Insurance Management
Insurance Management
Insurance Management
UNIT-I
What Is Insurance?
Insurance policies are used to hedge against the risk of financial losses, both
big and small, that may result from damage to the insured or her property, or
from liability for damage or injury caused to a third party.
The core components that make up most insurance policies are the
deductible, policy limit, and premium
Example:
Features of Insurance
From the above explanation, we can find the following characteristics, which
are generally observed in life, marine, fire, and general insurances.
1. Sharing of Risk
2. Co-operative Device
An insurer would be unable to compensate for all the losses from his own
capital. So, by insuring or underwriting a large number of persons, he can pay
the amount of loss.
3. Value of Risk
The risk is evaluated before insuring to charge the share of an insured, herein
called, consideration or premium. There are several methods of evaluation of
risks.
4. Payment at Contingency
For example, in term insurance, payment is made only when the assured death
occurs within the specified term, maybe one or two years.
The law of large numbers is based on the assumption that losses are accidental
and occur randomly.
For example, a person may slip on an icy sidewalk and break a leg. The loss
would be fortuitous. Insurance policies do not cover intentional issues.
6. Amount of Payment
The amount of payment depends on the value of loss due to the particular
insured risk provided insurance is there up to that amount. In life insurance,
the purpose is not to make good the financial loss suffered. The insurer
promises to pay a fixed sum on the happening of an event.
If the event or the contingency takes place, the payment does fail due if the
policy is valid and in force at the time of the event, like property insurance, the
dependents will not be required to prove the occurring of loss and the amount
of loss.
It is immaterial in life insurance what was the amount of loss was at the time of
contingency. But in the property and general insurances, the amount of loss
and the happening of loss is required to be proved.
7. A large number of Insured Persons
What is Insurance?
Represented in a form of policy, Insurance is a contract in which the
individual or an entity gets the financial protection, in other words,
reimbursement from the insurance company for the damage (big or
small) caused to their property.
The insurer and the insured enter a legal contract for the insurance
called the insurance policy that provides financial security from the future
uncertainties.
In simple words, insurance is a contract, a legal agreement between two
parties, i.e., the individual named insured and the insurance company
called insurer. In this agreement, the insurer promises to help with the
losses of the insured on the happening contingency. The insured, on the
other hand, pays a premium in return for the promise made by the
insurer.
The contract of insurance between an insurer and insured is based on
certain principles, let us know the principles of insurance in detail.
Principles of Insurance
The concept of insurance is risk distribution among a group of people.
Hence, cooperation becomes the basic principle of insurance.
To ensure the proper functioning of an insurance contract, the insurer
and the insured have to uphold the 7 principles of Insurances mentioned
below:
Principle of Subrogation
Subrogation means one party stands in for another. As per this principle,
after the insured, i.e. the individual has been compensated for the
incurred loss to him on the subject matter that was insured, the rights of
the ownership of that property goes to the insurer, i.e. the company.
Subrogation gives the right to the insurance company to claim the
amount of loss from the third-party responsible for the same.
Example – If Mr A gets injured in a road accident, due to reckless
driving of a third party, the company with which Mr A took the accidental
insurance will compensate the loss occurred to Mr A and will also sue
the third party to recover the money paid as claim.
Principle of Contribution
Contribution principle applies when the insured takes more than one
insurance policy for the same subject matter. It states the same thing as
in the principle of indemnity, i.e. the insured cannot make a profit by
claiming the loss of one subject matter from different policies or
companies.
Example – A property worth Rs. 5 Lakhs is insured with Company A for
Rs. 3 lakhs and with company B for Rs.1 lakhs. The owner in case of
damage to the property for 3 lakhs can claim the full amount from
Company A but then he cannot claim any amount from Company B.
Now, Company A can claim the proportional amount reimbursed value
from Company B.
Principle of Loss Minimisation
This principle says that as an owner, it is obligatory on the part of the
insurer to take necessary steps to minimise the loss to the insured
property. The principle does not allow the owner to be irresponsible or
negligent just because the subject matter is insured.
Example – If a fire breaks out in your factory, you should take
reasonable steps to put out the fire. You cannot just stand back and
allow the fire to burn down the factory because you know that the
insurance company will compensate for it.
What is IRDAI? Functions of IRDA
The concept of insurance dates back 6,000 years where individuals back then
also sought some kind of safety net. This need was realised and gave birth to the
concept of insurance. The dictionary meaning of insurance states “an
arrangement by which an organisation undertakes to provide a guarantee of
compensation for specified loss, damage, illness, or death in return for payment
of a specified premium”. With the growing need of this concept of security, it
gave rise to life insurance at first followed by general insurance. Insurance
when introduced in India was under the government regulation. However, to
institute a standalone body to oversee the functioning of the growing insurance
industry, a separate regulatory body was set up known as the Insurance
Regulatory and Development Authority of India or IRDA.
What is IRDA?
IRDA or Insurance Regulatory and Development Authority of India is the apex
body that supervises and regulates the insurance sector in India. The primary
purpose of IRDA is to safeguard the interest of the policyholders and ensure the
growth of insurance in the country. When it comes to regulating the insurance
industry, IRDA not only looks over the life insurance, but also general
insurance companies operating within the country.
To safeguard the policyholder’s interest while ensuring a fair and just treatment.
To have a fair regulation of the insurance industry while ensuring financial
soundness of the applicable laws and regulations.
To frame regulations periodically so that there is no ambiguity in the insurance
industry.
What is the role and importance of IRDA in the insurance sector?
India began to witness the concept of insurance through a formal channel back
in the 1800s and has seen a positive improvement ever since. This was further
supported by the regulatory body that streamlined various laws and brought
about the necessary amendment in the interest of the policyholders. Below
mentioned are the important roles of IRDA -
UNIT-II
Fire Insurance:
To avoid ambiguity for the claim amount, certain types of clauses are
included in this policy. Such types give more clarity on premium payable
and claim amount payable without any scope of a dispute. Businessmen
should be clear about the type of policy they need and whether it suits
his/her business operations. Let us look at some of the types of fire
insurance.
e) Consequential Loss Policy: The loss due to fire is not the only loss
an insured person faces after fire break. Your factory may lose important
machinery and the production line could go down for several weeks or
months after the fire. The loss of production is a loss of business or
profit. Such indemnity can be claimed under consequential loss policy.
The business in which continuous production is the essence must take
consequential loss policy to make good of such losses.
It covers all the losses arising out of the accidental fire, subject to terms
and conditions of the fire policy which is limited by the policy value and
not by the extent of damage sustained by the property owner. In general,
the following losses are covered:
Claim Process
Not all situations and cases are covered by fire insurance. Some
situations are excluded.
Fire caused by war, nuclear risks, riot or earthquake
Planned or intentional fire by the enemy or public authority for
whatsoever reasons
Underground fire
Loss because of theft during or after the fire
Malicious or hostile, human-made causes of fire
This list does not include all the exclusions as they vary for
different providers
Important Aspects
Considering the amount that the insurance company can pay for the
losses and save you from further problems, you should not ignore and
underestimate fire insurance. Let us look at some of the advantages of
buying this policy:
MARINE INSURANCE:
The term originated when parties began to ship goods via sea. Despite what
the name implies, marine insurance applies to all modes of transportation of
goods. For instance, when goods are shipped by air, the insurance is known as
the contract of marine cargo insurance.
Marine insurance best transfers the liability of the goods from the parties and
intermediaries involved to the insurance company. The legal liability of the
intermediaries handling the goods is limited to begin with. The exporter,
instead of bearing the sole responsibility of the goods, can buy an insurance
policy and get maritime insurance coverage for the exported goods against any
possible loss or damage.
The carrier of the goods, be it the airline or the shipping company, may bear
the cost of damages and losses to the goods while on board. However, the
compensation agreed upon is mostly on a ‘per package’ or ‘per consignment’
basis. The coverage so provided may not be sufficient to cover the cost of the
goods shipped. Therefore, exporters prefer to ship their products after getting
it insured the same with an insurance company.
Freight Insurance
Liability Insurance
Hull Insurance
Marine Cargo Insurance
Freight Insurance
In freight insurance, for example, if the goods are damaged in transit, the
operator would lose freight receivables & so the insurance will be provided on
compensation for loss of freight.
Liability Insurance
Marine Liability insurance is where compensation is bought to provide any
liability occurring on account of a ship crashing or colliding.
Hull Insurance
Hull Insurance covers the hull & torso of the transportation vehicle. It covers
the transportation against damages and accidents.
Floating Policy
Voyage Policy
Time Policy
Mixed Policy
Named Policy
Port Risk Policy
Fleet Policy
Single Vessel Policy
Blanket Policy
Floating policy
Floating in Marine Insurance policy, large exporters may opt for an open
policy, also known as a blanket policy, instead of taking insurance separately
for each shipment. An open policy is a one-time insurance that provides
insurance cover against all shipments made during the agreed period, often a
year. The exporter may need to declare periodically (say, once a month) the
detail of all shipments made during the period, type of goods, modes of
transport, destinations, etc.
Voyage policy
A specific policy can be taken for a single lot or consignment only. The
exporter needs to purchase insurance cover every time a shipment is sent
overseas. The drawback is that extra effort and time is involved each time an
exporter sends a consignment. With open policies, on the other hand,
shipments are insured automatically.
Time policy
Time policy in marine insurance is generally issued for a year’s period. One
can issue for more than a year or they may extend to complete a specific
voyage. But it is normally for a fixed period. Also under marine insurance in
India, time policy can be issued only once a year.
Mixed policy
Mixed policy is a mixture of two policies i.e Voyage policy and Time policy.
Named policy
Named policy is one of the most popular policies in marine insurance policy.
The name of the ship is mentioned in the insurance document, stating the
policy issued is in the name of the ship.
Fleet policy
Several ships belonging to the company/owner are covered under one policy.
Where it has the advantage of covering even the old ships. Also the policy is a
time based policy.
Blanket policy
In this policy, the owner has to pay the maximum protection amount at the
time of buying the policy.
Law of large numbers – This is a theory that ensures long-term stability and
minimises losses in the long run when experiments are done with large
numbers.
Good faith – Purchasing an insurance is entering into a contract between
company and individual. This should be done in good faith by providing all
relevant details with honesty. Covering any information from the insurance
company may result in serious consequences for the individual in the future.
This being said, the insurer must explain all aspects of a policy and ensure
that there are no unexplained or hidden clauses and that the applicant is
made aware of all terms and conditions.
UNIT –III
RE-INSURANCE
What Is Reinsurance?
A reinsurance, in its most basic sense, is insurance for insurers. It is the process through
which insurers minimise the possibility of paying high amounts of money, in case of an
insurance claim, by transferring a part of their risk portfolio to other parties.
But, to understand reinsurance better, let us first look at a more familiar term —
Insurance. By definition, insurance means — “an arrangement by which a company or
the state undertakes to provide a guarantee of compensation for specified loss, damage,
illness, or death in return for payment of a specified premium.” (Oxford Dictionary)
Hence, in case of an insurance claim, the insurer (ceding party) has to pay the
compensation to the claimant, which in most cases is large sums of money. However, to
minimise the risk of paying the entire amount by themselves, insurance providers opt for
diversifying their risk by sharing it through another party (reinsurer). Which brings us to
the question: How does reinsurance work?
Daniel Finance (DF) is a small electronic gadget insurance company with an annual
turnover of over Rs. 60,00,000 collected through premiums. Recently, a hefty insurance
claim was made to DF, owing to a huge fire in a client’s company building. The claim
amount could have almost led the company to insolvency. However, to the company’s
benefit, Daniel Finance had already used a part of the premiums received to purchase a
reinsurance contract that would pay out part or entire claim (as per the contract) to avoid
large losses. Therefore, Daniel Finance could split the claim with the reinsurer and keep
the company afloat.
Though it is important to note that legally, insurers are required to maintain enough
reserves to pay all potential claims from all policies issued. Having a reinsurer can be
looked at as protective gear, in place to avoid bankruptcy.
Further, depending on the needs and demands of an insurance company, the contracts
with a reinsurer can change. Sometimes, an insurance company might need a risk-
sharing of either part of their portfolio, or the entire portfolio. Based on this, there are two
types of reinsurers.
Types of Reinsurances
The two primary forms of reinsurance contracts are — Treaty reinsurance and
Facultative reinsurance. Each of these reinsurances caters to different levels of risk
subletting.
Treaty reinsurance
A reinsurance contract that involves an insurance business acquiring insurance from
another insurer is known as treaty reinsurance. The cedent is the firm that issues the
insurance and transfers all of the risks associated with a specific class of policies to the
purchasing company, the reinsurer.
Facultative
A primary insurer purchases facultative reinsurance to cover a specific risk (or a group of
risks) in the business. This form of contract offers a beneficial edge to the reinsurance
business, as it helps in reviewing individual risks. On the other hand, reinsurance
provides the insurer with additional protection for its equity and solvency in case of
extreme events,
Depending on the form of agreement between the two parties, the reinsurance —
treaty or facultative — can be further divided into two categories.
Proportional reinsurance
The reinsurer receives a prorated share of all policy premiums sold by the insurer under
proportional reinsurance. In the event of a claim, based on a pre-determined proportion,
the reinsurer is responsible for a share of the losses. The ceding company is also
reimbursed for processing, business acquisition, and writing costs by the reinsurer.
Non-proportional reinsurance
In a non-proportional form of agreement, the reinsurer is liable to pay if the insurer’s
losses reach a certain amount, known as the priority or retention limit. As a result, the
reinsurer receives no proportional part of the insurer’s premiums or losses. One type of
risk or an entire risk category determines the priority or retention limit.
Functions of Reinsurance
While the main function of any reinsurance company is to reduce the risk associated
with the insurance claims. There are a few other functions that a reinsurance company
performs.
Income Smoothing
By absorbing big losses, reinsurance may make an insurance company’s results more
predictable. This will very certainly lower the amount of cash required to offer coverage.
The risks are spread out, with the reinsurer or reinsurers covering a portion of the
insurance company’s losses. Because the cedent’s losses are restricted, income
smoothing occurs. This ensures that claim payouts are consistent and that
indemnification expenses are kept to a minimum.
Risk Transfer
The risk is transferred from the main insurance company to the reinsurer, which helps
the insurance company manage portfolios better.
Offering Expertise
In the case of a specific risk, the insurance company may desire to use the experience
of a reinsurer, or the reinsurer’s ability to determine a suitable premium. In order to
safeguard their own interests, the reinsurer will want to apply this knowledge to
underwriting. This is particularly true in the field of facultative reinsurance.
Expanding Portfolio
The reinsurer helps insurance companies expanding their portfolio by taking over some
part of the risk. This helps both the insurer and the reinsurer.
Objective of Reinsurance
Risk is distributed to guarantee that a claim is covered.
It gives a high level of underwriting stability during the claim period.
Financial obligations that exceed the insurance firm’s capability are outsourced to
another company with the necessary resources. As a result, the ceding business is only
left with the financial responsibility that it can meet.
Profiting from a premium on the net amount.
To settle their claims, the real insured individual must work with just one insurance
provider.
Enhance the risk exposure capacity.
Reinsurance Advantages
1. Insurance funds protected: In the case of reinsurance, the insurance funds are
protected and kept safe in case of any unforeseen claim. It also helps the insurance
company manage their funds better.
It provides a limit on the quantum of liabilities: By sharing the risk, the reinsurance
also helps in reducing the size and number of liabilities that any insurance company has
to bear. Which also helps in bettering the operations of the said insurer.
It further increases the goodwill of the main insurer: A reinsurer helps in building
goodwill for the insurance company. The better the claim settlement, the better the
business in the future as a rule.
What Is 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 partnership arrangement can be profitable for both
companies. Banks earn additional revenue by selling insurance products,
and insurance companies expand their customer bases without increasing
their sales force.
KEY TAKEAWAYS
Understanding Bancassurance
Bancassurance arrangements are common in Europe, where the practice
has a long history. European banks, such as Crédit Agricole (France),
ABN AMRO (Netherlands), BNP Paribas (France), and ING (Netherlands),
dominate the global bancassurance market.
But the picture varies widely from country to country. A 2013 report found
that while bancassurance accounted for 83.6% of life insurance sales in
Italy, 66.2% in Spain, 64.2% in France, and 62.6% in Austria, its market
share was lower in Eastern Europe and nonexistent in the United Kingdom
and Ireland.1
The United States has been slower than many nations to embrace the
concept. In part, that's because the question of whether banks in the U.S.
should be allowed to sell insurance was a matter of contentious debate for
many years. Among the issues: unfair competition for insurance agents,
possible risks to the banking sector, and the potential for banks to
pressure customers into buying insurance in order to qualify for loans.
UNIT-IV
INSURANCE CLAIM: