PBI - Unit 4 & 5

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Dr.

Sandeep Kumar Singh,


Assistant Professor,
Dept. of Commerce,
Christ University
Email: [email protected]
Risk
People express risk in different ways. To some, it is just the
possibility of loss, to some it is an uncertain situation.
Statisticians call it dispersion from expectation.

Defined as ‘the possibility that something bad might


happen’ or ‘the possibility of an adverse deviation from a
desired outcome.’

Risk may be objective or subjective. Objective risk is a


numerical variation of actual loss from expected loss.
Subjective risk is defined as uncertainty based on a person’s
state of mind.

Sandeep KS Lecture Notes


Types of Risk

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.

Non financial risk


When the possibility of a financial loss does not exist, the
situation can be referred to as non financial risk. Example:
Risk in selection of an educational institution.

Sandeep KS Lecture Notes


Group Risk
A risk is said to be a group risk or a fundamental risk if it
affects the economy or its participants at a macro level.
Examples could be of political risks, natural calamities etc
affecting businesses.

Individual risk
Individual risks are confined to specific individuals as it
affects only that specific person. Example could be of risk
associated with fire.

Sandeep KS Lecture Notes


Pure Risk
Pure risk, also called absolute risk, refers to situations are
those where there is only one possibility, that of a loss. For
example – Risks associated with:

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.

Sandeep KS Lecture Notes


Static risk
Static risks involves losses resulting from the destruction of
an asset or changes in the possession as a result of human
failure. Such risks have nothing to do with the external
environment. For example: Dishonesty, Carelessness,
Incompetence etc.

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.

Sandeep KS Lecture Notes


Economic risk
Risks related to market fluctuations, hike in tax rates and
surcharge, increased competitiveness through privatization
and globalization, reduced sales and profits in the face of
change in industrial cycles and economic conditions come
under economic risks.

Non economic risk


Non economic risks would include:
-Risks related to climatic conditions.
-Risks related to demographic changes.
-Risk leaded to socio cultural environment.

Sandeep KS Lecture Notes


Credit risk

It is the possibility of a loss resulting from a borrower's


failure to repay a loan or meet contractual obligations.

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.

Although it's impossible to know exactly who will default


on obligations, properly assessing and managing credit risk
can lessen the severity of a loss.

Credit risk also describes the risk that an insurance


company will be unable to pay a claim.
Sandeep KS Lecture Notes
Liquidity risk

 Liquidity refers to the ease with which an asset can be


converted into ready cash without affecting its market price.

 Liquidity risk stems from an organization not being able to


meet its short-term debt obligations due to the lack of
marketability of an investment that can't be bought or sold
quickly enough to prevent or minimize a loss.

 Liquidity Coverage Ratio (LCR) is a requirement under Basel


III whereby banks are required to hold enough high-quality
liquid assets to fund cash outflows for 30 days.
Sandeep KS Lecture Notes
Market Risk

Market risk is the possibility that an individual or other entity


will experience losses due to factors that affect the overall
performance of investments in financial markets. Also called as
systematic risk, such risks cannot be eliminated through
diversification.

Market risks include:


 Interest rate risk, relating to interest rate fluctuations.
 Equity risk, related to changing prices of stock investments.
 Commodity risk, related to changing prices of commodities such
as crude oil and corn.
 Currency risk, arising from change in the price of one currency in
relation to another.

Sandeep KS Lecture Notes


Uncertainty
Often confused with risk, it refers to a situation where the
outcome is totally uncertain or unknown. It refers to a state of
doubt, and lack of knowledge about what will happen in the
future. It is subjective and perceptual in nature.

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

The risk–return spectrum, also called the risk–return


tradeoff is the relation between return on an investment
and the amount of risk undertaken in that investment. For
higher return sought, more risk must be undertaken.
Returns are comparatively higher in speculative
investments like securities as there are huge risks involved.

On the other hand, some investments are less riskier than


others. For example, government bonds have very low risk
because they are issued by the government. Similarly, bank
deposits also carry low risk because they are backed by
large financial institutions and have the additional
protection of deposit insurance. With these low-risk
investments you are unlikely to lose money. However, they
have a lower potential return than riskier investments.

Sandeep KS Lecture Notes


Let’s take a look at a small example:

-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.

-However, if your friend is using the money to start a business,


and they say they’ll pay you back $1200 if their business is
profitable, there’s some risk there. There’s a higher return but
you could end up with nothing if the business fails.

-That’s risk in a nutshell, and there’s a mix between risk and


returns with almost every type of investment. Understanding the
relationship between the two will help you make solid, informed
decisions about your investments.

Sandeep KS Lecture Notes


RISK MANAGEMENT
Risk management is a scientific approach to dealing with risks
by anticipating possible accidental losses and designing and
implementing procedures that minimize the occurrence of
loss or the financial impact of the losses that occur. It involves
the following steps:

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

Statistical records of loss


Looking into past records

Interaction with industry experts


Taking opinion of others.

Environmental Scanning
Keeping a tab on the environment at large.

Sandeep KS Lecture Notes


B. Risk Evaluation
Risk evaluation includes a proper quantitative assessment
of the probability of loss occurring – Nil, Slight, Moderate,
High, Certain.

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

Based on this classification, further decisions are taken on


how these risks needs to be handled or countered.

Sandeep KS Lecture Notes


D. Risk Countering
Avoiding risks: Losses from theft can be avoided by
increased scrutiny, appointing watchmen, installing
CCTV cameras. Losses from bad debts can be curbed if
creditworthiness of loan seekers is studied first. Proper
inventory management will help avoid risks relating to
under-stocking of raw materials.

Reducing risks: Loss on account of market changes can


be minimized through market research. Loss on sale due
to fashion changes can be countered by stock clearance
sales.

Transferring risks: Some risks can be shifted to others


shoulders via insurance.
Sandeep KS Lecture Notes
Spreading of risks: For example: If you have a computer
store, you transfer the risk of operational failures by
outsourcing IT services to an organization that specializes
in electronic repairs. Now it is their responsibility to ensure
the systems are in perfect condition and working.

Acceptance of risks: Risk cannot be avoided always.


-Some risks are accepted in ignorance.
-Some risks are accepted inadvertently. A man delays his
decision of buying insurance for his family and then dies a
premature death.
-Some risks are accepted intentionally, people who like
challenging tasks.

Sandeep KS Lecture Notes


INSURANCE

 A contract under which insurer agrees to pay a certain sum


of money to compensate loss caused by the occurrence of
uncertain events in consideration of certain periodical
payments.

 Method which provides security and protection against


financial loss up to some limit.

 Parties to insurance are known as ‘insurer’ and ‘insured.’

 Means of shifting the risks to insurer in consideration of a


nominal cost called premium.

 It is a plan to counter losses from risks and uncertain


events.
Sandeep KS Lecture Notes
Functions of insurance

Providing certainty: Surety of payment in case of any loss in


the near future.

Providing protection: Sense of protection; Can’t remove risk


but can compensate.

Risk sharing: Risk is shared or spread between the insured lot.

Capital Formation: Amount received as premium is


reinvested by the companies.

Improves efficiency: Eliminates worries of individuals and


institutions, thus improving their efficiency.
Sandeep KS Lecture Notes
Essentials of an Insurance Contract

I) Offer and acceptance


The insured makes an offer by submitting an application to the
insurance company. The insurer accepts the application and
issues a policy.

II) Lawful object


The purpose for issuance of the insurance policy must fall within
a legal framework. An insurance contract encouraging an illegal
activity is invalid.

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.

Sandeep KS Lecture Notes


IV) Competent to contract
The concerned parties must be competent to enter into a
contract.

Minors,
Drunkards,
Insolvents,
People of unsound mind.

are generally not competent to enter into a contract. Any


contract, entered into by them, is void.

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.

Sandeep KS Lecture Notes


VI) Utmost good faith
It is the inherent duty to make full and fair disclosure of all
material facts relating to the subject matter of the
proposed insurance as it involves risk transfer. For ex: In
case of life insurance, disclosure of medical condition. In
case of fire insurance, revealing whether goods are
flammable.

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.

Sandeep KS Lecture Notes


VIII) Insurable Interest
The person getting an insurance policy must have an
insurable interest in the subject matter to be insured. A
person is said to have an insurable interest in the property
if he is financially benefitted by its existence and is
prejudiced by its loss, destruction or non-existence. A
person taking life insurance policy must have an insurable
interest in the life of the insured person.

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

#1 Principle of Insurable Interest


-Precondition for a valid contract of insurance.
-Person getting an insurance policy must have an insurable
interest in the subject matter to be insured.
-Person is said to have an insurable interest in the property
if he is financially benefitted by its existence and is
prejudiced by its loss, destruction or non-existence.
-A person taking life insurance policy must have an
insurable interest in the life of the insured person.
-Insured must be the owner or may possess the legal rights
or interest in the subject matter to be insured.

Sandeep KS Lecture Notes


-A person has unlimited insurable interest in his life.
-A husband in the life of his wife and vice versa.
-A father in the life of his son.
-A creditor in the life of a debtor.
-A partner in the life of his co-partner.
-A employer in the lives of his employees.

 Insurable interest should be present in the life of the insured at


the time of the taking of the policy. May or may not be present at
the time of death of the person or at maturity.

 In case of fire and marine insurance, insurable interest should be


present both at the time of taking the policy and the time of the
loss.

Sandeep KS Lecture Notes


#2 Principle of Utmost good faith

Contract of insurance are contracts of uberimae fidei, means


which require absolute and utmost good faith, as opposed to
caveat emptor.

 So, there should be full and fair disclosure of material facts


before the policy inception.

 Facts which may enhance the level of risk are known as material
facts. Eg: Medical illness, profession, type of cargo, type of goods
stocked.

 Material information enables the insurance company to decide


whether to accept or not to accept any risk.

 If accepted, what rate of premium will be taken and what would


be the terms and conditions.
Sandeep KS Lecture Notes
 In case of non disclosure or misrepresentation of material
facts, the contract would be considered null and void.

 An applicant for life insurance is generally asked to provide


information about health and family history. Concealing
facts in this regard is a violation of this principle.

 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.

Sandeep KS Lecture Notes


#3 Principle of Indemnity

 Seeks to restore the insurer back to his original position – Payment,


Repairs, Replacement.

 Applies to all contracts of insurance except the contracts of life


insurance and personal accident insurance. Loss of individual’s life or
extreme body injury cannot be measured in monetary terms.

 The amount of compensation shall never exceed the amount of actual


loss or the value of the policy.

 There exists an indirect relationship between principle of indemnity


and principle of insurable interest because the insured has to prove the
amount of actual loss and his interest in it to get compensation.
Sandeep KS Lecture Notes
#4 Principle of Subrogation

 Also known as the Doctrine of Rights Substitution.

 After the insured gets the claim money, the insurer steps into the
shoes of the insured.

 It is the transfer of rights and remedies of the insured in the


subject matter to the insurer after the indemnification.

 Is an extension and an outcome of the principle of indemnity


and is applicable to all contracts of indemnity.

 If the insured gets any money on account of compensation from


a third party, after being indemnified by the insurer, he shall
hold the amount of compensation as a trustee for the insurer.
Sandeep KS Lecture Notes
 Example 1:
 A person who has bought car insurance gets into an
accident. The insurance company compensates for all
his/her expenses. Once the payment is done, the insurance
company retain the rights to sell off parts of the damaged
car.

 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.

Sandeep KS Lecture Notes


#5 Principle of Contribution

 Contribution is the right of an insurer, who has paid under a


policy, to call upon other insurers or otherwise liable for the
same loss to contribute to the payment.

 The total loss suffered by the insured is contributed by different


insurers in the ratio of the value of policies issued by them for
the same subject matter.

 Sum insured by the insurer X Loss


Total sum insured

 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

 Causa Proxima- nearest or immediate cause.

 Helpful in deciding the actual cause of loss when a number


of causes have contributed to the occurrence of loss.

 While determining the liability of the insurer, the nearest


or proximate cause is to be taken into account by the
insurer.

 If the cause is not mentioned in the insurance policy, then


compensation wont be granted at all.

Sandeep KS Lecture Notes


#7 Principle of Mitigation of loss

 Means to minimize or decrease the severity of loss.

 Duty of the insured to minimize the loss.

 Insured should not become careless and passive at the time


of loss simply because his property is insured.

 Example 1: Indulging in rash driving just because you have


a comprehensive insurance coverage.

 Example 2: In case of fire insurance, no measures taken to


prevent any loss from happening because the owner is
already insured.

Sandeep KS Lecture Notes


TYPES
 Life Insurance
A contract in which the insurer in consideration of a certain
premium either in lump sum or other periodical payments,
agrees to pay to the assured or to the person for whose benefits
the policy is taken, a stated sum of money on the happening of a
particular event contingent on the duration of human life.

Different from non life insurance –


I) Loss is certain.
II) It is a long term contract.
III) Human life is the subject matter.
IV) It is not a contract of indemnity.
V) Insurable interest is needed only at the time of buying policy.
VI) Policy can be surrendered by assured before maturity date.

Sandeep KS Lecture Notes


Point of Life Insurance Non life Insurance
Difference
1. Certainty Loss due to risk is certain to Loss due to risk is uncertain,
happen. Death is inevitable. may happen or not.
2. Indemnity Life insurance is not a These contracts are contracts
contract of indemnity. of indemnity.
3. Duration Contract is a continuing Contract is usually for one
contract i.e., long term. year.
4. Subject Human life is the subject Goods or property of any
matter of life insurance other kind are the subject
contract. matter of non-life insurance.
5. Insurable In case of life insurance, In case of fire insurance,
Interest insurable interest must insurable interest must be
present only at the time of approved both at the time
taking out the policy, not at policy is effected and at the
the time of maturity. time when loss occurred. In
marine insurance, it must be
present only at the time of
loss occurring.
 Fire Insurance
A fire insurance contract is one:
-Whose principal object is insurance against loss or damage
caused by fire.
-Where the insurer has no interest in the safety or destruction
of the insured property apart from the liability undertaken.

Features:

 Against risk of fire on any material or property.


 Only issued for one year and renewed every year.
 Can be insured from one or more insurer.
 Contract of utmost good faith.
 An indemnity contract against actual loss to the maximum
limit of sum assured.

Sandeep KS Lecture Notes


Insurable Object in Fire Insurance

 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.

Sandeep KS Lecture Notes


ORDINARY SCOPE

 Accidental fires, lightning.


 Rioting mob, striking workers,
 Malicious acts and damage by terrorists.
 Commodities damaged by water used for extinguishing fire.
 Loss caused by pulling down of adjacent buildings by the fire brigade to
prevent the flames from progressing.
 Breakage of commodities in the process of their removal from the
premises where fire is intense.
 Payments made to people employed in extinguishing fire.
 Natural calamities like storm, cyclone, hurricane, tornado, flood and
impact damage.
 Damages caused due to bursting or overflowing of water tanks, and
pipes.
 Bush Fire.

Sandeep KS Lecture Notes


What it does not include?
 War and War like perils: Loss, destruction or damage
caused by war, invasion, act of foreign enemy,
hostilities, civil war, mutiny, military rising, rebellion,
revolution, insurrection or military or usurped power.

 Loss or damage caused by ionizing radiation.

 Loss or damage caused by pollution.

 Loss or damage to stocks in cold storage premises


caused by change of temperature.
Sandeep KS Lecture Notes
Conditions for Successful Claim
 The proximate cause of loss should be fire.

 The loss or damage must relate to subject matter.

 Fire must be accidental and not intentional.

 Loss must be created by actual fire and not just by high


temperature.

 The ignition must be either of the goods or of the premises where


goods are kept.

 Insurable interest must be proved both at the time policy is effected


and at the time when loss occurs.

Sandeep KS Lecture Notes


Types of Fire Insurance Policy

I. Valued Policy: In this policy the indemnity is a fixed amount


agreed upon at the time of signing the contract. The insurance co.
pays that amount regardless of the actual loss due to fire. The
insured is benefited when the value of the property declines, but
suffer loss when the value appreciates.

II. Replacement Policy: The policy indemnifies the cost of


replacement of machinery to a condition equal to but not better
than its condition when new. Hence this policy is new for old. This
policy can be issued for Building, Plant and Machinery, Furniture
Fixture & Fittings only.

III. Adjusted Policy: It is issued for existing stock. In this policy,


premium rate shall be adjusted according to increase or decrease
in the value of stock. The amount notified by the insured at the
maturity of policy is taken as final and indemnified up to that.

Sandeep KS Lecture Notes


IV. Floating Policy: This policy is suitable to those traders or
products whose raw-materials or merchandise are lying at
different localities or godowns. The objective is to cover the
risk of goods lying at different places under one policy.

V. Average Policy: Where a property is insured for a sum


which is less than its value, the policy contain a clause that
the insurer shall not be liable to pay the full loss but only that
proportion of the loss which the amount insured for, bears to
the full value of the property.

Amount of Indemnity = Value of policy x Actual loss amount


Full value of the property insured

For example: A value of the property is Rs. 1,00000. It is


insured for Rs. 60,000; the amount of loss is Rs. 60,000. The
insurance co. will not pay Rs. 60,000 to the policyholder but
Rs.36,000.

Sandeep KS Lecture Notes


 Marine Insurance
-One of the earliest forms of insurance, governed by the Marine
Insurance Act 1906.

-An agreement whereby the insurer undertakes to indemnify the


insured, in the manner and to the extent agreed, against marine
losses.

-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

Cargo insurance: It covers the cargo, or the goods, which are


being transported from one place to another.

Hull insurance: It covers the vessel of transportation against


damages and accidents. The policy covers the hull and torso
of the transportation vehicle.

Freight insurance: If the goods are damaged in transit, the


operator would lose the freight receivable. A freight insurance
policy provides compensation for the loss of freight.

Liability insurance: It is often taken as a part of hull


insurance policy. Under liability insurance plans, if the vessel
collides with another vessel and there is damage, the liability
suffered by the owner of the vessel for such collision is
covered.

Sandeep KS Lecture Notes


 Health Insurance

-Contract between an insurer and an individual or a group, in


which the insurer agrees to provide specified health insurance
at an agreed-upon price the premium

-Premium may be payable either in lump sum or installments.

-Health insurance provides either direct payment or


reimbursements for expenses related with illnesses/ injuries.

-Coverage:
Heart attacks, strokes, prolonged illnesses, loss of limb, eye,
or other parts of the body due to accidents, injuries, maternity
expenses, medicines.

Sandeep KS Lecture Notes


General Mediclaim Policy

 Provides for reimbursement of hospitalization expenses for


illness/diseases suffered or accidental injuries sustained
during the policy period.

 Insurance available to persons between age of 5 and 80 years.

 Protection is available for illness/disease contracted anywhere


in the world provided the treatment is availed in India.
Recently, the IRDAI instructed all insurance companies to
include treatment expenses for Covid 19 under their coverage.

 Minimum period of hospitalization must be 24 hours.

Sandeep KS Lecture Notes


 Motor Insurance
It is a legal requirement to have motor insurance if you want to
drive your vehicle in a public place and you must produce
documents to that effect when asked for it. Failure to have motor
insurance when driving is a very serious offence and will lead to
fines and penalties.

Motor insurance financially safeguards your vehicle against


physical damage and you against bodily injury/death and third-
party liability. However, it wont cover losses arising out of:

-Wear and tear and depreciation


-Mechanical or electrical breakdown
-Driving without a valid driving license
-Driving under the influence of alcohol or drugs
-Damage to your personal property
-Protection of your legal liability towards your paid driver
-Any other exclusions as per the policy wordings
Sandeep KS Lecture Notes
Insurance Intermediaries

 Insurance intermediaries are autonomous firms who carry the


insurer and the insured together and act as the mediator.

 Some groups of intermediaries also act as a distribution


channel for bringing the product of the insurance to the
customers as in the case of brokers.

 Intermediaries include insurance brokers, reinsurance


brokers, insurance consultants, surveyors and loss assessors.

 Intermediaries must hold valid license issued by the


authority. IRDAI has laid down the norms for licensing of
intermediaries.

Sandeep KS Lecture Notes


Insurance Brokers

Brokers are such individuals who contribute maximum share


of insurance business. A high standard of professional skill
and conduct is expected of the broker. Brokers can be issued
license under section 42D of Insurance Act, 1938.

Category I: Gen insurance broker, Life insurance broker.


Category II: Reinsurance broker.
Category III: Composite broker.
Category IV: Insurance consultants, risk mgt consultant.

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.

-Providing written acknowledgements and progress reports.

-Collecting and remitting premiums.

-Assisting in the negotiation of claims.

-Maintaining precise records of past claims.

-Duty to disclose all material facts to the clients.

-Accept and acknowledge complaints from customers.

-Reveal all fees or charges they propose to charge the client, which
will be in addition to the insurance premium

-Providing services such as insurance consultancy services, risk


management services, and uninsured loss recoveries.
Sandeep KS Lecture Notes
Surveyors and Loss Assessors
-Related to only non-life insurance business.

-Main functions are to survey and assess mishappenings, if any


and evaluate financial loss to insurance companies.

-Insurance companies provide financial assistance on the basis of


the evaluation made by the surveyor.

-Examine the causes and the circumstances of the loss in


question including their nature and extent of loss.

-Estimate, measure, determine, the quantum description


valuation of the subject under loss.

-Initiate immediate measures to protect damage property and to


prevent aggravation of losses.
Sandeep KS Lecture Notes
-Advise the insurer and the insured about loss minimization,
loss control, safety measures where appropriate to avoid any
losses.

-Check the admissibility of the loss whether it falls within the


scope of the policy contract.

-Survey and assess the loss on behalf of insurer or insuring


public.

-Advise on repair and replacement techniques.

-Checking the ownership, insurable interest, indemnity related


proofs.

-Conduct himself within professional code of conduct while


discharging the services, maintain the confidentiality and the
independent-neutral position without bias, prejudice.

Sandeep KS Lecture Notes


Insurance Agent

-Agent is a person licensed by the IRDA to do insurance


business. They are not the regular employees of the insurer
and work on commission basis in a freelance manner.

Who can be an insurance agent?

A person is eligible to be an insurance agent, if he


 Is a citizen of India,
 Is at least 18 years of age on the day of appointment,
 Has not been found to be of unsound mind by a court,
 Has not been guilty of criminal misappropriation,
 Possess the minimum educational qualification of 12th
Standard.

Sandeep KS Lecture Notes


Online Insurance

Insurance industry has moved towards using less paper by


going online. Now, you can:

-Maintain, store and retrieve your policies easily,


-Modify your insurance policies with speed and accuracy,
-Helps increase efficiency and transparency,
-Reduces cost of issuing and maintaining insurance policies.

Insurance Regulatory and Development Authority of India


(IRDAI) has issued new guidelines for insurance e-commerce.
The idea of these guidelines is to standardize e-commerce
rules across different entities selling insurance online.
Sandeep KS Lecture Notes
Major Guidelines

-Only a licensed entity can sell insurance online. So, only


insurers, brokers, agents, intermediaries or other entities
recognized by IRDAI can sell policies on the online
platform. If any unregistered market participant is enrolled by
the company, then it will be viewed as a very serious violation.

-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.

-No cashback, promotional incentives or payments will be


allowed by payment gateway companies.

Sandeep KS Lecture Notes


-Apart from allowing electronic payments by way of credit cards,
debit cards, net banking and e-wallets, the rules also allow for
premium payment through cheque and demand draft.

-An electronic insurance account is mandatory. It will help you


hold your policy in a digital format. The account will have to be
created within 15 days of selling the insurance policy.

-Existing insurers and intermediaries who already have set-up


their own portals for selling insurance products may continue to
operate these platforms provided that they comply with the
requirements of these guidelines within a period of three
months and obtain necessary permission from IRDAI.

-Privacy of data must be maintained at all times. Adequate


internal mechanisms should be in place for reviewing,
monitoring and evaluating its controls, procedures, safeguards.

Sandeep KS Lecture Notes


 The web-site/ portal of the applicant shall carry not more than
80% image. The insurers may merge all disclaimers under one
single link "disclaimer" and the customers can access all
disclaimers together through this single link.

 The applicant's portal shall have a mechanism to address


policyholders' grievances including expeditious refund of
premium in case of double or more debiting of the policyholder's
account. The grievances of policyholders shall be attended to in
the time frame specified by Authority from time to time.

 IRDAI may revoke the permission granted at any time, if it is of


the view that the activities carried out on the company is:
I) Not in the interest of the policyholders,
II) Not conducive for the orderly growth of the industry,
III) Violating the code of conduct given in Chapter lll,
IV) Not meeting the requirements as specified in the guidelines,
V) Violates provisions of lnsurance Act, 1938, IRDA Act, 1999.
Sandeep KS Lecture Notes
Insurance Industry in India
There are currently 57 insurance companies in India, of which 46
are from the private sector. There are 24 life insurance and 33
non-life insurance companies. Major names in the sector are:

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:

Life insurance: $ 71.1 billion


Non-life insurance: $ 23.38 billion

Sandeep KS Lecture Notes


C. Recent developments in the sector:

-HDFC ERGO General Insurance Co. acquires Apollo Munich


Health Insurance for 1347 crores.

-A consortium of private equity firms- Westbridge Capital and


Madison Capital, as well as billionaire investor Rakesh
Jhunjhunwala, acquire over 90% stake in Star Health and Allied
Insurance. (Estimated deal size: $ 1 billion)

-Indian e-commerce giant Flipkart has tied up with Bajaj Allianz


General Insurance to provide customized insurance products for
mobile phones sold on Flipkart.

-HDFC ERGO launched a new product E@Secure: an insurance


policy to protect individuals/families from cyber-attacks.

-IRDAI has issued new guidelines for insurance companies


selling insurance online.
Sandeep KS Lecture Notes
D. Future outlook and Growth drivers

The insurance industry in India is expected to register healthy,


consistent growth based on the following drivers:

-Low insurance penetration: 3.69%, compared to 6.3% globally.

-Government programs to increase insurance cover: Pradhan


Mantri Suraksha Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima
Yojana etc.

-Rising internet usage has contributed to this increasing interest


in buying insurance.

-Innovative products like Unit Linked Insurance Plans (ULIPs)


have contributed to the growth of insurance cover.

-New distribution channels such as bancassurance, online


distribution and NBFCs are contributing to the growth in
insurance cover.
Sandeep KS Lecture Notes
E. Government initiatives

-FDI limit for the insurance sector increased from 26 to 49%.


-Government to sell part of its holding in LIC through IPO.
-Life insurance companies operational for 10+ years are now allowed
to go public by IRDAI.

F. Flagship schemes

-Pradhan Mantri Jan Suraksha Bima Yojana: This scheme focuses on


providing affordable insurance to people below the poverty line.

-Pradhan Mantri Jeevan Jyoti Bima Yojana: This initiative provides


life insurance for people employed in the unorganized sector.

-Atal Pension Yojana: It guarantees pension coverage to all citizens


in the unorganized sector who join the National Pension System.

-Ayushman Bharat Yojana: Each beneficiary family will receive


medical insurance cover of 5 lakh.
Sandeep KS Lecture Notes
G. New Insurance Products

-ICICI Pru Life’s Precious Life


-Aegon’s Life iTerm
-Max Bupa’s Health Premia
-Allianz Suisse’s Splitsurance
-AXA’s Fizzy
-Pradhan Mantri Suraksha Bima Yojana
-Pradhan Mantri Jeevan Jyoti Bima Yojana
-Varishtha Pension Bima Yojana
-Pradhan Mantri Fasal Bima Yojana
-Pradhan Mantri Vaya Vandana Yojana
-Restructured Weather Based Crop Insurance Scheme

Sandeep KS Lecture Notes


REINSURANCE
-Insurance of Insurance.

-It means that an insurer who has assumed a large risk may
arrange with another insurer to insure a portion of the insured
risk.

-The original insurer who transfers a part of the insurance


contract is called the reinsured and the second insurer is called
the reinsurer.

-Retrocession: A reinsurance of a reinsurance wherein a reinsurer


desires to reduce the limit of his liability in respect of business
accepted.

-It enables wider distribution of risk. The insurer can contract to


indemnify more risk.
Sandeep KS Lecture Notes
DOUBLE INSURANCE
Double insurance arises where the same party is insured with
two or more insurers in respect of the same interest, on the same
subject matter against the same risk, and for the same period of
time.

 Same insured: The same person is entitled to benefit from each


policy.

 Same subject matter: The subject matter in respect of which


the claim is made is covered under both policies.

 Same risk: Double insurance will only arise if a substantial part


of the same risk is covered by both insurances.

 Same period of time: Finally, the periods of time within each of


the policies’ terms during which the insured party is protected
from the risk must be the same, or substantially the same.
Sandeep KS Lecture Notes
ASSURANCE

-Assurance refers to financial coverage that provides


remuneration for an event that is certain to happen.
Assurance is similar to insurance, with the terms often used
interchangeably.

-Insurance is based on the principle of indemnity whereas


assurance is based on the principle of certainty.

-Insurance refers to coverage over a limited time, whereas


assurance applies to persistent coverage for extended periods.

-Insurance is taken to reinstate the financial position of the


insured to his earlier position. Assurance is restricted to
paying an assured sum when an event happens.
Sandeep KS Lecture Notes
BANCASSURANCE
Bancassurance is an arrangement between a bank and an insurance
company allowing the insurance company to sell its products to the
bank's client base. This arrangement can be profitable for both.

Banks earn additional revenue by selling insurance products, and


insurance companies expand their customer bases without
increasing their staff or paying agent and broker commissions.

Bancassurance offers many benefits to customers, one of which is


convenience. The bank is a one-stop-shop for all financial needs.
For banks/insurance companies, it increases revenue diversification
and brings greater volume and profit for both players.

Restraining factors of bancassurance are the risks associated with


the reputation of banks and the stringent rules and regulations
enforced in some regions. Bancassurance remains prohibited in
some countries.

Sandeep KS Lecture Notes


UNDERWRITING

Underwriting is the process of evaluating the risks


associated with prospective clients, in order to determine if
it's profitable for the insurance company to transact with
them.

An insurance underwriter's role is to choose who and what


the insurance company will insure based on risk
assessment. It is the "behind the scenes" work in an
insurance company.

Underwriters are professionals who identify and analyze


the risks involved in insuring people and assets. They use
specialized software and actuarial data to determine the
likelihood and magnitude of a risk.

Sandeep KS Lecture Notes


Major focus Areas

- Essentials of an insurance contract


- Principles of Insurance
- Types of Insurance
- Bancassurance
- Underwriting
- Reinsurance
- Assurance

Sandeep KS Lecture Notes

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