Insurance II

8/14/2019 Insurance II

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INTERMEDIARIES

Agent/insurance advisor/ insurance planner:

They are trained to be sensitive to thedominant issues in life to sell the product.Agents may be;

Composite insurance agent- an agent whoholds a license to act as an insurance agentfor a life and a general insurer.

Corporate agent- a person other than an

individual that is a firm or a company formedunder companies act including a bankingcompany.


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Issue and Renewal of license A person desiring to obtain/renew a license for an insurance

agent shall have to apply to designated authority in the

format given in Form-IRDA- VA (for individuals)/ VC (forcompanies). For composite agency two separate applicationshas to be made.

Application form should accompanied by prescribed fees. On receipt of application, the authority scrutinize the form

and sanction license on fulfillment of following points ;

i) qualification- minimum 12th standard or equivalent.ii) Completion of practical training of 100 hrs.

iii) Passing of pre-recruitment examination.iv) Has furnished the application complete in all respect.v) Has requisite knowledge to solicit and procure business.

vi) Is capable of providing the necessary service to thecustomers.In case of refusal the reasons should be informed to the applicant.


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Cancellation of license- due to any disqualification thelicense shall be cancelled by the authority.

Fees- Rs.250/- shall be payable to obtain license.

Issue of duplicate license- shall be made by the authorityon payment of Rs.50/-.

These regulation is applicable to the existing agents beforethe commencement of these regulation.

Sources of recruitment of agents- normally insurancecompanies consider the following sources;

a) Advertisement b) employment Agencies (both public &private) c) life insurance agency career d) colleges andother institutions, e) on campus selection f) employee

recommendation g) labour union.


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Selection of agents- following process isadopted for selection;

1. Screening the application.

2. Selection test.

3. Interviews.

4. Checking of references.

5. Physical examination.

6. Approval by the appropriate authority.7. Placement.

Training of Agents- on the job training and off the jobtraining. On the job training includes sharing

experience, coaching, under study, special lecture,carrier agent schemes, vestibule school, timemanagement, etc. Off the job training includesspecial courses, conference, case analysis, roleplaying, sensitive training, field force analysis.


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Duties of the agents:1. Discharge the duties for achievement of

objective of the company.2. Maintain good relationship with customer and

the authority.

3. Provide personal help wherever necessary.

4. Ready to solve any servicing problem of thecustomer.

5. Take due care and act reasonably for successof any plan.

6. Made market research and provide feedbackinformation.

7. Help the customer in claim settlement.

8. Any other service as required by the

authority.


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Code of conduct for agent:1. Disclosing the license to the prospect on demand.

2. Explaining all available options to the prospect.

3. Explain the information required in proposal form.

4. Informing the insurer about any adverse habitsand material facts of the person to be insured.

5. Revealing of commissions , if necessary.

6. Advising policy holder to effect nomination.

7. Not interfering in others activities.

8. Should show his honesty and integrity.

9. Not demanding or receiving share of proceeds

under an insurance contract.


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Rights of the agent:1. Can issue renewal notice.

2. Can give receipt for premiumscollected.

3. Can introduce business on behalf of

the insurer.4. Can collect premiums from policy

holders directly.

5.

Is entitled to agreed payment for hisduties.

6. Entitled to receive reimbursement ofany payment properly made on behalf

of his insurers.


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Termination of agent

1. In case of cancellation or non

renewal of license.2. Permanent incapacity of an agent.

3. Conviction of any criminal offence.

4. Involvement in breach of trust.5. Involve in cheating or forgery.

6. Terminated by insurer in terms of the

appointment of the agency.7. Termination due to non-performance.

8. Violation of code of conduct.


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Third PartyAdministrator

"TPA" means a Third Party Administratorwho, for the time being, is licensed by

the Authority, and is engaged, for a feeor remuneration, by whatever namecalled as may be specified in theagreement with an insurance company,for the provision of health services;


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Conditions of and Procedure forLicensing of TPA

(1) Only a company with a share capital and registeredunder the Companies Act, 1956 can function as aTPA.

(2) The main or primary object of the company shall beto carry on business in India as a TPA in the health

services, and on being licensed by the Authority, thecompany shall not engage itself in any otherbusiness.

3. The minimum paid up capital of the company shall bein equity shares amounting to Rs. 1 crore (Rupees

One crore only);4. At no point of time of its functioning the TPA shall

have a working capital of less than Rs. 1 crore;


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5. At least one of the directors of the TPA shall bea qualified medical doctor registered with theMedical Council of India;

6. The aggregate holdings of equity shares by aforeign company shall not at any time exceedtwenty-six percent of the paid up equitycapital of a third party administrator.

7. Any transfer of shares exceeding 5% of thepaid up share capital shall be intimated by theTPA to the Authority within 15 days of thetransfer indicating the names and particularsof the transferor and transferee.

Explanation : For the purpose of this sub-regulation "working capital" means thedifference between the aggregate of thecurrent assets and current liabilities as on the

date of reckoning


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Procedure for obtaining license.(1) The TPA shall obtain from the Authority a licence to function

as a TPA for rendering health services.

2.The application for licence shall be made in writing to theAuthority in Form TPA-1 appended to these regulations andshall be accompanied by a non-refundable processing fee ofRs. 20,000 (Rupees Twenty Thousand only) to the Authority byway of a crossed demand draft in favour of the Authoritypayable in Delhi.

3.The Authority may, in the course of examination of theapplication, call for such information or ask for production ofsuch documents, as it may deem fit, and it shall be incumbentupon the applicant to furnish the same within the specifiedtime. contd..


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4. The Authority, on examination of the application anddetails furnished by the applicant, may issue alicence, if it is satisfied that the applicant TPA iseligible to function as a TPA.

5. Every TPA approved by the Authority shall pay afurther sum of Rs. 30,000 (Rupees Thirty Thousandonly) to the Authority as licence fee before thelicence is granted to it and the same shall be paid tothe Authority in the manner as stated in sub-regulation (2) of this regulation.

6. A TPA whose application has been rejected by theAuthority shall not, for a period of two years from thedate of such a rejection, apply once again to theAuthority for a licence.

C d f C d t f


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Code of Conduct forTPA

1. A TPA licensed under these regulations shall as

far as possible act in the best professionalmanner.

2. In particular and without prejudice to thegenerality of the provisions contained above, it

shall be the duty of every TPA, its ChiefAdministrative Officer or Chief Executive Officerand its employees or representatives to :-

(a) establish its or his or their identity to the

public and the insured/policyholder and that ofthe insurance company with which it hasentered into an agreement.

contd..


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(b) disclose its license to theinsured/policyholder/ prospect.

(c) disclose the details of the services it

is authorized to render in respect ofhealth insurance products under anagreement with an insurance company;

(d) bring to the notice of the insurance

company with whom it has anagreement, any adverse report orinconsistencies or any material fact thatis relevant for the insurance companysbusiness;


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(e) obtain all the requisite documents pertaining tothe examination of an insurance claim arising out ofinsurance contract concluded by the insurance

company with the insured/policyholder;(f) render necessary assistance specified under the

agreement and advice to policyholders or claimantsor beneficiaries in complying with the requirementsfor settlement of claims with the insurance

company;(g) conduct itself /himself in a courteous and

professional manner;


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(h) refrain from acting in a manner, whichmay influence directly or indirectly

insured/policyholder of a particular insurancecompany to shift the insurance portfolio fromthe existing insurance company to anotherinsurance company;

(i) refrain from trading on information andthe records of its business;

(j) maintain the confidentiality of the datacollected by it in the course of its agreement;


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(k) refrain from resorting to advertisements of itsbusiness or the services carried out by it on behalfof a particular insurance company, without the priorwritten approval by the insurance company;

(l) refrain from inducing an insured/policyholder toomit any material information, or submit wronginformation;

( m) refrain from demanding or receiving a share ofthe proceeds or indemnity from the claimant under

an insurance contract;(n) follow the guidelines/directions that may beissued down by the Authority from time to time.


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Miscellaneous Provisions

The Authority may, from time to time, constituteCommittees consisting of members drawn from varioussources including the TPAs, insurance companies, Authority,or any other persons as may be decided by the Authority tolook into the proper and efficient performance of the TPAs.

2 (1) Every TPA shall furnish to the insurance company andthe Authority an annual report and any other return, as maybe, required by the Authority on its activities.

.


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(2) The Annual Report, duly verified by adirector of TPA and the ChiefAdministrative Officer or the Chief

Executive Officer shall be submitted inForm TPA-4 (No. 1 to 7) within a period ofsixty days of the end of its financial year orwithin such extended time as the Authority

may grant.(3) The TPA shall also make available to

the Authority for inspection, copies of allcontracts with insurance company


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General :- (1) Any changes made from time to time in the

agreement entered into by an insurer and a TPAshall be filed with the Authority; (2) A TPA shall not charge any separate fees

from the policyholders which it serves under theterms of the agreement with the insurancecompany.

(3) If any person fails to furnish any document,statement, return, etc., to the Authority, the sameshall be construed as a non-compliance of the Act.

S


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S Are professionals who assess the specific

insurance needs of the client, evaluate the

risk and suggest a suitable insurance cover.Brokers perform following activities to provide

his advisory services;1. On specific insurance need of the client by

assessment of risk.2. Mitigation of specific risk factor.3. Optimal policy structure.4. Carry out preparatory work for insurance

contract.5. Claim administration and management.6. Assist in administration and performance of

the contract.


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Classification of brokers

Category-I Direct General insurance broker.

Category-II direct life Insurance Broker.

Category-III Re-insurance Broker

Category- IV Composite Broker

Category- V- Insurance Consultant.


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PROVISIONS

NET WORTH:1. Composite Broker- Rs.2.50 crores (with 26%

foreign participation).2. Reinsurance Broker- Rs2.00 crores3. Direct Broker- Rs.50 lakh.4. Consultant- Rs. 5 lakh Bank guarantee.

Brokerage Commission- not more than 30% of thepremium.Solvency Margin- Rs.25 lakh or 10% of the gross

brokerage and fee received in the previous year,whichever is higher. Auditors statement and

certification in this regard is required.Maintenance of books of account and submit annualreport within 60 days of completion of financialyear. Preserve records for at least 5 years.

Disclose all the required information and facilitates

inspection whenever required.


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Benefits

Brokers are retained by the insured andtherefore their primary responsibility istowards the insured. Benefits are;

1. Improvement in customer services.

2. Transfer of technology and managerialknow-how.

3. Benefit to insurance company.

4. Foreign exchange consideration-increase in retention capacity byassociating with international firms.

5. Assist to develop new products.


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BANCASSURANCE

The provision of insurance and banking

products and services through a commondistribution channel or to a common clientbase.Pressures on Banking

Customer retention in the face of competition-commoditisation of basic banking products

Squeeze on margins of fund based revenue

Staff retention and motivation

Universal Banking- approach to provide all financialproduct under one roof ; a broader relationshipapproach

Optimum utilization of infrastructure and resources-

maximize revenue


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Companies

Channel diversification from traditional direct sale

Access to a high quality customer base

Establishing brand equity in a new market

Achieve the geographical reach within minimum time andcost

Ensure higher probability of success in the sales process


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Bancassurance- A win-win solution

Bank Insurance Company Customer retention Revenue and channel

diversification

Satisfaction of more

financial needs under thesame roof

Quality customer access

Revenue diversification Quicker geographicalreach

More profitable resourceutilisation

Creation of brand equity

Enriched workenvironment

Leverage servicesynergies with Bank

Establish sales orientated Establish a low cost

B M d l


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Bancassurance Modeloptions

Insurer employs salesforce to follow up onBank generated leads

Insurer employs sales force to follow up on

Bank generated leads

Insurer employs sales force and

deploys them at bank branches

Separate Sales Force Integrated Hand In Glove

Quick to implement

Reduced bank management time

Little integration required

Least effective in maximising

opportunities from the Bank

database

Insurer controls sales process

Process managed by Bank

Insurer only product/service

provider

Minimal cross cultural issues

Strengths of insurer not utilised

Greater change management required

to engender sales culture

Quick to implement

Both partners strengths utilised

Bank as introducer, insurer sales

force as converters

Cultural fit key, since insurer

staff deployed at Bank branches

Decision- Utilise mutual strengths; level of integration desired;

existing organisational structure


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Pattern of distribution alliance

Banks selling product of their insurance

subsidiary exclusively. Banks selling products of an insurance

affiliate on exclusive basis. Banks offering product of several insurance

companies as Super Market. This brings various regulatory issues basedon followings;

1. Corporate Agency Model- which attracts theissue of responsibilities and code ofconduct and also raises question about therelevancy in case of banks.

2. Corporate Broker Model- raises questionabout the regulatory and operational

issues.


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Types of model

1. Distribution Alliance- tie-up for distribution of

products.2. Joint Venture- Banks provides the lead and its

reputation and brand name while insurer bringsproducts, underwriting and servicing expertise. Thepartners combine their individual expertise to forge

a best practice bancassurance operation withtailored products, tailored distribution and leadgeneration mechanism.

3. Leveraged Life Distribution- insurance company

takes the lead and banks act as corporate agent toprovide access to middle market leads.

4. Leveraged Bank Distribution- banks takes the leadand insurance companies supply products for its

bancassurance efforts.

A vantag


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A vantage

1. Enhanced customer service- providingconvenience, simplicity and value in a onestop environment.

2. Leverage of existing assets- valuables, offercustomer data base.

3. More Income- better customer retention.

4. Greater productivity.

5. Quality sales culture-that is customer driven.

6. Improved staff retention- provide goodtraining and better remuneration.

7. Cross selling opportunities

Imp ement ng Bancassurance: Key


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Imp ement ng Bancassurance: Keychallengesin Indian context;

Creating an environment of top level

involvement of bank management. Bringing relevance motivation and skill

development at the operating level at bankbranches.

Resolving possible conflicts of interestbetween the bank and the insurer.

Setting up distribution procedure consistentwith the manual systems in most banks.

Establishing credible service levelagreement between the bank and theinsurer.

Surveyor and loss


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Surveyor and lossAssessor.

Surveyors & loss assessor are independentprofessionals appointed by an insurancecompany to assess the loss when a claim isnotified under a policy issued by them.

Licence is issued to technically qualified people,

who are qualified in insurance subject. Surveyors are classified into 3 categories such

as category A B and C based on theirprofessional qualification, training undergone,

experience as surveyor & loss assessor andother professional experience and any othercriteria as decided by the authority.

Duties of Surveyor and loss


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Duties of Surveyor and lossassessor.

1. Investigate & confirm the cause of loss.2. Advice the insured to take good care of

salvage to mitigate the loss.

3. To ensure that insured has taken all necessary

steps to contain the loss.4. Assess the quantum of loss.

5. Determine the liability of the insurer within theframework of the policy condition.

6. To act on behalf of the insurance company indisposal of salvage to realize maximum value.

L Adj t V L


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Loss Adjuster Vs. LossAssessor

1.

Represent insurer2. There to see a fair

indemnity in line with thepolicy cover.

3. Earns flat fees based on

final settlement or brandvalue.

4. FSA compliant.

5. Represented by chartered

institutes.6. Access to wide range of

specialists.

7. Subrogation- has aresponsibility to try and

recover insurers outlay.

1.

Represent claimants.2. There to get best

settlement possible forclaimants.

3. Earns fixed percentage of

the final agreed figure.4. Not all are FSA compliant.

5. Trade organizations arenot chartered.

6. Limited access tospecialists.

7. Unless any uninsuredlosses has no interest insubrogation.

E g ty con t ons or


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E g ty con t ons orsurveyor

1. Satisfies all the applicable requirement of section 64UM read

with section 42D of the act and rule 56A of the InsuranceRules,1939.

2. Possesses such additional technical qualification as may bespecified by the authority.

3. Furnish evidence of payment of fees.

4. Has undergone practical training for 12 months.5. Any other information required by the authority.

6. A corporate surveyor has to fulfill the requirement of section64UM(1)D(i) of the act.

o e o


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o e oconduct

1. Behave ethically and with integrity in theprofessional pursuits.

2. Strive for objectivity in business judgment.

3. Act impartially.

4. Not accept or perform survey work where he is notcompetent or for which no license has issued.

5. Carry out the work with due diligence, care and skill.

6. Maintain proper records and keep all necessaryinformation regarding his job and profession.

7. Submit annual statement in form-IRDA-12 to theauthority.

8. Furnish all documents for inspection whenevernecessary.

Types of insurance


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Types of insurancecompanies

From legal point of view insurance companies are

either stock companies or mutual companies. Stock Companies- owned and controlled by its

common stockholders. In India most companies arestockholders type. The policy cover issued by thesecompanies are non- participating implies that none

except the benefit contracted shall be paid to thepolicyholders and no dividends accordingly shall bepaid.

These companies do sell participating policiesand in this case policyholders not only get the policy

dividend but also stock dividend.

Mutual


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MutualCompanies

Popularly known as mutuals, are generally non-

profit organization owned by the policyholders.Policyholders in a mutual companies are justshareholders and enjoy the benefitsaccordingly. Mutuals are following types;

1. Assessment Mutuals - the policy owner may or

may not pay a premium when policy begins, butthey are responsible for a premium based ontheir fair share of the losses and expenses atthe end of the period.

2. Advance premium Mutuals - policy owners pay

their premium at the beginning of the policyand eligible for dividend when the policy periodends.

contd..


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Exchanges


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Exchanges

It is an association, the members of which

exchange insurance. They are not-for-profit, unincorporated,

association of individuals. An individual is granted the legal ability to

transact business for the group and identifiedas the attorney-in-fact and is responsible forproviding all administrative services neededincluding sales and underwriting.

Initial capital is obtained from either

prepayment of excessive premium bymembers or contribution in the form of sub-ordinate loans made by attorney-in-fact.Surplus is also accumulated by retention ofearnings. The attorney-in-fact receives

percentage of premiums.


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Lloyds of London

Is one of the largest and best known insurer inworld.

It is an association, individual members of whichengage in insurance and not an insurancecompany.

Its underwriters sometimes insure unusual lossexposures, and thereby lloyds receives a gooddeal publicity.

Its worldwide reputation for prompt and fairclaim settlement, on even the largest losses.

Its financial capacity to handle largerexposures.

Its reputation for innovation and expertise inmany technical areas.

Reg strat on o Insurance ompan es -


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Reg strat on o Insurance ompan es a)

Legal form of insurance company. Capital and Deposit requirements

Business plan

Projected Balance Sheet for 5 years Suitability of Owners and Sr.

Management

Fit and proper test for Key Managementappointments

Assurance to infuse additional capital asand when required


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n mum ap a equ remen


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n mum ap a equ remen(3-c)

No insurer carrying on the business of life or generalinsurance or reinsurance in India shall be registered unless: a paid-up equity capital of rupees one hundred crore (US $ 25

mn) in case of a person carrying on life insurance or general

insurance or a paid-up equity capital of rupees two hundred crore (US $ 50

mn) in case of a person carrying on exclusively the business ofreinsurance.

Rationale Financially strong players capable to meet the liabilities of the

policyholders are in the market. Entry barrier for small and marginal applicants.


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DepositRequirement (3-d)

Amount to be deposited with the Reserve Bank of India is: In the case of life insurance business, a sum equivalent to

one percent of its total gross premium written in India in afinancial year not exceeding rupees 10 crores. (US$ 2.5mn)

In the case of general insurance business, a sum equivalent

to three percent of the total gross premium written in Indiain a financial year not exceeding rupees 10 crores. (US$2.5mn)

In the case of reinsurance business, a sum of rupees 20crores (US$ 5mn)

Rationale Additional financial cushion for protection of policyholders

liabilities.

i l (3 )


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Business Plan(3-e)

Application form requires a five-year business plan: Premium Income/ Amount of sales Size of sales force/ sales support/ administrative staff Investment income Commission and other related expenses/ Expenses of

management Statutory reserves/ Required solvency margin Profit and Loss Accounts and balance sheets Break-even periods and return on capital Geographical spread of business

Market Segmentation Rationale

Long term commitment Increased insurance penetration in the country


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Suitability of Owners (3-f)

IRDA needs to be satisfied that the financial condition and the general character of

management of the applicant are sound the interests of the general public will be served if the

certificate of registration is granted to the applicant

Due diligence regarding the background Regulatory clearances from Indian regulators like RBI,

SEBI, Income Tax clearances in case of Indian promoter Foreign promoters track record from home country

regulator

Rationale Comfort for the insured and the regulator

u a y o rec ors r gm


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u a y o rec ors r. gm(3-g) Application details include:

Name, address and the occupation of the directors, theproprietors, manager in India and key persons

Detailed information required is spread over academic and professional qualifications working experience over 15 years reputation and character association with a company which was wound up or

under receivership during the period of their association Key persons are defined as chief executive, chief

marketing officer, appointed actuary, chief investment

officer, chief internal audit and chief financial officer Rationale Professionally qualified persons are appointed to handle

the affairs of the company Ensure that good people with reputable background act as

trustees


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Investment of Funds (5-c) No insurer shall directly or indirectly invest outside India the funds of

the policy holders Mandatory investment of funds in infrastructure & social sectors Investments only in graded securities with minimum rating of AA of

Standard & Poor or its equivalent Every insurer to have an Investment Committee consisting of CEO, 2

non executive directors, Chiefs of Finance & Investment and A.A. Exposure Limits set for i) Investee Company; ii) Investee Group; iii)

Industry Sector; iv) Promoters Group Rationale

Pattern of Investments designed to control risk Ensure adequate spread of investments and diversification Maximise return on investments and have adequate safety of securities

Monitoring of Rural& Social Sector


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Monitoring of Rural& Social SectorObligations (7)

Rural Sector Life Insurer

7% (1st F.Y.)/ 9% (2nd F.Y.)/ 12% (3rd F.Y.)/ 14% (4th F.Y.)/ 16%(5th F.Y.) of total policies written direct in that year

General Insurer 2% (1st F.Y.)/ 3% (2nd F.Y.)/ 5% (thereafter) of total gross

premium income written direct in that year

Social Sector Life and General Insurer 5,000 (1st F.Y.)/ 7,500 (2nd F.Y.)/ 10,000 (3rd F.Y.)/ 15,000 (4th F.Y.)/

20,000 (5th F.Y.) lives Rationale

To carry out the mandate of the Parliament so that benefits ofinsurance reforms reach the poor and socially weaker classes.


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Development-Brokers, Agents, Referrals


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DevelopmentIssues (9)

Self

Regulation

Corporate

Governance

Detariffing

in

Gen.

ins

Rural

andSocial

Micro

insurance

Health

Insurance

Distribution

DevelopmentRole

-Pre Licensing Trg. & Exam

-Code of conduct

-Wkg. Gp.-Database

-Protocols-TPAs

-RegulatoryObligation

-Rural Agent

- New channels

-Role of coopsand NGOs

-Referrals

-Risk carrier?

-Life and Gen InsCouncils

-Act. Soc of India

-Surveyors Inst.

-IBAI

-Cross subsidy?

-Market based pricing

-Risk sensitive prem rate

-Aligning data base with

rating factors

-No listed Ins

co.

-Mgt. practice

U i I (10)


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Upcoming Issues (10)

Health insurance

Recommendation made to the Government to reduce capitalrequirements Creation of centralized health database, training in ICD-10 coding,

new product innovation and design undertaken. Unit Linked business

Guidelines framed to prevent regulatory arbitrage between lifeinsurance industry and mutual fund industry. More disclosurerequirements kept.

Detariffing General insurance companies asked to show to the Authority that

they have basic infrastructure such as i) upgrading underwritingskills of the underwriters; ii) IT systems to retrieve and analysedata; iii) ways and means to protect the policyholders; iv) scientific

and adequate pricing of covers, etc. in place. Market conduct

Mis-selling/ Rebating/ Payouts Advising and counseling insurance companies/ Establishment of

Self Regulatory Organizations (SROs)/ Target Examinations

MANAGEMENT


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MANAGEMENT It is an integrated process of delineating

specific areas of risk, developing acomprehensive plan, integrating the planand conducting on going evaluation.

The objective is to prevent financialdisaster and achieve the objective ofcapital management.

Involves loss control, loss financing andrisk reduction

Risk management includes the followings;1. Risk analysis.

2. Risk control

3. Risk financing.


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RISK MANAGEMENT PROCESS

Involves following process;

1. Defining the objectives of the riskmanagement exercise.

2. Identifying the risk exposure.

3. Evaluating the exposures.

4. Critical analysis of risk management

alternatives and selecting one of them.5. Implementation and review.


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RISK ANALYSIS

It includes;A) Risk identification- can be made

through checklist method, financialstatement method, flow chart,onsite evaluation, interaction withothers, contract analysis, statisticalrecord of losses.

B) Risk Evaluation- includes; Probability of loss occurring, and

Its severity.


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RISK FINANCING


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RISK FINANCING Refers to the means in which the risk control measures

that have been implemented shall be financed.

The objective is to spread more evenly over time costof risk in order to reduce the financial strain andminimize risk costs. Risk costs are financed in followingways;

1. Losses may be charged as they occur to currentoperating costs.

2. Ex-ante provisions may be made for losses eitherthrough the purchase of insurance or by building up acontingency fund to which losses can be charged.

3. When losses occur they may be financed with loans,which are repaid over the next few months or years.


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OBJECTIVES OF RISK MANAGEMENT

Before occurrence of losses;

1. Reduction in worry and fear.

2. Economical way of handling risk.

3. Overcome legal obligations. After occurrence of losses;

1. Survival.

2. Congruence with mission andobjectives.

3. Optimising social effects.

TE HNI UE IF RI K FINANCING


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FINANCING

It is risk retention and risk transfer.Risk Retention- refers retained or assumed of risk by the party or

the organization. It is a deliberate decision for businessfirms inherited with following characteristics;

1. The consequential losses are small,2. Losses shown as operating expenses or can be funded with

retained profit.3. Self insurance is one form of planned retention where a part

or full of the exposure is retained by the firm. It is exercisedby the firm when opportunity cost of transfer is less than thecost of insurance and have large pool of funds.

4. Captive insurance represent a special case risk retention. Acaptive insurance company is an entity created andcontrolled by a parent, whose main purpose is to provideinsurance to its corporate owners. In US it is known as trade association of insurance companies.

Transfer


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Transfer

Refers transferring of risk to another party. Thiscan be done through;

1. Insurance.

2. Non-insurance transfer- it includes the followings;

Hold-harmless agreement or indemnityagreement, indicating the losses shall be borneby the designated party.

Incorporation- changing organizational structure. Hedging- popular instrument is derivatives. Diversification- across business or geographic

location justified or coupled with synergies oreconomies of scale can also significantly reducerisk in aggregate.

Documents

Insurance II