Insurance involves spreading risk across many individuals or entities to minimize financial loss. It is a legal contract where one party agrees to pay a fixed amount if a specified uncertain event occurs. Underwriters evaluate risk to determine premium costs. Larger risk pools provide more predictable premiums if average health is similar. Reinsurance shares risk between insurers. Regulations protect policyholders and promote stable insurance markets.

1. Insurance

2. Insurance
• A social device to reduce or eliminate risk of loss
to life and property
• A collective bearing of risk
• Defined as a legal contract between two parties
whereby one party called the insurer undertakes
to pay a fixed amount of money on the
happening of a particular event, which may be
certain or uncertain. The other party called the
insured pays in exchange a fixed sum known as
premium.

3. A synallagmatic and aleatory contract
• A synallagmatic contract is one by which each
of the contracting parties binds himself to the
other
• An aleatory contract is one where the
insurer’s obligation to pay a loss is distant and
often uncertain, while the insured must pay a
fixed premium during the policy period

4. Distinct Financial Institutions
1. Insurers are liability driven financial
institutions
2. Unlike most other intermediaries, insurers
have to hold risk capital to ensure their
capital
3. Insurance pricing differs from the pricing of
other products
4. Marketing of insurance is challenging

5. Role in economic growth
1. Insurance covers many economic risks. Offers
kind of stability to business.
2. Through its support, businessmen and
industrialists are able to take bold decisions
3. Provide social security
4. Help in development of financial markets

6. Principles of Insurance
1. Principle of utmost good faith
2. Principle of indemnity – insured cannot make
a profit on his loss
3. Doctrine of subrogation – recover from a
negligent third party
4. Principle of causa proxima – cause of loss
must be direct and insured
5. Principle of insurable interest

7. Underwriter
• The underwriter is the person who evaluates the insurance
application
• He works on behalf of or for the life insurance company to
look at the applicants’ health and financial information to
figure out if they are eligible to receive the price that were
originally quoted.
• Underwriters use underwriting guidelines based on
mortality statistics that are calculated by actuaries.
• All insurance products involve some degree of
underwriting.
• For life insurance, the underwriter looks at data like health
and medical history as well as lifestyle information like
hobbies and financial ability.

8. Two Parts of Life Insurance Underwriting
1) Financial Underwriting
It helps the underwriter to make sure the amount
you’re purchasing is in line with your family’s and
your needs.
2) Medical Underwriting
Here, the underwriters determine how much of a
risk you are to insure by evaluating factors that may
affect your mortality.

9. Risk 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.
Pooling risks together allows the higher costs of the less healthy to be
offset by the relatively lower costs of the healthy, either in a plan
overall or within a premium rating category.
In general, the larger the risk pool, the more predictable and stable the
premiums can be.
Although larger risk pools are typically more stable, a large risk pool
does not necessarily mean lower premiums.
The key factor is the average health care costs of the enrollees
included in the pool.
Just as a pool with healthy individuals can result in lower-than-average
premiums, a large pool with a large share of unhealthy individuals can
have higher-than-average premiums.

10. Adverse Selection
• “Adverse selection” describes a situation in which an insurer (or an insurance market
as a whole) attracts a disproportionate share of unhealthy individuals.
• It occurs because individuals with greater health care needs, when given the
opportunity, are more likely to purchase health insurance and to purchase health
insurance with richer benefits than individuals with fewer health care needs.
• Adverse selection increases premiums for everyone in a health insurance plan or
market because it results in a pool of enrollees with higher-than-average health care
costs. Adverse selection is a byproduct of a voluntary health insurance market in which
people can choose whether and when to purchase insurance coverage, depending in
part on how their anticipated health care needs compare with the insurance premium
charged.
The higher premiums that result from adverse selection, in turn, may lead to more
healthy individuals opting out of coverage, which would result in even higher
premiums. This process typically is referred to as a “premium spiral.”
• Avoiding such spirals requires minimizing adverse selection and instead attracting a
broad base of healthy individuals, over which the costs of sick individuals can be
spread.
• Attracting younger adults and healthier people of all ages ultimately will help keep
premiums more affordable and stable for all members in the risk pool.

11. Reinsurance
It is when the primary insurer transfers a part or all
of the risk he has insured to another insurer to
reduce his own liability.
The amount of insurance retained by the primary
insurer (ceding company) for its own account is
called the retention.
The amount of insurance ceded to the reinsurer is
known as cession
Reinsurance operates on the same principles as
insurance.

12. Reasons for Reinsurance
• To increase the company’s underwriting capacity which, in
turn, would help to render improved service to the
reinsured and expand the market.
• To spread the risks with as many insurers as possible
• To obtain valuable advice and assistance with respect to
pricing, underwriting practices, retention and policy
coverage
• To stabilise profits by leveling out peak risks/losses
• To provide protection against catastrophic losses arising
due to natural disasters, individual explosions, etc
• To retire from the business or class of business or territory

13. Constituents of Insurance Business
• Actuary
• Underwriter
• Policy Owner Services
• Claim Administration
• Marketing
• Investment
• Accounting
• Information Systems
• Legal and Compliance

14. Regulations and legislation applicable
to insurance
• The Insurance Act, 1938
• LIC Act, 1956
• IRDA Act, 1999

15. The Insurance Act, 1938
• With a view to protect the interest of the
insuring public
• Comprehensive provisions for detailed and
effective control over activities of insurers
• An insurance wing was established and
attached first to the Ministry of Commerce
and then to Ministry of Finance

16. LIC Act, 1956
• The management of the life insurance business of all the
insurers and provident societies, then operating in India
was taken over by the Central Government and were
nationalised
• LIC was vested with the exclusive privilege to transact life
insurance business
• The objectives of LIC were to:
(i) Conduct business with utmost economy, in spirit of
trusteeship
(ii) Charge premium not higher than warranted by strict
actuarial considerations
(iii) Invest funds for obtaining maximum yield for the policy-
holders, consistent with safety of capital

17. IRDA Act, 1999
• Provides the establishment of an authority to
protect the interests of holders of insurance
policies, to regulate, to promote and ensure
orderly growth of the insurance industry

18. Functions of IRDA
• Exercise all powers and functions of the controller of insurance
• Protect the interests of the policyholders
• Issue, renew, modify, withdraw or suspend certificate of registration
• Specify requisite qualifications and training for insurance
intermediaries and agents
• Promote and regulate professional organizations connected with
insurance
• Conduct inspections, investigations etc.
• Prescribe the method of insurance accounting
• Regulate investment of funds and margins of solvency
• Adjudicate upon disputes
• Conduct inspection and audit of insurers, intermediaries etc.

19. Factors which affect premium
• Type of policy: e.g. term plan has a lower
premium than endowment plan
• Age:
• Term (duration) of the policy: (i) for savings plan
(like endowment) – longer the term, lesser the
premium (ii) for protection plan (like term
insurance) - longer the term, higher the premium
• Additional benefits
• State of health, Occupation and Hazard
• Sum assured