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Mf0018 assignment

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  • 1. MF0018 –Insurance and Risk Management Q1. Explain the different types of pure risk and the difference between pure and speculative risk. Ans. Pure risks are defined as situation in which there are only two outcomes that is the possibility of loss or no loss to an organization but no gain. The event either happens or does not happen. When this risk happens, the chance of making any profit is very badly low. Pure risks is broadly classified into four categories: a) Property risk: This is a risk to a person in possession of the property which faces loss because of some unforeseen events. Property includes both movable and immovable possessions. Property risk is further divided into direct loss and indirect loss. b) Personal risk: Personal risk are risks that directly affect the individual’s income. This may either be loss of earned income or extra expenditure or depletion of financial assets. There are four major types of personal risks. Risk of premature death—Premature death occurs when the bread earner of a family dies with unfulfilled financial obligations. Therefore, this can cause financial problems only if the deceased has dependents to support. Risk of insufficient income during old age—The risk arises when retired people do not have sufficient income after their retirement and it leads to social insecurity. Risk of poor health—The sudden disability of a person to earn income for living happens to be a disadvantage or sudden risk to that person. The risk of poor health includes payment of medical bills and the loss of earned income. This loss of income is a financial insecurity if the disability is severe. Risk of unemployment--- This risk is due to socio economic factors resulting in financial insecurity. c) Liability risk: This risk arises to a person when there is a possibility of an unintentional damage caused by him to another person because of negligence. Therefore, this risk arises when one’s activity causes adversity to another person. This risk arises due to government regulations and acts. d) Loss of income risk: This risk is due to an indirect loss from a certain given risk. Therefore in this period, production stoppage will lead to loss of income. The distinguishing features of pure risk and speculative risk are as following: Pure risks are out of the person's control, in that people, do not intentionally put themselves in a situation that is all downside and no upside in it. Speculative risks, on the other hand, are gambles. Speculative risks are the downside of choices one knowingly and sometimes intentionally makes that also have upside.
  • 2. Speculative risk may profit the society but the same does not apply to pure risk. Playing poker is a speculative risk. You risk losing some or all of the money you bring to the game. But it's not a pure risk because you could also win. The contract of insurance is usually applicable only to pure risks but not to speculative risks. Q2. What are voluntary and involuntary insurances? Ans. Insurance coverages are classified as voluntary and involuntary coverages. Voluntary insurance is an optional insurance which is taken by an individual or a company by their own wish. Private insurance is usually a voluntary insurance which includes automobile insurance, workers compensation insurance, etc. Only 3% of India’s population is covered under voluntary health insurance and there is lot of scope for expansion. Involuntary insurance comes under public sector where the individual is liable to take up insurance by law. It is usually taken for social development, unemployment or for the protection of particular class of people in the society. Q3. Explain the steps in underwriting process. Ans. The underwriting of life-insurance falls under a category that is different from all other forms of insurances. When the underwriter measures risk at beginning, the company assures a cover for 30 years or throughout life. Life assurance underwriting must consider factors, like, medical history, family details, occupational hazards, and person’s lifestyle. The underwriting process for life insurance involves the following steps: a) Execution of field underwriting. b) Renewing the application in the office. c) Gathering additional information, if required. d) Taking and underwriting decisions. Additional information is always essential for the underwriter in order to take a decision. This additional information may be in the form of questionnaires, a detail medical report from proposal’s own doctor (Medical Attendant’s Report), and an examination by an independent doctor (Medical Examiner’s report). The general steps followed by Underwriters are:
  • 3. 1) Getting applications -The application for insurance is the main source of insurability information that the underwriter of the life insurance company evaluates first. Applications are generally collected by the field officers or the agents. A typical life insurance consists of: a) General information – The general information consists of general aspects like name, age, address, date of birth, sex, income, marital status and occupation of the applicant. It also includes the details of requested insurance cover like type of policy, amount of insurance, name and relationship of the nominee, other insurance policies that the customer owns and the pending insurance applications as on date. b) Medical information – The medical information consists of consumer’s health condition and several queries about health history and family history. The medical section of the application is comprehensive and it is mandatory to fill it completely with relevant information. Information is also collected through a medical examination, depending on age and face value of the policy. 2) The medical report – An average medical test is compulsory (which is free of cost to the applicant except in case of revivals). Depending on the information filed in the application, an insurance company may ask the physician of the consumer for further information. Gathering information is a standard method used in all domestic insurance companies. Basically, life insurance companies have several sources of medical and financial information to assist them in the underwriting process. These include personal medical records and physicians, the medical information department, inspection reports and credit records. 3) Underwriting review – After collecting all the relevant information about the applicant, an underwriter from the insurance company evaluates the information. During this evaluation, the underwriter will organise the risk offered to the company and also determines the premium for the policy depending upon the primary and secondary factors influencing the premium. The premium rates are set by the company’s registrars depending upon the applicants risk profile. During each step of the underwriting process, the life insurance agent usually provides details, and is well-informed about the insured status in the process. If the applicant offers more risk than the insurance company standards, then the underwriter rejects the application. 4) Policy writing – A special department writes the policy, whose main function is to issue written contracts according to the instructions from the underwriting departments. A register must be maintained as most policies are long-term. Insurance companies generally use computerised systems to maintain the records of the customers, premium payments, and they to verify that all the requirements
  • 4. of underwriting have been met. Q4. Describe factors affecting claim management, and the importance of time element in claims payment. Ans: The factors that affect claim settlement are: a) The risk and cause of event covered in the policy. b) The cause of event is directly related to the loss, a remote cause cannot be placed in the settlement. c)The policy should be valid on the date of event. d) If conditions and warranties are not fulfilled according to the cover of the policy, the cover of insurance does not come into effect even though premium is paid. e) The loss occurred should not be intentional in order to make profit. f) Without the presence of the insurable interest for the property insured at the time of loss, the benefit or compensation cannot be availed. g) The assured has to make gains out of the insurance contract, as the contract is indemnity in nature as it makes good the loss suffered. h) Documentary evidence must support the claim. The time value is very important in the settlement of a claim. Insurer should submit the claim details within the specific period mentioned in the policy document. In few cases, either the policyholder or the claimant or the claimant representative, has to intimate the death of a person or the accident of vehicle, either orally or in person, immediately. The reasons for the importance of time element in the claims payment are as: a) The delay in the claim settlement causes an unfavourable opinion about the insurer. b) The extension of time increases the cost of claims. c) The delay may result in the insurer having to pay interest on the due insurance amount, or insurers may have to pay the case costs to the assured, as per the direction of the court, which increases the costs. d) The delay in payment, may lead to legal action, which is costly.
  • 5. e)The delay may cause extra burden to the insurer due to the unproductive use of manpower to defend, expenses incurred and waste of time on legal actions. f) Legal actions will affect on the productive areas of the business mainly in the marketing of the insurance business. g) The delay may increase the number of cases with consumer protection councils. Q.5. What do you understand by marketing of insurance products? Write down the issues in insurance marketing. Ans: Marketing of insurance products is an important tool in the insurance business. The marketing of insurance is possible in both the life insurance and the non-life insurance departments. The type of advertisement and marketing suitable for insurance business must be decided. The insurers must consider their budget, and plan their marketing strategy according to their budget. They must also consider their target market. The marketing tools that help in advertising the company’s insurance policies are: a) Online advertisement – It is one of the insurance marketing tools. Online advertisement helps the insurance marketers to get noticed. Through studies it is found that 75 percent of households have access to computers and internet resources. Thus, online advertisements plays very important role in advertising the company’s insurance policy. b) Block line advertisement – It is another marketing tool used in trade journals, industry publications and periodicals. This insurance marketing tool is useful with the perspective of industry professionals who read these publications. c) Television advertisements and print advertisements – These advertisements are the excellent forms of insurance marketing as they have a greater impact and reach. However, the only drawback is that both are very expensive. These may affect the insurance company’s advertising budget. Marketing issues for young growth-oriented insurance companies as well as other insurance companies are as follows: a. Initial marketing focus issues – A potential initiator of an insurance marketing
  • 6. business is needed, because, without support, the insurance company cannot succeed. Thus, if the insurer or the insurance company does not have potential to do marketing may have to face lot of difficulties in insurance marketing. b. Marketing the company vs. sponsoring products issues – A new or young unknown insurance company has to be accepted within the market place before marketing effectively to the end-users (consumers). These companies must be what they are. Every prospect will not value innovation and dexterity; instead the correct ones will value it. Thus, young insurance companies might face issues while finding out the correct prospect of policies. c. Marketing programs issues – Once after a young insurance company is positioned in the market, if its marketing program is not designed specifically to accomplish their current insurance program’s objectives, then the whole effort is almost worthless. Thus, it should re-evaluate its marketing program to acquire good marketing. d. Exit strategy issues – It is also one of the marketing issues. Right at the beginning, an insurer or a founder must understand, and be able to explain how they can exit. Even though they had given their expectation about company’s growth and prosperity, if they fail to describe which type of customers would ultimately want to purchase into it, they are said to be facing a marketing issue. Thus, they must plan for organising the company, provisioning of funds, and positioning of company in the market for the ultimate exit opportunity. e. Pricing issues – The desired price or premium at which an insurer seeks to sell their policy can impact on the distribution of the same. Since all the insurers wants to make profit for their contributions, their distribution schemes may affect the insurance products’ pricing. If too many competitors are involved, then ultimate selling price may become barrier to meet sales targets, in such cases an insurer may go for alternative distribution options. f. Target market issues – An insurance marketing is said to be effective, only if customers obtain the policies. The insurers must determine the level of distribution coverage needed that effectively meet customer’s requirements to reach their target market. Q.6. List the changes made in the Third and Fourth Regulations in the IRDA Investment Amendment Regulations 2001. Ans: IRDA investment regulations of 2001 were amended by the Insurance Advisory Committee to update the investment regulations for insurance companies in India.
  • 7. To implement the powers granted by sections 27A, 27B, 27D and 114A of the Insurance Act, 1938 (4 of 1938), the Authority, in consultation with the Insurance Advisory Committee, made the following regulations to modify the Insurance Regulatory and Development Authority (Investment) Regulations, 2000. There were totally 14 modifications made to the Insurance Regulatory and Development Authority (Investment) Regulations, 2000. The modifications made for the third and fourth regulations are as given below: a) The insurers should make an effort to keep a balance between infrastructure sector investments and social sector investments. The bonds provided for these sectors were rated ―AA‖ and guaranteed by the government and other reputed rating agencies. b) All investment of funds in assets, which are rated as per market practice will be based on rating of such assets. The rating should be by an independent, reputed and recognised Indian or foreign rating agency. c) All the assets for investment shall be have an investment grade ―AA‖ and not less than that. If the investment grade is not up to the mark to meet the investment requirements of the insurance company but the investment committee is fully satisfied about the same, then the investment of the asset is approved for not less than +A rating. d) All the debt assets issued by all India financial institutions are given an AAA rating and are recognised as such by RBI. If the investment grade is not up to the mark to meet the investment requirements of the insurance company but the investment committee is fully satisfied about the same, then the investment of the asset is approved for not less than AA rating from a reputed Indian or foreign rating agency. e) If any asset is capable of being rated only on the basis of market practice, then the asset shall not be invested. f) Investments in equity shares should be made in liquid instruments in a recognised stock exchange. The investment trade volume should not be below ten thousand units in the last 12 months.