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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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