•RISK – exists when there is uncertainty aboutfuture. •CONCEPT OF RISK Risk is present everywhere
Risk is a chance of losses Risk is the possibility of unfortunate occurrence Unforeseen events, eventualities Occurrence of economic loss Unpredictability Probability of some happening that is unwanted and unavoidable
PURE RISK : no prospects of gain but only loss or break even status Co.- subject of ins. Fire, accident, death etc SPECULATIVE RISK: possibility of loss, gain, breakeven. FUNDAMENTAL RISK: affect large section of society, act of God, PARTICULAR RISK: loss to individual, impact individuals
1) A logical on going process for dealing with the possibility of loss. 2) Three questions to ask. a) What can go wrong b) What can be do about it c) How can we pay for it? A DISCIPLINE FOR LIVING WITH THE POSSIBILITY THAT FUTURE EVENTS MAY CAUSE HARM
It can readily be seen that, unless accuratestatistical information is available, predictionsin the form of probabilities will be defective.Therefore, in each of the fields of insurance,carefully compiled statistics are assembled todetermine loss ratios and to accumulateexperience as a basis for rate making.
It has not been possible to apply mathematical formulas to property insurance rates with the same scientific precision that they have been used in the field of life insurance.As a result rates in these fields are estimated with a somewhat lesser degree of certainty than is the case with life insurance. Since property insurance rates are based upon the law of averages it is at once apparent that the broader the statistical base the more accurate will be the findings for rate- making purposes.
Nevertheless, an enormous amount of work has gone into the accumulation of data to be used as the basis for property rates. In the field of casualty insurance careful records are retained with respect to accident frequency and the average loss per accident. In taking so many factors into consideration, judgment must contribute to the final determination of the rate. It is the constant aim of rate-making authorities to reduce judgment to a minimum and to predicate rates, so far as it is possible, upon a purely scientific basis.
1. Loss rate must be predictable. Insurer must be able to predict the probable rate of loss that the people insured by the cover will experience. Insurer predict the loss rate to determine the premium to charge. 2. No specific loss predict, when to die, disable, need hospital, but can predict how many will die – by observation of past events to determine the likelihood that a given event will occurred in the future. This likelihood is called the probability of the event. An important concept that is used to determine the probability of an amount occurring is the law of large number. It states that. 3. Insurance company rely on the law of large number, when they make prediction about the covered losses.
4. The relative accuracy of the Co.’s prediction increases as the number of exposures in the pool increases. 5. Law of large number only allows accurate predictions of group result and does not concern to a particular exposure Ali’s house or B’s house in the group. 6. Prediction of losses accurately enable the insurance company to determine the premium rates adequate to pay claims.
Table -- Mobile phone Insurance Pool Number of Mobile insured = 100 Value of each mobile = Rs.5000/- Total value of property in ins. Pool = 5000x100 or 500,000 Predicted losses at the rate of 1% = 500000x1% or 5,000 Predicted loss per owner = 5000/ 100 or Rs.50 Loss per Rs.100 of property value = Amount of loss total property value
car insurance poolNumber of car insured =1000Value of each car = 80000Total value of car in pool = 80000000Predicted losses @ 1 % of total value = 800000Predicted losses per car owner = 800000/1000 or = 800Loss per 100 of car value = Rs 1
1) Insurance is defined as a financial arrangement for redistributing the cost of unexpected losses, and a legal contract. Whereby an insurer agrees to compensate an insured for losses. 2) A loss is defined as an undesired, unplanned reduction of economic value or utility. 3) A chance of loss represents the probability of a loss occurring. 4) It is fraction whose numerator represents the numbers or losses, and whose denominator represents the number of exposure to loss. 5) Risk can be defined as the variability in possible outcome of an event based on chance, or risk can be defined as “uncertainty concerning loss”. The degree of risk refers to accuracy, an event based on chance can be predicted.
6. The ability of an insurer to predict losses in advance of their occurring is made possible by the application of law of large numbers. This mathematical rule, states, that the greater the number of observations of an event based on chance, the more likely will the actual result, approximate the expected result. 7. The elements of an insurance premium are the cost of losses or operating expenses of insurance loss. Reserve for unexpected losses is availability of investment earnings, payments of premium in advance. 8. Insurance provides many benefits to the society e.g., stability in families and business, easier completion of lending arrangements, removal of one advantage of monopolies or large scale business persons small scale operations, provision of capital to business and individuals and active support of loss prevention research etc., etc.
1. Certainly an insurance company cannot remain solvent unless it takes in enough funds in the form of premiums to meet all losses. 2. In addition to securing sufficient funds in the form of premium payments to meet all losses, insurance companies must collect money enough to carry on the business. There are expenses such as rental of buildings, payment of salaries, cost of supplies, taxes, agents’ commissions, and the like – all of which form a part of the cost of doing business and must ultimately find a place in the premium paid by the policyholder. 3. While the insurance premium, in the long run, must pay the cost of all losses and also the cost of doing business, if the premium is to be a fixed sum and at the same time the insured is to be guaranteed an indemnity without any further payment to the company, there must be some source to take care of any deficiency that may develop as a result of a series of losses beyond the expectation of the rate-making agency.
Catastrophes of this sort can not be foreseen, but, because they do happen, preparation must be made for them. It is for this reason that insurance underwriters, particularly the large companies operating on a nation-wide basis, regard a reserve for catastrophes as of paramount importance, and this factor must be taken into consideration in computing the premium. 4) Summarizing, the foregoing factors that enter into the computation of a premium may be listed as follows: (1) the actuarial cost, or the cost of losses; (2) the cost of doing business; (3) the cost of capital; and (4) the cost of contributions to a reserve for catastrophes. Companies make an additional charge to set up a reserve for catastrophes. In the computation of premiums, losses are based upon a normal expectation. Insurance underwriters know, however, that from time to time abnormal situations develop. 5) All insurance companies must collect, in premium income, sufficient funds to pay losses and the cost of carrying on the business.
The actual cost of the loss The operating expenses Allowance for unexpected losses Earning on investment
1. Cost of paying for losses Rs.1 2. Cost of doing business Rs.0.30 3. Reserves for other losses Rs.0.10 4. Investment earning - Rs.0.03 5. Gross premium Rs.1.37
1. Subject matter But in general insurance In life insurance the subject goods or property. matter of insurance is human life. 2. Certainty of event But in general insurance the In life insurance the happening happening of event insured is of event insured is certain. not certain. 3. Contract of Indemnity It is a contract of indemnity. It is not a contract of indemnity. On the maturity of policy, the insurer pays full- assured amount. 4. Insurable Interest Insurable interest muist exist at the time of contract and at Insurance interest must exist the time of making claims. at the time of contract of insurance.
5. Duration of Contract It is a long term insurance, say But in general insurance it is a 10,20,30 years. short term insurance. It is 6. Certainty of Payment generally for one year. As the events are definite, the insured must get the full value But in general insurance as the of sum assured. events are uncertain, the 7. Payment of Premium payment of insured amount is The payment of premiums is not certain. made in installments. The payment of premium is 8. Objects made in lump sum. It has the elements of both security and investment in its Its object is to provide security objects. only.
9. Surrender The insured person can The insured cannot give up give up policy before the policy. The insured maturity. The insurer pays cannot claim any amount in surrender value to the case of surrender. insured in this case. 10. Double Insurance In case of double insurance In case of double the insurance companies insurance, the insured can contribute the amount on recover the amount from all the basis of premium paid. insurance companies. Total amount shall not be more than the actual loss.
1) Stability in families Continue their activities in a normal fashion after the loss. 2) Safety Provide safety against different kind of risk in business. Removing fear and establish confidence 3) Facilitates credit transactions Creditors are more willing if his landing is secure. 4) A mean of saving. Forced saving in individual life and re-invest the amount in economy.
5) Releasing funds otherwise tied up in reserves No need of keeping reserve rather invest to promote trace. 6) Reducing cost of services Assistance to Govt. 7. Reduction of losses Recommendations to business to control losses, rating, surveys inspection, survey expert..
8. conservation of health- social service – for medical camp, research, improve help. 9. rendered professional service- experts deal in your need; investor adviser. 10. stabilizer of organization; good relation. Business partner insurance, employee companies. Value of insurance as a factor. 11. provide fixed capital- 1 year to 3 years.
PRACTICE OF TRYING TO ATTRACT NEW BUSINESS BY PRICING INSURANCE “AT A LOSS” Investment income may be more than underwriting losses to make the company in profit
Loss ratioLoss ratio is the incurred losses reported to the insurer divided by earned premium Expense ratio Total expenses / written premium Combined ratio Sum of the loss and expense ratio
Insurance fraud Crime of insurance for making profit Deliberate malicious act to collect insurance money Serious insurance and social problem Insurance buying people (honest premium payers) bear the burden of fraud Insurer pass the cost to insured Proper claim investigation required