Meaning of insurance; Role of insurance as a risk mitigant, Introduction to various types of risks, Concept of insurable risks from an investor’s perspective, Various insurance products available–Life and Non Life, Concept of Human Life Value (HLV) and methods of computing HLVs.

1. Unit2 Role of Insurance 08Hours
Meaning of insurance; Role of insurance as a risk mitigant,
Introduction to various types of risks, Concept of insurable risks
from an investor’s perspective, Various insurance products
available–Life and Non Life, Concept of Human Life Value (HLV)
and methods of computing HLVs.
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2. Meaning of insurance
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3. • Definition: It is a form of contract or
agreement which one party agrees in
return of a consideration to pay an agreed
amount of money to another party to make
good for a loss, damage, injury to
something of value in which the insured
has to pay as a result of some uncertain
event. Thus, insurance is a method of
securing protection against future
calamities and uncertainties.
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4. Advantages of Insurance:
• 1. Provide certainty: Insurance helps the insured to convert his uncertainties into
• certainties by entering into contract with insurer. The payment of premium by
insured enables to reduce the risk.
• 2. Distribution of losses: It helps to distribute the losses as it enables to transfer
the risks and spread the financial loss of insured members over the whole
insurers.
• 3. Social security: It acts as an instrument to fight against evils of poverty,
unemployment,disease, old age, accidents, fire and other calamities.
• 4. Credit facility: The policies issued by insurance companies can be made use
to raise policy loans from insurance company, as well traders are in the position to
raise loans and get credit facilities from various financial institutions.
• 5. Increase efficiency: It reduces the risk and increases the efficiency in
business. It provides security for business community which in turn paves the way
for growth and diversification of the industry.
• 6. Earns foreign exchange: It provides security to the international traders,
shippers and banking institutions, thus paves the way for expansion of foreign
trade. The increased foreign trade activities lead to securing foreign exchange
which makes the country to become economically strong.
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5. Principles of Insurance:
• 1. Insurable interest: the person getting an
insurance policy must have insurable interest in the
property or life insured. A person said to have an
insurable interest if he is financially benefited by the
existence property and is prejudiced by its loss.
• 2. Utmost good faith: faith refers to absence of
fraud on the part of the parties to the contract. The
insured should disclose all the material facts to the
insurer. If utmost good faith is lacking the contracts
made by the parties becomes invalid.
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6. • 3. Indemnity: the principles are applied to all the insurance
contracts where the loss suffered by the insured can be measured in
monetary value. Hence all the contract of insurance, expect life
insurance are the contracts of indemnity bcoz loss of life cannot be
measured in terms of money.
• 4. Proximate cause: it is also called as causa proxima which means
nearest or proximate or immediate cause. This principle is useful in
deciding the actual cause of loss when a number of causes have
contributed for the occurrence of loss.
• 5. Subrogation: it is also known as Doctrine of Rights Substitution.
The insurer will step into the shoes of the insured and become
entitled to all rights of action against the third party to cover the loss.
• 6. Contribution: this principle ensures equitable distribution of
losses among the insurers.The total loss suffered by the insured is
contributed by all insures in the ratio of the value of policies issued
by them for same subject matter.
• 7. Mitigation of loss: it says that duty of the insured is to take all
such steps to minimize the loss as would have been taken by any
person who is not insured.
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7. • Re-insurance: It refers to an insurance
contract between two or more insurance
companies.Every insurer undertakes to
bear the risk according to his capacity. In
order to safe guard his interest. he may
insure the same risk undertaken by him
along with another insurer. Hence it is a
contract between two insuranc companies’
i.e. first insurer and reinsurer.
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8. Various types of risks
• Personal risks: Business owners and their employees face
many physical hazards while fulfilling their responsibilities. Insurance
carriers usually cover any loss of income or benefits they suffer due to
illness or injury from their work.
• Property risks: Businesses often rent or purchase property to
facilitate their operations, such as equipment, buildings, and vehicles.
Insurers are generally willing to cover damage to that property from
causes like theft, accidents, and weather events.
• Liability risks: Businesses are vulnerable to lawsuits from
third parties, such as when their products or services cause someone
bodily injury. Insurance companies usually cover the associated legal
fees.
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10. Insurable risk
• Insurable risks are risks that insurance
companies will cover. These include a wide
range of losses, including those from fire,
theft, or lawsuits. When you buy commercial
insurance, you pay premiums to your
insurance company. In return, the company
agrees to pay you in the event you suffer a
covered loss.
•
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12. LIFE INSURANCE
Life insurance is a contract between an insurance policy
holder and an insurer or assurer, where the insurer
promises to pay a designated beneficiary a sum of money
upon the death of an insured person (often the
policyholder). Depending on the contract, other events
such as terminal illness or critical illness can also trigger
payment. The policyholder typically pays a premium, either
regularly or as one lump sum. The benefits may include
other expenses, such as funeral expenses.
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17. GENERAL INSURANCE (NON-LIFE
INSURANCE)
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18. GENERAL INSURANCE
• “To insure is to protect and indemnify. It
does not mean Prevention of loss”.
• General Insurance is a type of insurance
policy that covers the financial loss
suffered due to the loss or destruction of
the insured asset.
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19. Different Types Of General Insurance
Almost everything under the Sun that you can call an asset can be
insured. However, in India, General Insurance is majorly classified into
the following types:
• 1. Health Insurance
• 2. Motor Insurance
• 3. Travel Insurance
• 4. Property Insurance
• 5. Commercial Insurance
• 6. Asset Insurance
• 7. Pet Insurance
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21. 1. Health insurance
• An essential risk mitigating tool, Health
insurance prevents out-of-pocket expenses
while dealing with a medical emergency.
• A general health insurance plan is an indemnity
plan that pays for hospitalisation expenses up to
the sum insured.
• While you can avail of a standalone health
policy, family floater plans provide coverage to
all the members of your family.
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22. 2. Motor insurance
• Motor insurance covers your vehicles against accidents,
damage, theft, vandalism, and so on. This form of
insurance comes in two forms - comprehensive and
third-party.
• A comprehensive motor insurance policy provides a
360-degree cushion to your vehicle against damages
caused due to flood, fire, riot, etc. Along with this, it also
offers you the rider or add-on benefit, a personal
accident coverage and third-party liability.
• On the other hand, a third-party motor insurance takes
care of the damages suffered by a third party in case of
an accident caused by your vehicle. It won't cover any
damages to your vehicle. As per the Motor Vehicles Act,
1988, it's mandatory for every vehicle plying on the road
to have third-party insurance.
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23. • 3. Home insurance
• As the name suggests, a home insurance policy protects
your home and its belongings from the damages
suffered due to man-made or natural disasters. Some
home insurance policies also provide coverage for
temporary living expenses if you live on rent due to your
home undergoing renovation.
• 4. Travel insurance
• In case you are travelling abroad, a travel insurance
policy protects you against losses suffered due to loss of
baggage, delays in flight and trip cancellation. In some
cases, if you are hospitalised while travelling, travel
insurance may also offer cashless hospitalisation.
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25. Concept of Human Life Value (HLV) and
methods of computing HLVs
Human Life Value (HLV) is the present value of all future
income you would expect to earn for your loved ones. It is
the sum of the total income you are expected to earn
before retirement. It also indicates the economic loss a
family would suffer in case of the unfortunate event of your
early death. Human Life Value helps you determine the
coverage amount for you life insurance need-based on
your income, liabilities, expenses, and savings.
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26. Why do you Need to Calculate Human
Life Value (HLV)?
If someone asks you your life value, you may not be able to answer. Also, if you
want to do financial planning, it is essential to know the value of your life.
Below are some of the reasons you need HLV:
• Human Life Value is not easy to calculate. The methods discussed above
help you solve the problem and give a number to human life value.
• It helps decide the coverage amount you need to financially protect your
family's future.
• If you have taken a loan or plan to take one, the HLV changes. It helps you
in loan management. How much loan you should take, when you should
clear the debt, etc.
Life insurance plans can help you fulfil important financial needs in life. Your
HLV is the maximum limit of your life cover need. Meaning, all the life insurance
plans combined should have the life cover equal to your HLV.
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27. Methods of computing HLV’s
There are different ways to calculate human life value. The
two popular ways are need-based
and income replacement methods.
1. Income Replacement Method:
In this method, your life value is calculated based on your
annual income. The HLV is determined as:
Your Annual Income * Years Left for Retirement
For example, if your income is Rs 10 Lakhs per year and
you are currently 35 years and plan
to retire at 50, your HLV is at least 10,00,000 * 15 = Rs 1.5
crore.
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28. 2. Need-Based Method:
The calculation is done based on day-to-day expenses till the life
expectancy of the youngest member in the family. The factors
considered for assessment are the number of dependents and their
needs, loans, children's education and marriage, your lifestyle, etc.
Once you sum up everything, the value that comes up is your Human
Life Value.
You can calculate HLV using the online calculators available. However,
you should know that the value keeps changing. The number changes
with your life stage, family condition, and annual income. If you
calculate Human Life Value at 25 when you are single, the value will
differ when you calculate at 35, married, and having children. Hence,
revisit the calculation regularly and not see it as a one-time activity.
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31. • Activities on HLV
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32. Thank you
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