CHAPTER – 1

INTRODUCTION

 MEANING & TYPES OF RISK

 EVOLUTION & OBJECTIVES OF RISK MANAGEMENT

 PROCESS OF RISK MANAGEMENT

 NEED & IMPORTANCE OF RISK MANAGEMENT

 METHOD &IMPLEMENTATION AND MONITORING OF

RISK MANAGEMENT

 CHANGING SCOPE &TOOLS IN RISK MANAGEMENT

*LIFE INSURANCE

 MEANING & SCOPE OF LIFE INSURANCE

 IMPORTANT PRINCIPALES OF LIFE INSURANCE

 VARIOUS PLANS & POLICIES OF LIFE INSURANCE

 PRIVILEGES &PROCEDURE OF ISSUE OF INSURANCE POLICY

 CONDITIONS TO LIFE INSURANCE POLICIES

- Present Study

 Objectives

 Scope

 Hypothesis

 Methodology

1
 MEANING OF RISK

Meaning & Definitions

Risks – Risk is the name of uncertainty and uncertainty is one of the basic realities of
life. The term risk has a variety of meanings in business and everyday life. At its most
general level, risk is used to describe any situation where there is uncertainty about
what outcome will occur. Life is obviously very risky. Even the short-term future is
often highly uncertain. In probability and statistics, financial management, and
investment management, risk is often used in a more specific sense to indicate
possible variability in outcomes around some expected value.

In the words of William Jr. and Heinz: ―Since no one knows the future exactly,
everyone is a risk manager not by choice, but by sheer necessity.‖

Benjamin Franklin writes: ―In this world, nothing can be said to be certain except
death and taxes.‖

Therefore, uncertainty and risk remain in every part of life. In other situations; the
term risk may refer to the expected losses associated with a situation. In insurance
markets, for example, it is common to refer to high-risk policy holders. The meaning
of risk in this context is that the expected value losses to be paid by the insurer (the
expected loans) are high. In summary risk is sometimes used in a specific sense to
describe variability around the expected value and other times to describe the
expected loses.

TYPESOF RISK

Risks may be classified into two categories: first, pure risks and second, speculative
risks. Then they are divided into static and dynamic risks and subjective and objective
risks. Their brief description is given as under:

(i) Pure versus Speculative Risk

(ii) Static versus Dynamic Risk

(iii) Subjective versus Objective Risk

 Risk

Pure Speculative

Static Dynamic Static Dynamic

Subjective Objective Subjective objective

Source: Reichmann, Hoyt and Somnue, ―Risk Management and Insurance‖, South-
Western Language Learning, 2005.

Broadly, risk may be classified into two categories:

I. Pure Risks,
II. Speculative Risks.

The description of each risk is as under:

(I) Pure versus Speculative Risks

An important classification of risks involves the concepts of pure risk and

speculative risk.

(a) Pure Risk: It exists when there is uncertainty as to whether loss will occur or
not. Examples of pure risk include the uncertainty of damage to property by
fire or flood or the prospect of premature death caused by accident or illness.

(b) Speculative Risk: It exists when there is uncertainty about an event that could
produce either a profit or a loss. Business ventures and investment decisions
are examples of situations involving speculative risk.

(II) Static versus Dynamic Risks

Another way of classifying risks involves the extent to which uncertainty changes
over time.
(a) Static Risk: It can be either pure or speculative, and stems from a changing
society that is in stable equilibrium. Examples of pure static risks include the
uncertainties due to such random events as lighting, wind storms and death.

(b) Dynamic Risk: These are produced because of changes in the society.
Dynamic risks can also be either pure or speculative. Examples of sources of
dynamic risks include urban unrest, increasingly complex technology, and
changing attitudes of legislatures and courts about a variety of issues.

(III) Subjective versus Objective Risks

(a) Subjective risk: It refers to the mental state of an individual who experiences
doubt or worry as to the outcome of a particular event.

(b) Objective Risk: It differs from subjective risk primarily in the sense that it is
more precisely observable and therefore, measurable. It is the probable
variation of actual from the expected experience.

EVALUATION & OBJECTIVES OF RISK MANAGEMENT

Meaning of Risk Management

Risk management is a process that identifies loss exposures faced by an organization

and selects the most appropriate techniques for treating such exposures. Because the
term ―risk is ambiguous and his different meanings, many risk managers use the term
‗loss exposure‘ to identify potential losses.

A loss exposure is any situation or circumstance in which a loss is possible, regardless

of whether a loss occurs.

According to Mark S. Dorfman, ―Risk Management is a logical approach to solving

those problems a business faces because it is expected to the possibility of loss.‖

According to Jain and Jain, ―Risk Management is a systematic process of identifying

and assessing company‘s risks and taking actions to protect a company against them.‖

Risk Management is the process used to systematically manage exposures to risk. The
risk management approach encourages management to put exposures to loss in a
broad perspective, in which insurance is just one of the several possible solutions to
 the problem. Risk Management is best used as a preventive measure rather than as a
reactive measure.

Evaluation of Risk Management

Initial risk management plans will never be perfect. Practice, experience, and actual
loss results will necessitate changes in the plan and contribute information to allow
possible different decisions to be made in dealing with the risks being faced.

Risk analysis results and management plans should be updated periodically. There are
two primary reasons for this:

1. To evaluate whether the previously selected security controls are still

applicable and effective, and

2. To evaluate the possible risk level changes in the business environment. For
example, information risks are a good example of rapidly changing business
environment.

ENTERPRISE

OPERATIONS FINANCIAL STRATEGIC KNOWLEDGE

PROCESS CAPITAL STRUCTURE STAKE HOLDERS INTELECTUAL PROPERTY

PHYSICAL ASSETS REPORTING GOVERNANCE INFORMATIO N

PEOPLE CREDIT AND LIQUIDITY

MARKET STRUCTURE SYSTEMS

LEGAL MARKET
 Objectives of Risk Management

1. Initial Investment and Underwriting

Investment decisions are supported by appropriately documented research and

analysis and made in accordance with company and client guidelines and objectives.
Appropriate recommendations and approvals are obtained to authorize investment
decisions. Legal and credit documentation is complete, adequately safeguarded, and
filed in an organized manner. Private investments are appropriately categorized and
rated.

2. Credit Monitoring

Investment agreement terms and covenants are monitored for adherence and reported
on an ongoing basis. Changes to investment terms, if any, are approved in accordance
with documented limits. Credit risk and investment quality is timely monitored,
appropriately categorized, and rated. Periodic reviews, including collateral security
reviews, are performed timely, appropriately documented, and results are reported.
Remedial action or restricting plans for loans identified as Especially Mentioned or
Watch List are appropriate, timely developed, authorized, and reported to the
Quarterly Loan Review Committee.

3. Investment Portfolio Monitoring

Investment positions and transactions are monitored against company policies and
limits and client investment guidelines and objectives. Exceptions of noncompliance
are properly reported, escalated to senior management, and the resolution is properly
authorized. Third-party investments acquired are allocated to investment accounts on
a reasonable and fair basis.

4. Trading

Trading transactions for publics are accurate, complete, and properly authorized.

5. Valuation and Pricing

Publics – Portfolios are accurately valued using independent sources on a timely basis
and reported to senior management. Discrepancies are researched and resolved timely.
Valuation of private investments is appropriate and documented.
6. Performance Monitoring

Performance measurement, ranking, and attribution analysis is regularly performed,

reviewed, reported, and approved.

7. Initial Disbursements

Funding disbursements are authorized, accurately recorded, timely, and supported by

appropriate contractual agreements and evidence of security.

8. Separation of Duties and Privacy

Effective organizational, logical, and physical security exists and is monitored to

ensure separation of mismatched functions and privacy over confidential client data.

9. Regulatory Compliance

Regulatory requirements are identified and compliance is achieved, monitored, and

reported.

10. Strategy and Direction

Business objectives and plans are clearly established and communicated. Associated
risks are identified, documented, and regularly assessed.

11. Policies, procedures, Authorities, and Responsibilities

Policies, procedures, authorities, and responsibilities are clearly defined and

communicated. Employees have the necessary knowledge, information, and tools to
manage relevant risks and support the achievement of the business unit‘s objectives.

12. Management Information

Management information is sufficient and timely. Performance is monitored against

targets and indicators. Follow-up procedures are established and performed.

Other Important Objectives

Risk management has important objectives. Baron and Thomas have classified these
objectives as follows:-
1. Pre-loss Objectives

2. Post-loss Objectives

1. Pre-loss Objectives: - Important objectives before a loss occurs include

economy, reduction of anxiety and meeting legal obligations.

a) The first objective means that the firm should prepare for potential losses in
the most economical way. This preparation involves an analysis of the cost of
safety programmers, insurance premiums paid, and the costs associated with
the different techniques for handling losses.

b) The second objective is the reduction of anxiety. Certain loss exposures can
cause greater worry and fear for the risk manager and key executives. For
example, the threat of a catastrophic lawsuit from a defective product can
cause greater anxiety than a small loss from a minor fire.

c) The Final objective is to meet any legal obligations. For example,

government regulation may require a firm to install safety devices to protect
workers from harm, to dispose of hazardous waste materials properly, and to
label consumer products appropriately. The risk manager must see that these
legal obligations are met.

2. Post- loss Objectives: - Risk management also has certain objectives after a
loss occurs. These objectives include survival, continued operation, stability of
earnings, continued growth, and social responsibility.

a) The most important post-loss objectives are survival of the firm. Survival
means that after a loss occurs, the firm can resume at least particle operations
within some reasonable time period.

b) The second post-loss objective is to continue operating. For some firms, the
ability to operate after a loss is extremely important. For example, a public
utility firm must continue to provide service. Banks, bakeries, dairies and
other competitive firms must continue to operate after a loss. Otherwise,
business will be lost to competitors.
c) The third post-loss objective is stability of earnings. Earnings per share can
be maintained if the firm continues to operate. However, a firm may incur
substantial additional expenses to achieve this goal, and perfect stability of
earnings may not be attained.

d) The fourth post-loss objective is continued growth of the firm. A company

can grow by developing new products and markets or by acquiring or merging
with other companies. This risk manager must therefore consider the effect
that a loss will have on the firm‘s ability to grow.

e) Finally, the objective of social responsibility is to minimize the effects that a

loss will have on other persons and on society. A firm loss can adversely
affect employees, suppliers, creditors, and the community in general.

RISK MANAGEMENT PROCESS

Risk management is both a top-down and bottom-up process. On the one hand the
process involves certain actions initiated at the top of the organization with downward
flow and on the other; certain actions are required to be taken at the business unit
level with upward flow. At the top level, organizational goals, target earnings and risk
limits are defined and are transmitted from the top level to business units responsible
for transaction with customers in the form of target revenues, risk limits and
guidelines with respect to business unit policies. This is achieved through top down
process.

The monitoring and the reporting of risks are bottom up oriented, starting with
transactions and ending with consolidated risks, revenues and volumes of
transactions.

The aggregation is required for supervision purposes and to compare, at all levels
where decisions are made, objectives and realization.

In the end, the process involves the entire insurance hierarchy from top to bottom, in
order to turn global targets into business unit signals, and from bottom to top, to
aggregate risks and profitability and monitor them.

The risk management process can be explained through an image of pyramid.

The image of pyramid offers a global view of the risk management process, combined
with the risk diversification effect obtained by moving up the hierarchy. Each face of
the pyramid can be through of as a dimension of risk, such as credit risk or market
risk.

Overall Targets
River limits

Group
Business Limits
Transaction
Reporting
Risk and
profitability
allocations

The pyramid image illustrates the important effect of risk diversification.

The overall risk is less than the simple arithmetic addition of all original risks
generated by transactions (at the base of pyramid) or by portfolios of transactions.
From bottom to top, risk diversify. This allows the risks taken at the transaction level
to be increased up to the amount consistent with the capital, once the risks are
aggregated and a significant portion of them is diversified away.

One important challenge of modern risk management is to measure such

diversification effects. Without such quantification there are missing links between
the sustainable risks, as measured at the level of transactions and the aggregated risks
at the top of the pyramid that should he hedged by insurance limited capital.

There are four steps in the risk management steps in the risk management process:-
 Steps in the Risk Management Process

Identify loss exposures

Analyses the loss exposures

Select the appropriate techniques for

treating the loss exposures
Risk Control
Avoidance
Loss
prevention
Loss financing
Risk Financing
Retention
Non-insurance
transfers Commercial

Implement and Monitor the Risk

Management Programmed

Each of these steps is discussed in detail below:-

1. Identifying Loss Exposures

The first step in the risk management process is to identify all major and minor loss
exposures. This step involves a careful analysis of all potential losses. Important loss
exposures relate to the following:-

(a) Property loss exposures such as

 Building, plants other structures.

 Furniture, equipment, supplies
 Computers, computer software, and data
  Inventory
 Accounts receivable, valuable papers and records
 Company planes, boats, mobile, equipment
(b) Liability loss exposures such as

 Defective products
 Environmental pollution (land, water, air, noise)
 Sexual harassment of employees, discrimination against employees,
wrongful termination.
 Premises and general liability loss exposures
 Liability arising from company vehicles
 Misuse of the internet and e-mail transmissions, transmission of
pornographic material.
 Directors and officers liability suits.
(c) Business income loss exposures, such as

 Loss of income from a covered loss

 Continuing expense after a loss
 Extra expenses
 Contingent business income losses.
(d) Human resources loss exposures, such as

 Death or disability of key employees

 Retirement or unemployment
 Job-related injuries or disease experienced by workers.
(e) Crime loss exposures, such as

 Holdups, robberies, burglaries

 Employee theft and dishonesty
 Fraud and embezzlement
 Internet and computer crime exposures
 Theft of intellectual property.
(f) Employee benefit loss exposures, such as

 Failure to comply with government regulations

  Violation of fiduciary responsibilities
 Group life and health and retirement plan exposures
 Failure to pay promised benefits.
(g) Foreign loss exposures, such as

 Acts of terrorism
 Plants, business property, inventory
 Foreign currency risks
 Kidnapping of key personnel
 Political risks
(h) Reputation and public image of the company

A risk manager has several sources of information that he or she can use to
identify the preceding loss exposures. They include the following:-

 Risk analysis questionnaires: - Questionnaires requires the risk manager to

answer numerous questions that identify major and minor loss exposures.

 Physical inspection: -A physical inspection of company plants and operations

and identify major loss exposures.

 Flowcharts: - Flowcharts that show the flow of production and delivery can
reveal production, bottlenecks, where a loss can have severs financial
consequences for the firm.

 Financial statements: - Analysis of financial statements can identify the

major assets that must be protected, loss of income exposures, and key
customers and suppliers.

 Historical loss data: - Historical and departmental loss data over time can be
invaluable in identifying major loss exposures.

In addition, risk managers must keep abreast of industry trends and market changes
that can create new loss exposures and cause concern.
2. Analyses the loss exposures

The second step in the risk management process is to analyses the loss exposures.
This step involves an estimation of the frequency and severity of loss. Loss frequency
refers to the probable number of losses that may occur during some given time period.
Loss severity refers to the probable size of the losses that may occur.

The relative frequency and severity of each loss exposure must be estimated so that
risk manager can select the most appropriate technique, or combination of techniques,
for handling each exposure.

For example, if certain losses occur regularly and are fairly predictable, they can be
budgeted out of a firm‘s income and treated as a normal operating expense. If the
annual loss experience of a certain type of exposure fluctuates widely, however, an
entirely different approach is required.

3. Select the appropriate techniques for treating the loss exposures :-

The third step in the risk management process is to select the most appropriate
technique, or combination of techniques, for treating the loss exposures. These
techniques can be classified broadly as either risk control or risk financing.

Risk control refers to techniques that reduce the frequency and severity of losses. Risk
financing refers to techniques that provide for the funding of losses. Many risk
managers use a combination of techniques for treating each loss exposures.

A. Risk Control

As noted above, risk control is a generic term to describe techniques for reducing the
frequency or severity of losses. Major risk control techniques include the following:

I. Avoidance
II. Loss Prevention
III. Loss reduction
I. Avoidance

Avoidance means a certain loss exposure is never acquired, or an existing loss

exposure is abandoned. For example, flood losses can be avoided by not
building a new plant in a floodplain. A pharmaceutical firm that markets a
drug with dangerous side effects can withdraw the drug from the market.

The major advantage of avoidance is the change of loss is reduced to zero if

the loss exposure is never acquired. In addition, if an existing loss exposure is
neglected the chance of loss is reduced or eliminated because the activity or
product that could produce a loss has been abandoned. Abandonment,
however, may still leave the firm with a residual liability exposure from the
sale of previous products.

Avoidance, however, has two major disadvantages. First the firm may not be
able to avoid all losses. For example, a company may not be able to avoid the
premature death of a key executive. Second, it may not be feasible or practical
to avoid the exposure. For example, a paint factory can avoid losses arising
from the production of paint. Without paint production, however, the firm will
not be in business.

II. Loss prevention

Loss prevention refers to measures that reduce the frequency of a particular

loss. For example, measures that reduce truck accidents include driver
examinations, zero tolerance for alcohol or drug abuse, and strict enforcement
of safety rules. Measures that reduce lawsuits from detective products include
installation of safety features on hazardous products, placement of warning
labels on dangerous products, and institution of quality control checks.

III. Loss reduction

Loss reduction refers to measures that reduce the severity of a loss after it
occurs. Examples include installation of an automatic sprinkler system that
promptly extinguishes a fire, segregation of exposure units so that a single loss
cannot simultaneously damage all exposure units, such as having warehouses
 with inventories at different locations, rehabilitation of workers with job-
related injuries and limiting the amount of cash on the premises.

In conclusion, effective risk control techniques can reduce significantly the

frequency and severity of claims.

B. Risk Financing

Risk financing refer to techniques that provide for the funding of losses after they
occur. Major risk-financing techniques include the following:-

 Retention

 Non-insurance transfers

 Commercial insurance

 Retention

Retention means that, all of the losses that can result from a given loss.
Retention can be either active or passive. Active risk retention means that the
firms aware of the loss exposure and plans to retain part or all of it, such as
collision losses to a fleet of company cars. Passive retention, however, is the
failure to identify a loss exposure, failure to act, or forgetting to act. For
example, a risk manger may fail to identify all company assets that could be
damaged in an earthquake. Retention can be effectively used in a risk
management programmed under the following conditions:-

 No other method of treatment is available

Insurers may be unwilling to write a certain type of coverage, or the coverage

may be too expensive. Also, non-insurance transfers may not be available.

 The worst possible loss is not serious

For example, physical damage losses to cars in a large firm‘s fleet will not
bankrupt the firm if the cars are separated by wide distances and are not likely
to be simultaneously damaged.
 Losses are highly predictable

Retention can be effectively used for workers companion claims, physical

damage losses to cars, and shoplifting losses. Based on past experience, the
risk manager can estimate a probable range of frequency and severity of actual
losses. If most losses fall within that range, they can be budgeted out of the
firm‘s income.

 Non-insurance Transfers

Non-insurance transfers are another risk-financing technique. Non-insurance

transfers are methods, other than insurance by which a pure risk and its
potential financial consequences are transferred to another party. Examples of
Non-insurance transfers include contracts, leases, and hold-harmless
agreements. For example, a company contract with a construction firm to
build a new plant can specify that the construction firm is responsible for any
damage to the plant while it is being built.

 Commercial insurance

Commercial insurance is also used in a risk management programmed.

Insurance is appropriate for loss exposures that have a low probability of loss
but for which the severity of loss is high.

If the risk manager uses insurance to treat certain loss exposures five key areas must
be emphasized:-

 Selection of insurance coverage.

 Selection of an insurer
 Negotiation of terms
 Dissemination of information concerning insurance converges.
 Periodical review of the programmed.
 Implementation and monitoring of risk management programmer

This part of the risk management programmed begins with a policy statement.

First: - The risk management must select the insurance coverage‘s needed.
The coverage‘s selected must be appropriate for insuring the major loss
 exposures identified in step one. To determine the coverage‘s needed, the risk
manager must have specialized knowledge of commercial property and
liability insurance contracts.

Second: - The risk manager must select an insurer or several insurers. Several
important factors come into play here, including the financial strength of the
insurer, risk management services provided by the insurer, and the cost and
terms of protection of policy owner‘s surplus, under writing and investment
results, adequacy of reserves for outstanding liabilities, types of insurance
written, and the quality of management. Several trade publications are
available to the risk manager for determining the financial strength of a
particular insurer.

Third: - After the insurer or insurers are selected, the terms of the insurance
contract must be negotiated. If printed policies, endorsements and forms are
used, the risk manager and insurer must agree on the documents that will form
the basis of the contract.

In addition, information concerning insurance coverage must be disseminated

to others in the firm.

Finally, the insurance programmed must be periodically reviewed. This review is

especially important when the firm has a change in business operations or is involved
in a merger or requisition another firm.

Risk Management policy statement:-

This policy statement is necessary to have an effective risk management programmed.

This statement outlines the risk management objectives of the firm, as well as
company policy with respect to treatment of loss exposures. This statement also
educate and gives the risk manager greater authority in the firms and provides
standards for finding the risk manager‘s performance.
 NEED AND IMPORTANCE OF RISK MANAGEMENT

The need of formal business risk management is driven by the rate of change in
business environment. In a stable environment, well established firms can deal with
their business risks through personal experience, skills of managers and tried and
tested routines. Business risk management skills are a product of a firm‘s successful
evolution and are built into its foundation.

“In a world of change and expansion, critical business risks are much harder to spot,
communicate and manage efficiently. Risk analysts say the relative importance of
business risk is rising in the financial industry for three big reasons.”

-J. N. Jain & R. N. Jain

First, as the wholesale risk and investment markers become more efficient conduits
for the sale and transfer of classic risks, banks are finding that the margins they are
paid for retaining these risks are falling meanwhile; banks are trying to stabilize their
revenues by promoting fee-based services and by widening their range of products,
improving quality of service, branding, product mix, and the depth of the customer
relationship. All these activities attract business risks or oblige institutions to make
risky assumptions that lie outside their traditional areas expertise.

Second, the nature of bank‘s decision-making over how their financial products are
marketed and delivered is changing from interest technology to call centers and
partnership strategies, mangers are being forced to take risky ―yes or no‖
decisions about distribution and technology strategies. These often mean making a
massively expensive investment or, increasingly a risky reliance on partners or other
third parties.

Third, the erosion of regulatory and technology barriers between various financial
sectors is increasing with competitive risks and encouraging the institutions to buy or
build businesses outside their natural areas of expertise. Managing these risks and
liabilities has dominated formal risk management in financial institutions- not the
least because these risks are the focus of interest for regulatory authorities who are
worried on risks to the wider financial system.
 THE CHANGING SCOPE & TOOLS OF RISK MANAGEMENT

Changing Scope of Risk Management

Traditionally, risk management was limited in scope to pure loss exposures, including
property risks, liability risks, and personnel risk. In the 1990s, however, as many
businesses began to expand the scope of risk management to include speculative
financial risks. Recently, some business has gone a step further, expanding their risk
management programmers to consider all risks faced by the organization in following
areas:-

1. Financial risk management

Financial risk management refers to the identification, analysis, and treatment of

speculative financial risks. These risks include the following:-

I. Commodity price risk

II. Interest rate risk
III. Currency exchange rate risk.

I. Commodity price risk

Commodity price risk is the risk of losing money if the price of a commodity
changes. Producers and users of commodities face commodity price risks. For
example, consider an agricultural operation that will have thousands of
bushels of grain at harvest time. At harvest, the price of the commodity may
have increased or decreased, depending on the supply and demand for grain.
Because little storage is available for the crop, the grain must be sold at the
current market price, even if that price is low. In a similar fashion, users and
distributors of commodities face commodity price risks.

II. Interest Rate Risk

Financial institutions are especially susceptible to interest rate risk. Interest

rate risk is the risk of loss caused by adverse interest rate movements. For
example, consider a bank that has loaned money at fixed interest rates to home
purchasers under 15-and 30-year mortgages. If interest rates increase, the bank
must pay higher interest rates on deposits while the mortgages are locked in at
 lower interest rates. Similarly, a corporation might issue bonds at a time when
interest rates are high.

III. Currency Exchange Rate Risk

The currency exchange rate is the value for which one nation‘s currency may
be converted to another nation‘s currency. For example, one Canadian dollar
might be worth the equivalent of two-thirds of one US dollar. At this currency
exchange rate, one US dollar may be converted to one and one- half Canadian
dollars.

Currency exchange rate risk is the risk of loss of value caused by changes in
the rate at which one nation‘s currency may be converted to another nation‘s
currency. For example, a US company faces currency exchange rate risk when
it agrees to accept a specified amount of foreign currency in the future as
payment for goods sold or work performed. Likewise, US companies with
significant foreign operations face an earnings risk because of fluctuating
exchange rates.

Managing Financial Risk

The traditional separation of pure and speculative risks meant that different business
departments addressed these risks. Pure risks were handled by the risk manager
through risk retention, risk transfer, and loss control. Speculative risks were handled
by the finance division through contractual provisions and capital market instruments.
Example of contractual provisions that address financial risks include call features on
bonds that permit bounds with high coupon rates to be retired early and adjustable
interest rate provisions on mortgages through which the interest rate varies with
interest rates in the general economy.

A variety of capital market approaches are also employed, including options

contracts, forward contracts, future contracts and interest rate swaps.

During the 1990s, some businesses began taking a more holistic view of the pure and
speculative risks faced by the organization, hoping to achieve cost savings and better
risk treatment solutions by combining coverage for both types of risk.
2. Enterprise Risk Management (ERM)

Enterprise risk management is a comprehensive risk management programmed that

address an organization‘s risk, speculative risks, strategic risks, and operational risks.
Pure and speculative risks were defined previously; strategic risk refers to uncertainty
regarding the organizations goals and objective, and the organizations strengths,
weaknesses, opportunities, and threats. Operational risks are risks that develop out of
business operations, including such things as manufacturing products and providing
services to customers.

By packaging all of these risks in a single programmed, the corporation offsets one
risk against another, and in the process reduces its overall risk. As long as the risks
combined in the programmed do not exhibit risk. Indeed, if some of the risks are
negatively correlated, risk can be reduced significantly.

Organizations adopting ERM programmed did so for several reasons, among the
reasons cited were, holistic treatment of risks facing the organization, advantage over
competing businesses, positive impact upon revenues, reduction in earnings volatility,
and compliance with corporate governance guidelines. Some barriers cited by survey
respondents included: organization culture, turf battles, management‘s perception that
ERM is not a priority, lack of a formal process, and deficiencies in intellectual capital
and technology.

CHANGING TOOLS OF RISK MANAGEMENT

The changing tools in risk management are as under:

1. Risk management information systems (RMIS)

2. Risk management intranets and web sites
3. Risk maps, and
4. Value at risk (VAR) analysis.

1. Risk Management Information Systems (RMIS)

A key concern for risk managers is accurate and accessible risk management data. A
risk management information system (RMIS) is a computerized database that permits
the risk management to store and analyses risk management data and to use such data
to predict and attempt to control future loss levels. Risk management information
systems may be of great assistance to risk management in decision making.

2. Risk Management Intranets And Websites

An intranet is a website with search capabilities designed for a limited, internal

audience. For example, a software company that sponsors trade shows at numerous
venues each year might use a risk management intranet to made information available
to interested parties within the company. Through the intranet employees can obtain a
list of procedures to follow along with a set of forms that must be signed and filed
before the event can be held.

3. Risk Maps

Risk maps are grids detailing the potential frequency and severity of risks faced by the
organization. Construction of maps requires risk managers to analyze each risk that
the organization faces before plotting it on the map.

4. Value At Risk (VAR) Analysis

VAR is the worst probable loss likely to occur in a given time period under regular
market conditions at some level of confidence. The concept is often applied to
portfolio of assets, such as mutual fund, or a pension fund, and is similar to the
concepts of ‗maximum probable loss‘, in traditional property and liability risk
management. For example, a mutual fund may have the Following VAR
characteristics: there is a 5 percent probability that the value of the portfolio may
decline by Rs. 50,000 in a single trading day. In this case, the most probable loss is
Rs. 50,000, the time period is on trading day, and the level of confidence is 95
percent. Based on a VAR estimate, the risk level could be increased or decreased,
depending on risk tolerance. Value at risk can also be employed to examine the risk of
insolvency for insurance.
 LIFE INSURANCE

MEANING & SCOPE OF LIFE INSURANCE

Life insurance means to insure the human lives. It is a contract under which insurer
promises to assured or representative to give a fixed amount in lieu of fixed
consideration in case of unexpected or expected happening of an undesirable or
desirable event. In life insurance, event may be death or expiry of fixed term of life
insurance policy. When life of a person is insured, the foundation of his economic
stability is laid down at that moment.

Life insurance may also be defined as a commonly accepted custom through which
risk is ended, uncertainty is replaced by the certainty, and which makes the assistance
available in case of untimely demise of earning person. In broad sense, life insurance
is such a symbol of civilization which solves the economic problems of a person
through society. As means of providing risk solution, its use is to solve the problems
in case of death or situation of helplessness.

Some quotations published by the Life Insurance Corporation clarify the meaning of
life insurance:

 Life insurance is a necessity rather than luxury.

 Life insurance is an insurance of life-style with life.
 Life insurance is a right of will before receiving it.
 Life insurance is a provision of income in case of losing work energy.
 Life insurance is a representation of affection towards dependents.

Section 2 (11) of the Insurance Act, 1938 has defined the life insurance business.
According to that, ―Life insurance business means the business of effecting
contracts of insurance upon human life, including any contract whereby the payment
of money is assured on death (expect death by accident only) or the happening of any
contingency dependent on human life, and any contract which is subject to payment
of premium for a term dependent on human life and shall be deemed to include?

a) The granting of disability and double or triple indemnity accident benefits, if

so provided in the contract of insurance,
b) The granting of annuities upon human life and

c) The granting of superannuation allowances and annuities payable and of

persons engaged or who have been engaged and any particular profession,
trade or employment or of the dependent of such persons.‖

In brief, life insurance is a contract under which fixed amount is paid to the insured or
an authorized person in case of happening of an event in lieu of fixed premium to
provide security against the risks related to human lives.

NEED AND IMPORTANCE OF LIFE INSURANCE

Need of Life Insurance

The above mentioned definitions of life insurance focus on some important elements
of life insurance. These important elements are security element and investment
element. In life insurance security means to get security in case of happening of an
unprecedented event or events and investment means the amount which may be
acquired at the end of a specified term by paying the premium to the insure.
Investment is a result of saving and through savings human beings want to fulfill
many of their futuristic needs.

Every human being has to bear the family responsibilities. And the fulfillment of
these responsibilities cannot be possible without financial resources. Money is needed
for the livelihood of children, their education, marriage, etc. In addition, money is
also needed for fulfillment of social customs. Not only this, every person also wants
to manage some money for his old age when his source of income will end or will be
comparatively low. Simultaneously, with the growing age of children, the volume of
expenditures upon them will also be comparatively more.

Saving is the only source to fulfill the ever increasing requirements of life and this
saving may be done in many ways. For example, saving may be done by opening a
bank account. Although, bank savings are a best source of money saving but security
element is absent in it like in life insurance. In case of untimely demise, money
deposited in the bank with interest may be received but in life insurance, at this time,
payment is made of insured sum. Thus, with the other kind of saving, a person gets
only that which he saved while from life insurance he gets that which had been
promised for. In this form, object of life insurance becomes very clear.

The life of any person is valuable not only for him but also for his dependents. If he
remains alive for sufficient time and is capable enough to earn for the livelihood of
his dependents, then it is all well, but in case of his untimely demise or decrease in
capacity to earn, the lives of his dependents will be in a critical situation. The scarcity
of money assumes a critical form. In this complex situation, security of life is
welcomed.

The need for life insurance is created due to three risks, they are-death, old age and
incapacity.

Incapacity may be of both temporary and permanent nature. Temporary incapacity is

illness, etc. and permanent incapacity may be the consequences of accident, etc. In
both the situation, life insurance is the best system to provide security from the
drawbacks and failures.

Life insurance is also the means of capital investment is the management of

permanent income. Annuity, which is one part of life insurance, through that life with
a permanent income may be managed.

Through the group life insurance, the management of group security is done for the
working employees in offices and factories. Hence, on one side, the burden of risk on
the employer reduces and on other side, employer becomes responsible for one part of
contribution. IN brief, life insurance is needed because:

 It Covers the Risk of Death:

The risk of death is covered under insurance scheme but not under ordinary
savings plan. In case of death, insurance company pays full sum assured,
which would be several times larger than the total of the premiums paid.
Under ordinary savings plans, only accumulated amount is payable.

 It Encourages Compulsory Saving:

After taking insurance, the premium is not paid, the policy lapses. Therefore,
the insured is forced to go on paying the premium amount continuously. In
 other words, it is compulsory. A savings deposit can be withdrawn very easily
at any time.

 Easy Settlement and Protection against Creditors:

Once nomination or assignment is made, a claim under life insurance can be

settled in a simple way. Under M.W.P. Act, the policy amount becomes a kind
of trust, which cannot be taken away, even by the creditors.

 It Helps to Achieve the Purpose of Life assured:

If a lump sum amount is received in the hands of anybody, it is quite likely

that the amount might be spent unwisely or in a speculative way. To overcome
this risk, the life assured can provide for that the claim amount be given in
installments.

 Insurance Facilitates Liquidity:

If a policy-holder is not in a position to pay the premium he can surrender the

policy for a cash sum.

 Loan Facility and Tax Relief:

The policy-holder can also take a loan for a temporary period to tide over the
difficulty. Sometimes, a life insurance policy is acceptable as security for a
commercial loan. By paying the insurance premium, the assured obtains
significant relief from income tax and wealth tax.

Importance of life insurance

The insured has many benefits of life insurance; hence, life insurance is the most
important activity in the eyes of assured. But insurance which was mainly started for
providing benefits to the insured, today its significance has increased due to its
subjective benefits which are available for other groups and segments also. In the
present era, many advantages of life insurance are available to industry and business
and there are many utilities of it from the social point of view also.

The important of life insurance may be divided into four categories from the study
point of view:
 I. Advantages to Insured
II. Advantages to Industry and Trade
III. Advantages to Society and Government
IV. Other Benefits

(I) Advantages to Insured

The insured has following advantages of life insurance:

 Family Protection

Life insurance is understood to be very important means for family protection.

It provides safety to the dependents after death. The human being is always
worried that what will happen to his family after his death and in this worry he
desperately tries to save money at the cost of minimizing the requirements.
But all other methods of savings are incapable to provide that security which
life insurance provides him.

 Provision for Education and Marriage

Today, the burden of social customs and traditions has increased significantly.
Money is needed for the marriage, education of the child and every person has
a desire that these tasks may be fulfilled without any hurdles. Many people are
incapable to fulfill their wish due to lack of money. Life insurance helps to
fulfill this desire of human beings. Money may be arranged easily by taking
education and marriage insurance policy.

 Provision for Old Age

Any person is confident and relaxed till he has sufficient earnings. But any
sort of limitation in the income may disturb his life. At the young age the
human beings has power and capacity and his sources of income may be
sufficient, but one day old age comes. Today‘s paid premium when received
tomorrow in the form of big amount, then old-age troubles will remain half.

 Encouragement to Thrift

Life insurance also encourages individual thrift. Through this, long-term

savings may be done without any hardship by monthly, quarterly, help-yearly
 or annually. After taking insurance, saving becomes essential to maintain it
and for this the assured reduces his unnecessary expenses.

 Increase in Credit

The credit of assured is also increased by taking life insurance. A loan may be
acquired on life insurance policy for the insurer himself. On this basis, loan
can also be taken from other financial institutions like banks etc. because life
insurance policy is accepted as a security.

 Tax Relief

There is also a provision of tax exemption on payment of life insurance

premium. Thus, the premium amount paid is automatically deducted from
income while calculating tax liability, hence, burden of tax payment is reduced
after getting tax exemption.

(II) Advantages to Industry and Trade

 Provision for Loans

Life insurance is a convenient source to acquire loans for the industry and
business. On life insurance policies, loan may be acquired from other sources
on the basis of surety provided by the insurer.

 Facility of Capacity

Life insurances also invest the premium income in the form of capital and loan
in the industrial and business units. If we take an overview of such life
insurers, then it will be known that they collect the premium from a huge
number of assured as savings and invest that amount in the government and
non-government institutions. Thus, they do the function of capital formation.

 Insurance by Partners

Partners of any partnership firm may take such joint insurance through which
in case of death of a partner, the amount of insurance may be availed by the
remaining partners.
 Group insurance

Today, it is possible by life insurance that any industrialist or businessman can

take group insurance of all his employees. In group insurance, insurance is
made of employees and premium rate is decided on the basis of group not on
individual basis. The insurance policy is named as group insurance policy.

 Security of Loans

The other benefit of life insurance is that the creditors may secure his loan
amount by insuring the life of the debtor.

(III) Advantages to Society and Government

 Industrial Development

Life insurance is also helpful in the industrial development of the nation. A

significant contribution is given in industrialization by life insurance through
providing investment assistance to industries of the country.

 Provision of Providing Resources to the Government for Economic

Development

For safety point of view, life insurance institutions want to invest their money
in the government loans and securities. Sufficient provisions have been made
in the investment policy of LIC.

 Self-dependence

Life insurance makes human being self-dependent and hence reduces the
burden on the society. After making provisions for the future, unnecessary
dependence of him and his dependents on the society are reduced.

 Reduction in Unemployment problem

Life insurance helps to reduce the unemployment problems directly and

indirectly. Many people get employment in the life insurance institutions. It is
also helpful in increment of the source of employment by assisting in the
economic plans.
 Social Satisfaction

Dissatisfaction takes birth due to scarcity. Economic scarcity creates such

dissatisfaction which becomes the basis cause of revolutions. Life insurance
creates both the individual and social satisfaction by providing economic
security.

(IV) Other Advantages

 Peace of Mind

Life insurance ends the confusion in the mind of human being by providing
economic safety. The human being feels mental peace while experiencing
being totally secured.

 Efficiency

Safety and peace keep the morale of human being higher and a motivated
person may carry out the work with more dedication and promptness.

 Defeat of Time

Money saving needs time and who known that how much time destiny gives
to any person. Sometimes, even time gets defeated at the hands of destiny.
Life insurance maintains coordination between time and expectations.

IMPORTANT PRINCIPLES OF LIFE INSURANCE

Life insurance in simpler terms is a method to bear the burden of risks related to
human life by many persons. In it, burden of financial losses is spread over the
maximum number of persons, which is not possible to be borne by a single person.
Thus, life insurance is a collective activity and effort in which many persons meet on
the basis of very low financial participation for the security in the probability of risks
arising out of similar hard work. For making this corporation possible, the concept of
insurance business have originated, the activity of risk bearing and collective effort of
life insurance is based on many principals. These principles of life insurance are as
follows:
(1) Cooperation of Large Number

The basic principle of insurance is cooperation of large number for the same risks.
Although, mutual cooperation for bearing the risks in very small number will also be
called insurance, but in this situation, the contribution towards loss due to risk borne
by the person included will be comparatively very large. Simultaneously, the
collected amount for bearing the risks will also be very large comparatively per
person, and which may be out of the capacity of each to bear. So, considering these
two aspects, as more persons cooperate, there is need to bear less amount of
contribution and less burden of losses. It also indicates the relationship of numerical
element of collaborative contribution with the quantity of contingent losses during the
prescribed time. According to this principle, if cooperative number is more, then
contingent losses will also be closer to average experience.

The principle of cooperative of large number thus indicates towards the two important
elements;

(a) To minimize individual contribution through allocation ofindividual losses.

(b) To escape from the changes in the form of average loss experience of risk
during the prescribed period.

(2) Equality of Risk

This principle of life insurance is based on the assumption that in spite of many
inequalities, risks related to human lives have basically the same impact in every
situation. On the basis of this principle, there is an arrangement of same premium for
fixed nature of risk. But an adjustment is also made on the basis of distinction in the
elements related to life. This discrimination is maintained in the rates of premium on
the basis of differences in age, occupation, health, etc.

(3) Insurance Protection

According to this principle, although many persons insured of any one risk but they
do not claim for the insurance amount at one time for bearing the losses. This is
because different assured persons may incur losses and claim for the insured amount
at different times. Hence, insurer has an opportunity to invest the premium amount
and gets income by doing so, out of which average contingent loss may be managed
during the decided time. So, insurance is a management of security for both assured
and insurer.

(4) Definite and Fortuitous Loss

This is not possible for the insurer to bear such risks which are manageable and in the
control of individuals. For insurance, the determination of risk must be with event
oriented method. In the life of human beings, only those losses are insured which are
definite and fortuitous. The fortuitous fact of death is untimely demise of human
being, which may be insured.

(5) Calculable Cost of Loss

The premium amount is already decided by the insurer and this is possible only when
he has sufficient bases for its determination. Generally, the basis of premium
determination is prior experience which is tabulated in the form of mortality rates.
Mortality tables show a certain death ratio at certain age in a year.

(6) Homogeneous Exposure

In normal situation, insurer will be benefited in the condition when the extension of
insurance is up to separate and similar insurance risks. This principle indicates the fact
that on one side homogeneous exposure is expected for the same kind of risk, on the
other hand, by keeping all eggs in one basket, expected objectives cannot be achieved.
The insurer makes efforts to diversify the insurance line so that risk and participation
elements in insurance may be widely extended.

CONDITIONS TO LIFE INSURANCE POLICIES

The conditions and privileges given in the insurance policy may be dividend in the
following groups as per convenience of study:

(A) Conditions relating to nature of the contract.

(B) Conditions regarding probability of the contract.
(C) Other facilities.
(D) Payment-method and payment-receiver.
A. Conditions Relating to Nature of Contract:

In these conditions, proof of age, payment of premium, forfeiture under special

circumstances, assignment and nomination relating conditions are included.

a) Proof of age:

The age which is given by the assured in the proposal from, the amount of
premium is calculated according to the same age. If afterwards, the age of
assured is found more than age mentioned in the proposal form, then assured
is liable to pay the remaining amount of premium due to increased age, and if
he does not pay then insurer has the right to deduct it from the amount with
interest at the time of payment of maturity amount.

b) Payment of premium:

The payment of premium for the insurance policy may be annually, half-
yearly, quarterly or monthly. The payment of premium is supposed to be in
advance than the due date.

c) Grace period:

If payment of premium is annually, half-yearly or quarterly then grace period

is provided to the extent of 30 days means premium may be paid within 30
days from the due date. In case of monthly payment, grace period is only of 15
days. If assured dies during this period, even then the policy remains valid.

d) Forfeiture under special circumstances:

In the insurance policy, those circumstances are also mentioned where policy
may be forfeited. According to life insurance policy norms, a policy may be
forfeited in the following circumstances:

(I) If premium has not been paid regularly.

(II) If there has been any violation of any terms noted or mentioned in the
insurance policy.
 (III) If there is any miss-statement in proposal form, personal declaration
statement or related documents or any material information has been
left as undisclosed and has not been mentioned in the policy.

In the above mentioned conditions, the insurance policy becomes illegal according to
the provisions of section 45 of the Insurance Act, 1938 and all benefits-interests are
ended relating to it and all amount paid to the corporation is also forfeited by the
corporation.

According to section 45 of the Insurance Act, 1938, it has been provisional that on the
basis of miss-statement or concealment of facts, insurance policy can be cancelled
within 2 years of its issuance. After 2 years, it can be cancelled in the condition only
if it has been proved that miss-statement or concealment was related with the
important material facts and made with an intention of fraud and assured knew that it
was untruthful on his part when related to important facts.

B. Conditions Restricting the Contract

 Suicide

Suicide has been considered as an insurance risk, but suicide within one year
of the commencement of risk makes the policy liable to be cancelled. But in
this situation the corporation is responsible for such person who has got a right
in lieu of variable consideration and such information has already been sent in
written to the corporation just before one calendar month of the death.

As far as the impact of this condition is concerned, there will be no adverse

effect on legality of the insurance if assured becomes a lunatic or commits
suicide after one year of the commencement of the risk and the claim may be
made under the insurance policy.

 Restriction on interest-benefit in the claim relating to disability or death

These are some restrictions that have been laid down to confine the claim for
either the interest-benefit or other facilities relating to death or disability,
which would be mentioned separately under the heading of other facilities.
The corporation will not be responsible to pay such profits, if death or
disability of the assured occurs due to the following reasons:
 1. To injure himself intentionally, to commit suicide, due to lunacy or
immoral conduct, or having liquor, drugs or medicines.

2. If due to such accidents while assured was on duty related to civil

aviation etc. But this provision will not be applied if travelling was
made after paying the air fair or rent.

3. Any injury due to riots, civil disorders, militant‘s revenge, war attack,
rock climbing, high-low jumping race or any other reason.

4. Due to reach of any laws by the assured or

5. Services of the assured in an army involved in war or any aggression

undertaken by army, air force, navy or any police organization.

C. Other Facilities:

Accident interest benefit:

In case of physically-handicapped condition of the assured or death, there is a

provision of accident interest benefit as an additional facility. According to this
provision, assured may get accident interest benefit, if before the due date of last
premium payment of the current policy or before the anniversary date of policy, on
which assured age will be 65 years (whichever is earlier). Accident interest benefit
becomes due in two situations:

a. In case of physically-handicapped Stat of Assured:

(i) Additional amount of interest benefit equal to the actual amount of

policy will be paid monthly during the 10 years period but if claim is
presented in the middle or just before the expiry of 10 years duration,
then previous installments due for such lapsed period will be given
with the claims.

(ii) Assured will get exemption from payment of further installments.

(iii) Interest benefit will be given for maximum Rs. 1, 00,000 or the total
amount of insurance policy on the person‘s life, not exceeding Rs.
1,00,000.
 (iv) Physically-handicapped state should be due to accident and of
permanent nature so that assured becomes unable to do any work for
any remuneration, profits etc.

(v) After a person has become physically-handicapped, and its information

have already been given to the corporation office.

B. In case of death of assured: In case of death of assured due to accident,

different provisions regarding eligibility to get interest benefits are as follows:

I. Interest benefit will be payable to assured in case accident occurs due

to external, dangerous and visible instruments and physical damages
directly due to that reason.
II. The assured dies within 90 days due to above mentioned causes.
III. Interest benefit would be equal to insured sum of the policy.
IV. Total amount will not exceed Rs. 1, 00,000 to be given on a specific
policy or other policies of the assured as an additional amount of
accident interest benefit to be not more than Rs. 1, 00,000 on all such
policies of the assured.

(D) Payment Method and Payment Receiver: In insurance policy, these two
aspects are also included and described. The payment method depends on the
nature of insurance policy. The payment is made to assured himself or to his
nominee or assignee or otherwise to his legal representative. These are
discussed on the cover page of the insurance policy. The payment method is
described under the clause‘ when and how insurance amount will be received‘
and on the payment receiver clause, the following are included:

(1) proposer
(2) Assignee of the proposer
(3) Nominated person by the proposer
(4) Certified manager, administrator
(5) Legal representative
PRIVILEGES & PROCEDURE OF ISSUE OF INSURANCE POLICIES

1) Reinstatement of closed policies:

As it has been discussed earlier, a policy becomes lapsed in case of non-payment of

premium even during the grace period. But there is a provision to reinstate the lapsed
policies. According to this provision if assured during his life time before the
completion date of policy, within five years from the date of non-payment of
premium, (a) presents a satisfactory proof of his insurability and (b) deposits the
remaining amount of premium with interest, informs the corporation about this, then
he can get his policy reinstated.

2) Rule regarding security against forfeiture:

The Corporation also has a provision that if minimum three years premium has been
paid, then according to rules, the policy will not be illegal, even in case of non-
payment of any premium further after three years. Such policy will be paid up from
the remaining amount. This deducted amount will be payable on completion of time
duration or death of assured before that and such amount should not be less than Rs.
250.

3) (A) Surrender value:

Under Section 113 of Insurance Act, 1938, the policy of life insurance under which
the whole of benefit become payable on a contingency, which is bound to happen,
shall if all premiums have been paid for at least 3 consecutive years, acquire a
guaranteed surrender value to which shall be added the surrender value of any
subsisting bonus already attached to the policy.

Further Section 113 (2) provides that a policy has acquired surrender value shall not
lapse by reason of non-payment of further premiums but shall be kept alive to the
extent of paid-up sum assured and such paid-up sum shall include in full all subsisting
reversionary bonuses that have already attached to the policy. Such amount shall not
be (excluding attached bonuses) less than the amount bearing to the total period for
which premiums have already been paid bears to the maximum period for which
premiums were originally payable.
 The paid-up value is calculated as under:

No. of Installments Paid x Sum Assured + Bonus Paid-

up Value =
Total No. of Installments Payable

Paid-up value x Surrender Value Factor

Surrender Value (SV) = 100

The surrender value factor depends upon the following:

 Rate of interest earned by the insurer

 The payment made in advance for number of years
To illustrate the paid-up and surrender value the examples are given below.

Example:

Sum Assured = Rs. 50,000

Age = 35 years
Date of commencement = 1-4-90
Term = 20 years
Mode of Payment = Yearly
Last Premium Paid = 1-4-2001
Surrender Value Factor = 60%

Calculation of paid-up value and Surrender Value:

No. of Installments Paid = (1-4-2001 – 1-4-90) + 1

= 12

(Note: Because the installment on 1-4-90 is also paid)

Total Installments Payable = 20
Paid-up Value = 12/20 x 50,000
= 30,000
Surrender Value = 30,000 x 60%
= Rs. 18,000
(B) Guaranteed surrender value:

The insurance policy becomes eligible for surrender after paying the premium till the
fixed period. After surrendering the policy, cash value may be received, if premium
has been paid for minimum 3 years period. This surrender value will be for the
remaining amount after deducting first year premium, additional amount of all types
of premium and premium paid for the accident benefit, out of the total amount of
premium paid. The cash value will also be given for the accrued bonus.

4) Loans:

At present, loan proposals are accepted by the corporation up to the surrender value of
policies. The minimum amount of loan is Rs. 250. There is a provision of payment of
interest on half-yearly basis on the loans. The loans are not given for less than 6
months duration. This facility regarding advances is available or not, it is mentioned
in the terms of the policy.

VARIOUS PLANS & POLICIES OF LIFE INSURANCE

There are many plans prevailing in the life insurance sector. From the diversity of
plans, one question arises obviously that what is the need of so many plans? There are
different needs of human beings who want to make any decision according to their
requirements. Not only this, the circumstances in which they live, are not common
and normal. It is necessary to consider and include all these circumstances in the
insurance plans.

The prevailing plans of life insurance are being discussed here under the following
headings:

(I) Whole Life Insurance Plans

(II) Endowment Insurance Plans
(III) Annuity Insurance Plans
(IV) Term Insurance plans
(V) Group Insurance Plans
(VI) Children Provision Plans
(VII) Salary Saving Scheme
 (VIII) Life Insurance Plans for Ladies and Minor Girls
(IX) Insurance Plans for Physically Handicapped
(X) Non-Medical Insurance Plans

(I) WHOLE LIFE INSURANCE PLANS

The risk is covered for the entire life of the policy-holder that is why they are known
as Whole Life Policies. The policy money and the bonus are payable only to the
nominee or the beneficiary upon the death of the policy-holder. The policy-holder is
not entitled to get any amount during his or her own lifetime, i.e., there is no survival
benefit. This represents a serious drawback in the case of whole life policies for they
go on covering a policyholder‘s life even after his life has no further economic value
for others. In this sense, whole life policies are fairly rigid and suitable only for few,
very specific cases.

Whole Life Insurance Plans

Ordinary SpecialLimited Payment Anticipated

Whole life Insurance Whole LifeWhole Life InsuranceInsurance
Whole Life Insurance

Convertible Whole Whole Life Single Premium

Life Insurance with Profit Whole Life

(II) ENDOWMENT INSURANCE PLANS

Endowment insurance plan is a plan in which sum assured is paid to policy holder on
the maturity of insurance policy or during the period if the assured is dead. In the case
of death of assured the amount of policy would be paid to nominee. In this plan
insurance is done for a prescribed duration and its object is both investment and
security.
 Endowment Insurance Plans

Ordinary Pure Double Joint Life

Endowment InsuranceEndowment InsuranceEndowment InsuranceEndowment Insurance

Anticipated Limited Fixed Term Endowment

Endowment Payment Marriage with
Insurance Endowment Endowment Profit
Insurance Insurance

(III) ANNUITY INSURANCE PLANS

Annuity insurance plans are beneficial for those persons who are willing to arrange a
source regular income for themselves or their dependents. Under these plans,
companies contract to pay a certain amount regularly to the assured at fixed age or for
whole life.

Annuity Insurance Plans

Immediate Annuity Deferred Annuity Education Annuity

(IV) TERM INSURANCE PLANS

Life insurance plans which provide only risk cover during a specified period without
any survival benefit are called Term Insurance Plans.

In the case of a Term Life Insurance Contract, the sum assured is payable only in the
event of death during the term. There is no refund of premium. These policies are
usually non-participating. Since only death risk is covered, the premium is low and
the contract is simple. Of late, however, some companies do offer participating
policies under term insurance plans.

The Terms of life insurance contracts are usually long, even up to 40 years or more.
The term may also be restricted to short periods. They help to provide collateral
security for loans.
Some insurers offer term insurance policies for longer terms of 3, 5, or 6 years with
fixed (level) premium payable each year. Such contracts can be renewed for further
equal periods till the life assured reaches the age of 65 years.

The term insurance policies are useful to those:

(1) who need extra-protection for a short duration; or

(2) due to ill-health who need protection for a longer duration but are unable to
purchase, for the time being, or less income;

(3) a young businessman can take the policy to save the business disaster during
initial stage of business;

(4) key men‘ insurance are generally on term insurance basis;

(5) a mortgagor of the property may be benefited by this scheme;

(6) a father can take this policy during the period of education of his child; and

(7) Any such persons who are willing to have insurance cover for a shorter period.

The life insurance companies issue the following types of term insurance:

Term Insurance Plans

Two Years Temporary Convertible Term

Insurance Policy Insurance Policy

In Term Insurance Plan, the payment of insurance amount is made only on the death
of assured in the prescribed duration. Hence, this plan is merely a safety plan. The
premium rate is comparatively low for the term insurance policy. If it is compared
with the endowment insurance, then clearly it is the opposite of the endowment
insurance. Whereas, in endowment policy, there is a provision of payment of
insurance amount in case of a person being alive after a certain period or death during
a certain period, but in term insurance, insurance amount is provided only in case of
death during a certain period, otherwise not.
 (V) GROUP INSURANCE SCHEMES

Life insurance companies make the arrangement for benefits of life insurance such as
safety and retirement benefits in the group insurance schemes in the same manner as
employer himself does under the employee welfare programmers. Group insurance
schemes persuade the employees towards more production and hence more
productivity in business by boosting their morale‘s. These schemes are issued
comparatively at a lower premium due to being economic in the administrative
expenditure of a company, and being of a collective nature. These schemes are
convertible according to the specific requirements of the group and the customers of
life insurance companies.

The life insurance companies have an arrangement of following group schemes:

Group Insurance Schemes

Group Group Group Group Group

Gratuity Super- Term Saving Scheme for
Scheme annotatio Insurance linked weaker
n Scheme Scheme Insuranc sections of
e society

(VI) CHILDREN PROVISION PLANS

Through this plan, insurance may be made on the life of Child for a larger amount at
minimum premium rate. This insurance may be in the form of limited payment
whole life insurance or limited payment endowment insurance in which risk cover
starts with the selected age. The plan is two stages, in which one step is the date of
commencement to deferred date and second step is from deferred date to maturity
date. In this plan, insurance policy is issued for both the two steps.

Children Provision Plans

Children New Children Children's Children Money

Deferred Deferred Anticipated Back Plan
Insurance Plan Assurance Plan Insurance Plan
(VII) SALARY SAVINGS SCHEME

Salary Savings Scheme is not a specific scheme of life insurance but a facility which
is available to employees working in any institution. Under this scheme an employee
can opt for deduction of the insurance premium directly from his salary. The total
amount of such deduction of all the employees is sent by the employer to the LIC
with details of each employee.

Salary savings scheme is different system of group insurance scheme. Every

employee takes life insurance policy on personal basis and can also end this option.
This insurance continues even after the employee‘s termination from services till the
total duration of the insurance cover.

(VIII) LIFE INSURANCE FOR LADIES AND MINOR GIRLS

In the view of LIC, the specific object of life insurance is optional arrangement of
earning power and in this regard when most of the ladies are not involved in the
employment, then in this situation life insurance has less significance. The ladies
who are living alone, they certainly need some money arrangement for the old age, if
their lives are dependent on their jobs.

If life insurance is essential for the ladies even then to get the information relating to
their health and personal life is not easy. The excess of their mortality rate due to
physical risks also creates some difficulties for their life insurance. Various elements
like education level and socio-economic level also increase moral risks in their lives.

(IX) INSURANCE PLANS FOR PHYSICALLY HANDICAPPED

Under this plan any person can take insurance on his own life for securing future
payment of funds to his dependent or nominee in lump sum or as on annuity if the
person, by providence, becomes physically handicapped. The payment of insured
sum for the dependent(s) of the disable person will be made to the nominated person
under the policy who may be handicapped person‘s dependent. The insurance
duration may be for 10/15/20/25/30 or 35 years.
 Insurance plans for physically handicapped

Jeevan Aadhar Jeevan Vishwas

(X) NON-MEDICAL INSURANCE PLANS

The following types of non-medical plans have been designed the LIC:

Non-Medical Insurance Plans

Non-Medical Non-Medical Scheme

Scheme for for Category 'A-1'
Approved Scheme officers in
Employees Armed Forces

Non-Medical
General Scheme

OBJECTIVES OF THE STUDY

The main objective of the present study is to analyze the risk management of life
insurance companies in India. This study has been undertaken with the following
objectives.

1. To analyze the growth and development of Life Insurance companies in India with
a focus on Risk Management.
2 . To obtain a true insight into the appraisal of Risk Management of life insurance
companies in India.
3 . To evaluate the changes, which have taken place during the last seven years and
examine their financial position?
4 . To examine the scope of improvement in the profitability of life insurance
companies in India by eradicating factors responsible for comparatively low profit
margin.
5 . To find out with in the life insurance companies which one is providing better
services to the customers.
SCOPE OF THE STUDY

The scope of this study is spread over seven years from 2003-04 to 2009-10. The
study is based on a comparative analysis of the following Life Insurance Companies.

1. Life Insurance Corporation Ltd.

2. ICICI Prudential Life Insurance Ltd.
3. HDFC Standards Life Insurance Pvt. Ltd.
4. Birla Sun Life Insurance Ltd.
5. Bajaj-Alliance Life insurance Ltd.

HYPOTHESIS

Hypothesis basically is a statement of belief which is to be tested. ―A hypothesis is

proposition, condition or principle which is assumed, without belief, in order to draw
out its logical consequences, and by method to test its accord with facts which are
known or may the determined.‖

The hypotheses are two types:-

 Null hypothesis, and

 Alternative hypothesis

The study is based on the hypothesis that the risk management of the Life Insurance
companies under study is not satisfactory and there are prospects to improve it. In this
study I will follow as null hypothesis.

METHODOLOGY

To achieve the basis objective of the proposed study, the following research design
will be adopted.

(A) Sources of Data: -

In this research study both primaries as well as secondary data will be used. As much
possible, primary data shall be collected with the help of questionnaires, meeting and
views of official‘s etc. secondary data shall be collected through the various reports,
newspapers, periodicals and data available from the concerned companies and any
other publication available related to that.
(b) Tools and techniques of financial performance: -

In this research study various techniques related to risk management shall be adopted.
Techniques of interpretation of financial statement analysis, trend analysis, ratio
analysis and cost of capital will be applied to conduct and make the present study
more fruitful. The statistical techniques like mean, range, index number, correlation,
regression, standards deviation, various tests i.e. ‗T‘ test, chi-square test and ‗F‘ test,
graphs and diagrams shall also be adopted.

Performance of an individual Life Insurance Company is insignificant for this

purpose, inter comparison within the Life Insurance Companies as a whole are very
essential. Therefore, a comparative study will be made for the purpose; the income
statement and financial statement of Life Insurance Companies will be recast and
presented in a condensed form.