Bangladesh Army University of Science and Technology

Department of Business Administration

Course Name: Insurance and Risk Management
Course Code: BBA 2202
Lesson Plan

Course Instructor: Nurun Nahar

Phone: 01680070329
E-mail: tulynahar1@gmail.com

Week 01
Lecture 01: Chapter 1 (Introduction to Insurance)

Insurance: Insurance is a contract, represented by a policy, in which an individual or

entity receives financial protection or reimbursement against losses from an insurance
company. The company pools clients' risks to make payments more affordable for the
insured. Insurance policies are used to hedge against the risk of financial losses, both
big and small, that may result from damage to the insured or her property, or from
liability for damage or injury caused to a third party.

Basic terms Used in Insurance: Different terms are used in Insurance, Important among them
are given billow:

Insurance- Insurance is a contract in which an insurance company promises to compensate an

insured.
Agent - A person or a group of people selling insurance on behalf of an insurance company.
Insurer- Is the company which accepts risks after receiving premiums and pays claims.
Insured- The term ‘insured’ refers to the person who has taken insurance against various risks
and who pays a premium for the insurance.

Beneficiary-The person or the party to whom the policy proceeds will be paid in the event of
death or happening of any contingency is called beneficiary.

Claim- Claim is the request by the insured for indemnity or policy benefit under his insurance.

Contract- An agreement required at law between two or more parties is called contract. It is a
legally enforceable agreement.
Broker - An independent professional person who is registered under the Insurance Act who
advises customers on insurance. The broker operates as your agent, and not that of any insurance
company.
Underwriter-The person who decides how much to charge and who manages the account that
bears the cost of claims for motor or household insurance, or the person who decides
Premium-The amount you pay to an insurance company, sometimes in regular installments or as
per your agreement with the insurer for your insurance policy.
Commission-This is the money that is paid to agents or brokers who sell an insurance product on
behalf of an insurance company. Commissions are paid by insurers
Excess-This is the amount the insured is expected to make when making acclaim. This amount is
usually specified in the policy. It discourages the insured from making very small claims and
instead meeting this cost themselves.
Liability - Your responsibilities for the adverse effects of your actions, or lack of actions on
others.
Third Party-Any other person who may be affected by your actions – for example, in a car
accident, it would relate to damage to their car. In this context, it is well to recognize that the first
party in an insurance policy is you, and the second is your insurance company and the third is the
other person or vehicle in the accident.
Proposal- This is the application form which you have to fill in when you apply for insurance
cover.
Sum insured-It relates to the value of goods at risk and this is the basis upon which the premium
is calculated.

Nature or characteristics of Insurance:

The nature of insurance depends on the nature of the risk required to be protected. An insurance
contract makes available the risk coverage to the insured. The buyer of insurance pays a fixed
premium in exchange for a promise of compensation in the event of some specified loss.
Insurance is bought because it gives peace of mind to the holders. This comfort stage is
important in personal and business life.

• It shares the loss which might fall on an individual or his family on happening of a given
contingency as explained in the policy documents.
• Premium payment by the individual or group to the insurer to receive a certain sum on
the given contingency.
• Insurer pays a certain sum to the individual or group on happening of a given
contingency.
• Payment by the insurer is only made on a contingency which is explained on the policy
documents.
• Insurance is not a gambling or charity.

Insurance is a contract between the insurance provider (insurer) and the individual or group, in
which insurer agrees to pay a certain sum of money to the individual or group upon a given
contingency. To take this benefit, individual has to pay a fixed amount of money to the insurer
on regular predetermined period of time and it is called as premium.

Functions of insurance:
 • Insurance provides certainty: It gives you certainty to receive a certain amount of
money after happening of a given contingency.
• Insurance gives protection: Insurance gives protection from the probable loss which
might happen any time.
• It gives you tension free life: After taking insurance, you become more concentrate &
confident towards other work .So, we could say that it improves your efficiency towards
other works.
• It spread the loss: Insurance distributes the loss falling on an individual or group over a
large number of persons, each bears a nominal expenditure and feels free and safe.

The Role and Importance of Insurance to Individual, Business and Society:

Insurance contributes a lot to the general economic growth of the society by provides stability to
the functioning of process. The insurance industries develop financial institutions and reduce
uncertainties by improving financial resources.

The process of insurance has been evolved to safeguard the interests of people from uncertainty
by providing certainty of payment at a given contingency. The insurance principle comes to be
more and more used and useful in modern affairs.

Not only does it serve the ends of individuals, or of special groups of individuals, it tends to
pervade and to transform our modern social order, too. The role and importance of insurance, has
been discussed in three phases: (i) uses to individual, (ii) uses to a special group of individuals,
viz., to business or industry, and (iii) uses to the society.

Uses to an individual:

1. Insurance provides Security and Safety:

The insurance provides safety and security against the loss on a particular event. In case of life
insurance payment is made when death occurs or the term of insurance is expired. The loss to the
family at a premature death and payment in old age are adequately provided by insurance. In
other words, security against premature death and old age sufferings are provided by life
insurance.

Similarly, the property of insured is secured against loss on a fire in fire insurance. In other
insurance, too, this security is provided against the loss at a given contingency.

The insurance provides safety and security against the loss of earning at death or in golden age,
against the loss at fire, against the loss at damage, destruction or disappearance of property,
goods, furniture and machines, etc.

2. Insurance affords Peace of Mind:

The security wish is the prime motivating factor. This is the wish which tends to stimulate to
more work, if this wish is unsatisfied, it will create a tension which manifests itself to the
individual in the form of an unpleasant reaction causing reduction in work.

The security banishes fear and uncertainty, fire, windstorm, auto-mobile accident, damage and
death are almost beyond the control human agency and in occurrence of any of these events may
frustrate or weaken the human mind. By means of insurance, however, much of the uncertainty
that centers about the wish for security and its attainment may be eliminated.

3. Insurance protects Mortgaged Property:

At the death of the owner of the mortgaged property, the property is taken over by the lender of
money and the family will be deprived of the uses of the property. On the other hand, the
mortgagee wishes to get the property insured because at the damage or destruction of the
property he will lose his right to get the loan replayed.

The insurance will provide adequate amount to the dependents at the early death of the property-
owner to pay off the unpaid loans. Similarly, the mortgagee gets adequate amount at the
destruction of the property.

4. Insurance eliminates dependency:

At the death of the husband or father, the destruction of family needs no elaboration. Similarly,
at destruction of, property and goods, the family would suffer a lot. It brings reduced standards
of living and the suffering may go to any extent of begging from the relatives, neighbors or
friends.

The economic independence of the family is reduced or, sometimes, lost totally. What can be
more pitiable condition than this that the wife and children are looking others more benevolent
than the husband and father, in absence of protection against such dependency? The insurance is
here to assist them and provides adequate amount at the time of sufferings.

5. Life Insurance encourages saving:

The elements of protection and investment are present only in case of life insurance. In property
insurance, only protection element exists. In most of the life policies elements of saving
predominates. These policies combine the programs of insurance and savings.

The saving with insurance has certain extra advantages:

(i) Systematic saving is possible because regular premiums are required to be compulsorily paid.
The saving with a bank is voluntary and one can easily omit a month or two and then abandon
the program entirely.
(ii) In insurance the deposited premium cannot be withdrawn easily before the expiry of the term
of the policy. As contrast to this, the saving which can be withdrawn at any moment will finish
within no time.

(iii) The insurance will pay the policy money irrespective of the premium deposited while in case
of bank-deposit; only the deposited amount along with the interest is paid. The insurance, thus,
provides the wished amount of insurance and the bank provides only the deposited amount,

(iv)The compulsion or force to premium in insurance is so high that if the policy-holder fails to
pay premiums within the days of grace, he subjects his policy to causation and may get back only
a very nominal portion of the total premiums paid on the policy.

For the preservation of the policy, he has to try his level best to pay the premium. After a certain
period, it would be a part of necessary expenditure of the insured. In absence of such forceful
compulsion elsewhere life insurance is the best media of saving.

6. Life Insurance provides profitable Investment:

Individuals unwilling or unable to handle their own funds have been pleased to find an outlet for
their investment in life insurance policies. Endowment policies, multipurpose policies, deferred
annuities are certain better form of investment.

The elements of investment i.e., regular saving, capital formation, and return of the capital along
with certain additional return are perfectly observed, in life insurance.

In India the insurance policies carry a special exemption from income-tax, wealth tax, and gift
tax and estate duty. An individual from his own capacity cannot invest regularly with enough of
security and profitability. The life insurance fulfils all these requirements with a lower cost. The
beneficiary of the policy-holder can get a regular income from the life-insurer; if the insured
amount is left with him.

7. Life Insurance fulfils the needs of a person: The needs of a person are divided into (A)
Family needs, (B) Old-age needs, (C) Re-adjustment needs, (D) Special needs (E) The clean-up
needs.

(A) Family Needs:

Death is certain, but the time is uncertain. So, there is uncertainty of the time when the sufferings
and financial stringencies may be fall on the family. Moreover, every person is responsible to
provide for the family.

It would be a more pathetic sight in the world to see the wife and children of a man looking for
someone more considerate arid benevolent than the husband or the father, who left them
unprovoked.
Therefore, the provision for children up to their reaching earning period and for widow up to
long life should he made. Any other provision except life insurance will not adequately meet this
financial requirement of the family. Whole life policies are the better means of meeting such
requirements.

(B)Old-age heeds:

The provision for old-age is required where the person is surviving more than his earning period.
The reduction of income in old-age is serious to the person and his family.

If no other family member starts earning, they will be left with nothing and if there is no
property, it would be more piteous state. The life insurance provides old age funds along with the
protection of the family by issuing various policies.

(C)Re-adjustment Needs:

At the time of reduction in income whether by loss of unemployment, disability, or death,

adjustment in the standard of living of family is required. The family members will have to be
satisfied with meager income and they have to settle down to lower income and social
obligations.

Before coming down to the lower standard and to be satisfied with that, they require certain
adjustment income so that the primary obstacles may be reduced to minimum. The life insurance
helps to accumulate adequate funds. Endowment policy anticipated endowment policy and
guaranteed triple benefit policies are seemed to be a good substitute for old age needs.

(D)Special Needs:

There is certain special requirement of the family which is fulfilled by the earning member of the
family. If the member becomes disable to earn the income due to old age or death, those needs
may remain unfulfilled and the family will suffer.

(i) Need for Education: There are certain insurance policies, and annuities which are useful for
education of the children irrespective of the death or survival of the father or guardian.

(ii) Marriage: In case of inadequate provision for meeting the expenses of marriage. The
insurance can provide funds for the marriage if policy is taken for the purpose.

(iii) Insurance needs for settlement of children. After education, settlement of children takes time
and in absence of adequate funds, the children cannot be well placed and all the education goes
to waste.

(E)Clean-up funds:

After death, ritual ceremonies, payment of wealth taxes and income taxes are certain
requirements which decrease the amount of funds of the family member. Insurance comes to
help for meeting these requirements. Multipurpose policy, education and marriage policies,
capital redemption policies are the better policies for the special needs.

Lecture 02:

Uses to business:

The insurance has been useful to the business society also. Some of the uses are discussed below:

1. Uncertainty of business losses is reduced:

In world of business, commerce and industry a huge number of properties are employed. With a
slight slackness or negligence, the property may be turned into ashes. The accident may be fatal
not only to the individual or property but to the third party also. New construction and new
establishment are possible only with the help of insurance.

In absence of it, uncertainty will be to the maximum level and nobody would like to invest a
huge amount in the business or industry. A person may not be sure of his life and health and
cannot continue the business up to longer period to support his dependents. By purchasing
policy, he can be sure of his earning because the insurer will pay a fed amount at the time of
death.

Again, the owner of a business might foresee contingencies that would bring great loss. To meet
such situations they might decide to set aside annually a reserve, but it could not be accumulated
due to death. However, by making an annual payment, to secure immediately, insure policy can
be taken.

2. Business-efficiency is increased with insurance:

When the owner of a business is free from the botheration of losses, he will certainly devote
much time to the business. The care free owner can work better for the maximization of the
profit. The new as well as old businessmen are guaranteed payment of certain amount with the
insurance policies at the death of the person; at the damage, destruction or disappearance of the
property or goods. The uncertainty of loss may affect the mind of the businessmen adversely.
The insurance, removing the uncertainty, stimulates the businessmen to work hard.

3. Key Man Indemnification:

Key man is that particular man whose capital, expertise, experience, energy, ability to control,
goodwill and dutifulness make him the most valuable asset in the business and whose absence
will reduce the income of the employer tremendously and up to that time when such employee is
not substituted.
The death or disability of such valuable lives will, in many instances, prove a more serious loss
than that by fire or any hazard. The potential loss to be suffered and the compensation to the
dependents of such employee require an adequate provision which is met by purchasing adequate
life-policies.

The amount of loss may be up to the amount of reduced profit, expenses involved in appointing
and training, of such persons and payment to the dependents of the key man. The Term Insurance
Policy or Convertible Term Insurance Policy is more suitable in this case.

4. Enhancement of Credit:

The business can obtain loan by pledging the policy as collateral for the loan. The insured
persons are getting more loans due to certainty of payment at their deaths. The amount of loan
that can be obtained with such pledging of policy, with interest thereon will not exceed the cash
value of the policy. In case of death, this value can be utilized for setting of the loan along with
the interest.

If the borrower is unwilling to repay the loan and interest, the lender can surrender the policy and
get the amount of loan and interest thereon repaid. The redeemable debentures can be issued on
the collateral of capital redemption policies. The' insurance properties are the best collateral and
adequate loans are granted by the lenders.

5. Business Continuation:

In any business particularly partnership business may discontinue at the death of any partner
although the surviving partners can restart the business, but in both the cases the business and the
partners will suffer economically.

The insurance policies provide adequate funds at the time of death. Each partner may be insured
for the amount of his interest in the partnership and his dependents may get that amount at the
death of the partner.

With the help of property insurance, the property of the business is protected against disasters
and the chance of disclosure of the business due to the tremendous waste or loss.

6. Welfare of Employees:

The welfare of employees is the responsibility of the employer. The former are working for the
latter. Therefore, the latter has to look after the welfare of the former which can be provision for
early death, provision for disability and provision for old age.

These requirements are easily met by the life insurance, accident and sickness benefit, and
pensions which are generally provided by group insurance. The premium for group insurance is
generally paid by the employer. This plan is the cheapest form of insurance for employers to
fulfill their responsibilities.
The employees will devote their maximum capacities to complete their jobs when they are
assured of the above benefits. The struggle and strife between employees and employer can be
minimized easily with the help of such schemes.

Uses of society:

Some of the uses of insurance to society are discussed in the following sections.

1. Wealth of the society is protected:

The loss of a particular wealth can be protected with the insurance. Life insurance provides loss
of human wealth. The human material, if it is strong, educated and care-free, will generate more
income.

Similarly, the loss of damage of property at fire, accident, etc., can be well indemnified by the
property insurance; cattle, crop, profit and machines are also protected against their accidental
and economic losses.

With the advancement of the society, the wealth or the property of the society attracts more
hazardous and, so new types of insurance are also invented to protect them against the possible
losses.

Each and every member will have financial security against old age, death, damage, destruction
and disappearance of his wealth including the life wealth. Through prevention of economic
losses, instance protects the society against degradation.

Through stabilization and expansion of business and industry, the economic security is
maximized. The present, future and potential human and property resources are well-protected.
The children are getting expertise education, working classes are free from botherations and
older people are guiding at ease. The happiness and prosperity are observed everywhere with the
help of insurance.

2. Economic Growth of the Country:

For the economic growth of the country, insurance provides strong hand and mind, protection
against loss of property and adequate capital to produce more wealth. The agriculture will
experience protection against losses of cattle, machines, tools and crop.

This sort of protection stimulates more production in agriculture, in industry, the factory
premises, machines, boilers and profit insurances provide more confidence to start and operate
the industry welfare of employees create a conducive atmosphere to work: Adequate capital from
insurers accelerate the production cycle.
Similarly in business, too, the property and human material are protected against certain losses;
capital and credit are expanded with the help of insurance. Thus, the insurance meets all the
requirements of the economic growth of a country.

3. Reduction in Inflation:

The insurance reduces the inflationary resource in two ways. First, by extracting money in
supply to the amount of premium collected and secondly, by providing sufficient funds for
production narrow down the inflationary gap.

With reference to Indian context it has been observed that about 5.0 per cent of the money in
supply was collected in form of premium.

The share of premium contributed to the total investment of the country was about 10.0 per cent.
The two main causes of inflation, namely, increased money in supply and decreased production
are properly controlled by insurance business, Insurance Need and Selling.

Other Importance of Insurance

a) Insurance helps to promote foreign trade providing protection again trade risk.

b) Insurance increases business efficiency eliminating the loss of damage, destruction, or

disappearance of property of goods.

c) Insurance protects the social wealth providing protection against social evil.

d) Development of insurance business helps to solve the evil of unemployment, generating

employment opportunity in the country.

e) The insured gets tax benefit in life insurance.

Lecture 03:
Most Important Principles of Insurance

The main motive of insurance is cooperation. Insurance is defined as the equitable transfer of
risk of loss from one entity to another, in exchange for a premium. The important principles of
insurance are as follows:

1. Nature of contract
Nature of contract is a fundamental principle of insurance contract. An insurance contract comes
into existence when one party makes an offer or proposal of a contract and the other party
accepts the proposal. A contract should be simple to be a valid contract. The person entering into
a contract should enter with his free consent.

2. Principal of utmost good faith

Under this insurance contract both the parties should have faith over each other. As a client it is
the duty of the insured to disclose all the facts to the insurance company. Any fraud or
misrepresentation of facts can result into cancellation of the contract.
3. Principle of Insurable interest

Under this principle of insurance, the insured must have interest in the subject matter of the
insurance. Absence of insurance makes the contract null and void. If there is no insurable
interest, an insurance company will not issue a policy.

An insurable interest must exist at the time of the purchase of the insurance. For example, a
creditor has an insurable interest in the life of a debtor, A person is considered to have an
unlimited interest in the life of their spouse etc.

4. Principle of indemnity

Indemnity means security or compensation against loss or damage. The principle of indemnity is
such principle of insurance stating that an insured may not be compensated by the insurance
company in an amount exceeding the insured’s economic loss. In type of insurance the insured
would be compensation with the amount equivalent to the actual loss and not the amount
exceeding the loss. This is a regulatory principal. This principle is observed more strictly in
property insurance than in life insurance.

The purpose of this principle is to set back the insured to the same financial position that existed
before the loss or damage occurred.

5. Principal of subrogation

The principle of subrogation enables the insured to claim the amount from the third party
responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of
loss, For example, if you get injured in a road accident, due to reckless driving of a third party,
the insurance company will compensate your loss and will also sue the third party to recover the
money paid as claim.
Week 02
Lecture 04:

6. Double insurance

Double insurance denotes insurance of same subject matter with two different companies or with
the same company under two different policies. Insurance is possible in case of indemnity
contract like fire, marine and property insurance.

7. Principle of proximate cause

Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable
when the loss is the result of two or more causes. The proximate cause means; the most dominant
and most effective cause of loss is considered. This principle is applicable when there are series
of causes of damage or loss.

Limitations or disadvantage of Insurance

Insurance is an answer to risk. Insurance neither reduces the uncertainty nor does it alter the
probability of the event. But it reduces the possible financial loss connected with the occurrences
of the event. In spite of number of advantage of insurance, it has certain limitations.

• Insurance leads to negligence as the insured feels that he/she can be compensated for any
loss or damage.
• All the risk cannot be insured. Only pure risk can be insured and speculative risks are not
insurable.
• Insurance companies do not make the compensation promptly on maturity of the policy
or for the financial losses as the expectation of the insured.
• The premium rate is higher in our country and as such certain category of people cannot
avail the advantage of insurance.
• Another important limitation is that it may lead to the crimes in the society as the
beneficiaries of the policy may be tempted to commit crimes to receive the insured
amount.
 • Although insurance encourage savings, it does not provide the facilities that are provided
by bank.
• It becomes difficult to control moral hazards in insurance. There are certain people who
may utilize the insurance plans for their self-interest by claiming false claims from
insurance companies.

Lecture 05: Chapter 2 (Risk management in Insurance)

Risk: 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.

Uncertainty: Uncertainty implies a condition where the future events are not known.
Uncertainty cannot be measured in quantitative terms through past methods.

Difference between Risk and Uncertainty

Topics Risk Uncertainty
1.Meaning Risk is referred to a situation where the If no information is available
probability of distribution of cash flows of an to formulate a probability
investment proposal in known. distribution of the cash flows
the situation is known.
2.from Risk is formed by information with probability It is formed by no
distribution. information with probability
distribution.
3.Measure Measured by statistical concept. It cannot be measured.
4.Occurance Probability of occurrence of outcome is known Probability of occurrence of
to all. outcome is unknown.
5.Tools Measurement tools are standard deviation and There is no tool for
variance. measurement.
6.Income Risk is related with income. It is related without income.
7.Avoidable Risk is avoidable It is unavoidable.
8.Insurance By insurance it can be transferable. It is no Insurable.
9.control It can be controlled. It is not controlled.
10.Risk Risk management is required to avoid it. Risk management is not
management required.

Classification of Risk
There are different types of risk. The most important types of risk include:
a. Pure Risk
b. Speculative Risk
c. Particular Risk
d. Fundamental Risk
e. Static Risk
f. Dynamic Risk.

PURE RISK

Pure risk is a situation that holds out only the possibility of loss or no loss. For example, if you
buy a new textbook, you face the prospect of the book being stolen or not being stolen. The
possible outcomes are loss or no loss. Also, if you leave your house in the morning and ride to
school on your motorcycle you cannot be sure whether or not you will be involved in an
accident, that is, you are running a risk. There is the uncertainty of loss. Your motorcycle may
be damaged or you may damage another person’s property or injured another person. If you are
involved in any one of these situations, you will suffer loss. But if you come back home safely
without any incident, then you will suffer no loss. So in pure risk, there is only the prospect of
loss or no loss. There is no prospect of gain or profit under pure risk. You derive no gain from
the fact that your house is not burnt down. If there is no fire incident, the status would be
maintained, no gain no loss, or a break-even situation. Therefore, it is only the pure risks that are
insurable.
Different Types of Pure Risk:

Both the individual and business firms face different types of pure risks that pose great threat to
their financial securities. The different types of pure risks that we face can be classified under
any one of the followings:

a. Personal risks
b. Property risks
c. Liability risks

Personal Risks

Personal risks are those risks that directly affect an individual.

Personal risks detrimentally affect the income earning power of an individual. They involve the
likelihood of sudden and complete loss of income, or financial assets sharp increase in expenses
or gradual reduction of income or financial assets and steady rise in expenses. Personal risks can
be classified into four main types:

a. Risk of premature death

 b. Risk of old age
c. Risk of sickness
d. Risk of unemployment

· Risk of Premature Death

It is generally believed that the average life span of a human being is 70 years. Therefore,
anybody who dies before attaining age 70 years could be regarded as having died prematurely.
Premature deaths usually bring great financial and economic insecurity to dependents. In most
cases, a family breadwinner who dies prematurely has children to educate, dependents to
support, mortgage loan to pay. In addition, if the family bread-winner dies after a protracted
illness, then the medical cost may still be there to settle and of course the burial expenses must
have to be met. By the time all these costs are settled, the savings and financial assets of the
family head may have been seriously depleted or possibly completely spent or sold off and still
leaving a balance of debt to be settled.

The death of family head could render some families destitute and sometimes protracted illness
could so much drain the financial resources of some families and impoverish them even before
the death of the family breadwinner.

When a family breadwinner dies, the human-life value of the breadwinner would be lost forever.
This loss is usually very considerable and creates grate financial and economic insecurity. What
is a human life value? A human life value is the present value of the share of the family in the
earnings of the family head.

· Risk of Old Age

The main risk of old age is the likelihood of not getting sufficient income to meet one’s financial
needs in old age after retirement. In retirement, one would not be able to earn as much as before
and because of this, retired people could be faced with serious financial and economic insecurity
unless they have build up sufficient savings or acquired sufficient financial assets during their
active working lives from which they could start to draw in old age.

Even some of the workers who make sufficient savings for old age would still have to contend
with corrosive effect of inflation on such savings. High rate of inflation can cause great financial
and economic distress to retired people as it may reduce their real incomes.

· Risk of Poor Health

Everybody is facing the risk of poor health. It is only when people are healthy, that they can
meaningfully engage themselves in any productive activity and earn full economic income. Poor
health can bring serious financial and economic distress to an individual. For example, without
good health, nobody can gainfully engage himself in any serious economic undertaking and
maximized his economic income.

A sudden and unexpected illness or accident can result in high medical bills. Therefore, poor
health will result in loss of earned income and high medical expenses. And unless the person has
adequate personal accident and health insurance cover or has made adequate financial
arrangements for income from other sources to meet these expenses, the person will be
financially unsecured.

Risk of Unemployment

The risk of unemployment is a great threat to all those who are working for other people or
organizations in return for wages or salaries. The risk equally poses a great threat to all those
who are still in school or undergoing courses of vocational training with the notion of taking up
salaried job after the training period. Self-employed persons, whose services or products are no
longer in demand, could also be faced with the problem of unemployment.

Unemployment is a situation where a person who is willing to work and is looking for work to
do cannot find work to do. Unemployment always brings financial insecurity to people. This
financial insecurity could come in many ways, among which are:

a. The person would lose his or her earned income. When this happens, he will suffer some
financial hardship unless he has previously built up adequate savings on which he can
now start to draw.
b. If the person fails to secure another employment within reasonable period of time, he
may fully deplete his savings and expose himself to financial insecurity.
c. If he secures a part-time job, the pay would obviously be smaller than the full-time pay
and this entails a reduction of earned income. This would also bring financial insecurity.

Lecture 06:

SPECULATIVE RISK

Speculative risk is a situation that holds out the prospects of loss, gain, or no loss no gain (break-
even situation). Speculative risks are very common in business undertakings. For example, if
you establish a new business, you would make a profit if the business is successful and sustain
loss if the business fails.

If you buy shares in a company you would make a gain if the price of the shares rises in the stock
market, and you would sustain a loss if the price of the shares falls in the market. If the price of
the shares remains unchanged, then, you would not make a profit or sustain a loss. You break-
even. Gambling is a good example of speculative risk. Gambling involves deliberate creation of
risk in the expectation of making a gain. There is also the possibility of sustaining a loss. A
person betting $500 on the outcome of the next weekend English Premier League Match faces
both the possibility of loss and of gain and of no loss, no gain.
Other examples of speculative risk include taking parts in a football pool, exporting to a new
market, betting on horse race or motor race.

Speculative risks are no subject of insurance, and then are therefore not normally insurable.
They are voluntarily accepted because of their two-dimensional nature of gain or loss.

Pure Risk Speculative Risk

1. Pure risk is a risk where there is only 1. Speculative risk is a risk where both
the possibility of a loss or you maintain a status profit and loss are possible. Speculative risks
quo. Only pure risks are insurable. are not normally insurable.

The few exceptions of speculative risks are

insurable firms that insure their institutional
portfolio of investments against loss.
2. Although there are some exceptions of 2. Speculative risks are not generally
pure risks which are not insurable. easily predictable. So, the law of large
numbers cannot be easily applied to
speculative risk.

However, gambling is one exception of

speculative risks to which the law of large
numbers can easily be efficiently applied.

Society may benefit from a speculative risk if a

loss occurs. For example, a firm may develop
a new invention for producing a commodity
more cheaply. As a result of this, a competitor
may be forced out of the market into
bankruptcy. In this situation, the society will
benefit since the products are produced more
efficiently and at lower cost to consumers,
even though competitor has been forced into
bankruptcy.

Speculative risks are more voluntarily accepted

 because of its two-dimensional nature of gain
or loss.
3. Pure risk are generally easily predictable
than speculative risks. So the application of
the law of large numbers can be more easily
applied to pure risk.
4. Society will not benefit from a pure risk
if a loss occurs. For example, if a flood or
earthquake devastates a region, society will not
benefit from such devastation.
5. Pure risk is not voluntarily accepted.

Liability Risks

Most people in the society face liability risk. The law imposes on us a duty of care to our
neighbor and to ensure that we do not inflict bodily injury on them. If anyone breaches this duty
of care, the law would punish him accordingly. For example, if you injure your neighbor or
damage his property, the law would impose fines on you and you may have to pay heavy
damages.

Unfortunately, one can be found liable for breach of duty of care in different ways and the best
security seems to be the purchase of liability insurance cover.

Liability Risks have two peculiarities:

a. Under liability risk, the amount of loss that can be involved has no maximum upper limit.
b. The wrong doer can be sued for any amount. For example, while riding on your bicycle
valued $500, you negligently cause serious bodily injury to another person, that person
can sue you for any amount of money, say $5000, N10,000 or even more depending on
the nature of the injury.

c. In contrast, if the bicycle value at $500 is completely damaged by another person, the
maximum amount of compensation (indemnity) that would be paid to you for the loss of
the bicycle is just $500, that is, the actual value of the bicycle.

d. Under liability risks your future income and assets may be attached to settle a high court
fines if your present income and assets are inadequate to pay the judgment debt. When
this happens, your financial and economic security would be greatly endangered.

Property Risks
Property owners face the risk of having their property stolen, damaged or destroyed by various
causes. A property may suffer direct loss, indirect loss, losses arising from extra expenses of
maintaining the property or losses brought about by natural disasters.

Natural disasters such as flood, earthquake, storm, fire etc can bring about enormous property
losses as well as taking several human lives. The occurrence of any of these disasters can
seriously undermine the financial security of the affected individual, particularly if such
properties are not unsecured.

Week 03
Lecture 07:
Direct Loss

Direct loss is that loss which flows directly from the unsecured peril. For example, if you insure
your house against fire, and the house is eventually destroyed by fire, then the physical damage
to the property is known as direct loss.

Indirect Loss or Consequential Loss

Indirect or consequential loss is a loss that arises because of a prior occurrence of another loss.
Indirect loss flows directly from an earlier loss suffered. The loss is the consequence of some
other loss. It arises as an additional loss to the initial loss suffered. For example, if a factory that
has a fire policy suffers fire damage, some physical properties like building, machinery maybe
destroyed. The loss of these properties flows directly from the insured peril (fire). The physical
damage to the properties is known as direct fire loss.

But in addition to the physical damage to the properties, the firm may stop production for several
months to allow for the rebuilding of the damaged of the premises and replacement of damaged
equipment, during which no profit would be earned.

This loss of profit is a consequential loss. It Is not directly brought about by fire but flows
directly from the physical damage brought about by fire and hence indirectly from the fire
incident. Other examples of consequential loss are the loss of the use of the building and the loss
of a market.

Extra Expenses

Alternative arrangement may have to be made to rend a temporary premise, pending the repairs
or reinstatement of the damaged building and it may also be necessary to rent, hire or lease a
machine in order to keep production going so as not to disappoint customers and in the process
lose market to competitors. The expenses incurred in securing the alternative premises, an
renting, hiring or leasing a machine are referred to as extra expenses. These expenses may not
have been insured if there has been no fire damage.

FUNDAMENTAL RISK

A fundamental risk is a risk which is non-discriminatory in its attack and effect. It is impersonal
both in origin and consequence. It is essentially, a group risk caused by such phenomena like
bad economy, inflation unemployment, war, political instability, changing customs, flood,
draught, earthquake, weather (e.g. harmattan) typhoon, tidal waves etc. They affect large
proportion of the population and in some cases they can affect the whole population e.g. weather
(harmattan for example). The losses that flow from fundamental risks are usually not caused by
a particular individual and the impact of their effects falls generally on a wide range of people or
on everybody. Fundamental risk arises from the nature of the society we live in or from some
natural occurrences which are beyond the control of man.

The striking peculiarity of fundamental risk is that is incidence is non-discriminatory and falls on
everybody or most of the people. The responsibility of dealing with fundamental risk lies with
the society rather than the individual. This is so because, fundamental risks are caused by
conditions which are largely beyond human’s control and are not the fault of anyone in
particular. The best means of handling fundamental risk is the social insurance, as private
insurance is very inappropriate. Although, it is on record that some fundamental risk, like
earthquake, flood are being handle by private insurance.

PARTICULARS RISKS

A particular risk is a risk that affects only an individual and not everybody in the community.
The incidence of a particular risk falls on the particular individual affected. Particular risk has its
origin in individual events and its impact is localized (felt locally). For example, if your
textbook is stolen, the full impact of the loss of the book is felt by you alone and not by the entire
members of the class. You bear the full incidence of the loss. The theft of the book therefore is
a particular risk.
If your shoes are stolen, the incidence of the loss falls on you and not on any other person.
Particular risks are the individual’s own responsibility, and not that of that society or community
as a whole. The best way to handle particular risk by the individual is the purchase of insurance
cover.

Lecture 08:
STATIC RISK

Static risks are risks that involve losses brought about by irregular action of nature or by
dishonest misdeeds and mistakes of man. Static losses are present in an economy that is not
changing (static economy) and as such, static risks are associated with losses that would occur in
an unchanging economy. For example, if all economic variables remain constant, some people
with fraudulent tendencies would still go out steal, embezzle funds and abuse their positions. So
some people would still suffer financial losses. These losses are brought about by causes other
than changes in the economy (perils of nature and the dishonesty of other people).

Static losses involve destruction of assets or change in their possession as a result of dishonesty.
Static losses seem to appear periodically and as a result of these they are generally predictable.
Because of their relative predictability, static risks are more easily taken care of; by insurance
cover then are dynamic risks. Example of static risk includes theft, arson assassination and bad
weather. Static risks are pure risks.

DYNAMIC RISK

Dynamic risk is risks brought about by changes in the economy. Changes in price level, income,
tastes of consumers, technology etc (which is examples of dynamic risk) can bring about
financial losses to members of the economy. Generally dynamic risks are the result of
adjustments to misallocation of resources. In the long run, dynamic risks are beneficial to the
society. For example, technological change, which brings about a more efficient way of mass
producing a higher quality of article at a cheaper price to consumers than was previously the
case, has obviously benefited the society.
Dynamic risk normally affects a large number of individuals, but because they do not occur
regularly, they are more difficult to predict than static risk.

Methods of risk management

Here are the 6 techniques associated with risk management.

1. Avoidance

Avoidance is the best means of loss control. This is because, as the name implies, you’re
avoiding the risk completely. If your efforts at avoiding the loss have been successful, then there
is a 0% probability that you’ll suffer a loss (from that particular risk factor, anyway). This is why
avoidance is generally the first of the risk control techniques that’s considered. It’s a means of
completely eliminating a threat.

2. Prevention
Loss prevention is a technique that limits, rather than eliminates, loss. Instead of avoiding a risk
completely, this technique accepts a risk but attempts to minimize the loss as a result of it. For
example, storing inventory in a warehouse means that it is susceptible to theft. However, since
there really is no way to avoid it, a loss prevention program is put in place to minimize the loss.
This program can include patrolling security guards, video cameras, and secured storage
facilities.

3. Reduction

Loss reduction is a technique that not only accepts risk, but accepts the fact that loss might occur
as a result of the risk. This technique will seek to minimize the loss in the event of some type of
threat. For example, a company might need to store flammable material in a warehouse.
Company management realizes that this is a necessary risk and decides to install state-of-the-art
water sprinklers in the warehouse. If a fire occurs, the amount of loss will be minimized.

4. Separation

Separation is a risk control technique that involves dispersing key assets. This ensures that if
something catastrophic occurs at one location, the impact to the business is limited to the assets
only at that location. On the other hand, if all assets were at that location, then the business
would face a much more serious challenge. An example of this is when a company utilizes a
geographically diversified workforce.

5. Duplication

Duplication is a risk control technique that essentially involves the creation of a backup plan.
This is often necessary with technology. A failure with an information systems server shouldn’t
bring the whole business to a halt. Instead, a backup or fail-over server should be readily
available for access in the event that the primary server fails. Another example of duplication as
a risk control technique is when a company makes use of a disaster recovery service.

6. Diversification

Diversification is a risk control technique that allocates business resources to create multiple
lines of business that offer a variety of products and/or services in different industries. With
diversification, a significant revenue loss from one line of business will not cause irreparable
harm to the company’s bottom line.

Risk control is a key component in any sound company strategy. It’s necessary to ensure long-
term organization sustainability and profitability.

Lecture 09:

Classification of Insurance
Sad eventualities such as loss of income, death, sickness, accidents, damage to property and
many more are difficult to accurately predict. By the help of insurance one can cover possible
unfortunate events so that when they happen one can conveniently restore status quo. Below is a
list of different types of insurance:

1. Life Insurance – Pays out a specified figure to the insured or specified beneficiaries on a
specific event such as death of the insured.

Types of Life Insurance

There are many types of life insurance available today and choosing one can be challenging. It is
essential to evaluate the benefits that can be attained from each cover. There are various features
and factors to consider when making a decision with regard to this type of insurance. The
concept behind it is provision for loved ones even after death and the dynamics of the beneficiary
can be used to determine what cover you should have. Fees and charges, flexibility and the time
frame should also be factored in. Consider these types of life insurance.

• Whole Life Insurance

This is a policy that is active during the whole duration of the insured individual’s life.
The premiums are usually paid annually to the insurance and the primary advantage is
that the protection given will not decline in value or expire.
• Term Life Insurance
This coverage is available for a predefined and limited period and the payments at a fixed
rate. The death benefit s paid after the insured person dies during the specified term.
There are different forms of this insurance.
• Annual Renewable: This is a simple policy that covers a single year and the premiums
paid will be based on the likelihood of the individual dying within the year. Renewing
can be challenging especially in the case of terminal illnesses.
• Universal Life Insurance
This is a policy that offers permanent life insurance and one can also access the tax-
deferred cash value of the cover. The advantage attained is the flexibility in the premium
payments, the savings as well as the death benefits.

• Variable Life Insurance

This is a permanent life insurance form that provides an opportunity for investment in
addition to the death benefits. The insured can invest in separate accounts and these are
included in the cash component of the policy. The advantages include the investment
options, tax deferral and the guaranteed death benefit.
• Variable Universal
This policy has aspects of both the universal and variable life insurance. The variability is
in the value accounts in which the insured can invest and the universal aspects allow
flexibility in payments of the premium.
• Survivorship Universal
This is a cheaper alternative to individual types of life insurance. It provides cover for
two people and the benefits can only be paid after they are both gone. It is beneficial to
those who want an affordable policy that results in a larger cumulative sum. Consider
individual aspects of each policy such as guarantee of death benefits, flexibility and cash
value to make certain that you have the best cover that suits the needs presented.