WHAT IS INSURANCE ?• Insurance Indemnifies Assets & Income. EveryAsset has a value and generates Income to itsOwner. There is a normally expected Life-timefor the Asset during which time it is expected toperform. If the Asset gets lost earlier, beingdestroyed or made Non-functional through anAccident or other unfortunate event the Owneris Prejudiced. Insurance helps to reduceCONSEQUENCES of such AdverseCircumstances which are called Risks
• Insurance is the SCIENCE OFSPREADING OF THE RISK. It is thesystem of spreading the losses of anIndividual over a group of Individuals• Insurance is a Method of sharing offinancial losses of a FEW from aCOMMON FUND formed out ofContribution of the MANY who areequally exposed to the same loss
What is UNCERTAIN for an Individualbecomes a CERTAINTY for a Group. Thisis the basis of All Insurance Operations.Thus INSURANCE CONVERTSUNCERTAINTY TO CERTAINTY
The object of Insurance is to provideprotection against Financial Lossescaused by Fortuitous Events. ThusInsurance is a protection against theConsequences of RISK. RISK is defined for Insurance Purpose asthe UNCERTAINTY OF A FINANCIALLOSS.
• Element of RISK is Inherent in Life. RiskMeans that there is a possibility of lossor damage.• To the common Man, Risk meansExposure to Danger.• In Insurance, the word Risk may beused interchangeably with Peril-whichmeans the Event or Occurrence whichCAUSES the Loss.
In Insurance, the word Risk may also referto the Property or Subject Matter ofInsurance The Subject Matter of Insurance can beLife, Limb, Property, Interest & Liability
• The Problem of Risk in Economic andCommercial Activities can be dealtwith in FOUR WAYS.1. Risk Avoidance2. Risk Retention3. Risk Transfer4. Risk MinimisationInsurance is ONE of the most Importmethodof Risk Transfer
• Insurance spreads the Risk among theCommunity and the likely Big Impact onONE is reduced to Smaller ManageableImpacts on ALL. Thus Insurance acts as aSHOCK ABSORBER.• A RISK OF TRADE is Insurable but a TradeRisk is not Insurable. In a Risk of Tradethere can only be a LOSS whereas in aTrade Risk, there can be LOSS OR GAINRisks of Trade are called PURE RISKS.
• Only Economic or Financial Losses canbe compensated by Insurance.• The Business of Insurance is thePooling of RISK and RESOURCES. It is atechnique which provides forcollection of small amounts ofPREMIUM from many Individuals andFirms out of which losses suffered bythe FEW are paid. Insurers act asTRUSTEES of the Common Pool.
INSURANCE ACTS AS A SOCIALSECURITY Social Shock Absorber Solarium Fund for Hit & Run Victims ofRoad Accidents. PASS (Personal Accident & SocialSecurity) scheme launched by the Govt.of India Crop Insurance Schemes and other RuralInsurance covers for the Rural Masses.PURPOSE AND NEED OF INSURANCE
INSURANCE CONTRIBUTES TONATIONALWEALTH It contributes to a vigorous Economyand National Productivity. LIC & GICfunds formed out of the savings ofPeople are channelled intoInvestments for Economic Growth.HUDCO, IDBI, IFCI, use funds siphonedfrom Insurance Money for lending toEntrepreneurs.PURPOSE AND NEED OF INSURANCE
INSURANCE PROTECTS THE CAPITAL ININDUSTRY - It helps release the same forfurther Expansion Insurance is the HAND MADE toCommerce and Trade.PURPOSE AND NEED OF INSURANCE
RATE OF PREMIUM WILL BE DIRECTLYPROPORTIONAL TO THE DEGREE OF HAZARD TO ASSESS VARIATIONS IN THE DEGREE OFHAZARD,RISKS MUST BE CLASSIFIED INTOHOMOGENEOUS CATEGORIES WITHSIMILARITY OF EXPOSURE IN EACH SUB-CLASS,PAST LOSS EXPERIENCEWILL BE THE CRITERIA APPLIED TO DECIDETHE PREMIUM RATE
GREATER THE RISK,HIGHER WILL BE THEPREMIUM RATE THE MORE PROBABLE THE LOSS AND THEMORE SEVERE IT IS LIKELY TO BE,THE HIGHERWILL BE THE PREMIUM RATE Eg.—HAZARDOUS GOODS AND HAZARDOUSPROFESSIONS WILL ATTRACT A HIGHERPREMIUM AS COMPARED TO NON-HAZARDOUS GOODS OR PROFESSIONS
RATES OF PREMIUM SHOULD BE EQUITABLEAND FAIR AS BETWEEN DIFFERENTINDIVIDUAL INSUREDS HENCE,A SYSTEM OF CLASSIFICATION OFRISKS INTO BROAD CATEGORIES IS ADOPTED. THESE MAY BE FURTHER CLASSIFED INTOGROUPS AND SUB-GROUPS DEPENDINGUPON THE HAZARDS INVOLVED AND THEIRSIMILARITY Eg.CLASSIFICATION IN MOTOR/FIRE/W.C.
IN EACH SUB-GROUP,THE PAST LOSS EXPERIENCE ISWORKED OUT AND FUTURE FORECASTS ARE MADEON THIS BASIS FORMULA FOR PURE PREMIUML X100 L=SUM TOTAL OF LOSSES----------V V=SUM TOTAL OF VALUES PURE PREMIUM WILL BE JUST SUFFICIENT TO PAYTHE LOSSES,HENCE LOADING IS REQUIRED FOROTHER FACTORS LIKE-COMMISSIONS/MANAGEMENTEXPENSES/RESERVES FOR UNEXPIREDRISKS/PROVISION FOR UNEXPECTED HEAVYLOSSES/MARGIN OF PROFITS FINAL RATE=LOADED RATE
LAW OF LARGE NUMBERS IS FUNDAMENTAL TO ALLINSURANCE OPERATIONS THIS IS A MATHEMATICAL PRINCIPAL ANDSTIPULATES THAT- The greater the number of cases studied and longerthe duration of study, the more accurate will be thefuture forecast …PROVIDED THE CONDITIONS REMAIN THE SAME AS THE No. OF CASES INCREASES,THE GAP BETWEENTHE ESTIMATED FUTURE LOSSES AND ACTUALFUTURE LOSSES BECOMES LESS AND LESS APPLYING THIS PRINCIPLE,INSURERS ARE ABLE TO ANTICIPATEFUTURE LOSSES MORE ACCURATELY AND FIX PREMIUM RATESACCORDINGLY (SUBJECT TO TREND ADJUSTMENTS
INSURANCE OPERATIONS ARE DIRECTLYAFFECTED BYIRDA-ACT—2000INSURANCE ACT—1938LIBNA—1956---LIFE OPERATIONSGIBNA—1972---NON-LIFE OPERATIONSBILL OFLADINGACT-1963INDIANCARRIERSACT-1865MERCHANTSHIPPINGACT-1958MARINEINSURANCEACT-1963W.C.ACT1923PLI ACT-1991SALE OF GOODSACT-1930INDIAN STAMPACTINDIANRAILWAYSACT-1890INDIAN POSTOFFICEACT--1898C.P.ACT1986FERA-1973COGSA-1925M.V.ACT-1988
The ultimate underwriting objectives are The production of large volume of premium incomesufficient to maintain and progressively enlarge theinsurers business. The earning of a reasonable profit on the operations The important underwriting factors are- Well spread out and Large Volume of business- Retention limits- Reinsurance of the surplus Reinsurance is insurance of insurance . The cedingcompany retains a part of the risk / premium andcedes the balance to the reinsurer. There are twomain methods of reinsurancea) Facultative b) Treaty
Facultative Reinsurance : In facultativereinsurance, the choice / faculty toaccept or reject a risk is with thereinsurer. This method involvesconsiderable amount of clerical work andceding company cannot go on risk unlessconfirmation is received from thereinsurer about the acceptance of therisk and premium rate / terms conditionsof insurance.
Treaty :There are two types of treaty reinsurance –Proportional and Non-proportional. Proportional : Proportional treaties are risk based& can be divided into – a) Quota Share b) Surplus c) Poolsd) Auto Facultative (Facultative obligatory) Non Proportional : Non proportional treaties arenot risk based but loss based. The insurer limits theamount of loss as per the underlying limit and thereinsurer agrees to pay the loss over and above theunderlying limit. Examples of non proportionaltreaties area) Excess of loss – for event lossesb) Stop loss – for portfolio losses
Retrocession---Reinsurance of aReinsured Risk Purpose of Reinsurance— Creation of additional capacity Achieves Global Spread of risk Best protection against Catastrophic Risks Facilitates acceptance of Mega/Jumbo Risks Works on the Principle of: No Cession without Retention Follow the Fortune of the Ceding Company
The Major Portfolios are as follows: Fire Insurance—20% Marine Insurance---15% Motor Insurance---35% Engineering Insurance—10% Aviation---5% Miscellaneous Traditional—10% Miscellaneous Non-Traditional—5%