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Risk management in Life Insurance by Dr. Amitabh Mishra

The document discusses various concepts related to risk and risk management in insurance. It defines risk as the possibility of a loss occurring and explains that risk management involves processes to reduce risks to a minimum level. It also discusses how insurance companies pool risks from many policyholders to spread costs and how life insurance specifically provides a tool for risk management by allowing people to share unexpected losses. The document also covers topics like how insurance underwriters evaluate risks, classify policyholders, and determine appropriate premiums based on risk factors like age, health, occupation, and family history.

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Dr. Amitabh Mishra
 “Risk is the possibility that a loss or injury will occur”.  “Risk is danger, peril, hazard, chance of loss, amount covered by insurance, person or object insured”.  “The risk is an event or happening which is not planned but eventually happens with financial consequences resulting in loss”. Dr. Amitabh Mishra
 People generally seek security and avoid uncertainty.  The risk of death is unavoidable, and is especially an economic threat if premature.  Insurance provides a means for reducing the adverse impact of unexpected losses. Dr. Amitabh Mishra
 Life insurance provides a tool for risk management, “a process for dealing with the risk of loss of life”.  The risk management is nothing but “a method to prejudge the risk that may come up sometime in future”.  It is not prediction but a process of reducing the risk to a minimum level. Dr. Amitabh Mishra
 Risk is a fear of happening something adverse and in order to restrict such adverse happenings a plan is envisaged to overcome such adverse happenings. Which is called as risk management. Dr. Amitabh Mishra
 Insurance companies are in the business of taking risks. Therefore, insurance companies should be good at managing their own risks.  Shriram Gokte: “Today it is well recognized that sound management of an insurer, as for other financial sector entities, is dependent on how well the various risks are managed across the organization.” Dr. Amitabh Mishra
 Life insurance is based on a mechanism called risk pooling, or a group sharing of losses.  People exposed to a risk agree to share losses on an equitable basis. They transfer the economic risk of loss to an insurance company. Insurance collects and pools the premiums of thousands of people, spreading the risk of losses across the entire pool. By carefully calculating the probability of losses that will be sustained by the members of the pool, insurance companies can equitably (fairly) spread the cost of the losses to all the members. The risk of loss is transferred from one to many and shared by all insureds in the pool. Each person pays a premium that is measured to be fair to them and to all based on the risk they impose. Dr. Amitabh Mishra
 In insurance, the risk manager evaluate risks which endangers’ the company’s funds or capacity to pay claims. Their work is done together with underwriters by given the degree of risk the company can cover and profit realization on an insurance application.  Risk manager is said to be one who manages risk by: ◦ Assessing and quantifying business risk ◦ Taking into accounts control or measures to reduce them. ◦ Advice on investment strategies and pricing on policies. Dr. Amitabh Mishra
underwriting the risk Dr. Amitabh Mishra
 The selection of risk is: ◦ “process of accepting or rejecting risk” ◦ “a process whereby inferior lives are “weeded out” ◦ “a life insurer decides whether a proposal can be accepted at standard rates of premium or on different terms or be rejected”. Dr. Amitabh Mishra
Applicant Standard (A normal risk; offered the basic rate) Substandard (A higher than usual risk; offered a more expensive premium) Preferred (A low risk; offered a premium discount accordingly) Dr. Amitabh Mishra Applicants can be grouped in
 To determine whether the proposal should be accepted or not.  To determine the rate of premium to be charged from the assured. ◦ The premium depends upon the amount of risk. ◦ Higher is the risk the more will be amount of premium. Dr. Amitabh Mishra
 To classify the insurance risk into standard/sub-standard/or preferred on the basis of selection. ◦ Since, there are various degrees of risk to a person and so theoretically at least, all the persons should be charged different premiums, but it is not practicable to charge so many premiums as many applicants are. Therefore, for practical purpose the risks are classified and premiums are determined accordingly.  To avoid any discrimination on the part of the lives assured. ◦ Since the degree of risk is not the same to all the persons, different premiums should be charged from different groups. For instance, it would be wrong to charge the same premium from the persons who are engaged in the hazardous occupation and from the persons who are enjoying robust health and conducive occupation. Dr. Amitabh Mishra
 To avoid adverse-selection ◦ Adverse-selection/Anti-selection means selection of the persons for insurance who are not insurable and charging of lesser premium for those who are to be charged higher premium. Dr. Amitabh Mishra
Dr. Amitabh Mishra
 In life insurance, the factors which may affect the risk are usually those factors which are affecting the mortality; they are also called factors affecting longevity of a person.  Major factors are: Dr. Amitabh Mishra
Factors affecting Selection & Classification of Risk Age Build Physical Condition Personal History Family History Residence Morals Race and Nationality Gender Dr. Amitabh Mishra
◦ Age  The age of the life to be assured is the most important factor to affect mortality. Except for a few years of the childhood, the premium is determined at every year of the completion of age. ◦ Build (physique of the proposed life) includes  Height, weight  Distribution of weight and chest expansion  There are standards of weight according to maximum weight reveal the indication of certain hidden diseases.  The relationship between height, weight, girth and expansion of chest are the basic determinants of mortality expectations. Dr. Amitabh Mishra
◦ Physical Condition :  The conditions of an applicants’  Sight, hearing,  Heart, arteries, lungs, tonsils,  Teeth, kidneys, nervous system, etc.  The physical condition of the age life proposed has a direct bearing on the mortality of the life. Dr. Amitabh Mishra
 Personal History : ◦ The personal history reveals the possibility of death. Dr. Amitabh Mishra Personal History Health record Past surgery, Recent injuries and illness Past habit Drugs or Alcohol Previous occupation Past hazardous or unhealthy occupation Insurance history Previous amount of insurance Previous refusal for insurance
 Health Report ◦ The past health record is the most important factor under personal history because it affects the longevity or mortality of a person to a greater extent. ◦ It has been the practice not to accept the proposal form of the applicants who are suffering from illness. If the applicant has suffered from certain serious disease or operation during the past 5 years, he may be under the possibility of getting it again.  Past Habits ◦ The insurers want to know the past habit the life proposed, for drugs or alcohol because the cure may be only temporary. The past history is usually expected to be repeated. Therefore, past history is very cautiously examined.  History of Occupation: ◦ If the proponent was employed in hazardous or unhealthy occupation, there is a possibility that he may still retain ill-effects there from or may revert to such occupation. ◦ An intimate association within a person suffering from a contagious disease may influence the health of the life proposed. The past hazardous occupations generally affects, health slowly occupational diseases are contacted. Inorganic dust may create silicosis.  Insurance History: ◦ The previous amount of insurance may disclose the degree of risk of the applicant. If he was refused insurance, it might be a suspicious factor of his insurability. If it was found that the applicant was already insured for adequate amount this request for more insurance is regarded with suspicions. Dr. Amitabh Mishra
 Family History : ◦ Family history requires information of habit, health, occupation and insurance of other family members. ◦ Particularly of  Parents, brother and sisters.  The children’s history of health is also required. ◦ The certain diseases, (tuberculosis and insanity, etc.), and longevity of the parents will be relevant factors for determining the degree of risk of the proponents. Dr. Amitabh Mishra
 Residence : ◦ The residence affects the risk. Important residence related factor which may affect the risk:  The geographical location,  Atmosphere and climate,  Political stability,  Construction of house, travel, etc., ◦ The risk will be lesser in a good climate area and more in a bad climate. Dr. Amitabh Mishra
 Morals : ◦ It has been observed that the departure from the commonly accepted standards of ethical and moral conduct involve extra mortality. ◦ Infidelity seriously may affect the health. ◦ Unethical conduct is considered to be another form of moral hazard. ◦ Insurance is not generally given to bankrupt and reputed dishonest persons. Dr. Amitabh Mishra
 Race and Nationality : ◦ The mortality rate differs from race to race and nation to nation. ◦ Similarly, countries near to equator have more mortality. The climate and way of life of a country affect the health conditions of the people. ◦ In India, persons of high, race or caste are expected to live longer than the scheduled castes or tribes.  Gender ◦ Mortality among female is, generally, higher than that of male because the physical hazard of maternity is present in the former case. ◦ Moreover, the ladies are physically more handicapped. Dr. Amitabh Mishra