Re-Insurance:

Reinsurance is insurance that an insurance company purchases from another insurance

company to insulate itself from the risk of a major claims event. With reinsurance, the
company passes on some part of its own insurance liabilities to the other insurance
company. an arrangement whereby an insurer transfers all or part of a risk to another
insurer to provide protection against the risk of the first insurance.

Insurance pooling:

The pooling of risk is fundamental to the concept of insurance. A health insurance risk pool
is a group of individuals whose medical costs are combined to calculate premiums. In
Insurance Terms, risk pooling is the sharing of common financial risks evenly among a large
number of people. So, the Capital Markets or here, Insurance companies, take that risk from
you in exchange for a regular payment called premium. The company believes the premium
is enough to cover the risk.

Insurance pooling is a practice wherein a group of small firms join together to secure better
insurance rates and coverage plans by virtue of their increased buying power as a block. This
practice is primarily used for securing health and disability insurance coverage. Those doing
insurance pooling are often referred to as insurance purchasing cooperatives.

Pure endowment

A pure endowment plan is a type of life insurance policy wherein the insurance company
agrees to pay the sum assured to the policyholder if they survive the polity term. The
amount is paid on maturity of the policy in a single instalment as a lump sum. This implies
that with a pure endowment policy, you can be assured of getting returns. A pure
endowment policy is a risk-averse insurance plan. But, a pure endowment plan alone may
not suffice your insurance needs; you must buy a standard policy to take care of your
family’s future even in your absence.
Annuity

An annuity is a contract between you and an insurance company in which you make a
lump-sum payment or series of payments and, in return, receive regular disbursements,
beginning either immediately or at some point in the future. Annuities are insurance
contracts that promise to pay you regular income immediately or in the future. Annuities
come in three main varieties—fixed, variable, and indexed—each with its own level of risk
and payout potential. The income you receive from an annuity is typically taxed at regular
income tax rates, not long-term capital gains rates, which are usually lower.

Principle of Indemnity

The principle of indemnity governs that an insurance contract compensates you for any
damage, loss or injury caused only to the extent of the loss incurred. Insurance contract
ensures that the insurer does not make a profit in the event of an incurred loss. In other
words, principle of indemnity deals with the premise that in the event of a loss, the insurer
must put the insured to the position in which he was before the loss occurred. This means
that the insurer shall receive any compensation that is neither more nor less than the actual
loss that has taken place. The limit of the compensation is always subject to the sum insured
and the terms and conditions that govern the policy. Principle of Indemnity is applicable in
case of fire insurance and marine insurance contracts.

1. Explain management of Risk by Individual and management of Risk by Insurers

Risk management for individuals is a key element of life-cycle finance, which recognizes that
as investors age, the fundamental nature of their total wealth evolves, as do the risks that
they face. Life-cycle finance is concerned with helping investors achieve their goals,
including an adequate retirement income, by taking a holistic view of the individual’s
financial situation as he or she moves through life. Individuals are exposed to a range of
risks over their lives: They may become disabled, suffer a prolonged illness, die prematurely,
or outlive their resources. In addition, from an investment perspective, the assets of
individuals could decline in value or provide an inadequate return in relation to financial
needs and aspirations. All of these risks have two things in common: They are typically
random, and they can result in financial hardship without an appropriate risk management
strategy. Risk management for individuals is distinct from risk management for corporations
given the distinctive characteristics of households, which include the finite and unknown
lifespan of individuals, the frequent preference for stable spending among individuals, and
the desire to pass on wealth to heirs (i.e., through bequests). To protect against unexpected
financial hardships, risks must be identified, market and non-market solutions considered,
and a plan developed and implemented. A well-constructed plan for risk management will
involve the selection of financial products and investment strategies that fit an individual’s
financial goals and mitigate the risk of shortfalls.

Learning outcomes:

The member should be able to:

a. compare the characteristics of human capital and financial capital as components of an

individual’s total wealth;

b. discuss the relationships among human capital, financial capital, and economic net
worth;

c. discuss the financial stages of life for an individual;

d. describe an economic (holistic) balance sheet;

e. discuss risks (earnings, premature death, longevity, property, liability, and health risks)
in relation to human and financial capital;

f. describe types of insurance relevant to personal financial planning;

g. describe the basic elements of a life insurance policy and how insurers price a life
insurance policy;

h. discuss the use of annuities in personal financial planning;

i. discuss the relative advantages and disadvantages of fixed and variable annuities;

j. analyze and critique an insurance program;

k. discuss how asset allocation policy may be influenced by the risk characteristics of
human capital;

l. recommend and justify appropriate strategies for asset allocation and risk reduction
when given an investor profile of key inputs.

Investing in the insurance business can be a daunting task if you are a newbie to start with.
There are certain insurance risks that have coupled this industry and the failure to do
something to avert the risk can be detrimental to the success of your insurance company.
Some of the common risks faced by insurance companies include.

Common Risks faced by Insurance Companies

Some common types of Insurance Risks are given below:

. Liquidity risk

Liquidity is the ease in which business assets can be converted into cash. This is an
important aspect of consideration for success in an insurance company. Liquidity risks may
arise due to a large number of clams in general insurance and a large surrender of policies in
life insurance. This may lead to a loss of the company property in instances when the
company may not be able to raise the required cash.

Actuarial Risks

Actual studies deal with the study of risks and quantifying the amount of compensation
accorded to each risk. Actuarial risks may be caused by different factors such as mortality
rate variance, perils and certain variance. Calculations of the given risks may be subjected to
a variety of adjustments. You may consider current statistical data, some past experience
and future possibilities but in the future, there will be a great variance in the speculated and
the risks amount.

Reputation risks

Reputation risks are faced when an insurance name has lost value in the insurance market.
This has a great impact on the amount of revenue which will be raised by the insurance
company. In the short run, it may not be an easy task to quantify the exact value caused by
the reputation risks but adverse results may pop-up during auditing. In Extreme cases,
reputation risks may lead to bankruptcy.

Business risks

Business risks that are faced by the insurance company are just the normal risks faced by
many other businesses. Risks ranging from data breaches have resulted in a loss of the
great amount of relevant data in the insurance industry. Other related business
insurance risks include human capital loss, loss of damage and some of the relevant
professional service mistakes that may be relevant. There is a lot to do when faced with
this risks. A lot of professionalism is required to handle these risks, especially in the
insurance industry.

Strategic risks

Strategic risks in the insurance sector require excellent strategic management skills to avert
risks. Strategic risks involve the process of identification, assessing and the management of
the insurance strategy.
Underwriting insurance Risks

Underwritings of risks resulting from the process of selection and approval of which risks
need to be insured. Insurance risks may also be caused by the use of an inflexible
underwriting of risks process. The process of underwriting forms the basis of insurance and
the failure to get it right at this step may result in great loses in the future.

2. Define Insurance Customer, how do you understand customers needs and behavior
in insurance purchase.

The development of the economy depends on the soundness of its financial system.
Insurance sector is one of the major players in financial system. Insurance sector in India is
growing at a very fast pace. As a result of liberalization of Indian economy, new private
sector insurance companies had came into existence which competed with both foreign
insurance companies and Indian companies for market share. Insurance companies are
competing not only with themselves but also with other financial institutions within the
financial industry. With the entry of private sector insurance companies the number of
insurance companies in all over the country has gone up. High level of competition is the
most important factor in influencing the structure and activities of the insurance system
around the globe. More and more insurance facilities are made available in every part of the
country even to small cities, towns and rural areas. With the growing awareness among the
people about the insurance, various services provided by the companies and availability of
insurance facilities across the globe, the insurance sector is emerging very rapidly and there
is a need to identify the main factors that affect customer‟s choice for a insurance
companies
It is important for the insurance companies to set up a customer base so that the market
share increases and also work upon the factors that determine the choice of a particular
company. It's high time and the insurance companies now focus on inducing an approach
that is largely public oriented and not profit based. As users nowadays are highly demanding
and curative, it is imperative to adopt strategies that promote the choice of a company by
the users. The insurance agency needs to look on providing the services to the customers in
terms of their preferences so that they not just retain their old customer but also attract
new ones. With the competition boiling up each day in the industry, it is important that
companies clarify the factors that promote one company over the other to be chosen by a
customer. Identification and evaluation of such data helps company strategize steps they
need to take to sustain in the insurance industry for long.
Remarkably, the insurance sector is one of the major players in defining the health of any
economy. This leads to immense competition among the insurance companies to attract
customers and diversify their services. Most importantly, in order to keep up with the
competition, insurance companies need to focus intensely on what drives a customer’s
behavior patterns. They are constantly working to improve their services by adapting to
market innovations at lightning speeds and becoming customer-oriented rather than profit-
oriented.
Some of the major factors that influence customer behavior and choice of insurance
include:
1. Demographics and Customer Behavior
Gender, age, and stage of life influence purchase decisions significantly. Men and women
need and buy different products. While men in most households manage insurance, women
are taking an increasingly active role in purchase decisions. Shopping differences between
men and women seem to be changing rapidly. Therefore, it is imperative that the insurance
companies appeal to all genders in their advertising efforts to attract and retain customers
by taking note of customer’s behavior patterns.
2. Proximity and convenience
When you have to drive 100 miles to get to your closest insurance branch location, we know
it is not a good business model. No matter how trivial this seems, it plays a major role in
dictating a customer’s behavior pattern and decision to stick with a particular insurance
company. Having a convenient branch location, easy parking space, and the number of
branches across the globe influence a consumer’s decision of buying from the company and
staying with it.
3. Technology adaptation
Consumers are relying more on technology with its effects being felt in every aspect of their
decision-making from where to shop, to what to buy, and how to pay. Any insurance
company that pays attention to these customer behavior patterns by adapting to
technology and use of modern equipment radically changes a customer’s shopping
experience and speaks volumes about a company’s effort to stay up-to-date and provide
the most efficient and timely services to its customers.
4. Security
With the convenience of access comes the risks of security. In the past, the merchants knew
their customers personally, which made identity theft very difficult. With the shift to
technology, authentication has become important to protect against hackers. Making the
customers feel that their information and data are safe is a top priority and greatly influence
a customer’s behavior pattern in decision-making. It befalls on the insurance company to
convey and convince the customer about the safety measures they have in place. Security
and data breaches always remain a significant threat to technology adaptation.
5. Reputation
Reputation is an overall estimation of a company’s current behavior and estimated future
behavior. Any insurance company’s reputation is very important in dictating a customer’s
behavior and attracting customers. An insurance company that is constantly in the news for
negative publicity attracts very few customers. Insurance companies can more easily
achieve their goals and objectives if they have a good reputation among stakeholders. No
organization can control its own reputation completely. It can only operate in a way that
communicates this to the stakeholders and/or consumers to influence customer behaviors.
Components that factor-in include ethical outlook, workplace, financial transparency,
leadership and management style, social responsibility, customer focus, quality upkeep,
reliability, and emotional appeal.
According to Identity Theft Resource Center, there have been 7,689 data breaches involving
900,315,392 records from June 2005 to June 2017

6. Situational factors
As with any product purchase, situational influences affect how insurance customers
behave. For instance, if a customer purchases a car over the weekend and needs immediate
insurance before they drive the car out of the lot, they are most likely to go with the
instantly available choice. This is the case even though they think it is not the best offer for
them because the risk of driving without any insurance outweighs the risk of paying a few
extra bucks. Situational factors are influenced by several elements including physical factors,
social factors, reasons for purchase and a customer’s behavior patterns and mood. Physical
factors such as a store’s design and layout play a major role. If a customer has difficulty
finding his or her way to the product they need, they are less likely to buy it. Improving their
situational factors will most likely gain the customer’s trust in the insurance company and
keep them coming back.

3. Traditional or Combination Insurance Plans in India

Insurance is a contract which provides protection against a possible eventuality or risk.

So, insurance in its purest form is an expense rather than an investment.

Broadly speaking, life insurance can be categorized as a ‘pure risk’ coverage plan and the
other, which is a combination of insurance and savings (investment) component.

Traditional plans or conventional plans are the oldest types of insurance plans
available. Term Insurance plans, Money-back plans, Whole-life Plans, Endowment plans etc.,
are considered as Conventional plans.

Traditional policies are considered as risk-free, as they provide fixed returns in case of death
(or) on policy maturity. These plans take a limited exposure in high risk products like
equity (market-linked) and hence the downside probability is also low.

Different types of Traditional Life Insurance Plans

Below are the popular types of conventional or traditional life insurance policies in India;

 Money-back Life insurance plans

 Endowment life insurance policies
 Whole-life plans
 Term Life Insurance Plans
Moneyback Life Insurance Policies

Money-back life insurance plan provides life coverage during the term of the policy and the
maturity benefits are paid in installments by way of Survival Benefits (money-back
payments). A percentage of the sum assured is paid back to the insured on periodic intervals
as survival benefit.

Most of the Money back plans are eligible to receive the bonuses declared by the insurance
company from time to time.

 For a 20 year policy, the Premium paying term is 16 years.

 A limited premium payment plan is a plan where you pay the premium for a shorter
span of time and enjoy the benefits of an insurance cover for a long time.
 1st Survival benefit (money-back) of 45% of Basic Sum Assured is payable in 16th year
and 2nd SB in 18th year.
 Guaranteed Additions at the rate of Rs 50 p.a. per Rs 1,000 Sum Assured is payable for
the first five policy years. Form 6th year till 20th year, GA @ Rs 55 p.a. per Rs 1,000 SA is
payable on maturity/death of the policyholder.
 If death occurs during the first five years, death benefit of Sum assured on death +
accrued Guaranteed Additions is payable to the nominee. In case, death occurs after 5
years, death benefit = SA + GA + Loyalty Addition is payable.
 After 20 years, the maturity benefit would be equal to 10% of BSA + accrued GAs + LA is
payable.

Endowment life insurance policies

It is a combination of insurance and investment. The insured will get a lump sum along with
bonuses (if any) on policy maturity or on death event. A certain amount is kept for life cover
– insurance, while the rest is invested in low-risk products by the life insurance company.

Under this endowment plan, a policy holder is required to pay premium for 10 years only.
After the PPT of 10 years, he will stop paying premium but the policy will continue till the
policy term of 16 years.

The possible events that can happen are :

 On Death of Policy holder – If Mr Paswan dies during the policy term, his nominee will
receive the Sum Assured + Accrued Bonuses + FAB (if any). After this, the policy will
cease to exist.
 On Survival till maturity – If Mr. Paswan survives till the end of policy term, he will get
the Sum Assured + Accrued Bonuses+FAB (if any). The policy will terminate thereafter.

Whole-life Insurance Plans

It is a life insurance policy which is guaranteed to remain in force for the insured’s entire
lifetime. The Sum assured is paid to the Policyholder’s nominee in the event the insured
dies.
In most cases, a whole life insurance policy covers the life assured for up to the age of 100
years. If the life assured outlives the age of 100 years, the insurer pays the matured
endowment coverage to the life insured.

Let’s consider an example – Policy holder’s current age is 30 years (male), buys this whole-
life policy for Sum Assured of Rs 10 Lakh and with Premium Paying Term as 25 years. So, the
policy term would be for 70 years (100-30 years).

The policyholder has to pay premiums for 25 policy years (till he attains 55 years of age).
After PPT ends, survival benefits @ 8% of Sum assured are payable till one year before
policy maturity year. So, benefits are payable till policy holder attains 99 years. Maturity
benefit is payable to policyholder when he attains 100 years (ie policy term completes, on
70th policy year).

Term Life Insurance Policies

Term insurance is the simplest and most fundamental insurance product. These insurance
plans are designed to ensure that in the event of the policyholder’s death, the family gets
the sum assured (the cover amount).

Term plan provides risk coverage for a certain period of time (policy term/duration). If the
insured dies during the time period specified in the policy and the policy is active – or in
force – then a death benefit will be paid. It is the cheapest form of Life insurance in terms of
premium.

Let’s consider an example – A 40 year old male individual buys LIC’s Tech Term insurance
plan for Rs 1 cr level Sum Assured, with 10 year term, premium payable @ Rs 10,260 p.a.,
opts for regular premium payment for 10 years and selects ‘lump sum’ death benefit option.

In case, the policy holder expires anytime during the policy tenure (10 years), his nominee
will receive the death benefit of Rs 1cr as a lump sum amount and the policy gets closed.

4. Features of Product covering Fire and Allied perils?

Fire and Allied Perils Insurance is a risk management tool that safeguards a business’s
finances in the event of any loss or damage to its stock, plant and machinery, building,
and other commercial assets.
Building a business takes years and sometimes decades of hard work. Yet, a single
unforeseen disaster can bring the entire operation down– leaving you struggling to manage
the financial losses and keep the enterprise running. That’s where Fire and Allied Perils
Insurance can help. This policy helps businesses mitigate the impact of the inherent risks
that most companies face in today's environment. The sudden occurrence of a fire, storm,
flood, riot, or landslide, can cause huge damage to business property, requiring large
amounts of money for repairs and replacements. But with Fire Insurance, all these costs can
be easily recovered from the insurance company.
 Fire and Allied Perils Insurance is a Property Insurance policy for shops, factories,
warehouses, offices, department stores, consulting businesses, and all other types of
commercial establishments. It provides financial reimbursement to these businesses for any
loss or damage to their property due to fire, natural disasters, explosions, missile testing
operations, riots, strikes, landslides, sprinkler leakage, and several other risks.
Fire Insurance helps cover the cost of property replacement, reconstruction, repair, and
other associated expenses that may unexpectedly arise during the course of business
activity. This policy is usually purchased on a yearly basis, for which periodic premiums have
to be paid by the business at the start of each renewal cycle.

Fire Insurance provides coverage for a business’s physical property, such as its building
structure, office space, plant and machinery, equipment, furniture and fixtures, stocks of
goods (including raw materials, work-in-progress and finished goods), and any other asset
specifically mentioned in the policy.
Fire Insurance offers financial protection against any type of loss or damage caused to the
above mentioned assets due to the following risks:

 Fire, lightning and explosion - Any damage caused due an explosion or fire resulting from a
short circuit, chemical reaction, third party’s malicious intent, can be covered. Furthermore,
damage directly caused by a lightning strike, whether or not it results in a fire, can also be
covered.
 Aircraft damage and impact damage - Any property damage due to falling objects from an
aircraft or collision with some other object, person, vehicle, or animal not belonging to the
business can be covered. The risks of Fire, Lightning, Explosion, and Aircraft
Damage collectively come under the FLEXA cover.
 STFI cover - This includes coverage for any kind of damage caused by a storm, typhoon,
cyclone, flood, inundation, or a similar natural disaster
 RSMD cover - This includes coverage for damage to property caused by third party actions,
such as riots in your neighbourhood, strikes, or malicious acts like arson or vandalism.
 Subsidence of land - Any property damage due to landslides, rockslides, or collapse of the
land on which the business is located can be covered.
 In-built covers - These include coverage for stocks located at more than one location,
movable stocks, professional fees, debris removal, startup expenses after loss, etc.
Other risks covered under this policy include coverage against missile testing operations,
bursting/overflowing of water tanks, leakage of automatic sprinklers, and several in-built
covers.

A Fire and Allied Perils Insurance policy does NOT provide coverage for the following:

 Any loss or damage to business property caused by the owner's or their employees’
negligence or willful misconduct
 Any loss, destruction or damage to stocks in cold storage due to change in temperature
 Any loss or damage to bullion, precious stones, works of art, or other precious property
 Any loss or damage caused by war, invasion, or similar perils
 Any loss or damage caused by ionising radiation, or nuclear risks
 Any loss or damage to missing or mislaid property
 Consequential losses, such as loss in market share, loss of profits, etc.
Furthermore, no coverage is provided if the insured property remains unoccupied for more
than 30 days during the policy period.

Fire Insurance is one of the most comprehensive, affordable, and widely bought insurance
policies for businesses in India. For this reason, the country’s apex insurance regulator,
IRDAI, has made several changes to this policy to make it more accessible and affordable for
MSMEs.

Up until April 2021, the Standard Fire and Special Perils policy (SFSP) was the only Fire
Insurance product that insurance companies were allowed to offer. However, As per new
regulations by the IRDAI, w.e.f. 1st April 2021, the old SFSP model has been divided into 3
products covering 3 distinct categories of property. This allows insurance companies to
tailor their offerings based on individual risk assessments, resulting in more competitive
pricing and better coverage options for policyholders.