NAMESANDEEP KUMAR UJJWAL

ENROLLMENT 1308018838

DRIVE SPRING 2015

PROGRAM MBA SEM 4

SUBJECT CODE AND NAMEMF0018 INSURANCE AND RISK MANAGEMENT

Q1. Explain the risk management methods. Loss control Loss financing Internal risk reduction Answer.Risk managementThe process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making refers to risk management in business. It is a two-step process that can be represented as follows in Figure.

Figure: Risk Management ProcessRisk management involves essential features such as reliable resources, financial strategies and foresight. It prevents or reduces the possibility of external as well as internal risks in business by employing intelligent strategies, and thus forms an integral part of business or investment.Risk management processRegardless of the type of risk being considered, the risk management process involves several key steps:1.Categorize all significant risks.2.Estimate the potential frequency and severity of losses.3.Improve and choose methods for managing risk.4.Execute the risk management methods selected.5.Keep track of the performance and suitability of the risk management methods and strategies on a continuous basis. Figure gives a flow chart of the risk management process.Risk management methodsThese methods are not mutually exclusive and may be largely categorized as:Loss controlLoss financingInternal risk reductionUsually, loss control and internal risk reduction include the decisions to invest (or forgo investing) resources to cut down the expected losses. These are theoretically similar to other investment decisions, such as a companys decision to purchase a new plant or an individual deciding to buy a computer. Loss financing decisions are the decisions concerned about the manner of paying for the losses if they do occur.Loss controlThe activities which decrease the expected cost of losses by lowering the occurrence of losses and/or their extent are referred as loss control. Sometimes loss control is also termed as risk control. Usually, the actions basically affecting the frequency of losses are referred as loss prevention methods. Actions primarily influencing the severity of losses that do occur are often called loss reduction methods.Loss financingMethods applied to obtain funds for paying for or offsetting losses that occur are termed as loss financing (sometimes called risk financing). There are four broad methods of financing losses:(1)Retention,(2)Insurance,(3)Hedging, and(4)Other contractual risk transfers.Internal risk reductionIn addition to loss financing methods that allow businesses and individuals to reduce risk by transferring it to another entity, businesses can reduce risk internally. There are two major forms of internal risk reduction:(i)Diversification, and(ii)Investment in information.Q.2 An organization is a legal entity which is created to do some activity of some purpose. There are elements of a life insurance organization. Explain the elements of life insurance organization.Answer:Elements of a Life Insurance OrganizationAn organization is a legal entity which is created to do some activity or to achieve some purpose. It is created under some law, whichgives it a status and identity. Because of the identity, the organization is consideredto be a person inlaw. Therefore, it can enter into contracts, be sued in courts, accumulate property and wealth, and do business, in the same manner as any individual can do.Important activitiesThe important activities in a life insurance company are:1. Procuringorproposals fromprospectivebuyers oflife insurance.2. Scrutinizingand making decisions on the proposals for insurance. This is called underwriting.3. Issuing the policy document, incorporating the terms and conditions of the insurancecover.4. Keepingtrack of the performance of the insurance contract by either party, like payment of premium or payment of benefits.5. Attending to the various requirements that may arise during the term ofthe contract like nominations, assignment, alteration of terms, surrenders and payment of claims6. Other supporting activities like advertising, investment of funds, maintenance of accounts, management of personnel, processing of data, compliance with regulations and laws.7. InternalorganizationWithin an insurance office, the followingdepartments are likely to exist. These may belocated in the branch office (as in the LIC now) or in the Divisional / Head offices (as in the LIC earlier and new companies now). These departments are to be identified by the activities beingcarried out, although they may be called by different names.1. Business development or agency or marketing concerned with thedevelopment of agency force, market development and business growth.2. New business, which would receive, scrutinize and take underwriting decisions on the new proposals for insurance and also issue the policy.3. Policy-holders servicing which would be concernedwith administration of the policy, monitoring premium payments, lapses and revivals, attending to alterations, nominations, assignments, surrenders, loans and claims.4. Accounts to handle the financial flows. The following departments are likely to becentralized in the Head Offices, as they require specialized skills and also because they impact the whole organization.5. Actuarial, studying the experience, doing valuations, declaring bonuses, monitoring the adequacy of premiums, setting underwriting standards, studying mortality rates, etc.6. Investments of funds, studying the opportunities for maximizing returns.7. Advertisement, publicity and public relations.The distribution systemLife insurance is not compulsory under law. General insurance is frequently purchased dueto compulsions under the law (Motor Vehicles Act)or from the financiers demanding insurance ascollateral security. In the case of life insurance, the compulsionis negligible. There isoften a tendency of deferring the decision. Death as a practicalpossibility is either ignored or notconsidered imminent. The requirements of today take priority over the requirements of tomorrow. Even if notabsolutely essential, the requirements of today seem to be more compelling.Life insurance has to be securedwhen in the best of health. Otherwise, the insurer will refuse togrant the insurance cover.Functions of the agentThe major function of the agent isto solicit and acquire lifeinsurance business for the insurer, which has appointed him as an agent. Whileproposing a person for insurance, the agent hasto assess his needs and his paying capacity, make all reasonable enquiries about the health and habits of the life to be insured and get proof of hisage to be admitted at the commencement of thepolicy. If medical examination is required, the agent has to arrange forthe same. After the proposal becomes a policy, the agent has to ensure continuance of the policy by the means of timely payment of renewal premiums, get nomination or assignment effected and help in prompt settlement of claims. Agents of the LIC are not authorized to collect premiums other than the first premiumalong with the proposal. If apolicyholder pays premium to an agent, the LIC does notaccept any liability for the same. The premium is treated as paid only when it is paid into the office. However, in practice agents do collect premiums from policyholders to ensure promptness in payment.Q.4 Insurance is the most important industry. Elaborate the different types of mediclaim and liability policies.Ans:-Types of Mediclaim /Health PolicyBroadly speaking, health insurance policies in India are of the following types:1. Individual Mediclaim Policy2. Group Mediclaim Policy3. Deferred Mediclaim Policy4. Overseas Mediclaim Policy5. Innovative Mediclaim PolicyIndividual mediclaim policyIndividual and group mediclaim policies are similar in scope and nature. These policies provide for reimbursement of hospitalization/domiciliary hospitalization expenses for illness/disease suffered or accidental injury sustained during the policy period. The policy covers for expenses incurred under the following heads:(a)Room, boarding expenses in the hospital/nursing home(b)Nursing expenses(c)Surgeon, anaesthetist, medical practitioner, consultant, specialist fees(d)Anaesthesia, blood, oxygen, operation theatre charges, medicines, diagnostic materials, etc.Group mediclaim policyThe group mediclaim policy isavailable to any group/association/institution/ corporate body, provided it has a central administration point and subjectto minimum number of 100 persons to be covered .The group policy is issuedin the name of group/association/institution/ corporate body (called insured)with a schedule of namesof the members including his/her eligible family members (called insured person) forming part of the policy.Deferred mediclaim policyAlso widely known as Bhavishya Arogya Policy, this policy can be taken at any age from 25 years onwards up to 55 years. The insured at the time of taking the policy has to select a retirement age between fifty-five and sixty years after which the coverage forhospitalization expenses willcommence. The coverage under the policy is similar to what is available under a standard mediclaim policy with the following differences:1. Pre- and post-hospitalization expenses arenot covered underthe policy.2. The following exclusions ofthe mediclaim policyare not applicable.3. Thirtydays waitingperiod4. First year exclusions5. Pre-existing diseases exclusion6. Circumcision, pregnancy, etc.Overseas mediclaim policyThis policy provides for medical expenses in respect of illness suffered or accident sustained by Indian residents during their overseas visits for official or personalpurpose. First started in 1984, this insurance policy has been since modified to provide for additional benefits such as in-flight personal accident coverage, compensation for the loss of passport, personal liability, etc.Videsh Yatra Mitra policyThe widest coverage available under a variation of the overseas mediclaim policy is known as VideshYatra Mitra policy. There are five sections underthe policy and the insuredhas the option to choose minimum three and maximum all six sectionsby paying appropriate premium. The six sections areasunder:Section A (personal accident):This section covers death or bodily injury resulting in total or partial permanent disablement to the insured.Section B (medical expenses and repatriation):This section covers medical related expenses during and in course of the overseas stay.Section C (loss of checked baggage):Total loss of a baggage during the course of travel is covered in this section.Section D (delay of checked baggage):This section covers emergency purchase of replacement items if there is a delay in delivery of checked baggageof more than 12 hours from the scheduled arrivaltime at the destination.Section E (loss of passport):This section covers actual expenses necessarily and reasonably incurred by the insured person in connection with obtaining a duplicate or fresh passport.Section F (personal liability):This section covers legal liability that may attach to the insured person for any bodily injury or property damage to a third party accidentally caused by any act of the insured.Liability InsuranceLiability insurance is broadly classified into two categories: (i) Public liability insurance and (ii) Product liability insurance. Public liability insurance is broadly classified into two categories: Compulsory public liability insurance and Voluntary public liability insurance policies.Types of Liability Policies Compulsory public liability policyThe Public Liability InsuranceAct, 1991 imposes no fault liability, i.e., irrespective ofany wrongful act, neglect or default on the part ofthe owner of any hazardous substance, he hasto pay relief in theevent of death or injury to any person other than a workman or damage to property of any person arising out of an accident involving the hazardous substance.Voluntary public liability policyThe owner of any industrial risk or non-industrial risk may take a voluntary public liability policy to cover his legal liabilityin respect of accidental physical death/ injury/property damage of a third party arising out of his property. Industrial risks are manufacturing premises including godowns and warehouses. Non-industrial risks are hotels, restaurants, cinema halls, auditoriums, residential premises, office premises, schools, amusement parks and film studios.Products liability policyProducts sold to their users/consumers, if defective, may cause death, bodily injury, illness orproperty damage. The manufacturers/marketers of such products are liable to pay relief to the accidentalvictims of their products under law. The product liability insurance policy provides insurance cover tomanufacturers/marketers. The structure of the policy is similar tovoluntary public liability policy with differences relating to only the coverage and some exclusion. The indemnity is available to claims arising out of accidents during the period of accident and first made in writing against the insured during the policy period arising out of any defects in the products specified in the policy schedule.Professional indemnity policyProfessional indemnities are designed to provideinsurance protection to professional people such as doctors, solicitors, chartered accountants, architects, etc., against their legal liability to pay damages arising out of negligence in the performance of their professional duties.Directors and officers liability policyDirectors and officers of an organization holdpositions of trust and responsibility. They may become liable to pay damages toshareholders, employees, creditors, etc., of the company for wrongful actsQ.4 Give short notes on: Pricing objectives. Pricing elements. Rate computation.

Ans:

Pricing objectives 1. Rate adequacyTo avoid financial problems and insolvency, insurance company rates must be adequate in the light of benefits promised under the companys insurance products. Rate adequacy means that for a given block of policies, total payments collected now and in the future by the insurer plus the investment earnings attributable to any net retained funds are sufficient tofund the current and future benefits promised plus cover-related expenses.2. Rate equityEquity means charging premiums commensurate with the expected losses and other costs that insured bring to the insurance pool. The pursuit of equity is one of the goals of underwriting (classification and selection of insured).3. Rates not excessiveRates should not be excessive in relation to the benefits provided. This objective is achieved by establishing a ceiling on the rates. Competition discourages excessive pricing.

Pricing elementsThe pricing elements underlying the pricing of life and health insurance contracts are:

expected mortality or morbidity experienceexpected investment returnexpenses1. The probability of the insured event occurring It is shown by mortality tables in life insurance and morbidity tables in health insurance. The part of risk premium can be calculated by multiplying the sum assured with relevant information in these tables.

2. The time value of money The time value of money through rate of interest is the second factor taken into account for the calculation of premium. Net premium can be calculated by deducting interest component from risk premium.

3. Loading to cover expenses, taxes, profits and contingencies Tabular premium can be calculated by adding all these office expenses to net premium.

4. The benefits promised The fourth factor is the benefits promised under the contract. A loading in this respect is also included to arrive at the actual premium payable. Office premium is the sum of tabular premium and the promised benefits.Q.No:5- Explain the creation and application of insurable interest. give the differences between wagering and insurance.Ans:- Creation of insurable interestThere are a number of ways in which insurable interest will arise or be limited:(a)By common law: Where the essential elements of insurable interest are automatically present, the same can be described as having arisen at common law. The common law duty of care which one owes to the other may give rise to a liability, which again is insurable.(b)By contract: In some contracts a person will agree to be liable for something which he or she would not ordinarily be liable for.(c)By statute: Sometimes an Act of the Parliament will create an insurable interest either by granting some benefit or imposing a duty. While the statute may create insurable interest where none would otherwise exist, there can be statutes which restrict liability and thereby also restrict insurable interest.Application of insurable interestThere are three main categories of application of insurable interest as follows:lifepropertyliabilityEvery person has an unlimited insurable interest in his or her own life. However, the obvious restriction in the application of this is the means with which to pay the premium. If a person is married then there is an automatic unlimited insurable interest in the life of the persons husband or wife. However, no other family relationship will give rise to insurable interest by itself. If family members are involved in business together or in the case of some other financial relationship, then in these circumstances, it is not the family ties, which create insurable interest, but it is the extent of the financial involvement. There is a basic rule that insurable interest will exist to the extent of the financial interest in another person or other persons. Thus, partners are capable of insuring each others lives as they incur loss in the event of the demise of any of them. A creditor may incur financial loss in case a debtor meets with death prior to the repayment of a loan.Difference between Wagering and InsuranceContract of InsuranceWagering Agreement

1. A contract of insurance is a contract to make good the loss of property (or life) of another person againstsome consideration called premium.

1. A wagering agreement is an agreement to pay money or moneys worth on the happening ofan uncertain event.

2. In a contract of insurance the insured must have insurable interest. Without insurable interest itwill be a wagering agreement.2. No insurable interest is necessary in case of a wagering agreement

3. In a contract of insurance both the parties are interested in the protection of the subject matter, i.e.,there is mutuality of interest.3. In a wagering agreement, there is conflict of interest and in reality there is no interest at all to protect.

4. Except life insurance, a contract of insurance is a contract of indemnity, i.e., a contract to make good the loss.4. In case of a wagering agreement there is no question of indemnity. On the happening of the eventfixed amount becomes payable.

5. Contracts of insurance are based on scientific and actuarial calculation of risks.5. Wagering agreements are not based on such calculations and are in the nature of gambling.

Q.No 6 identify the role of insurance in managing risk financing. Explain the important of insurance transaction .discuss in different perspectives of insured and insurer.Ans:- Role of insurance in managing risk financingBusiness organizations and individuals take insurance policies. These insurance policies help them to cover the losses in case of any emergency. Here, the idea is to transfer the risk involved with the business to the insurance provider by taking an insurance policy. This insurance policy will honour claims in case certain emergencies disrupt the working of the organization. This type of financing strategy offers the benefit of knowing that even if the project faces financial trouble due to unseen events, the losses will be settled without having to useother company assets. However, these events will have to be mentioned in the insurance papers that the organization signs with the insurer. If an insurance policy does not cover theft, the organization cannot claim the amount from his insurer. The organization should maintain an adequate insurance to cover all insurance risks relating to the calamities that can happen. Insurance should be maintained in at least the following major areas of coverage such as:Real and personal propertyMachineryCrime coverageExtra expense and valuable papersWorkers compensationComprehensive general liabilityAutomobile liability and physical damage

Insurance TransactionInsurance is a contract. One party, namely, the insurer, contracts with another, the policyholder, to perform a particular service. The nature of insurance transaction can be represented by the following triangle:The risk

The insured The insurer

At the apex of this triangle there is the risk insured against. The insured policyholderis the person or company entering into the insurance contract and the insurer is the insurance company which has contracted with the insured to provide cover for the risk insured against.

From the perspective of the insurer(a)It will be told about the risk by the proposer;(b)In many cases the insurer will not rely on this source of information alone but will make its own inquiries. This may imply using skilled risk surveyors to look at pro-posals and make physical inspection or doctors to carry out medical examination for a life or permanent health insurance proposal;(c)The insurer will decide on the level of cover which it is prepared to offer to the proposer;(d)Finally, the insurer will have to determine the price to be charged for the cover it is willing to offer. This price will have to reflect a number of relevant factors.