HAZARD RISK MANAGEMENT

History of Insurance
History of Insurance

 Though some form of risk-sharing existed among Chinese and

Babylonian traders as early as 5000 BC, the first documented concept
of Insurance had its origins in 1668 at the Lloyd’s coffee club in
Though some form London.
of risk-sharing existed among Chinese and Babylonian
traders as early
 as 5000Insurance-----the
Marine BC, the first documented
mother of allconcept of Insurance had its
Insurances.
origins in 1668 at the Lloyd’s coffee club in London.
 Life Insurance
Marine Insurance-----the mother also
of originated later in the 17th century. The first
all Insurances.
Company
Life Insurance also in lifelater
originated Insurance
in thein17
the
th US started in 1760 .The first non-life
century. The first Company in life
Insurance in the Insurer in USinstarted
US started 1760 operations i
.The first non-life Insurer in US started
operations in 1732,underwriting fire Insurance.
As far as Automobile Insurance is concerned, horse-driven carriages were
Insured in UK in the year 1875.
World Insurance Industry

 Total Life-Insurance business: $2657 billion

 Total Non-life Ins. Business : $2234 billion
 Leaders in Life Ins. (USA) : $547 billion
 Leaders in Non-life Ins. (USA): $830 billion
 USA’s total share in world mkt : 28%
 World’s biggest Insured natural loss : $38100m ( Katrina)
 World’s biggest Insured loss due to manmade
 disaster (WTC9/11) : $20053m
In Japan, the Life Insurance business is about 4 times the size of non-
life Insurance business. But in other developed nations like USA,
Germany, Canada & Spain, the size of non-life Insurance business is
much higher than Life Insurance business.
Western Insurance market

 Life & health Property & casualty

 All Life, Annuities All property , liability
 Health & loss of income risks
 Indian Insurance industry

 Life Non-life(Gen)

Fire
Marine
Motor
Misc.

Total Life insurance business underwritten (2020-21): INR 278278 crores

No. of policies : 28.17 million

Total Non-life insurance business underwritten (2020-21): INR 198736 Cr

What is insurance

 It is a tool to spread the loss of an individual over a large number of

persons through a mechanism of cooperation or pooling.
 A form of risk management used to hedge against risk of a contingent
loss.
 It is an equitable transfer of risk of a loss from one entity (Insured) to
another (Insurer) in exchange for a consideration called premium. The
latter promises to pay him/his nominee a certain or ascertainable sum of
money on a specified contingency.
 Different from wagering.
 Insurance does not eliminate risks or replace destroyed property, but
only compensates for the pecuniary loss.
Insurance –alternate definitions

 Insurers are in the business of marketing “promises to indemnify upon

operation of certain contingencies” for a certain price.
 It is an intangible product whose benefits are distant and contingent.
 Insurance is a contract wherein all the essentials as applicable for a
commercial contract would apply, viz (1) Offer & acceptance
(2)Mutual consent (3) Consensus ad-idem (4)Consideration
(5)Capacity of parties (6) legality of contract.
Contract type

Conditional- As indemnity is given for losses from specific perils, insurance is a

conditional contract.
Unilateral- When insurers alone set contract terms, it is unilateral.
Aleatory- When benefits accrued for the contracting parties may vary vastly, it is
aleatory. Insureds (policyholders) or nominees benefit financially when there is a loss
and insurer when there is no loss during risk coverage period.
Hazard risk management –the most
hazardous business?

 Hazard is a condition pertaining to a risk or person (whose risk is

insured), which creates or increases chance of loss. Four major
types of hazards influence loss propensity.
 Physical hazard
 Moral hazard
 Morale hazard
 Legal hazard
 “ The foundation for insurance industry is built on ‘utmost good
faith’.
Hazard Types

 Physical-The physical attributes of a risk, which enhances loss

exposure-Eg: low visibility on roads due to fog in winter.
 Moral- The behavior or habits of insured which can enhance loss
exposure. Eg: Drunken driving, dishonesty or fraudulent
practices.
 Morale-The indifferent attitude after getting insurance protection
can be a morale hazard. Just observing happening of loss to own
insured property without taking measures to reduce impact.
 Legal-Legal or regulatory environment which can enhance loss
exposure. Liberal awards passed by some courts.
Information asymmetry

 Information asymmetry exists when two parties entering a

contract have incomplete information about the subject matter of
contract. As regards an insurer, they have incomplete information
on the risk they cover, partly because the proposal cannot elicit
all relevant material information and also because of proposer’s
tendency to avoid disclosure of facts which could either result in
insurer’s decision not to underwrite the risk or imposition of
terms with penalties.
Adverse selection

 When persons with relative higher proneness for losses enter a

risk pool which charges uniform premium rates for all members,
there is adverse selection against insurers. Common examples are
that of vehicle owners having frequent accidents buying
insurance or smokers entering a health insurance pool which
charges uniform rates for smokers/non-smokers.
Basic insurance concepts

• Indemnity: Exact amount for which compensation is offered to insured who has
sustained a loss (All non-life)
• Coinsurance: It indicates the amount/proportion of insurance to be shared, either
between two insurers or between insured & insurer. Synonymous with co-pay
which is the % of loss to be borne by a policyholder.
• Reinsurance: When an insurer finds a risk too large to handle, they transfer whole
or part of it to another, called Reinsurer.
• Deductible/Excess. A percentage or flat amount of loss to be borne by
policyholder on every claim. When all policyholders bear that loss, it is
Compulsory excess. If it is opted by insured for getting a premium discount, it is
Voluntary excess.
Basic insurance concepts-cont’d

* Depreciation: It is an amount to be borne by insured in the event of replacement of

damaged item allowed by insurer. Since insured gets ‘New’ for ‘old’, he bears a part
of cost of replaced item, depending on age of property.
•Rider: They are additional coverages or benefits offered over and above the standard
coverage in a policy. (Eg: Critical illness rider in health insurance)
•Waiting period: Is the minimum duration for which a policyholder must wait, in
order to get a claim.
•Free-look period: Trial period of policy when insured can cancel policy to get full
refund.
Some basic questions
 How much of risk coverage can one have?
 Can someone cover the same risk under separate policies to make
a gain after having a loss?
 Who is legally entitled to cover a risk?
 What if someone obtains a health insurance policy, concealing
material facts or suppressing vital information and then makes a
huge claim?
 How can insurers manage fraud claims?
Benefits of insurance

 Indemnification of loss
 Reduction of worry & fear
 Source of investment funds
 Loss prevention & reduction
 Enhancement of credit
Costs of insurance

 Increase in business expenses

 Fraudulent claims
 Inflated claims
Insurance pricing

Pure Premium (Cost based or expected-loss based

pricing)
Fair Premium----- should include
(1) Discounted expected claim cost
(2) Sales & distribution charges
 (3) Administrative costs
(4) Profit loading.
Claims---Life Vs Non-life

 In a normal Life Insurance Policy, there is probability for either

(1) Death Claim or (2) Maturity Claim
 In a normal Non-life Insurance Policy, three results are possible.
(a) No-claim (b) Partial loss claim (3) Total loss claim.
RISKS THAT CAN BE
COVERED BY
INSURANCE
Property losses

 Fire & natural perils

 Terrorism, malicious damage
 Accidental damages
 Burglary
 Lost/misplaced property or loss of one out of a pair
 Transit loss
 Breakdown of machinery
 Loss of cultivation/plants/crops/animals
Liability losses

 General public liability

 Motor third party liability
 Employer’s liability
 Professional liability
 Product liability
 Carrier’s legal liability
Consequential losses

 Increased cost of working/production loss resulting from :

 1) Fire/natural perils
 2) Burglary
 3) Machinery breakdown
 4) Deterioration of stock
Guarantees

 Fidelity risk
 Bank Guarantees
Personal risks

 Life risk
 Accident risk
 Health risk