INSURANCE

&

RISK
MANAGEMENT
 RISK
Risk is the uncertainty associated with the end of
a period value of an investment.

Risk is the uncertainty of a financial loss.

Every risk involves the loss of one or other kind.

The risk cannot be averted but loss occurring due

to certain risk can be distributed amongst the
agreed persons.
 INSURANCE
Insurance is defined as a cooperative 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.
The function of insurance is to spread the loss
over a large number of persons who are agree to
co-operate each other at the time of loss.
The insurance is also defined as ‘a social device to
accumulate funds to meet the uncertain losses
arising through a certain risk to a person
insured against the risk.’
The Definition of insurance can be made
from two points-

1. Functional definition

2. Contractual definition
 1. Functional definition
Insurance is 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 insure themselves against
the risk.

Thus insurance is-

• A co-operative device to spread the risk

• The system to spread the risk over a number

of persons who are insured against the risk

• The principles to share the loss of each

member of the society on the basis of
probability of loss to their risk,

• The method of provide security against

losses to the insured.
2. Contractual definition
The insurance is contract between insurer and
insuree. Thus insurance is a contract whereby,
• Certain sum, called premium, is charged in
consideration,
• Against the said consideration, a large sum is
guaranteed to be paid by the insurer who received
the premium,
• The payment will be made in a certain definition
sum, e.g., the loss or the policy amount whichever
may be,
• The payment is made only upon a contingency
NATURE
OF
INSURANCE
1. Sharing of risk

2. Co-operative device

3. Value of risk

4. Payment at contingency

5. Amount of payment

6. Large number of insured persons

7. Insurance is not gambling

8. Insurance is not charity

 Functions of Insurance

The Functions of insurance can be studied

into two parts-

• Primary functions

• Secondary functions
(a) Primary Functions
 1. Insurance provides certainty

The risk will occur or not, when will occur,

how much loss will be there? Nobody
knows so Insurance provides certainty of
payments at the uncertainty of loss.

The uncertainty of loss can be reduced by

better planning and administration, but
the insurance relives the person from such
difficult task.
 2. Provides protection
The main function of insurance is to provide
protection against the probable chances of
loss.
The insurance guarantees the payment of
loss and thus protects the assured from
suffering from sufferings.
The insurance cannot check the happening
of risk but can provide for losses at the
happening of the risk.
 3. Risk-sharing

When risk takes place, the loss is shared by

all the persons who are exposed to the
risk.

In today’s scenario risk sharing is done on

the basis of probability of risk.
(B) Secondary Function
 1. Prevention of Loss

The insurance joins hands with those institutions

which are engaged in preventing the losses of
the society because the reduction in loss causes
less payment to the assured and so more
saving is possible which will assist in reducing
the premium.
 2. Provides Capital

The insurance provides capital to the

society.

The accumulated funds are invested in

productive channel.

The industry, the business and the individual

are benefited by the investment and loans
of the insurers.
 3. Improves efficiency

The insurance eliminates worries and

miseries of losses at death and destruction
of property.

The carefree person can devote his body

and soul together for better achievement.
4. It Helps in Economic progress

The insurance by protecting the society from

huge losses of damage, destruction and
death provides an initiative to work hard
for the betterment of the masses.
 Principles
of
Life Insurance
The insurance business has its important
principles in economic development.

The important principles of life insurance

are given as-

(1) To spread life insurance and provide life

insurance protection to the masses at
reasonable cost.
(2) To mobilize people’s savings through
insurance linked savings schemes.

(3) To invest the funds to serve the best

interests of both the policy holders and

the nation.

(4) To conduct business with maximum

economy.
(5) To act as trustee of the policy holder
and protect their individual and collective
interests.

(6) To innovate and adopt to meet the

changing life insurance needs of the
community.

(7) To involve all the people working in the

corporation to ensure efficient and
courteous services to the insured public.
 Kinds
of
Insurance
The insurance can be classified from two
angles-

• From the Business point of view

• From the Risk point of view

(a) From the Business point of view
From this point of view, business can be
divided in the following categories
namely-

• Life insurance

• General insurance

• Social insurance
 1. Life Insurance
It is different from other insurance in the
sense that the subject matter of insurance
is life of human being.

The insurer will pay the fixed amount of

insurance at the time of death or at the
expiry of certain period.
This insurance provides protection to the
family at the premature death or gives
adequate amount at the old age when
earning capacities are reduced.

The business of life insurance is wholly done

by the life insurance corporation of India.
 2. General Insurance
This insurance includes property insurance,
liability insurance and other forms of
insurance. Motor, theft, fidelity and
machine insurances include the extent of
liability insurance to a certain extent.
 3. Social Insurance

The social insurance is to provide protection

to the weaker section of the society who
are unable to pay the premium for
adequate insurance.
Pension plans, unemployment benefits,
disability benefits sickness insurance
and industrial insurance are the various
form of insurance.

With the increase of social ideas, the social

insurance is an obligation duty to the
nation.
(b) From the Risk point of view
From this point of view, insurance can be
classified in to the following ways-

(1) Property insurance-

• Marine insurance
• Fire insurance
• Miscellaneous insurance
(2) Liability insurance
(3) Other forms
(1) Property Insurance-

Under the property insurance property of a

person is insured against a certain
specified risk.

The risk may be fire or marine perils, theft

of property or goods, damage to property
at accident.
• Marine Insurance-
It provides protection against the loss of
marine perils. the marine perils are collision
with rock, or ship attacks by enemies, fire
and capture by pirates, etc.

So marine insurance insures ship, cargo and

freight etc.

The marine insurance has been divided into

two categories-
(1) Ocean marine insurance- In this format

the insurer insures only the marine perils.

(2) Inland marine insurance- This format

covers inland perils which may arise with
the delivery of cargo (goods) from the
go down of insured and may extend up to
the receipt of the cargo by the buyer
(importer) at his godown.
 • Fire Insurance
It covers the risk of fire.

With the help of fire insurance the losses,

arising due to fire are compensated and the
society is not losing much.

The individual is protected from such losses

and his property or business or industry will
remain approximately in the same position in
which it was before the loss.
 • Miscellaneous Insurance

The property, goods, machine, furniture,

automobile, valuable articles, etc. can be
insured against the damage or destruction
due to accident or disappearance due to
theft.
(2) Liability Insurance
The general insurance also includes liability
insurance whereby the insured is liable to pay
the damage of property or to compensate the
less of personal injury or death.

This insurance is seen in the form of fidelity

insurance, automobile insurance and machine
insurance etc.
(3) Other forms
There are certain other insurances which
are included under general insurance.

The example of such insurances are

export-credit insurances, state employees
insurance, etc. whereby the insurer
guarantees to pay certain amount at the
certain events.
HISTORICAL PERSPECTIVE

OF
INSURANCE BUSINESS
IN
INDIA
 Kinds of Insurance from Risk point of view

INSURANCE

Personal insu. Property insu. Liability insu. Fidelity insu.

Life Insurance Personal Accident Health

Insurance Insurance

Marine Fire Automobile Cattle Crop Machinery Theft

Insu. Insu. Insu. Insu. Insu. Insu. Insu.

Third party Employees Motor Re-insurance

Insu. Insu. Insu.

Fiduciary insurance Credit insurance Privilege insurance

 (1) Personal Insurance
The personal insurance includes insurance of
human life which may suffer the loss due to
death, accident and disease.

Therefore the personal insurance is further

classified into life insurance, personal
accident insurances and health insurance.
 (a) Life Insurance
It is defines as a contract whereby the
insurer in consideration of a premium
undertakes to pay a certain sum of money
either on the death of the insured or on
the expiry of a fixed period.
 (b) Personal Accident Insurance

It is a kind of insurance whereby the

insurer gets the benefits under the
condition of accidental and death cases.
This insurance provide the safety for injury,
disability and death case.
 (c) Health Insurance
It is a personal insurance that covers the
cost of hospital and medical expenses
arising from illness or injury. Benefits are
paid as a lump sum or as a proportion of
actual treatment costs.

It includes individually hospital cash, critical

illness and disability benefits.
(2) Property Insurance

Under the property insurance property of a

person is insured against a certain
specified risk.

The risk may be fire or marine perils, theft

of property or goods, damage to property
at accident.
 (a) Marine Insurance
It provides protection against the loss of marine perils.

The marine perils are collision with rock, or ship

attacks by enemies, fire and capture by pirates,
etc. so marine insurance insures ship, cargo and
freight etc.

The marine insurance has been divided into two

categories-

(1) Ocean marine insurance

(2) Inland marine insurance-

(b) Fire Insurance
It covers the risk of fire.
With the help of fire insurance the losses,
arising due to fire are compensated and
the society is not losing much.

The individual is protected from such losses

and his property or business or industry
will remain approximately in the same
position in which it was before the loss.
 (c) Automobile Insurance
This insurance comes under the category of motor
insurance whereby the number of kind of
insurance has divided.

It covers the insurance f various vehicle which is

generally used by the people.

The categories of vehicle are commercial, Non-

commercial, and other vehicle.

It also includes the insurance of first, second and

third party.
(d) Cattle Insurance
This insurance provides cover against death
of animal, like buffaloes, cows, horses etc.
arising as a result of accident, disease, or
pregnant condition as the case may be.

The number of animals covered by cattle

insurance in India has increased from 2.10
lakhs in 1976 to 256..22 lakhs in 1988-89.
 (e) Crop Insurance
The crop insurance is part of agriculture
insurance.

It is the main rural insurance wherein the product,

price and income risks are insured.

If the farmers do not get a standard amount

of product, required price and income from
the farms, they are compensated by
insurance companies under the crop
insurance.
 (f) Machinery Insurance
This insurance covers the insurance of
various machines and equipments which are
essential production and other works.

It takes into account the kind of

machineries which are different in their
nature.
(g) Theft Insurance

Under this insurance, the goods and the

other properties are insured against the
theft.

There are some of the categories of goods

which are insured for this insurance.
 (3) Liability Insurance
This insurance covers the risks of third
party, compensation to employees, liability
of the automobile owners and reinsurances.

This insurance is seen in the form of fidelity

insurance, automobile insurance and
machine insurance etc.
(a) Third party Insurance
(b) Employees Insurance
(c) Motor Insurance
(d) Re-insurance
 (4) Fidelity/Guarantee Insurance
It covers the loss arising due to dishonesty,
disappearance and disloyalty of the
employers.
The party must be a party of the contract.
His failure causes loss to the first party.

Example- In export insurance, the insurer

will compensate the loss at the failure of
the importers to pay the amount of debt.
(a) Fiduciary Insurance
(b) Credit Insurance
(c) Privilege Insurance
The insurance business was regulated
through the insurance act 1938.

The life insurance services have been in

exercise in India since 1818 when the first
insurance company namely, Oriental life
insurance company was established in
Calcutta.

The general insurance services has been

available since 1950 when the first tritan
insurance company was established, again
in Calcutta.
Till 1956, for Life Insurance and 1972 for
General Insurance, industry has grown in
terms of the member of companies
providing those services, the volume of
premium, investible resources, and so on.

Till 1956/1972 there were a large number

of insurance companies (total 352
comprising 245 life and 107 general
insurance) and all of them were in the
private sector.
In 1956, 245 Indian and foreign life insurance and
provident societies were nationalize and a new
single entity namely, Life Insurance Corporation
(LIC) was established by passing the LIC Act
1956.

Similarly in 1972, 107 general insurance companies

were nationalized through the passing of general
insurance business (nationalization) Act, 1972.

Then 107 companies amalgamated and grouped into

five companies namely,-
• National insurance company (NIC)
• New India assurance company (NIAC)
• Oriental insurance company (OIC)
• United India insurance company (UIIC)
• General insurance company (GIC)

Thus in 1956 and 1972 the private insurance

industry was transformed into monopolistic
and oligopolistic state or public sector
insurance industry in India.
 Insurance Sector reform in India
The insurance regulatory and development
authority (IRDA) bill was passed by the
Indian parliament in December 1999.

The IRDA become a statuary body in April

2000 and has been framing regulations and
registering the private sector insurance
companies.

The insurance sector was opened for private

sector in august 2000.
There were about 7 general and 11 life insurance
companies operating in the private sector in India
in the early part of 2004.

Taking into account LIC, GIC and its four

subsidiaries, there are 24 organizations doing life
and general insurance business in India in 2004.

In addition there is post office life insurance

business also.
Insurance Sector in India /Conceptual Framework
Insurance industry

Public sector Private sector

Life General Life General

(11 Companies) (7 Companies)

GIC and its

4 subsidiaries

LIC Post office

Insurance
The below mentioned table shows the share
of private insurance companies in the total
life insurance premium was only 0.54 % in
2001-02, and the LIC accounting for the
remaining 99.46 %.

In the general insurance field also, the

share of private insurance companies in the
total premium was only 3.76% in that year,
and the four GIC subsidiaries accounted
for the remaining 96.24% of the premium.
The total life and general insurance premium
income was Rs. 62477 crore in 2001-02 in
which the share of life insurance and
general insurance was Rs. 50094 crore
(80.18%) and Rs. 12383 crore (19.82%)
respectively.
Similarly the total investment by both the
insurance companies were Rs. 273242
crore in 2001-02 in which the share of life
insurance was Rs. 246869 crore (90.35)
and Rs. 26373 crore (9.65) respectively.

The share of insurance sector in household

financial savings has increased from 7.6 %
during 1980s to 12% in 2000-01.
 Summary of Insurance Business in India
Item 2000-01 2001-02
(A) Life insurance

• Premium 36070 50094

• Of which private insurers 7 273
• Total investments 194010 246869
• Of which govt. & other-
-approved securities 132177 100037
• Other than appro. Invest. 18584 16521

(B) General insurance

• Gross direct premium income 10087 12383

• Of which private insurers 7 466
• Total investments 24462 26373
• Of which govt. & other-
-guaranteed securities 7703 15910

• Other than approved securities 3761 2972

 Governance
of
Insurance Business
 Corporate Governance
The Corporate governance is mainly concern with
how ownership influence, promoting corporate
fairness, transparency and accountability.

In simple words, corporate governance means doing

everything to improve relationship between
companies and their shareholders to improve the
quality.

Insurance companies are important constituent of

corporate governance.
Corporate governance becomes an organize
system when companies are directed and
controlled by the management in the best
interest of the stakeholders and insuring
greater transparency and financial
reporting.

Corporate governance in insurance companies

makes corporate entities, institutional
investment and business opportunity.
COMPONENTS OF CORPORATE GOVERNANCE

Insurance companies are important constituent of

corporate governance.

Keeping and open mind, listening and learning from

other, ready to share ideas and thoughts
recognizing and rewarding cooperation's and
franchisees, development skill of employees.

The components of corporate governance are as

follows-
 1- Transparency
The Insurer should develop transparency of
financial resources.

The insurance companies are directly & indirectly

link with banking industry, financial markets and
the industrial and agricultural development along
with the policyholder’s interest.

Example of transparency present in public sector

i.e., LIC and GIC have been a guide line for the
private insurers.
2. Efficient and Independent Directors
Directors are link between policyholders and
shareholders.
There primary duty is to monitor management on
behalf of the shareholders as well as for the
interest of policyholders.
Directors supervise and approved financial
objectives, major strategies and plans. They
have to review the internal control system to
mitigate risk exposures.
The board should have information about financial
statements, market intelligence, competitors
role regulations measures, management,
performance.
Need of Corporate Governance in Insurance
Industry
Insurance industry bears a fiduciary
relationship with policy-holders and has long
term performances.
The honesty and integrity of insurers are paramount
important as the industry has the financial
functions.
The need of corporate governance is realized
for confidence building, change management,
investment, and viability.
Need of corporate governane required the following
points-
 1- Confidence
Insurance is based on confidence. long term
contract is built only on the confidence.

New insurance companies can develop only

if the old insurance companies have
demonstrated honestly and integrity. For

Example - LIC has proved the insurance has

sovereign guarantee.
 2- Change Management
Insurance companies are facing several changes in
the society.

They have to cope with the changes and come

forward to challenge the changes.

The insurance companies have to manage them-

-selves for maintaining safety and solvency.
 3- Investment
Insurance companies manage their funds through
investment which involves safety solvency risk
management and protection of policy holders
interest.

There is need of good governance standard against

which the companies conduct and perform would
get measured against these backdrops.

SEBI has formulated several rules and regulations

which have to be followed by the insurer.
 4- Viability
The insurer have to prove their viability.

Many new and existing companies now enter in the insurance

business.

Foreign insurance companies have to prove their

viability.

Public sector insurance have to proved their

viability and private sector insurer have to follow
them.

They have to operate in safe and sound manner and in

accordance with the applicable rules and regulations.