INTRODUCTION TO INSURANCE

RISK

“At the most general level, risk is used to describe any situation where there is uncertainty about what outcome will occur. Life is obviously risky.”

Risk

Financial Risk

Emotional Risk

Physical Risk

Categories of risk

Financial RiskCause and Effect

Risk

Pure Risk Speculative Risk

Fundamental Risk

Particular Risk

Two of the most basic terms used by risk managers are pure risks and speculative risks. All risks are historically associated to one of the two families. Understanding the motivation and reason behind this differentiation is key to taking the first steps in risk management.

Pure risk: A person may suffer in complete loss or no loss at all when he comes across a pure risk. There are no chances of partial gain in these risks. Pure risk are static in nature.Eg: a car theft, earthquake, flood, famine are pure risks

Speculative risk: an individual may suffer loss or gain something out of this risk he faces. The kinds of risk one takes where there are chances of gaining something. Speculative risks are in which some possible outcomes are beneficial. In other words a speculative risk is a situation that might also end in a gain. For example, the risks of stock investment, business venture or gambling are speculative Risks . These risks are dynamic and changing in nature. Speculative risks have been traditionally dealt with in the confines of financial management. Modern risk management deals with these kinds of risks as well, as their impact might be as significant as that of pure risks.

Particular Risk: Particular risks are risks that affect only individuals and not the entire community.  Examples of particular risks are burglary, theft, auto accident, dwelling fires.  With particular risks, only individuals experience losses, and the rest of the community are left unaffected. The distinction between a fundamental and a particular risk is important, since government assistance may be necessary in order to insure fundamental risk.

Fundamental risks affect the entire economy or large numbers of people or groups within the economy.  Examples of fundamental risks are high inflation, unemployment, war, and natural disasters such as earthquakes, hurricanes, tornadoes, and floods. Social insurance is a system of compulsory contribution to enable the provision of

state assistance in sickness, unemployment, etc] , government insurance programs, and government guarantees and subsidies are used to meet certain fundamental risks in our country.  For example, the risk of unemployment is generally not insurable by private insurance companies but can be insured publicly by federal or state agencies.   In addition, flood insurance is only available through and/or subsidized by the federal government.

WHAT IS INSURANCE

Insurance is defined as a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk.

Insurance is designed to protect the financial well-being of an individual, company or other entity in the case of unexpected loss.

Benefits of Life Insurance

Risk Cover

Planning for life stage needs

Protection against rising health expenses

Builds the habit of thrift

Benefits of Life Insurance

Regulated sector

Assured income through annuities

Protection plus savings over a long term

Facility of loans without affecting the policy benefits

Mortgage Redemption

Tax Benefits