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INTRODUCTION TO

INSURANCE
WHAT IS INSURANCE ?

• Insurance Indemnifies Assets & Income.


Every Asset has a value and generates
Income to its Owner. There is a normally
expected Life-time for the Asset during
which time it is expected to perform. If
the Asset gets lost earlier, being
destroyed or made Non-functional
through an Accident or other
unfortunate event the Owner is
Prejudiced. Insurance helps to reduce
CONSEQUENCES of such Adverse
Circumstances which are called Risks
WHAT IS INSURANCE
(Contd.)

• Insurance is the SCIENCE OF


SPREADING OF THE RISK. It is the
system of spreading the losses of
an Individual over a group of
Individuals
• Insurance is a Method of sharing of
financial losses of a FEW from a
COMMON FUND formed out of
Contribution of the MANY who are
equally exposed to the same loss
WHAT IS INSURANCE Contd..

• What is UNCERTAIN for an Individual


becomes a CERTAINTY for a Group.
This is the basis of All Insurance
Operations. Thus INSURANCE
CONVERTS UNCERTAINTY TO
CERTAINTY
THE CONCEPT OF RISK

• The object of Insurance is to provide


protection against Financial Losses
caused by Fortuitous Events. Thus
Insurance is a protection against the
Consequences of RISK.
• RISK is defined for Insurance Purpose
as the UNCERTAINTY OF A FINANCIAL
LOSS.
THE CONCEPT OF RISK

• Element of RISK is Inherent in Life.


Risk Means that there is a
possibility of loss or damage.
• To the common Man, Risk means
Exposure to Danger.
• In Insurance, the word Risk may be
used interchangeably with Peril-
which means the Event or
Occurrence which CAUSES the
Loss.
THE CONCEPT OF RISK

• In Insurance, the word Risk may also


refer to the Property or Subject
Matter of Insurance

• The Subject Matter of Insurance can


be Life, Limb, Property, Interest &
Liability
PURPOSE AND NEED OF
INSURANCE
• The Problem of Risk in Economic
and Commercial Activities can be
dealt with in FOUR WAYS.
1. Risk Avoidance
2. Risk Retention
3. Risk Transfer
4. Risk Minimisation
Insurance is ONE of the most Import
method
of Risk Transfer
PURPOSE AND NEED OF
INSURANCE

• Insurance spreads the Risk among


the Community and the likely Big
Impact on ONE is reduced to Smaller
Manageable Impacts on ALL. Thus
Insurance acts as a SHOCK
ABSORBER.
• A RISK OF TRADE is Insurable but a
Trade Risk is not Insurable. In a Risk
of Trade there can only be a LOSS
whereas in a Trade Risk, there can be
LOSS OR GAIN Risks of Trade are
called PURE RISKS.
PURPOSE AND NEED OF
INSURANCE
• Only Economic or Financial Losses
can be compensated by Insurance.

• The Business of Insurance is the


Pooling of RISK and RESOURCES. It
is a technique which provides for
collection of small amounts of
PREMIUM from many Individuals
and Firms out of which losses
suffered by the FEW are paid.
Insurers act as TRUSTEES of the
Common Pool.
PURPOSE AND NEED OF INSURANCE

INSURANCE ACTS AS A SOCIAL


SECURITY
• Social Shock Absorber
• Solarium Fund for Hit & Run Victims
of Road Accidents.
• PASS (Personal Accident & Social
Security) scheme launched by the
Govt. of India
• Crop Insurance Schemes and other
PURPOSE AND NEED OF INSURANCE

INSURANCE CONTRIBUTES TO
NATIONAL WEALTH
• It contributes to a vigorous
Economy and National
Productivity. LIC & GIC funds
formed out of the savings of
People are channelled into
Investments for Economic Growth.
HUDCO, IDBI, IFCI, use funds
PURPOSE AND NEED OF INSURANCE

• INSURANCE PROTECTS THE CAPITAL


IN INDUSTRY - It helps release the
same for further Expansion

• Insurance is the HAND MADE to


Commerce and Trade.
THEORY AND PRACTICE OF
RATING
• RATE OF PREMIUM WILL BE DIRECTLY
PROPORTIONAL TO THE DEGREE OF
HAZARD
• TO ASSESS VARIATIONS IN THE DEGREE
OF HAZARD,RISKS MUST BE CLASSIFIED
INTO HOMOGENEOUS CATEGORIES WITH
SIMILARITY OF EXPOSURE
• IN EACH SUB-CLASS,PAST LOSS
EXPERIENCE WILL BE THE CRITERIA
APPLIED TO DECIDE THE PREMIUM RATE
DEGREE OF HAZARD
• GREATER THE RISK,HIGHER WILL BE THE
PREMIUM RATE
• THE MORE PROBABLE THE LOSS AND THE
MORE SEVERE IT IS LIKELY TO BE,THE
HIGHER WILL BE THE PREMIUM RATE
• Eg.—HAZARDOUS GOODS AND
HAZARDOUS PROFESSIONS WILL ATTRACT
A HIGHER PREMIUM AS COMPARED TO
NON-HAZARDOUS GOODS OR
PROFESSIONS
CLASSIFICATION OF RISKS

• RATES OF PREMIUM SHOULD BE


EQUITABLE AND FAIR AS BETWEEN
DIFFERENT INDIVIDUAL INSUREDS
• HENCE,A SYSTEM OF CLASSIFICATION OF
RISKS INTO BROAD CATEGORIES IS
ADOPTED.
• THESE MAY BE FURTHER CLASSIFED INTO
GROUPS AND SUB-GROUPS DEPENDING
UPON THE HAZARDS INVOLVED AND THEIR
SIMILARITY
• Eg.CLASSIFICATION IN MOTOR/FIRE/W.C.
PAST LOSS EXPERIENCE

• IN EACH SUB-GROUP,THE PAST LOSS EXPERIENCE


IS WORKED OUT AND FUTURE FORECASTS ARE
MADE ON THIS BASIS
• FORMULA FOR PURE PREMIUM
L X100 L=SUM TOTAL OF LOSSES
----------
V V=SUM TOTAL OF VALUES
• PURE PREMIUM WILL BE JUST SUFFICIENT TO PAY
THE LOSSES,HENCE LOADING IS REQUIRED FOR
OTHER FACTORS LIKE-
COMMISSIONS/MANAGEMENT
EXPENSES/RESERVES FOR UNEXPIRED
RISKS/PROVISION FOR UNEXPECTED HEAVY
LOSSES/MARGIN OF PROFITS
• FINAL RATE=LOADED RATE
LAW OF LARGE NUMBERS
• LAW OF LARGE NUMBERS IS FUNDAMENTAL TO
ALL INSURANCE OPERATIONS
• THIS IS A MATHEMATICAL PRINCIPAL AND
STIPULATES THAT-
• The greater the number of cases studied and
longer the duration of study, the more accurate
will be the future forecast …
PROVIDED THE CONDITIONS REMAIN THE SAME
• AS THE No. OF CASES INCREASES,THE GAP
BETWEEN THE ESTIMATED FUTURE LOSSES AND
ACTUAL FUTURE LOSSES BECOMES LESS AND
LESS
• APPLYING THIS PRINCIPLE,INSURERS ARE ABLE TO
ANTICIPATE FUTURE LOSSES MORE ACCURATELY AND FIX
PREMIUM RATES ACCORDINGLY (SUBJECT TO TREND
ADJUSTMENTS
LEGISLATIVE AN REGULATORY
MATTERS
MERCHANT BILL OF INDIAN
SHIPPING LADING CARRIERS INDIAN
ACT-1958 ACT-1963 ACT-1865 RAILWAYS
ACT-1890
COGSA-1925
INDIAN POST
OFFICE
MARINE
ACT--1898
INSURANCE
ACT-1963 INSURANCE OPERATIONS ARE DIRECTLY
AFFECTED BY
IRDA-ACT—2000
M.V.ACT-
W.C.ACT INSURANCE ACT—1938
1988
LIBNA—1956---LIFE OPERATIONS
1923 GIBNA—1972---NON-LIFE OPERATIONS
C.P.ACT
1986
PLI ACT-1991
SALE OF GOODS INDIAN STAMP
ACT-1930
FERA-1973
ACT
REINSURANCE
The ultimate underwriting objectives are
• The production of large volume of premium
income sufficient to maintain and progressively
enlarge the insurers business.
• The earning of a reasonable profit on the
operations
• The important underwriting factors are
- Well spread out and Large Volume of business
- Retention limits
- Reinsurance of the surplus
• Reinsurance is insurance of insurance . The
ceding company retains a part of the risk /
premium and cedes the balance to the
reinsurer. There are two main methods of
reinsurance
REINSURANCE…contd
• Facultative Reinsurance : In
facultative reinsurance, the choice /
faculty to accept or reject a risk is
with the reinsurer. This method
involves considerable amount of
clerical work and ceding company
cannot go on risk unless confirmation
is received from the reinsurer about
the acceptance of the risk and
premium rate / terms conditions of
insurance.
REINSURANCE …. Contd.
• Treaty :There are two types of treaty
reinsurance – Proportional and Non-
proportional.
• Proportional : Proportional treaties are risk
based & can be divided into –
• a) Quota Share b) Surplus c) Pools
d) Auto Facultative (Facultative obligatory)
• Non Proportional : Non proportional treaties
are not risk based but loss based. The insurer
limits the amount of loss as per the underlying
limit and the reinsurer agrees to pay the loss
over and above the underlying limit.
Examples of non proportional treaties are
a) Excess of loss – for event losses
REINSURANCE…contd
• Retrocession---Reinsurance of a
Reinsured Risk
• Purpose of Reinsurance—
• Creation of additional capacity
• Achieves Global Spread of risk
• Best protection against Catastrophic Risks
• Facilitates acceptance of Mega/Jumbo Risks
• Works on the Principle of:
• No Cession without Retention
• Follow the Fortune of the Ceding Company
GENERAL INSURANCE—BUSINESS
PORTFOLIO
• The Major Portfolios are as follows:
• Fire Insurance—20%
• Marine Insurance---15%
• Motor Insurance---35%
• Engineering Insurance—10%
• Aviation---5%
• Miscellaneous Traditional—10%
• Miscellaneous Non-Traditional—5%