinite number of observation.
 For Example: The probability that a person age 21 will die before
age 26 cannot be logically deduced. However, by careful analysis
of past mortality experience, life insurer can estimate the
probability of death and sell a five-year term life insurance policy
issued at age 21.
 Subjective Probability:
 Subjective probability is the individual‟s personal estimate of the
chance of loss.
 For Example: People who buy a lottery ticket on their birthday
may believe it is their lucky day and over estimate the small
chance of winning.
Chance of Loss vs. Objective Risk
 Chance of Loss: Chance of loss is the probability an event that
causes a loss will occur.
 Objective Risk: Objective risk is the relative variation of actual
loss from expected loss.
 The chance of loss may be identical for two different groups,
but objective risk may be quite different.
City Homes Average Range Cause of Loss Objective
fires (Chance of Fire) Risk
Philadelphia 10,000 100 75 – 125 {(100/10,000) x {(25/100) x
100}= 1% 100}=25%
Los Angeles 10,000 100 90 - 110 {(100/10,000) x {(10/100) x
100}= 1% 100}=10%
Forms of Risk
1. Pure Risk (Absolute Risk):
 Any risk in which there is no possibility of gain, only the
avoidance of loss.
 Pure risk, also called absolute risk, is a category of threat that is
beyond human control and has only one possible outcome - loss.
Examples:
 Pure risk includes such things as natural disasters, fire or
untimely death.
 If a company car is stolen, the company endures a loss, but if
it is not stolen, the company does not make a gain.
 Individuals and companies purchase insurance to mitigate
the potential damage from a loss from a pure risk.
Forms of Risk
2. Speculative Risk:
 A situation where the possibility of either a financial loss or a
financial gain exists.
 Unlike pure risks, speculative risks are usually not insurable.
 Speculative risk involves possibility of loss and gain. While
pure risk involve the possibility of loss only.
Examples:
 Purchase of shares or betting on horses.
 Investing in a stock market is an example of a speculative
risk. One can only speculate on whether the investment will
produce a profit or a loss.
Forms of Risk
3. Fundamental Risk:
 A fundamental risk is one that is impersonal both in origin and
consequence. Losses that flow from fundamental risks are not
normally caused by one individual and the impact generally falls
on a wide range of people.
Example:
 War, Inflation, Changing customs, typhoon, earthquake, tsunami
and tidal waves etc.
4. Particular Risk:
 A risk of a particular nature has its origin in individual events and
its impact is felt locally.
Examples:
 Theft of property, accidental damage to personal effects and
explosion of a boiler.
Enterprise Risk
 Enterprise risk:
 Enterprise risk encompasses all major risks faced by a business
firm, which include: pure risk, speculative risk, strategic risk,
operational risk, and financial risk
 Strategic Risk:
 Strategic Risk refers to uncertainty regarding the firm‟s financial goals
and objectives.
 Operational Risk:
 Operational risk results from the firm‟s business operations.
 Financial Risk:
 Financial Risk refers to the uncertainty of loss because of adverse
changes in commodity prices, interest rates, foreign exchange rates,
and the value of money.
Risks & Insurance
 Risk may be classified in the following ways:
1. High Risk
2. Medium Risk and
3. Low Risk
Example of High Risk :
In Fire Insurance : A Paint Factory (where alcohol based solvent is used).
In Personal Accident Insurance: Member of the armed forces, Sky divers,
Scuba divers etc.
Example of Medium Risk
In Fire Insurance: A Warehouse where non-hazardous goods are stored.
In Personal Accident Insurance: Outdoor sales personnel.
Example of Low Risk
In Fire Insurance: Insurance of office
In Personal Accident Insurance: Office or desk staff
Methods of Risk Management
 Risk Management and Insurance go hand in hand.
Insurance is a risk transfer mechanism and it is based on
the theory of “probability”.
 A loss may or may not occur. But a potential risk may
lurking in the shadow waiting to strike.
 Risk management as the name suggests is all about
managing risks. Life is full of risk be it in a business
world or in domestic life.
 Risk management plays an important role in insurance and
is perhaps one of the most talked about subject in our
time.
Risk Management Process
Risk
Identification

Risk Evaluation

Severity Frequency

Risk Control

Financial Physical

Retention Transfer Elimination Minimization

Methods of Handling Risks
 Five major methods of handling risks:
1. Avoidance
2. Loss Control
3. Retention
4. Noninsurance Transfers
5. Insurance
Methods of Handling Risks
 Loss Control:
 Loss Control refers to techniques that reduce both the
frequency or severity of losses.
 Loss control has two major objectives.
1. Loss Prevention
2. Loss Reduction
 Loss Prevention:
 Loss prevention refers to activities to reduce the frequency of
losses
 Loss Reduction:
 Loss reduction refers to activities to reduce the severity of
losses
Methods of Handling Risks
 Retention:
 Retention means that an individual or business firm retains
part or all of the losses that can result from a given risk.
 Risk retention can be active and passive.
 Active Retention:
 Active retention means that an individual is aware of the risk
and deliberately plans to retain all or part of it.
 Self Insurance: Self Insurance is a special form of planned
retention by which part or all of a given loss exposure is
retained by the firm.
 Passive Retention:
 Passive retention means risks may be unknowingly retained
because of ignorance, indifference, or laziness.
Methods of Handling Risks
 Noninsurance Transfer:
A „Noninsurance Transfer‟ transfers a risk to another party.
 A risk can be transferred by several methods, including:
 Transfer of risk by contracts

 Hedging price risk

 Incorporation of a business firm.

 A transfer of risk by contract : For example, through a after sales service

contract.
 Hedging: Is a technique for transferring the risk of unfavorable price
fluctuations to a speculator by purchasing and selling futures contracts on
an organized exchange.
 Incorporation of a business firm: If a firm is a sole proprietorship, the
owner‟s personal assets can be attached by creditors for satisfaction of
debts. If a firm incorporates, personal assets cannot be attached by
creditors for payment of the firm‟s debt.
Methods of Handling Risks
 Insurance:
 For most people, insurance is the most practical method for
handling major risks.
 Risk transfer is used because a pure risk is transferred to
the insurer.
 The pooling technique is used to spread the losses of the
few over the entire group.
 The risk may be reduced by application of the law of large
numbers.
Insurance

 In simple words insurance can be described as a risk transfer mechanism by

which risk is transferred to an insurance company in return for a known
amount of money charged by the insurer termed s insurance premium.
 Insurance is a contract in which an individual or entity receives financial
protection or reimbursement against losses from an insurance company.
 Under an insurance contract, a party (the insurer) indemnifies the other
party (the insured) against a specified amount of loss, occurring from
specified eventualities within a specified period, provided a fee called
premium is paid.
 Insurer : Insurance company that issues a particular insurance policy to an
insured.
 Insured : The person, group, or organization whose life or property is
covered by an insurance policy.
Basic Characteristics of Insurance
 Pooling of Losses
 Spreading losses incurred by the few over the entire group
 Risk reduction based on the Law of Large Numbers.
 Law of Large Numbers: Statistical concept that the larger
the sample population (or the number of observations) used in a test, the
more accurate the predictions of the behavior of that sample, and smaller
the expected deviation in comparisons of outcomes.
 Payment of Fortuitous Losses
 Insurance pays for losses that are unforeseen, unexpected, and occur as a
result of chance.
 Risk Transfer
 A pure risk is transferred from the insured to the insurer, who typically is
in a stronger financial position.
 Indemnification
 The insured is restored to his or her approximate financial position prior
to the occurrence of the loss.
Nature of Insurance
 Sharing of Risk: Insurance is a device or a mechanism to share financial
losses which might befall on an individual or his/her family on the
happening of a specified event.
 Co-operative Device: Co-operation of large number of persons who agree
to share the financial loss arising from a particular risk which is insured.
 Value of Risk: The risk is evaluated or assessed before accepting or
insuring the risk in order to charge an equitable or adequate premium
proportionate to the degree of risk underwritten by the insurer. For example
a relatively higher premium is charged for a higher risk.
 Insurance is Not a Gambling:
 Gambling (Take risk willingly)
 Insurance ( Risk inherently exists; Try to avoid risk).
 Insurance is Not a Charity:
 Charity is given without consideration.
 Insurance provides safety in consideration of premium.
Basic Terms
 Insurance Policy: A document detailing the terms and conditions of a
contract of insurance.
 Insurer: Insurance company that issues a particular insurance policy to an
insured.
 Insured: The person, group, or organization whose life or property is
covered by an insurance policy.
 Premium:
 The price of insurance.
 Premium is an amount paid periodically to the insurer by the insured for
covering his/her risk.
 Exposure to Loss:
 In insurance, areas in which the risk of loss exists.
 Four loss risk areas are: (1) Property; (2) Income; (3) Legal vulnerability;
and (4) Key personnel in an organization.
Basic Terms
 Peril: The cause of a risk of loss to person or property.
 Types of Perils by Ability to Insure
Natural Perils Human Perils
Generally Generally Generally Generally
Insurable Difficult to Insure Insurable Difficult to Insure
Windstorm Flood Theft War
Lightning Earthquake Vandalism Radioactive
contamination
Natural Epidemic Hunting accident Civil unrest
combustion
Heart attacks Volcanic eruption Negligence Terrorism
Frost Fire and smoke
Types of Peril

 Natural Perils:
Perils over which people have little control, such as hurricanes, volcanoes,
and lightning.
 Human Perils:
Causes of loss that lie within individuals’ control, including suicide,
terrorism, war, theft, defective products, environmental contamination,
terrorism, destruction of complex infrastructure, and electronic security
breaches.
 Economic Perils:
Employee strikes, arson for profit
Hazards
 Hazards:
 Conditions that increase the cause of losses.
 Hazards may increase the probability of losses, their frequency, their
severity, or both.
 For example, when summer humidity declines and temperature and wind
velocity rise in heavily forested areas, the likelihood of fire increases.
Conditions are such that a forest fire could start very easily and be difficult
to contain. In this example, low humidity increases both loss probability and
loss severity.
 Frequency:
The number of losses during a specified period.
 Severity:
Is the amount of damage that results from a loss.
Types of Hazard
 Types:
 Physical Hazards
 Moral Hazards
 Morale Hazards
 Physical Hazards: Tangible environmental conditions that affect the
frequency and/or severity of loss.
Examples include slippery roads, which often increase the number of auto
accidents; and old wiring, which may increase the likelihood of a fire.
 Location: A building located near a fire station and a good water supply
has a lower chance that it will suffer a serious loss by fire than if it is in
an isolated area with neither water nor firefighting service.
 Construction: A frame building is more apt to burn than a brick
building
 Use: Buildings used to manufacture or store fireworks will have greater
probability of loss by fire than do office buildings.
Types of Hazard
 Moral hazards: It refers to the dishonesty of the insured person leading to
increase probability of loss from given risk exposure.
 Generally, moral hazards exist when a person can gain from the
occurrence of a loss.
 Risk transfer through insurance invites moral hazard by potentially
encouraging those who transfer risks to cause losses intentionally for
monetary gain.
 Morale hazards: Morale hazards involve attitudes of carelessness and
lack of concern.
 Morale hazards increase the chance a loss will occur or increase the size
of losses that do occur.
 For Example: Poor housekeeping (e.g., allowing trash to accumulate in
basements) or careless cigarette smoking are examples of morale hazards
that increase the probability of fire losses.
 Insurance vs. Assurance
Assurance Insurance
This term is used only in life This term is used for all other
Scope insurance and therefore the scope types of insurance and
is comparatively limited. therefore, the scope is wider.
The element of investment is
It lacks the element of
Element of present in assurance since there is
investment since there is no
Investment certainly of receiving payment
certainty of receiving payment.
either on death or on maturity.
The insurer gives assurance to the The insurer only promises to
Assurance insured to pay the claim in any secure the property in case of
case, either on maturity or death. actual loss.
The policy amount is paid to the
The payment of claim is
assured in full on the maturity or
Amount of subjected to the element of
on death along with bonus, etc.
Claim actual loss but not more than
announced by the insurance
the insured sum.
company from time to time.
Insurance vs. Assurance
Assurance Insurance
There is no certainly to
Certainly Payment of claim either on
receive payment since it is
of payment maturity of the policy or on
paid only in case of loss of the
of claim death of the assured is certain.
property insured.
Principle
Principle of indemnity does not Principle of indemnity is the
of
apply in life assurance. basis of insurance contracts.
Indemnity
It is not certain that the event
Certainty The event is bounded to happen
insured against may happen
of event sooner or later.
or not.
In insurance, the policy
amount is restricted to market
Insurance policy for any amount
Insured value of assets; not more than
or any number of policies can be
Sum that. This is because that
taken in this case.
indemnity cannot be more
than the value of asset.
Life Insurance vs. General Insurance

Life Insurance General Insurance

 Subject matter is human life.  Subject matter is goods or

 The event insured, namely death,
is bound to happen, sooner or later.
 Life insurance is a valued contract.
Not a contract of indemnity.
 Assured must have an insurable
interest, at the time of effecting the
policy-need not be afterwards.
 Life insurance is a long term
contract.
property.
 In case of non-life insurance, the
event insured may or may not
happen.
 Any other form, is a contract of
indemnity.
 Presence of insurable interest both
at the beginning and at the time of
loss.
 1 year contract (Renewable after 1
year)
Insurance vs. Gambling

Insurance Gambling

 Insurance is a technique for  Gambling creates a new

handling an already existing speculative risk.
pure risk.  Speculative Risk: Uncertainty
 Pure Risk: Situation where there about an event under
is a chance of either loss or no consideration that could
loss, but no chance of gain; for produce either a profit or a loss.
example either a building will
burn down or it won't.
 Gambling is not socially
 Insurance is socially productive
productive:  The winner‟s gain comes at the
 Both parties have a common expense of the loser.
interest in the prevention of a
loss.
DEVELOPMENT OF INSURANCE IN BANGLADESH
 1947-1971:
Insurance business gained momentum in East Pakistan during 1947-
1971, when 49 insurance companies transacted both life and general
insurance schemes. Ten insurance companies had their head offices
in East Pakistan, 27 in West Pakistan, and the rest elsewhere in the
world.
 Nationalization:
The government of Bangladesh nationalized insurance industry in
1972 by the Bangladesh Insurance (Nationalization) Order 1972
(Presidential Order No. 95).
Result of Nationalization:
Except postal life insurance and foreign life insurance companies, all
49 insurance companies and organizations transacting insurance
business in the country were placed in the public sector under five
corporations.
DEVELOPMENT OF INSURANCE IN BANGLADESH
Five Corporations
 The Jatiya Bima Corporation (Supervisory Authority)
 Teesta Bima Corporation
 Karnaphuli Bima Corporation
 Rupsa Jiban Bima Corporation
 Surma Jiban Bima Corporation

 Restructuring:
Consequently, on 14th May 1973, a restructuring was made under the
Insurance Corporations Act 1973. Following the Act VI, 1973, in
place of five corporations the government formed two:
 Sadharan Bima Corporation for general insurance business.
 Jiban Bima Corporation for life insurance business.
DEVELOPMENT OF INSURANCE IN BANGLADESH
 After 1973:
General insurance business and Life insurance business
became the sole responsibility of the Sadharan Bima
Corporation and Jiban Bima Corporation respectively.
 Privatization:
The privatization policy adopted in the 1980s paved the way
for a number of insurers to emerge in the private sector.
 After 1984:
The private sector availed the opportunity promptly and came
forward to establish private insurance companies through
promulgation of the Insurance Corporations (Amendment)
Ordinance 1984.
BANGLADESH INSURANCE INDUSTRY
Bangladesh Insurance Industry
• Total Insurance Companies: 79
• Private Non-Life Insurance Companies: 45
• Private Life Insurance Companies: 32
• Public Insurance Companies : 2

Private Insurance Companies

• 1st Private General Insurance Company: BGIC
• 1st Private Life Insurance Company: National Life
Insurance Company Limited

Regulatory Authority
• Insurance Development & Regulatory Authority (IDRA)
• Insurance Act: Insurance Act 2010
TYPES OF INSURANCE
 Insurance is broadly categorized into two classes
 Private Insurance
 Life and Health
 Property and Liability

 Government Insurance
 Social Insurance

 There are two main types of insurance.

 Life Insurance
 Non-Life (General) Insurance
PRIVATE INSURANCE

 Private insurance coverage's can be grouped into two

major categories
 Personal lines
 Provide coverage that insure the real estate and personal property of
individuals and families or provide protection against legal liability.
 Examples: Individual Motor Insurance, Individual Life Insurance etc.
 Commercial lines
 Provide coverage for business firms, nonprofit organizations, and
government agencies.
 Examples: Marine Cargo Insurance, Group Life Insurance & Group
Medical Insurance etc.
PRIVATE INSURANCE
 Life and Health
 Life insurance pays death benefits to beneficiaries when the
insured dies.
 Health insurance covers medical expenses because of sickness or
injury.
 Disability plans pay income benefits.
 Property and Liability
 Property insurance indemnifies property owners against the loss or
damage of real or personal property.
 Liability insurance covers the insured‟s legal liability arising out
of property damage or bodily injury to others.
 Casualty insurance refers to insurance that covers whatever is not
covered by fire, marine, and life insurance.
MAJOR GENERAL INSURANCE PRODUCTS
IN BANGLADESH
Products

Fire Marine Motor Miscellaneous

Workmen's
Fire & Allied Perils Marine Cargo Comprehensive
Compensation
Industrial "All
Marine Hull Act Liability Fidelity Guarantee
Risk"

Public Liability

Products Liability

Burglary &
Housebreaking

Cash-In-Transit

Cash-In-Safe
GOVERNMENT INSURANCE

 Social Insurance Programs

 Financed entirely or in large part by contributions from
employers and/or employees.
 Benefits are heavily weighted in favor of low-income
groups.
 Eligibility and benefits are prescribed by statute.
 Example: Workmen‟s Compensation Insurance
How to Set Up an insurance company in
Bangladesh:
 Setting up an insurance company and its capital
Requirement
• Company Registered in Bangladesh (Non-Life): A
minimum Paid Up Capital of BDT 400 Million is required
to be registered for insurance operation.
• Company Registered in Bangladesh (Life): Private Life
insurers must have a minimum Paid-up Capital of BDT
300 million of which the sponsor must pay 60% at the
outset and the balance 40% by public subscription within
three years.
Insurance Acts in Bangladesh
 There are Acts related to insurance and current regulation
are done by IRDA. The brief summary of each act can
also be read here.
• The Insurance Act 1938
• The Insurance Rules 1958
• The Insurance (Amendment) Ordinance 1984
• Insurance Regulations 1990
• Insurance Ordinance 2008
• Insurance act 2010
• Insurance Development and Regulatory Authority Act
2010
• Asian Reinsurance Corporation Act 2013
• Insurance Corporation Act 2019
Thank You……