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The Assignment of Insurance and Risk Management

Introduction:

East West Insurance Company Limited appeared on the horizon of Insurance Industry

in Pakistan in 1983, Fouded by late Mr.

Unus Khan woh was its first Chairman.

Over the years the Company, with the

half of its management and diligent

staff, has successfully accomplished the

essential task of gaining the good will and confidence of its policyholders as one of

the leading insurance Companies with a vast network of branches all over the country.

Besides transacting traditional Insurance business like Fire, Marine & Motor, East

West Insurnace underwrites specialized portfolios for which it has created specialized

divisions within the company namely, Engineering, Crops & Livestocks divisions.

The Company business is thus well diversified and provides coverage to a wide range

of Agricultural and commercial business activities.

Our Vision

Quality Services, Innovative Solutions and comprehensive risk cover Developing a

Culture based upon the 'philosophy of absolute

Customer focus, by providing quality service,

innovative product and comprehensive risk cover.

Our Mission

Long term commitment to our valued clients Commitment for the growth of

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Organization in an increasingly competitive

environment through effective utilization of

Information Technology, prompt service to customers,

Effective Human Resource Management and

Maximization of profit

PRODUCT AND SERVICES:

The respective contribution

of portfolios in the total

premium income and in the

underwriting profit / loss of

the company vary from the

year to year . It mainly

depend on the pace of

economic activity in the

country and underwriting

policy of the company. the low interest rates combined with liberal credit facilities by

the banks for auto finance phenomenally increased the number of vehicles on the

road. Resultantantly demand for auto insurance tremendously increased. This

obviously increased the motor premium portfolio by many folds. Similar factors also

influenced various other portfolios resulting in our all premium distribution as under.

FIRE INSURANCE:

A fire insurance policy involves an insurance company agreeing to pay a certain

amount equivalent to the estimated loss caused by fire to the insured, within the timespecified in the contract. The indemnity is subject to change depending upon the

policy. One should confirm with the insurer about the types of risks covered, since

one cannot insure the property against all types of risks of fire.

Fire insurance provides protection for the estimated value of the physical house.

However, there are a number of exclusions to the same, for example medical bills,

loss of human life and pets, loss of personal belongings, structures outside the

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property (including garages and gazebos), damage to the landscape and expenses for

accommodation for the time being. These

things can be covered under a package of

extended property insurance.

During the year 2007, the gross premium in

Fire Portfolio has increased to Rs.251.80

million which shows an overall gain of 26%

compared to previous year, whereas the

increase in net premium is 47%. Whereas cession to reinsures has increased by almost

8%. The net claim ratio in Fire portfolio is 24% and hence the overall claim ratio has

decreased.

Marine Insurance:Marine insurance covers the loss or damage of ships, cargo, terminals, and any

transport or cargo by which property is transferred, acquired, or held between the

points of origin and final destinationDuring the year 2007, the gross premium in

Marine Portfolio has increased from Rs.49.922 million to Rs.89.34 million. This

shows a net gain of Rs.39.4 million. You would also observe that the net premium has

also increased by 208%. The net claim ratio in this portfolio is 58%.

MISCELLANEOUS ACCIDENT INSURANCE

Provides cover against almost anything that is not covered by the specific classes

mentioned earlier. Personal Accident Insurance was first introduced in England in

1845 following the invention of steam engine. this class of Insurance developed

Rapidly following the promulgation of the Act in 1900, and is now widely purchased

all over the world.The deteriorating law & order situation in the

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country in general and in metropolitan cities in particular has resulted in increased

demand for this type of Insurance. As a result, people tend to insure themselves

against variety of risks. This includes Personal Accident, Household Insurance, Travel

Insurance, Burglary, Public liability, Cash in Safe and Transit Insurance & Workmen

Compensation, etc. Some of these are of special interest to the businessmen. In the

year 2007 we have written a premium over Rs.2.39 million in this portfolio.

MOTOR & AUTOMOBILE INSURANCE:

Automobile Insurance is based on two major classes of automobile insurance; namely,

public liability or third party liability and comprehensive insurance. The former

provides indemnification against thebodily injuries and or property damages

to the third party only. As in most other

countries, in Pakistan, it is a requirement

under law to have this minimum

coverage before plying any motor

vehicle on the road. Comprehensive

insurance provides a broader coverage. In addition to third party liability, it provides

protection to the insured for damage to his own car and may include losses due to

accident as well as theft. Because of the high rate of motor accident as well as theft,

especially in the metropolitan cities, those who can afford it tend to buy

comprehensive insurance in spite of its high premium rates. The motor insurance

generates substantial amount of revenue to the insurance companies. However,

profitability for this portfolio has not been encouraging due to huge losses in the past.

With the improvement in law & order situation and introduction of car tracking

devices, the frequency of claims on account of theft is declining. An improvement in

the profitability of this portfolio is therefore expected. in the year 2007, we have

earned gross premium of Rs. 75.46 million in Motor Portfolio.

BONDS AND CREDITINSURANCE:

Contractors undertaking the Construction of public works building, roads etc are

required to furnish bonds for faithful execution of their obligations. The surety bound

to indemnify the employer if the contractor fails or refuse to complete the job in

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accordance with the contractual obligations. The large or medium size contractors

also provide the facility of mobilization advance to the contractors. This advance is

paid on the provision of Mobilization Advance Bond. In addition, the contracts are

normally awarded against the tenders duly secured with bid bonds so that the

contractor does not refuse to commence the work after the award of contract. East

West Insurance Co. Ltd. provides several kinds of Bonds to their clients namely, Bid

Bond, Advance Payment Bond/Mobilization Bond, Performance Bond, Supply Bond,

Fidelity Bond, Maintenance Bond, Custom or Excise Bond.

In the year 2007, premium income under this head was Rs.22.72 million.

CROPS INSURANCE:

In spite of many technological advancements in agriculture sciences including

weather forecasting, Crop farming enterprise still remains vulnerable to the vagaries

of nature including floods, drought, hailstorm,

windstorm, pest and diseases, etc.

Hence, it continues to be a risky business

indeed. Moreover, an overwhelming majority of

our farmers engaged in crop farming are small

farmers with meager financial resources. When

crop losses occur, they are the worst affected. Hence, farmers need financial

protection against total and partial crop losses because of calamities happening due to

these factors. Crop Insurance provides the much needed protection in this case.

Mindful of the role CI has played in the sustained development of Agriculture

Production in many countries, the need and desirability of Crop Insurance Program

for the country's farmers has been felt for a long time. However for one reason or

another, it could not materialize until the bank of Punjab took the initiative and incollaboration with the East West Insurance officially launched Crop Insurance

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Scheme for its farmers borrowers in July 2004.

Under this scheme, EWI insures crop loans advanced by the Banks to the farmer

borrowers against a wide range of perils namely, floods, heavy rains, hail storm, wind

storm, frost, drought, pests etc. at a minimum cost and indemnifies crop losses of

Insured farmers to the extent of outstanding loans in a Calamity situation. Our Crop

Insurance Scheme is now in the 4th year of operation and is operating successfully to

the full satisfaction of the borrowers of bank of Punjab. Other Banks have also

approached us, expressing their interest in the scheme.

Now that the State Bank of Pakistan (SBP) is also interested in a CI program, and has

been holding meetings with Banks and Insurance Companies in this regard, It is

expected that a uniform CI program will be formulated soon in which all the Banks

and Insurance Companies can participate.

It is worth mentioning here that the Draft CI Proposal which the SBP has circulated as

a working paper for discussion by the representative of Banks and Insurance

Companies contains many of the essential features of EWI Crop Insurance Scheme

which we have been advocating for the past many years.

The year 2004 was the first time, in the history of the Company that we generated a

premium income of Rupees. 2.51 million under the CI portfolio, which has increased

to now more than Rupees 8.57 million in 2007.We are expecting this premium to

grow manifold in the years ahead when other Banks especially the large Banks (HBL,

NBP, MCB, ABL) begin to offer the CI scheme to their Borrowers. Beedless to stay,

there is indeed tremendous potential for generating premium income under this

portfolio.

LIVESTOCK INSURANCE:

Livestock sector has assumed an increasingly critical role in the rural economy of

Pakistan as 30-35 million rural population is engaged in raising livestock for their

livelihood. With the population growing at the rate of force persons per minute,

increasing dietary awareness and rising standard of living, demand for Livestock

Products in the country are rapidly increasing. Consequently, this sector has the

potential of rapid growth and fast economic returns. Hence, it can also serve as an

effective tool for government poverty

reduction program in the rural areas. In fact,

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realizing this potential, government is now talking keen interest and giving priority to

the development of this sector However, there are a wide variety of risks associated

with the health and well being of animals and their productivity, which can result in

significant financial losses to the livestock owners. Livestock insurance provides

financial protection to Livestock owners against risks of these losses. Investment in

animal often constitutes a large part of the farmers total capital. This investment

therefore needs to be protected. Moreover, procurement of animals is often financed

through credit. Insurance as a security for credit, improves the credit worthiness of

farmers. Lending institutions feel comfortable when credit given to farmers for the

purchase of livestock is insured, as it serves as a supplementary security. East West

Insurance (EWI) has been involved with Livestock insurance right from the beginning

and is one of the leading insurers with good experience in this field. The company

provides comprehensive all risks insurance cover for individual animals as well as

herds against death due to disease of accident including fire, lightening and snakebite

as well as against risks of calving. Thus the insurance cover protects the interest of the

borrowers as well as the Bank advancing loans for the purchase of livestock.

During the year 2004, a gross premium income of Rupees 2.85 million was generated

on this account, which has now increased to rupees 11.94 million during the year

2007. Because of the government interest and emphasis in the expansion of this

industry as reflected in the liberal credit policies and easy loaning to livestock owners

by the banks, we foresee a rapid and substantial increase in volume of business under

this head in the coming years.

RISK THIS COMPANY FACE:

They face many types of risks, known as exposures. Exposures exist for all types of

insurance that is provided by a specific type of insurance company. The most

common types of risks include paying claims for automobile accidents and storm

damage to a dwelling or property. Insurance companies can manage the risks that are

insured by excluding certain types of coverage from a policy.

In the early days of marine insurance, the details of a ship or cargo to be insured

would be described on a slip. This slip would be taken to Lloyd's and the person who

was to carry the risk would read the details and then sign the slip under the details of

the risk. In this way the person carrying the risk became known as the underwriter.

The underwriting process is far more complicated nowadays but the term still applies.

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When we looked at the nature of insurance we take it as a common pool. The

contributions of many people were made to the pool and the losses of the few were

met from it. In essence the task of the underwriter is to manage this pool as effectively

and profitably as he can. Thinking of the role of the underwriter in this way we could

say that he has to:

* Assess the risk which people bring to the pool;

* Decide whether or not to accept the risk or how much to accept;

* Determine the terms conditions and scope of cover to be offered;

* Calculate a suitable premium

The first task of the underwriter is to assess the risk which person brings to the

common pool. There are various definitions of risk and a number of different

associated terms. One of the terms we examined was hazard. We differentiated hazard

from peril by saying that peril was the event giving rise to the loss itself, such as

collision, fire, theft. Hazard was the factor which might after the frequency or severity

of the peril.

Underwriter has the task of assessing the hazard which is associated with the various

perils brought to the common pool. There are two aspects of hazard, physical and

moral with which the underwriter is concerned.

Claims

Insurance company primary objective is to pay claims and to earn a profit. This can

be accomplished by accepting only certain types ofbusiness that have a low-to-

medium chance of experiencing a loss that will result in a claim. The most common

types of policies property and casualty insurers issue that result in various types of

claims are automobile and homeowners policies. Insurance companies will pay for

valid claims that have not been excluded on the policy.

Peril

Insurance company that provide policy coverage for an individual's automobile,

home, life orhealth insure against losses that are known as perils. A peril is a

considered an event or action that has the potential to cause loss. Perils exist for all

types of policies. Perils for an automobile policy include theft and vandalism.

Homeowners policies provide insurance against perils such as fire, wind or storms

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such as a tornado. Health insurance provides protection from health-related perils

such as a heart attack.

Hazard

Insurance companies are also concerned with hazards that exist which can increase

the chance of a loss occurring or cause more damage than expected. Insurance

companies take hazards into consideration when determining cost and eligibility for a

policy. Hazards can include the type of wiring used in a house when determining risk

of loss due to fire. Smoking is also a hazard when determining losses for a health

insurance or life insurance policy.

Distribution of Loss

Insurance companies that calculate the amount and type of risk to insure also need to

the distribution of losses that occur. The number or amount of losses that occur within

specific period such as one year or three years is known as the frequency of loss. In

addition to loss frequency, insurance companies are also concerned with the severity

of losses. Loss severity is typically the amount that an insurer pays out for a benefit or

a claim.

Age:

In automobile insurance, statistics show that younger people are more likely to have

an accident due to carelessness and inexperience.

Property Risks

In homeowners insurance, companies will want to know about the construction

material of your home. For example, a wood home is more susceptible to fire than a

brick home, so companies will charge a higher premium. Other property risk factors

include the presence of items outside the home such as trampolines and swimming

Pools.

Risk relates to live stock:

If the owner of livestock doesnt take care of livestock as they think that they are

insured and due to their careless the livestock get affected by any disease like Congo

virus etc and die.

How to Manage Risks

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Insurance company uses a variety of factors to assess risk. In the world of insurance,

the concept of risk is very important. Insurance company employees called actuaries

use statistical risk analysis to determine how much to charge in the way of premiums

for insurance coverage. This Insurance company also attempt to limit their exposure

to risk so that they pay out as little as possible in claims, which makes them more

profitable.

Age is an important risk factor in some types of insurance. . In automobile insurance,

people under the age of 25 generally pay higher insurance rates because statistics

show that younger people are more likely to have an accident due to carelessness and

inexperience.

THE UNDERWRITING PROCESSThe actual process by which risks are underwritten will vary from one class of

business to another and will also depend on an insurers general approach.

Underwriting in a general sense in relation to personal insurances, life assurance and

commercial insurances

PERSONAL INSURANCE

The underwriting of personal insurances is relatively straightforward. The main

source of information abut a risk will come from the proposal form and if there is

anything else which an individual underwriter may want, he would write to the

proposer. A large volume of proposal forms for various classes of personal insurance

will be dealt with by branch offices of insures. Much of the work will be mechanical

in nature and the vast bulk will be processed with little difficultly

In many cases the underwriting is delegated to some other person, quite outside the

insurance company. This is the case for example in travel insurance where the policy

is sold by a travel agent or airline. A proposal form is completed by the proposer and

the policy issued almost immediately from a pad of policies. Possibly with an upper

Monetary limit on the sum insured. Underwriting in these cases is almost a matter of

making sure that a completely undesirable proposer is not allowed cover. There will

be little discrimination among those cases which are accepted and he brooked or other

agent will have little or no flexibility in pricing.

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COMMERCIAL INSURANCE

The underwriting of commercial business insurances is a much more complicated and

involved task. Commercial insurance rang reform small shops and factories to large

multinational corporations with operations in many countries throughout the world.

The degree of complexity of the underwriting required will obviously vary with sheer

size of the risk but certain basic principles are still recognizable.

The essence of the task is that the underwriter has to evaluate the hazard associated

with the risk which is being proposed. In small cases he may be able to do this from

reading a proposal form and corresponding with the proposer. It may be that a local

inspector asked to call and see the shop or factory for himself. In large cases this is

simply impossible. For one thing the details of a risk could not be confined to aproposal from. There is just too much information to condense on to a form no matter

how large the form may be.

This is where the broker may help. As we mentioned earlier, the broker in these large

cases will be in a position to prepare the case for the underwriter. This may mean site

inspections by the broker and the preparation of the plans and reports on the relevant

aspects of the risk. This documentation, which may be extremely extensive, is then

Passed to the underwriter and negotiation can commerce on the

Terms, conditions, cover and price

A RISK SURVEYS

Even where a broker is involved (and certainly when there is no broker). The

underwriter will involve a surveyor. This risk surveyor is the person who acts as

The eyes and ears of the underwriter, many companies employ specialists surveyors

in the different areas of risk such as fire, security, liability, business interruption and

so on. The surveyor will eventually prepare a report for the underwriter and in the

case of many property risks will also draw plan. The report will cover a number of

features, including. A full description of the risk. This may include the plan of the

Premises in the case of property risk, the process being carried on at the premises,

details of the insured etc. An assessment of the level of risk. This will take into

account all

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The relevant hazard factors, both moral and physical, and provide the underwriter

with some idea of the degree of risk which he is being asked to accept. The surveyor

will also be able to comment on surrounding property as in the case of fire insurance,

for example, this may have an impact on the level of risk.

A measure of maximum probable loss (MPL)

This MPL, or estimated maximum loss (EML) as is known by some, is the maximum

that the surveyor believes will be the subject of a loss This MPL calculation takes no

account of any good features which may be present. The underwriter must then

consider the impact of good features and may reduce the MPL. In a fire risk the

underwriter may take account of fire lighting apparatus of various kinds such as

automatic sprinklers. One point the surveyor would have to remember is that MPL, hehas just calculated is only for fire damage. The building could, for example, be in the

flight path for a major airport and run the risk of being destroyed by aircraft.

Dividing walls would be little calculating MPLs is to give the underwriter an idea of

the maximum which is likely to be lost.

Recommendations on loss prevention:

The surveyor will also make known to the insured what steps should be taken to

protect the risk. In a few cases these recommendations will be in the form of

requirements which the insured must implement if cover is to be granted.

The surveyors view on the adequacy of the insurance being requested. In all of this

the responsibility for ensuring that the cover is adequate, rests with the insured. He

may seek advice from a broker or other expert but at the end of the day he will have to

satisfy himself that the insurance are adequate.

Adequacy, in the case of many classes of insurance will mean the sum insured. This

will be true for many classes of property insurance. In the case of liability insurancethere is of course no sum insured, but a limit of indemnity. Adequacy in thee cases

will mean a limit of indemnity large enough to cater for the expected claims. The

adequacy of cover is an extremely important issue and the underwriter will want to

ensure, as far as is possible. That the insured is not under insuring the risk.

Assuming that the risk is acceptable in all matters relating to the level of hazard, the

decision as to how much of a risk can be accepted is, in part, dependent on the

financial capacity of the insurer. The insurer may have some limit on how much of a

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particular type of risk it wants to accept in any year. Questions relating to the financial

capacity of the insurer, lead us into the area of reinsurance.

PREMIUMS:

Tasks of the underwriter are as:

* Assess a risk which people bring to the pool;

* Decide whether or not to accept the risk or how much to accept;

* Determine the terms; conditions and scope of calculate a suitable premium.

So far we have looked at the role of the underwriter, the underwriter process itself and

the part played by reinsurance. These have examined, in their different ways, the way

in which risks are accepted insurers and the financial steps which insurers take to

protect themselves. Insurance Companies have two final aspects the insurance

transaction to examine. The first, which business of pricing and praying for the

insurance service and the second is the making of claims. The last task of the

underwriter was to calculate a suitable premium. The premium which an insured pays

represents that insureds contribution to the common pool. This contribution must be

fair and must reflect the degree of hazard which that insured brings to the pool. In

other words the premium must be sufficient to:

Cover Expected claims:

The insurer is in a position to estimate the level of claims which it expects. It is not

possible to say exactly how much is to be paid out in claims but because of the

numbers involved the insurer can make a reasonably accurate assessment of the likely

loss costs. At the very minimum the premium must be sufficient to meet these

expected claims.

Create an estimate for outstanding claims:

Not all claims will be settled during the year for which the premium has been paid and

hence the premium must take into account those claims still to be settled at the end ofthe year. This is particularly true in the case of claims involving personal injury. They

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can take several years to settle and the insurer must bear them in mind when

calculating the premium.

Provide a reserve:

The insurer must also take into account the fact that there can be contingencies,

beyond their control, which may involve a liability to meet claims at some time in the

future. Insurers do this bymaking reserves.

Meet all expenses:

The insurer has a number of operational expenses to meet in the running of the

business. These include:

* Salaries to staff;

* Office costs of all forms

* Advertising;

* Commission.

The premium collected from each insured must be sufficient in Aggregate to cover

these costs of operating.

Provide for profit:Finally, the insurer must ensure that there is provision for a reasonable profit. The

majority of insurers is answerable to shareholders and must provide a reasonable

return on the investment which these shareholders have made in the company. In the

case of mutual companies, the members will still be looking for a reasonable surplus

being made in order to meet the objectives of the mutual. Arriving at the premium,

however, is not simply a matter of calculating the correct premium by a mathematical

formula. A number of important commercial considerations must also be borne inmind. These will include:

Inflation:

The insurer must be aware of the changing value of money. Claims will be met

tomorrow, out of premium received today. The implication of this is that the cost of

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settling a claim may rise, not due to any increase in the magnitude of the claim itself,

but simply due to the all insurer can not ignore in their premium calculations.

Interest rates:

We have already seen that insurers are major investors of funds. These funds generate

substantial investment income upon which insurers depend. Variability in interest

rates has also to be taken into account in premium calculations..

Required Documents:

Documents required under taking insurance are as follows:

Documents and information for Motor insurance:

1. Original CNIC,

2. Details of vehicle,

3. Sum insured,

4. Registration Book,

5. Driving license,

Documents and information for Marine insurance:

1. Original CNIC,

2. L/C Number

3. Performa invoice

4. Sum Insured

5. Vessel Name

6. Port of shipment and destination

Documents and information for Fire insurance:

1. Original CNIC of Insured,

2. Type of Risk,

3. Construction class,

4. Sum insured,

5. Subject Matter of insurance,

Documents and information for Travel insurance:

1. Original CNIC,

2. Area of visit

3. Sum insured

4. Duration for insurance

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5. No of persons

So this was the Insurance company which we selected to study.We got the knowledge

that how they work, which risk they face and how they mitigate that risk.

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