PBI - Unit 4 & 5
PBI - Unit 4 & 5
PBI - Unit 4 & 5
Financial Risk
If a risk leads to financial loss that can be measured in
monetary terms, it is known as financial risk. Example:
Loss from theft of equipment as it will affect the enterprise
financially.
Individual risk
Individual risks are confined to specific individuals as it
affects only that specific person. Example could be of risk
associated with fire.
Premature death,
Disability,
Sickness,
Unemployment.
Obsolescence.
Speculative risk
Speculative risk is defined as a situation where there is
possibility of a gain/loss. It is a risk that’s voluntarily
assumed. For example: Investing in public securities.
Dynamic risk
Dynamic risk involves losses mainly concerned with
financial loss as a result of the frequently changing
business environment. For example: Changes in price level,
changes in consumer preferences, development of new
technology leading to decline in sales and profits and rise
in costs.
It refers to the risk that a lender may not receive the owed
principal and interest, which results in an interruption
of cash flows and increased collection costs.
Loss
Loss means being without something previously possessed.
Perils
Perils refer to immediate causes of loss. Eg: Fire, Collusion.
Hazards
Conditions that increase the severity of loss are called hazards.
For example: Stocking crackers in a cramped shopping complex,
putting fire to own factory incurring losses, deliberate collusion,
fraudulent insurance. Sandeep KS Lecture Notes
Risk-Return Relationship
-If you give a friend $1000 today, and they tell you they’ll give you
$1100 in a year, your expected return is $100. If there’s absolutely
no conditions on this, and they’re going to pay you the $1100 no
matter what, that’s a fairly low risk investment.
A. Risk Identification
Without proper risk identification, a firm’s operations have no
direction. It requires knowledge of the organization, the
market in which it operates, the environment in which it does
it’s business. In order to identify risks, main techniques are –
Risk Analysis questionnaires
Questions about internal control systems and procedures.
Sandeep KS Lecture Notes
Financial Statement Analysis
Liquidity Ratios = Current ratio, Quick ratio.
Solvency Ratios = Debt-Equity ratio, Debt ratio.
Profitability Ratios = Gross Profit ratio, net Profit ratio,
Operating Profit ratio
Environmental Scanning
Keeping a tab on the environment at large.
C. Risk Hierarchy
This involves creating a hierarchical list in order of the
degree of risks. A priority ranking based on probability and
severity of the risk is done.
-Critical risks
-Moderate risks
-Unimportant risks
III) Consideration
Insurance is not charity. There has to be lawful consideration
paid by the insured to the insurer known as premium. Without
the payment of premium, insurance contract cannot start.
Minors,
Drunkards,
Insolvents,
People of unsound mind.
V) Free Consent
Parties entering into a contract should enter into it by their
free consent. Consent will be free when it is not caused by:
Coercion, Undue influence, fraud, misrepresentation.
VII) Indemnity
All contracts of insurance, except life insurance and
personal accidents are contracts of indemnity. Loss of life
or body injury cannot be measured in monetary terms. The
insured can be indemnified only up to the extent of actual
loss.
IX) Subrogation
Once the compensation is paid for by the insurer, the
company gets the right to sell remainder of the asset and
pocket the money thus generated. Ex: In case of car
accident, the insured will get the money claimed, after
which, the insurer can sell remainder of the car and try to
earn in form of salvage value.
Sandeep KS Lecture Notes
PRINCIPLES OF INSURANCE
Facts which may enhance the level of risk are known as material
facts. Eg: Medical illness, profession, type of cargo, type of goods
stocked.
Exemptions:
-Facts already known to the insurer.
-Facts which reduce the risk one way or the other.
-Facts which the insurer does not want to be disclosed.
-Facts that are commonly known to one and all.
-Facts which can be concluded or inferred from the
information of facts already provided by the insured.
After the insured gets the claim money, the insurer steps into the
shoes of the insured.
Example 2:
A person who has bought car insurance gets his car stolen
in a troubled part of the city. He gets indemnified by the
insurance compant. The police acting on a complaint by
the same person, goes on a trail and finds the stolen car.
The insurance company will have the right to sell off the car
and make money off it.
Conditions:
The subject matter of insurance must be common to all policies.
The peril which causes the loss must be common to all.
The policies must be in force at the time of loss. Sandeep KS Lecture Notes
#6 Principle of Causa Proxima
Features:
Building,
Electrical installation in buildings,
Machinery, Plant and equipment,
Goods in factories ( raw materials, Work in progress,
process, finished goods etc ),
Goods in open,
Godowns,
Contents in dwellings,
Shops, Hotels etc,
Furnitures, fixture and fittings,
Pipelines located inside or outside the compound etc.
-Types of vessels:
Dinghies, Yachts, Cargo vessels, Liners, Super tankers, Oil rigs,
Fishing trailers.
-What it covers:
Perils of the sea and other navigable waters,
Piracy, violent thefts etc,
Fire, explosion,,
Jettison
Pollution hazard,
Bursting boilers or breaking shafts. Sandeep KS Lecture Notes
TYPES OF MARINE INSURANCE
-Coverage:
Heart attacks, strokes, prolonged illnesses, loss of limb, eye,
or other parts of the body due to accidents, injuries, maternity
expenses, medicines.
Functions of Brokers
-Obtaining detailed knowledge of the client’s business.
-Maintaining a detailed knowledge of available markets.
-Recommendation of an insurer or group of insurers.
-Negotiating with insurers on the client’s behalf.
Sandeep KS Lecture Notes
-Acting promptly on instructions from a client.
-Reveal all fees or charges they propose to charge the client, which
will be in addition to the insurance premium
-In terms of pricing, the rules state that insurers can offer
discounted pricing on a product when it is sold through its
web portal. However, the differential price for products offered
on the digital platform will remain the same, whether it’s
offered directly by the insurer or an intermediary.
Life insurance:
Life Insurance Corporation
HDFC Standard Life
SBI Life Insurance
ICICI Prudential Life Insurance
Non-life insurance:
New India Assurance
United India Assurance
National Insurance Company
ICICI Lombard
Oriental Insurance Company
Bajaj Allianz
Sandeep KS Lecture Notes
A. Market Share
The market share of private sector players has increased over
the years. In the non-life insurance sector, private companies
had a market share of 54.68 % in FY 19. In life insurance
sector, private companies had a market share of 33.74 % in FY
19.
B. Market size
The overall market for insurance is expected to be $280 billion
by 2020. Gross premiums in India reached $94.48 billion in
FY 18. Of this number, the split between life insurance and
non-life insurance was as follows:
F. Flagship schemes
-It means that an insurer who has assumed a large risk may
arrange with another insurer to insure a portion of the insured
risk.