BNI Insurance

8/6/2019 BNI Insurance

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Nature and scope of risk management

meaning and definition of riskrisks arise due to uncertainties in regard to cost, loss or damage. Theloss or damage may be related to financial loss or non-financial loss.

Definition of risk it is the possibility of loss or damage. The possibilityis between 0 and 1.

Peril A peril is the cause of loss. Eg. Fire, wind, storm, theft.

Hazard It is a condition that may create or increase the chance ofloss arising from a given peril or under a given condition.

Hazards can be classified into the following three categories:

1. Physical Hazards - it consists of those physical conditions thatincrease the chance of loss from any peril. For example,premises for bad repair proposed for public liability insurance.

2. Moral hazards it refers to the increase in probability of loss thatresults from dishonesty in the character of the insured person.An extreme illustration of bad moral hazard is the person whoeffects a policy of insurance in order to make a profit by meansof false and exaggerated claims.

3. Morale hazard- the term Morale refers to a mental condition orthe attitudes of individual and groups which determines theirwillingness to corporate. It may be reflected in a careless

attitude to word the occurrence of loss or in an indifference orthe cost of restoring damage. It increases both the frequencyand severity of loss has went such loss is covered by insurance.

Classification of risk1. financial and non-financial risks -any a risk concerned with

financial loss is stormed as financial risk. Badly defined financialrisk encompass the risk of possible insolvency and variability inthe earnings available to shareholders. It is avoidable to theextent that management have the freedom to decide to borrowor not to borrow funds. Risks other than financial consequences

are called non-financial risks.2. static and dynamic risks -3. fundamental and particular risks4. pure and speculative risks

pure risk can also be classified further into


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1. personal risk2. property risk3. liability risk4. other risk

financial and non-financial risks -any a risk concerned with financialloss is stormed as financial risk. Badly defined financial riskencompass the risk of possible insolvency and variability in theearnings available to shareholders. It is avoidable to the extent thatmanagement have the freedom to decide to borrow or not to borrowfunds. Risks other than financial consequences are called non-financialrisks.

Static risk involves losses resulting from the destruction of an asset orchanges in its possession as a result of dishonesty or human failure.Such risk allies even if there were no changes in the economic

environment. Static risks are most fit able to treatment by insurance.Example-death of responsible officer.

Dynamic risk involve losses mainly concerned with financial loss. Itoccurs resulting from the causes relating to changes in price level,consumer wants and needs, in common, output and development oftechnology. Example-foreign exchange losses, bad publicity, workercompensation claims, loss of production and assets.

fundamental and particular riskfundamental risk is also termed as group risk. It involves those losses

that occur as a result of the causes or problems relating to majorfactors such as changes of economic, social, cultural and politicalenvironment. The consequences of the fundamental risk severelyaffect the whole population.

Particular risk-it involve losses that occur resulting from individualevents. Example-burning of the house and robbery of the bank.

Pure risk- the concept pure risk the first to those situations that involvethe chances of loss or no loss. Speculative risk means those riskswhich involve a situation where and there is a possibility of gain. The

nature of insurable risk refers to the losses involved relating to onlypure risk and not against speculative risk, because speculative risk ismainly concerned with the nature and possibility of gain.

1. Personal risk-uncertainties arising out of human elements.Example-pre mature death, dependent old-age, sickness ordisability, unemployment.


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2. Property risk it refers to direct loss/consequential loss. Example-loss of the property, loss of use of the property and additionaloverhead expenses caused by loss of property.

3. Liability risk-it is concerned with those losses which result fromunintentional injury to other persons or damages to their

property through negligence or carelessness.4. The risks arising from failure of others- any loss the dockersresulting from failure of another person to meet an obligation.

Methods of handling risk

The following methods are usually adopted for handling risks1. prevention of risk or avoiding of risk2. reduction of risk


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2. risk identification3. risk analysis4. risk assessment5. taking corrective action6. risk evaluation

7. risk controla. risk transferb. risk retention

Risk management objective- example-protecting employees fromaccident, effective utilisation of resources.

The purpose of selection of risk- it is to deter mined whether thedegree of risk presented by an applicant for insurance iscommensurate with the premium charged for poor son in this categoryor some additional premium should be charged or the applicants

proposals would be rejected. From the insurance point of view thepurpose of selection are as follows

1. To determine whether the proposals would be accepted or not2. to determine the rate of premium to be charged from the

assured3. to determine the risks and premium according to the

classification of risks4. to avoid any discrimination on the part of the lives assured5. to check NT selection or adverse selection which means select

some of the person for insurance who are not insurable and

charging of lesser premium for those who are to be chargedhigher premium.

Sources of riskthere are several sources of risk information available.

1. Proposal form-it may be application form or personal statement2. medical examiner's report3. development officers, agents, and brokers report4. Field officers report5. medical information bureau report6. private agency report

7. business associates report8. commercial credit investigation bureau

Risk identification

Important tools used in risk identification are1. insurance policy checklist2. risk analysis questionnaire


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3. analysis of financial statement4. hundred and operability study5. physical inspection of the operations6. flowcharts7. organizational chars

8. management information system9. procedure manuals10. insurance policies11. maintenance records12. plans of specific premises13. loss records14. plus maps, photographs etc.

Principles of risk insurance management1. principles of risk identification2. principle of risk analysis

3. principles of risk assessment4. principles of taking corrective decisions5. principles of evaluation6. principles of alternative course of action7. principles of risk control8. principles of risk retention9. principles of risk transfer

1. Principles of risk identification- proper identification of risk isessential to achieve the several objectives of risk management.

2. Principles of risk assessment

a. frequency of riskb. monitory cost of financial severityc. human cost in terms of pain and sufferingd. purpose of the assignmente. nature of the riskf. description of the projectg. resources involved or affectedh. scale of the impacti. benefits of the hazardj. mitigating factorsk. contingency plans

l. limitations of the assessmentm. conclusions and recommendationsn. excellent taken

3. principles of taking corrective decisionsa. to retain riskb. to involve with the risk through loss prevention effective

alternative solutions applied for prevention of loss


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c. to transfer the risk through insurance and this must befollowed by the selection of an insurer

4. principles of evaluation- finding the best alternative course ofaction for handling risk

5. principles of alternative course of action - the final choice from

among the several alternatives6. principles of risk controla. carrying out a supplier assessmentb. inspecting during manufacturec. investigating complaintsd. improved detectione. minimising the opportunity to steal

7. principles of risk retention8. principles of risk transfer

Types of insurance organizations1. proprietary or individual insurers2. partnership insurer3. joint stock companies4. mutual insurers5. corporative insurance organization6. Lloyds Association of underwriters7. state insurance8. light insurance Corporation and general insurance Corporation9. employee state insurance Corporation

10. deposit insurance Corporation

Scope of insurance management1. property insurance2. liability insurance3. workmen's compensation insurance4. pension5. group life6. hospitalization7. auto Mobil insurance8. accounts received insurance

9. consequential loss insurance- in case a power plant spoilage ofproperty due to the lack of power, heat, light, steam etc.

10. contingent business interrupts on insurance-protects theform against interruption of its business due to fire or otherinsured perils

11. credit insurance12. electronic data-processing insurance13. motor cargo insurance


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14. Marine insurance15. powerplant insurance16. valuable papers insurance17. Manufacturers output insurance18. export credit insurance

19. Fire legal liability insurance20. employers liability insurance

Nature of insurance business

Classification of insurance

Insurance can be classified into two broad categories1. life insurance


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2. nonlife insurancea. general insurance

i. marine insuranceii. Fire insuranceiii. personal accident insurance

iv. vehicle insuranceb. miscellaneous insurancei. fidelity guaranty insuranceii. crop insuranceiii. burglary insuranceiv. flood insurancev. Cattel insurancevi. cash in transit insurance

Life insurance- it is a contract whereby the insurer in consideration of apremium paid either in a lump sum or in a perodical instalments

undertakes to pay an annuity or a certain sum of money, either on thedeath of the insured or on the expiry of a certain number of years,whichever is the earlier.

Marine insurance - it is a contract of insurance under which the insurerundertakes to indemnify the insured against losses incidental tomarine adventure. It may cover loss or damages to the ship, cargo,freight, vessels all any other subject of a marine adventure.

Fire insurance - it is a contract of agreement between the insurer andthe insured whereby the insurer undertakes to indemnify the insured

for destruction or damage to property caused by fire or other specifiedperils during an agreed period of time, in return for payment of thepremium in lump sum or by instalments.

Motor vehicle insurance- it falls under general insurance. Itsimportance increasing day by day in motor insurance the ownersliability to compensate people who were killed or injured road throughthe negligence of the motorist or drivers is passed on to the insurancecompany.Personal accident insurance-it is a contract of insurance which providesan absolute protection against death or disability arising is solely and

directly from accident caused by violent external and visible means.

Fidelity guaranty insurance- it is a type of contract of insurance andalso a contract to guarantee to which the general principles ofinsurance apply. Fidelity guaranty does not mean the guarantee of theemployee's honesty. But it guarantees the employer for any damagesor loss resulting from the employee's dishonesty or disloyalty.


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Crop insurance- a contract to provide a measure of financial support tofarmers in the event of crop failure due to draught or flood.

Burglary insurance- the loss of damages of household goods andproperties and personal effects due to theft, larceny, burglary,

housebreaking are covered.

Cattle insurance- a sum of money is secured to the steward in theevent of death of animals like bulls, buffalos, cows etc.

cash in transit insurance- it covers the insured against any loss in theevent of money being stolen from his business premises while it isbeing carried from or to the bank.

General insurance

establishment of general insurance Corporation of India (GIC)

General insurance was nationalised by the passing of the generalinsurance business (nationalisation) act 1972. Owner andnationalisation

Documents

BNI Insurance