Basic Fundamentals

8/2/2019 Basic Fundamentals

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Insurance

Insurance the business of insurance is related tothe protection of economic values of assets

System of combining many loss exposures so that

the cost of unexpected losses are shared by allparticipants.

A mutual cover of numerous independent,assessable, economic (exposure )units facing

similar hazards.

Insurance is a method in which a large number ofpeople exposed to a similar risk make contributions

to a common fund out of which the losses sufferedb the unfortunate few due to accidental events are

Risks of few are spread over


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System of insurance deals with risk.

Risk means uncertainty about future loss or in otherwords, the inability to predict the occurrence or size of

a loss; all accidental happenings which produce amonetary loss.

Classification of Risks

Critical/Catastrophic Risk

ImportantVs.Unimportan

t Risk

DynamicVs.Static

Risk

FundamentalVs.

ParticularRisk

Pure Vs.Speculative Risk


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CATASTROPHIC RISK Classification is based on the

extent of damage likely to be caused. Cat. risks are thosewhich may lead to the bankruptcy of the owner. Eg.Tsunami,heavy indebtedness.

IMPORTANT RISKMay not spell doom, but may upset

family or business finances badly requiring a lot of time torecover. Eg.adverse effect of economic recession.

UNIMPORTANT RISK-Temporary illness or accidentwhich are less damaging.

DYNAMIC Vs. STATIC RISK-Dynamicrisk arise fromthe changes that take place in society like economically,socially, technologically, environmentally and politically. Suchrisks are caused by perils which have national consequence

whereas static risks are caused by perils which have noconsequence on the national economy.


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Several commonly used words have rather precise meanings

whenthey are used in connection with insurance LOSS, PERIL, HAZARD

LOSS an unexpected reduction or disappearance ofeconomic value. Wear & tear, gradual deterioration,

sentimental losses are not considered as loss. PERIL Peril is the cause of loss. Commonly insured perils

include fire, theft, explosion and illness.

HAZARD hazard is a condition that increases the likelihood

of loss due to a particular peril.Types of hazard

Physic

al

Moral Moral

e


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HAZARDS

PERILS

LOSSES

Increasesthelikelihood of

Causing

Cigarette Fire FireDamage

Fig.: Hazards, Perils andLosses


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Methods of Handling Risk

Risk Avoidance,

Risk Retention,

Loss Control- Loss frequency and loss severityLoss prevention and reduction

Risk Transfer - Insurance


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Functions of insurance

To provide protection against financial lossescaused by unforeseen events,

Provides assistance to business enterprise,

Provides financial stability to trade and industry andthus benefits the entire community,

Provides financial stability to a family,

Insurance encourages invisible export,

Indirectly encourages loss-prevention and loss-reduction,

Provides capital for the economic development ofthe country,

Earns valuable foreign exchange for the country by


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How insurance handles risk Insurance companies or insurers accepts the risk

which are transferred to them. This process involves 3other concepts:

1)Chance Of Loss (probability) can be definedas the probable number of losses out of a givennumber of loss exposures.

2)Degree Of Risk it is the extent of uncertaintyabout the future losses; it is the extent to which thelosses are unpredictable

3)Law Of Large Numbers The law of large numbers

is a mathematical principle stating that as the number


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A risk becomes insurable if the following requirementsare complied with:

1)the insured must suffer financial loss if the periloperates,

2)the loss must be measurable in money,

3)the object of insurance contract must be legal

4)the insurer should have sufficient knowledge about

the risks he accepts.


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Ideal features of insurable risks

There are many similar loss exposures.

Losses are definite, measurable and important.

Losses are accidental Catastrophic losses are extremely unlikely


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Fields/classes of insurance

There are several ways in which various kinds ofinsurance can be classified:

Individuals (personal line) vis--vis Corporates

Voluntary/Involuntary vis--vis Mandatory

Protection against loss of income (such as by death,disability)vis--vis Types that pay for damage toproperty

Division on organizational basis whether provided byGovt. or pvt. insurance companies or by public sectorinsurance co.s.


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The conventional classification are as follows:

Life & Non-Life (i.e. general) Again Non-life can be grouped into the following

classes

Marine & Non-Marine or as fire, marine & accident

(now termed as miscellaneous insurance)

Health insurance, rural insurance, micro insuranceare considered as separate divisions undermiscellaneous insurance group


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In modern times general insurance is classified

differently 1)Insurance of persons

2)insurance of property

3)insurance of liability 4)insurance of interest

American way of classification:

1)life

2)health

3)property and casualty

Under property: marine and non-marine

Under casualty: anything which does not fall under


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Non-Life

Fire Marine Miscellaneous

InsuranceofPersons

InsuranceofProperty

Insuranceof Liability

Insuranceof Interest


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Insurance operations

Starts with MarketingThrough 1)Intermediaries

2)Direct

3)Bancassurance

4)Tie ups

Pricing - done with the help of actuaries based onthe following:

1)Classification

2)Discrimination; and

3)Experience


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Underwritinginvolves selection of risks at a price

depending on the degree of hazard present in the risk. Depending on the circumstances/risks to ensure

arrangement of re-insurance.

Claim adjusting

Company Management based on various laws/bye-laws, rules/regulations set by the Govt.

The main purpose of insurance regulations is tosafeguard the financial stability of the insurancecompanies so that they will be in a position to pay theclaims to the policy-holders.


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UNDERWRITING

Basic underwriting principles Selection of insureds according to the companys

underwriting standards

Proper balance within each rate classification

Equity among policyholders

Sources of underwriting information

Application/Proposal Form

Agents report Inspection Report

Physical inspection

Physical examination and attending physicians report20


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Making an underwriting decision

3 steps

Accept the application

Accept the application subject to certain restrictions or

modifications Reject the application

Other underwriting considerations

Rate Adequacy and underwriting Re-insurance and underwriting

Renewal underwriting

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CLAIM SETTLEMENT

Basic objective of claim settlement

Verification of a covered loss Fair and prompt payment of claims

Personal assistance to the insured

Types of Claim Adjustor

Company Adjustor Independent Adjustor

Adjustment Bureau

Public Adjustor/Specialists

Steps in settlement of a claim Notice of loss must be given

The claim is investigated

A proof of loss may be required

A decision is made concerning payment22

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Basic Fundamentals

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