1. •RISK – exists when there is uncertainty about
future.
•CONCEPT OF RISK
Risk is present everywhere

2.  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

3.  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

4.  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

5. It can readily be seen that, unless accurate
statistical information is available, predictions
in the form of probabilities will be defective.
Therefore, in each of the fields of insurance,
carefully compiled statistics are assembled to
determine loss ratios and to accumulate
experience as a basis for rate making.

6. 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.

7.  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.

8.  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.

9.  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.

10.  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

11. car insurance pool
Number of car insured =1000
Value of each car = 80000
Total value of car in pool = 80000000
Predicted losses @ 1 % of total value = 800000
Predicted losses per car owner = 800000/1000 or = 800
Loss per 100 of car value = Rs 1

12.  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.

13.  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.

14.  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.

15.  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.

16.  The actual cost of the loss
 The operating expenses
 Allowance for unexpected losses
 Earning on investment

17.  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

18.  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.

19.  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.

20.  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.

21.  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.

22.  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..

23.  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.

24.  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

25. Loss ratio
Loss 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

26.  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