win expectation? thieves/dishonest employ: Will a new bonus/incetuys new factory, will it pure strike? If some one builds 2 ees steal his stock from the warehouse? one of the fundamental facts of ake it, “Uncertainty is of life” it helps to ™ life i hope, planning, to dispute, fear, jts greatest ally probable that either of progress. failure, re! of two poss! uncertainty iS greatest c ss of "os is equally probable: trogression- mites) cach) 33 Ce when one believes . The risk (sometimes even interchangeably). it ip between the terms risk and ¥ The most widely held meaning of uncertainty refers 1° a state of mind rized by doubt, ‘based on a lack of Knowledge about WHA will or vill not happen 17 the future. It is the opposite of rertainty, which is @ conviction OF cel about a particular situation. mn of Risks following tyPes* ritude Classificatio be classified into 1.1.4. ‘The risk can Classification Based °° ‘Nature of Event ‘Classification Based 7 ‘Consequence of the Risk Event z Zest ll16 BBA Fifth Semester (IPP) Bh-U 1.1.2. ani t finiti i Me inn soaning and Definition of Uncertainty | ay tonne nd everything we do in life. In a business, uncertainty is very amopertane most everything that the businessman does, is in it crtain environment, If any one invests in new machinery, will the output be what is expected, will the employees be comfortable working avith it? If a firm launches a new product, will it sell as per its expectation? Will a new bonus/incentive scheme for employees avoid a threatened strike? If some one builds a new factory, will it burn down? Will thieves/dishonest employees steal his stock from the warehouse? According to Knight, “Uncertainty is one of the fundamental facts of life". And like certain other “facts of life” it helps to make life interesting. Out of uncertainty, spring discussion, hope, planning, accomplishment, progress. But it also gives rise to dispute, fear, defensive tactics, failure, retrogression- Gneertainty is at its greatest height when, of two possibilities, ‘each is equally probable — Consciousness of uncertainty is greatest when one believes that either of two possibilities is equally probable. 1.1.3. Relationship between Risk and Uncertainty Basically, risk is uncertainty or lack of predictability. In this instance, it afore to the uncertainty as to loss that a person OF a property covered bY insurance faces. Insurance companies Frequently refer to the insured person 4 in connection or property as the risk. The term uncertainty is often use with the term risk (sometimes even interchangeably), it seems appropriate to explain the relationship between the terms risk and uncertainty. ‘The most widely held meaning of uncertainty refers to a state of mind characterized by doubt, based on a lack of knowledge about what will or eri not happen in the future. It is the opposite of certainty, which is a conviction or certitude about a particular situation. 1.1.4. Classification of Risks The risk can be classified into following types: Classification Based on Nature Classification Based on of Event Consequence of the Risk EventRisk and Insurance (Unit 1) 1.1.5. Sources of Risk Sources of risk are divided into: 1.1.5.1. External Sources of Risk Sources of Risk [ External Sources of Risk HE Internal Sources of Risk | — Economic Factors | ~ Natural Factors "— Political Factors [-—- Operational Factors [-— Human Factors [— Technological Factors ‘~ Physical Factors Forces belonging to the external environment affecting the particu! business enterprise cause external risks. Following are some facto which cause external risk: : 1) 2) 3) Economic. Factors: These are the most important causes ¢ external risks. They result from the changes in the prevailin market conditions. They may be in the form of changes in deman for the’ product, price fluctuations, changes in tastes an preferences of the consumers and changes in income, output o trade cycles. The conditions like increased competition for thé product, inflationary. tendency’ in the economy, rising unemployment as well as the fluctuations in world economy may also adversely affect the business.enterprise. Such risks which are caused by changes in the economy are known as ‘dynamic risks’. These risks are generally less predictable because they. do not appear at regular intervals. Also, such risks may not necessarily result in- losses to the. firm because_they may also contain an element of ‘gain for the firm. For example, due to market fluctuations, a well known product of a firm may either lose its demand or may occupy a larger market share. Natural Factors: These are the unforeseen natural calamitiés over which an entrepreneur has very little or no control. They result from events like earthquake, |flood, famine, tyclone, lightening, tornado, ete. Such events mal cHuse jloss|of| lifel andl: propsrty to| the firm on they may’ spoil its goods. For example, Gujarat earthquake. caused irreparable amase poe only to the business enterprises’ but also adversely , whole economy of the State. ee ii i jence on; Political Factors: These have an important intuenes Ont tty functioning of a business, both in the long term.DDA Tinh Semester (Ps BHU According to Jorion, “Risk management is the Process by which Sanious risk exposures are identified, Mensuree andl controlled Out unaterstanding of risk has been much improved by the development of Sonvatives markets™ Accord sly, the term ‘risk management’ refers to the systematic ‘rplicanion of principles, approach and processes to the tases of SSASRURE and assessing risks, and then planning and implementing risk esponses. This provides ih a disciplined environment for proactive 1.2.2. Risk Mana; gement Process ‘ TP ORTOCesS Of Fisk management consists of several steps Which are as ollows: 1) Establishing the Context: the context involves: i) Identification: Identification of risk in a selected domain of interest, Planning: Planning the remainder of the process. iii) Mapping-Out: involves the following: Establishing Identification ii) Mapping-out Potential Risk Treatments a) The social scope of risk management, Review and Evaluation of b) The identity and objectives of the Plan stakeholders, °) The basis upon which risks will be evaluated, constraints. Defining a Framework: Defining a framework for the activity “and an agenda fer identification. ¥) Developing an —_— Analysis: Developing an analysis of risks inyolved in the process. vi) Mitigationy Mitigation of risks using available technological, human ahd organizational resources, Identification: After establishing the context, the next step in the Process of managing risk is to identify potential risks. Risks are about events that, when triggered, cause problems. Hence, risk identification ean start with the source of problems, or with the problem itself, Implementation iv) ‘Create a Risk- Management Plan, Figure 1.1: Risk ‘Management Process 2» Risk and totwrance (Unit ty i) Source Analysis: Risk s the system that is the targ For example, stakehol company. and the weathe ii) Problem Analysis: Rist example, the threat of lo information or the threa may exist with various + customers and legislativ When either source of prc may tigger or the even investigated. For examy Project’ may endanger information may be sto network; lightning strikir all people onboard imme ‘The chosen method of industry practice and « formed by templates or source, problem or ever i)’ Objective-Basea Project teams hav. achieving an objec ii) Scenario-Based differen scenaric alternative ways imteraction of for triggers an undes iii) Taxonomy-Bass taxonomy-based tisk sources. B Practices, a qu ‘questions revea iv) Common Ris known risks a for application v) Risk Chartir by listing resc factors whicjf the on f ‘ eeLY op but i 7 retain the risk and deaj ,,,, occar. = ssment js subjective and lacks co, nagement processes 100 highly + completing & project or even ;, er work is suspended plete. joriti ganization fr ‘ i ally wue 4 ad coe 5 is ‘considered com] urance ancial device or contra te risk of loss (© life and property: Insurance is 3 ily used to hedge against the risk of a « ive bearing Of rist a lary thanging liability. 1 of the community S$ nn which a sum ot rs be defined as @ device i the insure a deration of Insurance may a e premium is paid py the insured in cons 1 nerf follows: ee risk of paying 2 large Sm upon a given contingency (risk ‘particular, risk Thus, insurance involves avoiding. mitigating and transferrit nt otherwise be which creates greater predictability for jndividuals and ore: Insurance enables risk to De handled intelligently tO achieve sth petter prepared. growth. ; er. reduces internal 1.3.2. Nature of Insurance ger can often The nature of insurance case ‘of life, marine, fire and general | . 7 Nature of Insurance ronmental and Risk Sharing, Risk Assessment ‘Cooperation |} = {- Payment at the Time of Cones nent » disadvantages Quantum of Compensation 45 t{ Larger the Number, Betier ts » can be wasted Sccur. Spending eer avon [ tsar Gre ant ob cre| pen BBA Fifth Semester (IPP) Bh.U perating costs is added to the pure Operating Costs: Insurers o premium to salateal Cover expenses, including commissions, general administral expenses, state premium taxes and acquisition expenses. nn) Allow for contingencies and profit. 3) Fraudulent and Inflated Claims: Insurance encourages insured to fabricate claims, to cause intentional losses, and to exaggerate claims. ive. For examples, i) Staged auto accidents, in) Fake slip and fall accidents, iii) False health claims, iv) Life Insurance purchased on already deceased people, v) Loss exposure value and amount of property stolen from a home or business, vi) Suits for high liability judgments that exceed the economic loss of the victim, vii) Inflated auto collision claims to cover the collision deductible, viii) Exaggerated claims regarding the value of property stolen, ix) Disabled persons malingering beyond true duration of disability to collect disability benefits. 1.3.8.~ Types of Insurance The insurance can be classified into two types: ‘Types of Insurance Life Insurance Non-Life/General Insurance [— Term Insurance [— Whole Life Insurance | Endowment Insurance |__ Money-Back Policy |_ Fire Insurance |_ Marine Insurance | Motor Insurance |_ Accident Insurance |— Annuity |__ Unit Linked Insurance - Credit Insurance Policy (ULIP) |_ Public Liability Insurance |— Property/Casualty Insurance | Fidelity Insurance | Burglary Insurance L- Workmen Compensation Insurance [~ Unemployment Insurance | National Health Insurance [— Cash Transit Insurance — Employment Liability InsuranceRisk and Insurance (Unit 1) . 51 6) To promote fairness, transparency, and orderly conduct in financial markets dealing with insurance and to build a reliable management information system to enforce high standards of financial soundne: amongst market player. 7) To take action where such standards are inadequate or ineffectively enforced. S 8) To bring about optimum amount of éelf-regulation in day-to-day * working of the industry, consistent with the requirements of prudential regulation. 1.5.4. Responsibilities of IRDA The authority has the following duties and responsibilities: 1) Registration: Issuance of certificate of registration, or to renew, modify, withdraw, suspend or cancel such registration. 2) Protection: Protection of the intérésts of policy holders in matters conceming assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions in contracts of insurance. 3) Qualification: Specifying the requisite qualifications, code of conduct and practical training. for insurance intermediaries and agents. 4) Code of Conduct: Specifying the code of conduct for surveyors and loss assessor. = 5) Efficiency: Promoting efficiency in the conduct of the insurance business. . 6) Professionalism: _ Promoting _and__ regulating _ professional organizations connected with the insurance and re-insurance business. 7) Fees: Levying fees and other charges for carrying out the objectives Of this act. ; : 8) Information: Calling for information from, undertaking inspection Of, and conducting enquiries and investigations, including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business. 9) Terms of Business: Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers for general insurance, business not so controlled and regulated by the Tariff Advisory Committee under Section 64U of the Insurance Act, 1938 1 (4 af 1938).Er — ic nba fey Semester PP) BEL Pir ld 2.1.1. Meaning of Life Insurance Po hburance Act, 1938, defines life insurance business as the Dosing TP Titng contacts of insurance upon human life. including, death -Sbasrar whereby te payment of money is setored on death xerr | Fe EEaSN oni) or tre happening of any event insured by the conta Ih other words, a life insurance contract is a contract in whieh te saat in consideration of @ certain premium either in Yomp som & raat vodical payments, agrees to pay tothe assured or to the Parsee Pane, erecta the policy is taken, an agreed sum of money OF Ne Te anon ee ored of.on the expicy of a specified period of time, Whichever is easier. In case of life insurance. the payment is ceriain. The event insured | we sfast ie eure to happen. though the time of its occurrence fs uneenit | een eee’ convacis are contingent contracts, while non-tee Life Ine ranctrats are contracts of indemnity. That is why. We inuurance fs known as life assurance and not jnsurance, 2.1.2. Features of Life Insurance Fae following are the essential features of a valid contract of Tie sae ccents of a Valid Contract: Since life insurance establishes © caeeual relationship between the insured and the insurer, (Oe coe at insurance must contain the essential elements of 2 valid caoieact ea accordance with the provisions of the Indian Contract ‘Act, 1872, 2) Insurable Interest: A person cannot insure the life of any other sana lS yas an insurable sntrest init, The insurable interest must aesess pe time of the contract of insurance. The risk against this Soin is the death of the insured. Insurable interest exists in the following cases pene petson has unlimited insurable interest in his own life wd to have insurable inter tne life of t erste sacerest #7 aise oe 1s insurable interest in thy cen) ns ae se dept ner Pte ot hs PATENT fe rarest im me eo : extent of the debt vip panner as isa ost Goo 2» act ‘pased on utmos te insereat im the life of his ea vst good faith. The doctrine of 6 a e908 (ue important pen embodie’ Neen At the me of JnsarergT questions 1 the P ayy plesentation. non": honder siewered, Any ISTEPTES oS Bre correctly ANSWETCE Caaing to the acceplance cf \h< Tt a he eee Sennen fo the aha. Fer figores Erow 10 Oe. Cupation, health fs. Income: HS at shoud be acowed mE in he conrach Hele er ta necome Tal ams TO gues, the eons eee te emu pad would ented na propost a te =o sured wi ome ang be the bass FW Cm sy asogement and Nomination: Bot Signe Assignment an gatures of life insurance POley are the essen gnsfering the EN of 3 Me policy mee Surges the ease of ABE the policy 10 te eorlleck the amount 10 DE Ba ig merely marca soured, ut the rights of th transfered ©) Certainty of the Event: In jife assurance poli Certain cored ammount one day or other ecm Ban ceaching a particular age is cera" rramiies are a9 important feature of _ \oF unt aesth of the Terms of Potiey: ‘umber of years oF the balance ste ‘rortaliy. and the premium fe ney pay "8 We rice pal by the sured for the re. average rate of Tras PA>abte Ul the maurty of Be ace Policy specifies the nature of risk ons of Insurance ty also the Ur fe" surance pot Polley” may covers weeny aie, ‘ Insurance Act, 1931 lepistation governing FMRe Inturnnce Act of 1938 was the fen all forms of insuranc a an control over insurance Busines Serre Comporation Act, India. ‘This “Act may Development Auth Life Insurance Cory 1956 0 provide fo insurance business in India’ by wend Comoration established for the segulation and control of the tas! ‘matters connected therewith or inckieneas yy poration Act, 1956: The Life Insurance the nationalization ‘of te fering all stich business to a Purpose and to provide for the ness Of the Comoration aad for be ‘called the Insurance Regulatory aed ority Act, 1999. It extends to the whole of ledae ite tarane (Ui) » 2.4.4. General Principles of Life Insurance ontract ‘A contrat is an agseement made between 910 oF more partis tt wil enor. nsrance is convat betueun te parc une which one pany (called insurer) undertakes, in exctianpe tor a fee Sieur gemiam ay he ter pry cle iad Re amount of money on the happening of a certain sveni- Since insurance corel rater ee a1s0 applicable. S coniract, certain sections of Indian Contesct Act a Foren socom Se ‘Agreement not Setned Wot ‘gal Formatee openers 1) Elements of General Contract: Elements of general contract ‘been explained in Section 10 of Indian Contract Act, 1872, Se 10 of this Act says, “All agreements are contract it they are tea free consent of ‘parties, competent to contact for ah sonsideration aod with a lawful abject and which are net t declared to be ‘oid. Thus, the insurance contract mast hin following essentalitics: 1) Offers and Acceptance: There exists agrecment betwe wo parties in insurance contract, This agreement com force when one pary proposes and other party acces Proposal. In insurance ‘contract, the offer Yor emer Contract generally comes from the insured and the in ‘company gives the acceptance 8) Free Consent: The partis to ihe contract must be of d ‘mind and there must be free consent. “Free Consent” cased by’ 2) Coercion, b) Undue infiuence, ©) Fraud, 2) Misrepresentation, ©) Mistake.a 7 derstanding Most of the complex products ve sub Sdinermes they OY nee nce policies which af ‘tar too expensive | Different products Offered by Life Insurers | oo ‘Money-Back Policy ie Plans (ULIPS) [Unit Linked Insuran ‘amie oldest form of policy, It the pure and ve ihe fife insurance where the &hre premium paid goes rowards covers “he risk of death during @ Com period of Pine. Here the insurer makes “ne payment only if the Ti. assured dies tinigin the “term” of the. POleY. Fane case of & term lite insurance ae event of death during the fend at the end of term. contre premium is ow and the ‘contract iS int term of policy of tll he surance 2474. Term Ins crm insurance policy at pasie form of insurance term. In case O} ‘Since only death risk is coves simple. The premium is paid throughout prior death of the life assured. ‘Advantages of Term Insurance amdjwantages of term insurance: ne ing low income can Prov’ 271d. Following are 0 1) A_ person g family dpligations at low cost. 2) Persons on the thresholds of new rere nsurance policies 10 38V6 00 ter ce income or eapital for GeV! ide for mectin ness can avail of can utilize their business. careers of busit costs, so that they Joping their career 0 nyurance (Was 2) Life ho have invested subst 3) Persons Perseeting at heavy interest Takes o bor the risk of serious Toss to Feeorance at low, premium. ay Tis useful as supplemen’ © endowin Iie co get higher risk Cover. . 5)_In modem business indemnifying loss « Jn he key person responsible forthe ru ore enrough term insurance plan in useful to those who need ext Pro ‘Term Insurance Products mes aze covercd Uncles tert Teitwo Year Temporary Assurance Vo Fepiduals who specifically require in rd of two Years. eB. Perso 2A7A2 Following sche: a short-perio ane for instance for & Year OF SO 2) Convertible Term Assurance Pole Settaed to meet the needs of those fhe Targer premium required for Ine yrange policy. but hope to be able | ae future, This plan would be foun pe tfesiced to leave the final decision vehen, perhaps a better choice could by 3) Anmol Jeevan-: Life Insurance © Jeevan-l (Plan No. 164) is a unique Cheapest policy to buy: cheaper than Sih Anmol Jeevan-l is a pure ter Mnlike endowment and money back Saving element too. It is a pure Term sex imam risk with minimum possiP 4) Amulya Jeevan-I: In case of unfor Garing the term of the policy, Sum / policy is kept in force. Maturity Be ‘Whole Life Insurance me suggests, the whole life i protection over ¢ of whole 2.4.7.2. As the na provide life insurance insurance plan, The essenc for payment of the assured amount oP of when it occur, Tt-means that thes beneficiary on the death of the insure