This document discusses key concepts and principles of insurance. It explains that insurance works by transferring risk from individuals to a group, where losses are shared equitably among members. Premium contributions are calculated based on past loss experience to determine expected losses. Insurance companies collect premiums in advance from a large number of policyholders to compensate the few who suffer losses, using statistical data and probability theory to set accurate premium rates. The document defines insurance and outlines its nature as a risk-sharing cooperative device where payments are made contingent on specified events.

1. MGT- 312
I N S U R A N C E
&
RISK MANAGEMENT

3. Concept of Insurance
Insurance is based on this concept-
 Transfer of risk from an individual to a group or
community
 Sharing of loss by all on equitable basis
 200 motorbikes in a town valued Tk.30,000 each.
04 motor bikes are either stolen or totally damaged
every year. Loss = Tk.1,20,000.
 Rate of contribution= L/V x100,
L= Loss, V=total value.
 Tk.(1,20,000/60,00,000)x 100 = 2% on value.
 Each member to contribute= 2% of Rs.30,000 i.e.
Tk.600 to compensate 4 motor bikers each yr.
 but is that all ?........

4. Concept of Insurance…….
 It is possible that after a loss few members
do not pay.
 To avoid such situations, the contribution
can be taken in advance
 To organize a system it shall require some
expenses as well
 It is also possible that the estimate of loss of
only four m/c may deviate
 To solve it, the contribution can be suitably
increased to Tk.750 per member or 2.5% per
value of m/c to meet expenses and
deviations

5. INSURANCE
 So, from individual point of view, insurance
is an economic device whereby an individual
substitutes a small contribution for a large
uncertain financial loss
 It eliminates the risk of financial loss that an
individual may suffer by loss/damage to his
property

6. 6
Insured
Low Premiums.
Risk
Manager
Insurer
Insurance

7. 7
Example
 Say 1000 motor cars valued @ 300,000/- are observed
over a period of five years. On an average say per year
two are total loss by accident. Then the total annual
loss would be Tk. 600000. If the loss is to shared by
all the thousand owners then they have to contribute
Tk.600/-
 The loss experience will be established by taking the
past experience, geographical area in which the
vehicles are used and density of traffic.

8. IMPORTANT ELEMENTS INVOLVED IN
THE CONCEPT OF INSURANCE
 Subject matter of insurance.
 The PERIL (risk)
 The financial loss.
 Subject matter is property, human life,
machinery, goods etc.,
 Peril is fire, storm, burglary, earth quake, injury,
explosion etc.,
 Financial loss is normally defined before the
contract is signed.

9. How Insurance Co. use Concept of Insurance
 Insurance Companies work on large scale
and in an organized manner
 Collect premium contribution in advance
from a large number of members
 Compensate the few sufferers
 Collect/maintain statistical data to find the
behavior of various categories of insurances
or policies and segments of insured
members

10. How Insurance Co. use Concept of Insurance….
 Use probability theory to predicts the expected loss
and analyze it
 Fix the premium rate in a scientific manner based
on past data analysis and changes expected for
each product.
 The rate should be near accurate otherwise
Insurance Company shall suffer a loss.

11. How Insurance Co. use Concept of Insurance….
 While fixing premium or contribution, addition
is also done for administrative expenses,
provision for future contingencies and profit in
the rate of premium
 Sell the insurance product in large numbers to
spread the risk
 To invest the idle or surplus funds available
with the insurer to earn an investment income

13. What is Insurance ?
 Insurance is something that we hear all the time.
 Car Insurance, Motor Bike Insurance, Factory
Insurance, Health Insurance, Personal accident
Insurance, Ship Insurance, Aircraft insurance, Satellite
Insurance, Cattle Insurance, there are a whole bunch
of insurance products available.
 What is Insurance ?
 Insurance is a contract between the insurer (The
Insurance Company) and the insured (You) to get paid
an amount as compensation if any unforeseen event
occurs.
It’s a financial security against certain contingencies

14. Definition of Insurance
 The collective bearing of risk is Insurance. – W.
Beverideges
 Insurance is a cooperative form of distributing a
certain risk over a group of persons who are
exposed to it and who are agree to ensure
themselves. – Ghosh and Agarwal

15. Insurance
 Insurance may be described as a social device
whereby a large group of individuals, through a
system of equitable contributions, may reduce or
eliminate certain measurable risks of economic
loss common to all members of the group. –
Encyclopedia Britannica

16. Insurance…….
 Insurance in law and economics is a form of risk
management primarily used to hedge against the
risk of a contingent uncertain loss.
 Insurance is defined as the equitable transfer of
the risk of a loss from one entity to another in
exchange for payment.

17. Insurer VS Insured
An insurer is a company selling the insurance;
an insured or policyholder is the person or
entity buying the insurance policy
Insurer
Insured
Insurance

18. Functional Definition of insurance
 Insurance is defined as a co-operative device to
spread the loss caused by a particular risk over a
number of persons who are exposed to it and
who agree to ensure themselves against that risk-
M.N Mishra

19. Definition explanation
 A co-operative device to spread the risk
 The system to spread the risk over a number of
persons who are insured against that risk
 The principal to share the loss of each member
of the society on the basis of probability
 The method to provide security against losses to
the insured

20. Contractual Definition
 Insurance has been defined to be that in which
sum of money as a premium is paid in
consideration of the insurer’s incurring the risk
of paying a large sum upon a given contingency.

21. Explanations……..
 Certain sum called premium is charged in
consideration
 Against the consideration large sum is
guaranteed to be paid by the insurer
 The payment will be made in a certain definite
sum
 The payment is only upon a contingency

22. Definition in legal sense
 Insurance can be defined as a contract between
two parties by which one party undertakes to
make good or indemnify any financial loss
suffered by other party, in consideration of a
sum of money, on the happening of a specified
event e.g. fire, accident or death.
 We call the party agreeing to pay for the losses
the insurer. We call the party whose loss makes
the ‘insurer’ pay the claim the insured.

23. Characteristics of Insurance
1. It is a contract for compensating losses.
2. Premium is charged for insurance Contract.
3. The payment of Insured as per terms of
agreement in the event of loss.
4. It is a contract of good faith.
5. It is a contract for mutual benefit.

24. Characteristics of Insurance
6. It is a future contract for compensating losses.
7. It is an instrument of distributing the loss of
few among many.
8. The occurrence of the loss must be accidental.
9. Insurance must be consistent with public policy

25. Why do we need Insurance?
 As everyone knows, future is uncertain.
 An element of RISK is always there in life or in any activity.
There may be a scenario's where the loss due to some
event would be extensive and we would not be in a position
to absorb the losses.
 A factory or office is totally damaged due to fire or
earthquake, etc.
 The entire investment and loan amount is at stake
It is better to be proactive - Arrange Insurance

26. Purpose and Need of insurance
 Indemnifies loss
 Reduces worry and fear
 Makes available funds for investment
 Provides employment to a large number of
people
 Educates people about loss prevention
 Insurance enhances credit worthiness
 Social benefits

27. Function of Insurance
Primary Function
 Provision of certainty of payment at the time of
loss
 Provision of protection
 Risk sharing
Secondary Function
 Prevention of loss
 Provision of Capital

28. Secondary Functions Continue….
Ensuring welfare of the Society
Employment
Financial services
Loss control/prevention
Savings/investments
Economic growth/development

29. Nature of Insurance
1) Sharing of Risks
2) Co-operative Device
3) Valuation of Risk
4) Payment made on contingency
5) Amount of Payment
6) Large Number of Insured Persons
7) Insurance is not gambling
8) Insurance is not charity

30. Sharing of Risks
 Insurance is a device to share the financial losses
on the happening of a specified event.
 The event may be death in case of life insurance
fire in fire insurance
 If insured the loss arising shared by all insured

31. Co-operative device
 Insurance plan is the cooperation of large
number of persons
 Agree to share the financial loss
 A particular risk which is insured.
 Insurer would be unable to compensate all
losses
 By insuring a large number of persons, he is able
to pay the amount of loss.

32. Value of risk
 The risk is evaluated before insuring
 Charge the amount of share of an insured,
premium.
 Expectation of more risk, higher premium may
be charged
 The probability of loss is calculated at the time
of insurance.

33. Amount of payment
 Depends upon the value of loss
 The particular insured risk
 In life insurance the financial loss suffered
 The insurer promises to pay a fixed sum
 The contingency takes place
 If the policy is valid and in force at the time of
the event.

34. Payment at contingency
 Payment is made certain contingency insured
 Life insurance contract is a contract of certainty
death or the expiry of term will certainly occur
 the contingency in the fire or the marine perils
 contingency occurs payment is made otherwise
no amount is given to the policy-holder.

35. Large number of insured persons
 To spread the loss immediately, smoothly and
cheaply
 Large number of persons should be insured
 Lower the cost of insurance and the amount of
premium
Insurance is not a gambling
 serves indirectly to increase the productivity
 uncertainty changed into certainty insuring
property
 life insurance is essentially non-speculative

36. Insurance is not charity
 Charity is given without consideration but
insurance is not possible
 provides security and safety to an individual in
consideration of premium it guarantees the
payment of a loss
 It is a profession charging a nominal premium
for the service.

37. Principles of insurance
 Principles of Co-operation
 Principles of Probability

38. Principles of Probability
 repeated over a large number of trials
 how likely loss-event is to happen and how
much this loss-event is likely to cost
financially
 The events to be examined are those which
are uncertain
 The frequency with which an event happens
or repeated reflects the actual probability
 The larger is the sample under examination.

39. Principles of Probability
 In a commercial factory, the probability of a theft is 0.1, fire
is 0.05 and for M.B is 0.3
 There should be larger contributors or insurance contracts
 Expenses incurred by Insurer - Administrative expenses in
procuring premium, other management expenses, taxes,
provision for contingencies; and profit
 The rate of contribution is accordingly added/loaded to
meet these expenses and profit.

40. Principles of Probability
 But if we study Two small samples- 100 houses each and one bigger 1000 hs.
 Yr burnt houses (I) burnt houses (II) (III)
1 06 16 99
2 09 04 103
3 12 10 100
4 08 12 97
5 15 08 101
Total 50 (5 yrs.) 50 500
Chance of loss 10 houses/yr/100 10 houses/yr/100 100/yr/10000
Estimate of probability- 10/100=.1 10/100=.1 100/1000= .1
but the variation of loss per year is different:
Loss per year 6- 15 04-16 97- 103
This problem can be reduced by the insurance companies by observing a
larger sample over a period of large number of years and adjust the
probability with margin of errors or variations.

41. Principles of Probability
 WHAT If things may not happen in the future as they were
expected ?
 Then the estimate of probability used to calculate the price
may be inaccurate and contribution (premium) may be
insufficient to meet the liabilities and expenses.
 Actuaries work on the law of probability

42. Role of insurance companies in
the economic development
 Formation of capital & increase of
investment
 Reduce of hindrance of risk
 Maintenance of national wealth
 Distribution of risks
 Extension of business
 Increase of awareness

43. Prospects of insurance in Bangladesh
 Higher GDP
 Increased population
 New business’s individual insurance
 Developing mass awareness about insurance

44. Problems of insurance in Bangladesh
 Low per capital income
 Poor knowledge of agents
 Illiteracy
 Religious superstition
 Low awareness
 Low savings
 Shortage of fund

45. Insurance Contract
 Insurance may be defined as a contract
whereby one party agrees to indemnify the
other party against a loss which may be
arise or to pay a certain sum of money on
the happening of a certain event in return
of a compensation called premium -M. K.
Ghosh & A. N.Agarwal

46.  Insurance is that in which a sum of money as a
premium is paid in consideration of the insurer’s
incurring the risk of paying a large sum upon a
given contingency- M. N Mishra.
Insurance Contract

47. ESSENTIALS OF COMMERCIAL CONTRACT
A. Elements of General Contract
 1. Offer & Acceptance
 2. Consideration
 3. Legal capacity to contract or competency
 4. Consensus “ad idem”
 5. Legality of object

48. B. Elements of Special Contract relating to Insurance
1. Life Insurance
 a. Utmost Good Faith (Uberrima Fides)
 b. Insurable Interest
2. General Insurance
 a. Utmost Good Faith (Uberrima Fides)
 b. Insurable Interest
 c. Indemnity
 d. Subrogation
 e. Proximate Cause

49. Essentials of an Insurance Contract
A. Legal elements
 Plurality of members
 Offer & acceptance
 Legal relationship
 Lawful consideration of object
 Capacity to contract of the parties
 Free consent
 Certainty

50. B. Element related to insurance business
 Written contract
 Insurable interest
 Fiduciary relationship
 Payment of premium
 Financial indemnity
 Causa proxima
 Proportionate contribution
 Subrogation

51. Principles of Insurance contract
 Insurable interest
 Utmost good faith
 Proximate cause
 Indemnity
 Contribution
 Subrogation
 Mitigation of loss
 Warranties

52. Insurable Interest
 The word "interest" can have a number of
meanings. In the present context it means a
financial relationship to something or
someone.
 The insurable interest is the pecuniary interest
whereby the policy-holder is benefited by the
existence of the subject matter and is prejudice
by the death or damage of the subject matter.-
M. N Mishra

53. Essential Criteria
a) There must be some person, property (thing),
liability or other legal right capable of being
insured
(b) That person, thing etc. must be the subject
matter of the insurance
(c) The person wishing to have insurance must
have the legally recognized relationship to the
subject

54. How It Arises
 Insurance of Persons
 Insurance of Property (physical things)
 Insurance of Liability (legal responsibility)
 Insurance of other legal Rights

55. When is it needed?
a) When the insurance is arranged
(b) When a claim arises.

56. Utmost Good Faith
 Still frequently referred to by its Latin name
"uberrima fides", utmost good faith relates to
the duty of disclosure upon the parties involved
in an insurance contract.

57. Ordinary Good Faith
 Ordinary good faith means that the parties must
behave with honesty and such information as
they supply must be substantially true.
 It is not their responsibility to ensure that the
other person asks all relevant questions
 Ordinary good faith is effectively the negative
duty of not telling lies

58. Utmost Good Faith
 Insurance is subject to a more tough duty of
good faith
 positive duty of revealing all vital information
 the other party asks for this information or not.

59. (a) Material Facts
 "Material facts" must be revealed, whether asked
for or not
 A fact that would influence the judgment of a
prudent insurer in determination
 Accept the risk, or on what terms he will accept
it".

60. (b) Non-material facts
 would not influence the existence or terms of
the contract
 Matters of common knowledge;
 Facts already known, or deemed to be known, by the
insurer;
 Facts which improve the risk

61. 2.4 Duty of Disclosure
 (a) Duration (at Insurance Contract Law)
 (b) Duration (under policy terms)
 (c) Renewal
 (d) Contract alteration

62. 2.5 Breach of Utmost Good Faith
 (a) Concealment
 (b) Non-disclosure
 (c) Fraudulent Misrepresentation
 (d) Innocent Misrepresentation

63. 2.6 Remedies for a Breach of Utmost Good Faith
 Avoid the contract;
 Refuse payment of a particular claim;
 Additionally sue for damages if fraud is involved;
 Waive the breach, in which case the
contract/claim is valid.

64. 3. PROXIMATE CAUSES
 Insurable interest and utmost good faith apply
to all insurance contract
 exclusively related to claims
 Proximate cause important with all types of
insurance

65. 3.1 Definition of Casa proximate
 The active efficient cause that sets in motion a
train of events which brings about a result,
without the intervention of any force started
and working actively from a new and
independent source. -M N Mishra

66. 3.2 Types of Peril
 (a) Insured peril
 (b) Excepted (or excluded) peril
 (c) Uninsured peril

67. 4. INDEMNITY
 will not apply to every kind of insurance
 Suppose, a person insured his factory for Tk.20
lakhs against fire, the factory is partially burnt
and it is estimated that a sum of Tk.10 lakhs will
be required to restore it to the original
condition. The insurer is liable to pay Tk.10
lakhs only.

68. 4.2 Implications
 An exact financial compensation
 Some types of insurance deal with "losses" that
cannot be measured precisely in financial terms.
 Life insurance and most personal accident
insurances. Both are dealing with death or injury
to human beings and there is no way that these
things can be measured precisely

69. 4.4 How Indemnity is provided
 (a) Cash payment
 (b) Repair
 (c) Replacement
 (d) Reinstatement

70. 4.3 Link with Insurable Interest
 Principle represents the financial "interest" in
the subject matter
 Exactly what should be payable in a total loss
situation
 Life and personal accident insurances having an
unlimited insurable interest
 Indemnity cannot apply to them.

71. 4.5 Salvage
 Certain property remain damage
 The remains have any financial value
 Value has to be taken by insurer when providing
an indemnity
 Value of the salvage is deducted from the
amount payable to the insured
 Insurer pays in full and disposes of the salvage

72. 4.6 Abandonment
 Mostly found in marine insurance
 Surrendering the subject matter
 Other classes of property insurance policies
usually specifically exclude abandonment.
 Completely handed over to the insurer
 Therefore benefit from its residual value

73. 4.7 Policy Provisions Preventing Indemnity
 (a) Average
For example, if the actual value of property at the time
of a loss was Tk.2 million and it was only insured for
Tk.1 million, we may say that the property is only 50%
insured. Therefore, by the application of average only
50% of any loss is payable.
 (b) Policy excess/deductible
 (c) Policy franchise
 (d) Policy limits

74. 5. CONTRIBUTION
 In simple terms, contribution means that if two
(or more) insurers are contracted to provide an
indemnity to the same person (interest), the
insurers should share ("contribute" towards) the
indemnity payment.

75. 5.2 How Arising
 (a) The respective policies must each be providing
an indemnity
 (b) They must each cover the same financial interest
 (c) They must each cover the same peril giving rise
to the loss
 (d)They must each cover the same subject matter;
 (e) Each policy must cover the loss

76. 5.5 How Calculated
Policy A has a Sum Insured of Property 200,000
Policy B has a Sum Insured of Property 400,000
There is a loss in the amount of Property 60,000

77. Which one selected…….
 (a) We may say A should pay Property 20,000
and B should pay Property 40,000.
 (b) We could say A should pay Property 30,000
and B should pay Property 30,000.
 Method (a) above is known as the "respective
sums insured" method.
 Method (b) above is known as "independent
liability" method

78. 6 SUBROGATION
 Again in simple terms, subrogation provides that
an insurer who provides an indemnity is entitled
to take over and use for his own benefit any
recovery rights the insured may possess against
third parties.
Suppose, a house is insured for Tk.2 lakhs against fire, the
house is damaged by fire and the insurer pays the full value
of Tk.2 lakhs to the insured. Later on the damaged house is
sold for Tk.20, 000. The insurer is entitled to receive the
sum of Tk.20, 000.

79. 6.2 How Arising
 In contract
 Under statute
 In salvage