Insurance Basics Presentation - Unitedworld School of Business

7/28/2019 Insurance Basics Presentation - Unitedworld School of Business

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WHAT IS INSURANCE ?

Insurance Indemnifies Assets & Income. Every

Asset has a value and generates Income to its

Owner. There is a normally expected Life-time for

the Asset during which time it is expected to

perform. If the Asset gets lost earlier, being

destroyed or made Non-functional through an

Accident or other unfortunate event the Owner is

Prejudiced. Insurance helps to reduce

CONSEQUENCES of such Adverse

Circumstances which are called Risks


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Insurance is the SCIENCE OF

SPREADING OF THE RISK. It is thesystem of spreading the losses of anIndividual over a group of Individuals

Insurance is a Method of sharing offinancial losses of a FEW from a

COMMON FUND formed out ofContribution of the MANY who areequally exposed to the same loss


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What is UNCERTAIN for an Individual

becomes a CERTAINTY for a Group. This

is the basis of All Insurance Operations.

Thus INSURANCE CONVERTS

UNCERTAINTY TO CERTAINTY


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The object of Insurance is to provide

protection against Financial Losses

caused by Fortuitous Events. Thus

Insurance is a protection against the

Consequences of RISK.

RISK is defined for Insurance Purpose as

the UNCERTAINTY OF A FINANCIALLOSS.


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Element of RISK is Inherent in Life. Risk

Means that there is a possibility of lossor damage.

To the common Man, Risk meansExposure to Danger.

In Insurance, the word Risk may be

used interchangeably with Peril-whichmeans the Event or Occurrence whichCAUSES the Loss.


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In Insurance, the word Risk may also refer

to the Property or Subject Matter of

Insurance

The Subject Matter of Insurance can be

Life, Limb, Property, Interest & Liability


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The Problem of Risk in Economic andCommercial Activities can be dealt within FOUR WAYS.

1. Risk Avoidance2. Risk Retention3. Risk Transfer4. Risk Minimisation

Insurance is ONE of the most Importmethod

of Risk Transfer


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Insurance spreads the Risk among the

Community and the likely Big Impact onONE is reduced to Smaller Manageable

Impacts on ALL. Thus Insurance acts as aSHOCK ABSORBER. A RISK OF TRADE is Insurable but a

Trade Risk is not Insurable. In a Risk of

Trade there can only be a LOSS whereasin a Trade Risk, there can be LOSS ORGAIN Risks of Trade are called PURERISKS.


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Only Economic or Financial Losses can becompensated by Insurance.

The Business of Insurance is the Poolingof RISK and RESOURCES. It is a

technique which provides for collection of

small amounts of PREMIUM from many

Individuals and Firms out of which lossessuffered by the FEW are paid. Insurers act

as TRUSTEES of the Common Pool.


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INSURANCE CONTRIBUTES TO

NATIONAL WEALTH

It contributes to a vigorous Economy

and National Productivity. LIC & GICfunds formed out of the savings of

People are channelled into Investments

for Economic Growth. HUDCO, IDBI,IFCI, use funds siphoned from

Insurance Money for lending to

Entrepreneurs.

PURPOSE AND NEED OF INSURANCE


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INSURANCE PROTECTS THE CAPITAL

IN INDUSTRY - It helps release the same

for further Expansion

Insurance is the HAND MADE to

Commerce and Trade.

PURPOSE AND NEED OF INSURANCE


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RATE OF PREMIUM WILL BE DIRECTLYPROPORTIONAL TO THE DEGREE OFHAZARD

TO ASSESS VARIATIONS IN THE DEGREE OFHAZARD,RISKS MUST BE CLASSIFIED INTOHOMOGENEOUS CATEGORIES WITHSIMILARITY OF EXPOSURE

IN EACH SUB-CLASS,PAST LOSSEXPERIENCE WILL BE THE CRITERIA

APPLIED TO DECIDE THE PREMIUM RATE


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GREATER THE RISK,HIGHER WILL BE THEPREMIUM RATE

THE MORE PROBABLE THE LOSS AND THEMORE SEVERE IT IS LIKELY TO BE,THEHIGHER WILL BE THE PREMIUM RATE

Eg.HAZARDOUS GOODS AND HAZARDOUSPROFESSIONS WILL ATTRACT A HIGHERPREMIUM AS COMPARED TO NON-

HAZARDOUS GOODS OR PROFESSIONS


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RATES OF PREMIUM SHOULD BE EQUITABLEAND FAIR AS BETWEEN DIFFERENTINDIVIDUAL INSUREDS

HENCE,A SYSTEM OF CLASSIFICATION OF

RISKS INTO BROAD CATEGORIES ISADOPTED. THESE MAY BE FURTHER CLASSIFED INTO

GROUPS AND SUB-GROUPS DEPENDINGUPON THE HAZARDS INVOLVED AND THEIR

SIMILARITYEg.CLASSIFICATION IN MOTOR/FIRE/W.C.


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IN EACH SUB-GROUP,THE PAST LOSS EXPERIENCEIS WORKED OUT AND FUTURE FORECASTS AREMADE ON THIS BASIS

FORMULA FOR PURE PREMIUML X100 L=SUM TOTAL OF LOSSES

----------V V=SUM TOTAL OF VALUES

PURE PREMIUM WILL BE JUST SUFFICIENT TO PAYTHE LOSSES,HENCE LOADING IS REQUIRED FOROTHER FACTORS LIKE-

COMMISSIONS/MANAGEMENTEXPENSES/RESERVES FOR UNEXPIREDRISKS/PROVISION FOR UNEXPECTED HEAVYLOSSES/MARGIN OF PROFITS

FINAL RATE=LOADED RATE


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LAW OF LARGE NUMBERS IS FUNDAMENTAL TO ALLINSURANCE OPERATIONS

THIS IS A MATHEMATICAL PRINCIPAL ANDSTIPULATES THAT-

The greater the number of cases studied and longer the

duration of study, the more accurate will be the futureforecast PROVIDED THE CONDITIONS REMAIN THE SAME

AS THE No. OF CASES INCREASES,THE GAPBETWEEN THE ESTIMATED FUTURE LOSSES AND

ACTUAL FUTURE LOSSES BECOMES LESS ANDLESS APPLYING THIS PRINCIPLE,INSURERS ARE ABLE TO

ANTICIPATE FUTURE LOSSES MORE ACCURATELY AND FIXPREMIUM RATES ACCORDINGLY (SUBJECT TO TREND

ADJUSTMENTS


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INSURANCE OPERATIONS ARE DIRECTLY

AFFECTED BY

IRDA-ACT2000

INSURANCE ACT1938

LIBNA

1956---LIFE OPERATIONSGIBNA1972---NON-LIFE OPERATIONS

BILL OFLADING

ACT-1963

INDIANCARRIERS

ACT-1865

MERCHANTSHIPPING

ACT-1958

MARINE

INSURANCE

ACT-1963

W.C.ACT

1923

PLI ACT-1991 SALE OF GOODSACT-1930

INDIAN STAMP

ACT

INDIAN

RAILWAYS

ACT-1890

INDIAN POST

OFFICEACT--1898

C.P.ACT

1986

FERA-1973

COGSA-1925

M.V.ACT-

1988


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The ultimate underwriting objectives are

The production of large volume of premium incomesufficient to maintain and progressively enlarge theinsurers business.

The earning of a reasonable profit on the operations The important underwriting factors are

- Well spread out and Large Volume of business- Retention limits- Reinsurance of the surplus

Reinsurance is insurance of insurance . The cedingcompany retains a part of the risk / premium and cedes

the balance to the reinsurer. There are two mainmethods of reinsurancea) Facultative b) Treaty


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Facultative Reinsurance : In facultativereinsurance, the choice / faculty to acceptor reject a risk is with the reinsurer. This

method involves considerable amount ofclerical work and ceding company cannotgo on risk unless confirmation is receivedfrom the reinsurer about the acceptance of

the risk and premium rate / termsconditions of insurance.


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Treaty :There are two types of treaty reinsurance

Proportional and Non-proportional.

Proportional : Proportional treaties are risk based &

can be divided into

a) Quota Share b) Surplus c) Pools

d) Auto Facultative (Facultative obligatory) Non Proportional : Non proportional treaties are not

risk based but loss based. The insurer limits the

amount of loss as per the underlying limit and the

reinsurer agrees to pay the loss over and above theunderlying limit. Examples of non proportional treaties

are

a) Excess of loss for event losses

b) Stop loss for portfolio losses


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Retrocession---Reinsurance of aReinsured Risk

Purpose of Reinsurance Creation of additional capacityAchieves Global Spread of risk Best protection against Catastrophic Risks Facilitates acceptance of Mega/Jumbo Risks Works on the Principle of: No Cession without Retention

Follow the Fortune of the Ceding Company


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The Major Portfolios are as follows: Fire Insurance20%Marine Insurance---15%

Motor Insurance---35%Engineering Insurance10%Aviation---5%Miscellaneous Traditional10%Miscellaneous Non-Traditional5%


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Insurance Basics Presentation - Unitedworld School of Business