Unit I

Insurance – meaning, nature and significance of

insurance – Principles – Reinsurance – Double
insurance– Nationalisation VS Privatisation of
insurance– Insurance Regulatory Development
Authority Act – RECENT developments in the
insurance sector.
INTRODUCTION TO INSURANCE
LEARNING OBJECTIVES:
● Meaning of Risk
● Classification of Risk
● Methods of Handling Risk
● Management of Risk
What is Risk?
 RISK
Risk means “Exposure to Danger”

In insurance Practice, Risk means “Perils or Loss producing Events”

Risk is an uncertain event that may have a Positive or Negative Impact

 DEFINITION OF RISK

According to Federation of Insurance Institutes, “the risk can be

thought of as the degree of variation in the possible outcome from an
uncertain event, or as the variation in the possible outcomes”.

According to Life Insurance Corporation of India, Risk may be

defined as, “ a condition where there is a possibility of an adverse
deviation from a desired outcome that is expected or hoped for; there
is no requirement that the possibility be unmeasurable, only that it
must exist”.
Uncertainty
 UNCERTAINTY
The term uncertainty used to Indicate situations where the possibility of
occurrence of a result is non-quantifiable, consequently is not possible to
insure against uncertainty.

Eg:- Although Death is certain, When we will die is uncertain (Date and time
of death is unknown). So Death is an Insurable Event.

Eg:- Once the timing of Death becomes certain (due to fatal disease or old
aged person), then insurance company will not cover such risk.

“If there is possibility of loss, but not a certain loss, only that event can be
insured”
Peril &
Hazard
 PERIL
PERIL: The specific Event or Reason which might cause a Loss. Eg.
Fire, Wind, Storm, Hail or Theft.

Eg:- When a building burns, Fire is the Peril

Eg:- When an Individual is injured in an accident,

the Accident is the Peril.

Natural disasters such as earthquakes, storms ,floods

etc.are examples of perils which may lead to loss of life and
 PERIL
HAZARD: A condition that may create or increase the chance of loss
arising from a given peril or under given condition.
Hazard means anything that could harm.

HAZARDS

Physical Moral Morale

Hazards Hazards Hazards

Eg: Living in flood zone Eg: Dishonesty Eg: Careless Attitude

 Physical Hazards
● Physical hazards can be any factors within
the environment that can harm the body
without necessarily touching it
● It arises from an individual’s occupation,
health, lifestyle etc.
■ a) People working inside a coal mine
■ b)A person with family history of heart
disease, high blood pressure etc. is a
physical hazard
■ It relates to the physical characteristics of the
risk, such as the nature of construction of a
building, the location of a storehouse,
security protection at a shop or factory, or the
proximity of houses to a riverbank.
Moral Hazards
● Dishonesty or Character defects
in an individual that increases the
frequency or Severity of Loss

○ Eg: People Who have availed flood

insurance may build in areas that are
known to be at risk of flooding.
○ Insured giving false information to
insurer in order to get an insurance
policy
○ Burning down a house to collect on
fire insurance.
 Morale Hazards
Carelessness or Attitude to a loss because of the existence
of insurance. The attitude is an “Why should I care? I am
Insured” is an example of Morale Hazard.
Morale Hazard Increases the Chances of Loss
○ Leaving doors unlocked that allows burglar to enter
○ Leaving car keys in an unlocked car which increases the
chances of theft.
Classification of Risk
 Financial and Non- Financial Risk
Financial Risk
Financial risks are the risks where the outcome of
an event (i.e. event giving birth to a loss) can be
measured in monetary terms.

The losses can be assessed and a proper money

value can be given to those losses.
● Theft of a property
● Material damage to property arising out of an event
● Loss of profit of a business due to fire damage the
material property.
● Personal injuries
● Death of a breadwinner in a family leading to
corresponding financial hardship.
 Financial and Non- Financial Risk
Non - Financial Risk
Non-Financial risks are the risks the outcome of which cannot
be measured in monetary terms.
There may be a wrong choice or a wrong decision giving rise
to possible discomfort or disliking or embarrassment but not
being capable of valuation in money terms.
Examples can be:
● Choice of a car, its brand, color, etc.
● Selection of a restaurant menu,
● Career selection, whether to be a doctor or engineer etc.
● Choice of bride/bridegroom,
● Choice of publicity etc.

Since the outcome cannot be valued in terms of money, we

shall call these non-financial risks as uninsurable.
 Pure and Speculative Risk
Pure Risk
● Those situation that involves the chances of Loss
or no Loss. It is insurable risk and can be
measured in terms of money.
Three types of Pure risk
■ Personal Risk - Premature death, Old age dependent,
Sickness and unemployment
■ Property Risk - Loss of property due to crash, fire,
breakdown etc.
■ Liability Risk - Loss resulting due to unintentional injury
to person or damage to property due to carelessness.
 Pure and Speculative Risk
Speculative Risk
● Risk which involves situation where
there is a possibility of either gain or
loss or no loss.
● Speculative risk cannot be insured.

Eg. Investment in Shares or Real estate,

betting on horse or race.
 Dynamic & Static Risk
Dynamic Risk
● Dynamic risks arise from changes in the
economics, social, technological and political
environment.
● They are difficult to predict.
● It resembles speculative risk.
■ Eg: Change in economic policies
■ Total ban of tobacco/ plastic may be heavy risk
for the concerned industry.
 Dynamic & Static Risk
Static Risk
● Static risks involves those that occur even if there were no
change in economy such as perils or dishonesty.
● They are generally predictable.
● It is insurable risk.
■ Eg: It involves loss or damage caused by dishonesty,
man-made mistakes and unexpected natural
events.
■ Theft, robbery, change in weather conditions like
thunder & lightning.
 Fundamental & Particular Risk
Fundamental Risk
● Fundamental risk is a risk affecting a large number of persons.
These risk have wide spread effect and usually occur on a vast
scale.
● Thes risk are sometimes insurable or uninsurable.
● These risk arise due to economic, Social, Political or Natural
causes.
■ Natural causes like earthquakes, flood, drought etc.
■ Social causes like inflation & deflation, unemployment etc.
■ Political & Economic causes like political unrest, Economic
upward and downwards.
 Fundamental & Particular Risk
Particular Risk
● These risks are personal or local in
their effects. The consequences of
these risks affect specific individuals
or localities.
● This is an insurable risk.
■ E.g. Fire breaking in a factory which
might impact the nearby buildings
but might not impact the whole
community.