RISK MANAGEMENT

PERIL IS A CAUSE OF LOSS FIRE, THEFT,

WINDSTORM OR HAIL.
A HAZARD IS A CONDITION THAT MAY
CREATE OR INCREASE THE CHANCE OF
A LOSS ARISING FROM A GIVEN PERIL.
PHYSICAL HAZARD : CONSISTS OF THOSE
PHYSICAL CONDITIONS THAT INCREASE THE
CHANCE OF LOSS FROM ANY PERIL.

RISK MANAGEMENT
MORAL HAZARD : REFERS TO INCREASE
IN THE PROBABILITY OF LOSS THAT
RESULTS FROM DISHONESTY IN THE
CHARACTER OF THE INSURED PERSON.
IT IS THE DISHONEST TENDENCIES ON
THE PART OF THE INSURED THAT MAY
INDUCE THE INSURED TO DEFRAUD THE
INSURER EXAMPLES MOTORCAR
ACCIDENTS,INDUCED FIRES, STOVE
BURSTS ETC..

MORAL HAZARD(CONTD.) :
THE TENDENCY OF THE PHYSICIANS TO
PROVIDE MORE EXPENSIVE LEVELS OF CARE
WHERE COSTS ARE COVERED BY INSURANCE
COMPANIES IS A TYPE OF MORAL HAZARD .
THE INCLINATION OF THE COURTS TO GIVE
LARGER AWARDS BECAUSE THE LOSS IS
COVERED BY INSURANCE COMPANIES.

MORAL HAZARD(CONTD.) :
IN SHORT MORAL HAZARD ACTS TO
INCREASE BOTH THE FREQUENCY AND
THE SEVERITY OF LOSSES WHEN SUCH
LOSSES ARE COVERED BY INSURANCE.

RISK MANAGEMENT :
A MANAGERIAL FUNCTION CONCERNED
WITH THE PROTECTION OF FIRMS
ASSETS, EARNINGS, PROFITS, LEGAL
LIABILITIES AND PERSONNEL AGAINST
FINANCIAL LOSSES THAT MAY RESULT
FROM FORTUITOUS EVENTS , i.e.
ACCIDENTAL HAPPENING

RISK MANAGEMENT INVOLVES FIVE STEPS :

1.RISK IDENTIFICATION
IDENTIFICATION OF LOSS PRODUCING
EVENTS, e.g., FIRE,BURGLARY.
A DETAILED CHECK LIST OF VARIOUS PERILS
PHYSICAL INSPECTION OF PREMISES,
PROCESSES AND PRODUCT

2.RISK EVALUATIONFREQUENCY AND SEVERITY OF LOSSES

MINOR LOSSES OF GOODS IN TRANSIT
(FREQUENT) EXPLOSIONS, FLOODS,EARTHQUAKES
(NOT FREQUENT BUT HUGE LOSSES.)
THE EXERCISE SERVES TWO PURPOSES
(a) TO DECIDE WHETHER TO INSURE OR
NOT AND
(b) TO FIX THE SUM TO BE INSURED.

3. SELECT APPROPRIATE TECHNIQUES TO

MANAGE THE RISK
4. RISK AVOIDANCE , e.g., FACTORIES ON
THE BANKS OF RIVER BAD RISK
5. LOSS PREVENTION & LOSS REDUCTION

LOSS PREVENTION :
FIRE LOSSES MAY BE PREVENTED BY USE OF
NON COMBUSTIBLE MATERIALS IN
CONSTRUCTION.
ISOLATION OF STORAGE OF HAZARDOUS
GOODS LIKE PETROL, CELLULOID ETC.,
SEGREGATION OF HAZARDOUS PROCESSES
e.g., SPRAY PAINTING FROM THE MAIN
MANUFACTURING BLOCK.

ELECTRICAL INSTALLATION TO CONFORM TO

SPECIFIED STANDARDS AND SUBJECTED TO
REGULAR MAINTENANCE.
MEASURES FOR CARGO LOSS PREVENTION
INCLUDE ADEQUATE PACKING OF GOODS,
SELECTION OF RELIABLE TRUCK OPERATORS
BURGLAR ALARM SYSTEMS.

RISK TRANSFER :
TRANSFER OF HAZARDOUS MATERIALS TO
SUB CONTRACTOR FOR PROCESSING.
SMALL LOSSES MAY BE ABSORBED AS
NORMAL OPERATING EXPENSES
(self insurance fund).
REVIEW
VARIOUS WAYS OF SPREADING RISK IS :
RISK DIVERSIFICATION :

WRITING DIFFERENT CLASSES OF

INSURANCE BUSINESS
REINSURANCE .
RISK MANAGEMENT- HUMANITARIAN PROTECTING EMPLOYEES.
BHOPAL-CHERNOBYL (RUSSIAN
NUCLEAR POWER STATION) COLUMBIA SPACE SHUTTLE
UPKAR THEATRE
SURAT PLAGUE.

LEGAL PROVISIONS
AN ACT IS NEEDED TO DOCUMENT EXISTING
PRACTICES AND HAVE THEM VALIDATED BY
AN ACT OF PARLIAMENT.
1912: INDIAN LIFE INSURANCE COMPANIES
ACT AND PROVIDENT FUND INSURANCE
SOCIETIES ACT WAS PASSED.
FIRST COMPREHENSIVE LEGISLATION IN
INDIA BECAUSE PROVISIONS OF INDIAN
COMPANIES ACT DID NOT MEET THE
PURPOSE.

FURTHER LEGISLATION IN 1928

COMPREHENSIVE LEGISLATION IN 1938.

CONSOLIDATED AND AMENDED THE LAW
RELATING TO BUSINESS OF INSURANCE IN
FORCE AS ON 1-7-1939.

CHANGES IN 1950. ABOLITION OF CHIEF

AGENTS, SPECIAL AGENTS AND PRINCIPAL
AGENTS.
EXPENSES LIMITED INVESTMENTS
REGULATED
TARIFF ADVISORY COMMITTEE,
INSURANCE ASSOCIATION COUNCILS
IS A MATTER OF SELF REGULATION.

FURTHER AMENDMENTS TO THE INSURANCE

ACT 1938 WERE MADE THROUGH IRDA ACT
1999 FACILITATING THE OPENING OF THE
INSURANCE SECTOR IN 2000.
INSURANCE ACT 1938 CONTAINS 123
SECTIONS AND EIGHT SCHEDULES
PART I : PRELIMINARY

PART II: WHO CAN TRANSACT INSURANCE

BUSINESS
REGISTRATION
RULES
RENEWAL LIMITS ON ANNUITIES
NAME
CAPITAL ACCOUNTS
FUNDS
INSPECTION OF DOCUMENTS

SECTION 27 : INVESTMENT OF ASSETS

LIABILITIES TO HOLDERS POLICIES
FOR MATURED CLAIMS, MATURING IN
INDIA (MINUS) THE AMOUNT OF
PREMIUMS FALLEN DUE AND NOT PAID
(PLUS) THE AMOUNT DUE FROM LOANS AND
INVESTMENTS

25 % OF THE AMOUNT IN GOVERNMENT

SECURITIES.
ANOTHER 25 % IN GOVT. SECURITIES OR
OTHER APPROVED SECURITIES.
BALANCE IN ANY OF THE APPROVED
INVESTMENTS SUBJECT TO CERTAIN
LIMITATIONS, RESTRICTIONS AND
CONDITIONS.

SECTION 27 :
NO INSURER SHALL INVEST OR KEEP
INVESTED ANY PART OF HIS
CONTROLLED FUND OTHERWISE THAN
ANY OF THE FOLLOWING INVESTMENTS
1. APPROVED SECURITIES.
2. FIRST MORTGAGE ON ANY IMMOVABLE
PROPERTY. ANY APPROVED BUILDING
SCHEME.

4. DEBENTURES OR SECURITIES ISSUED

WITH THE PERMISSION OF THE STATE
GOVERNMENT.

5. DEBENTURES SECURED BY A FIRST

CHARGE ON ANY IMMOVABLE PROPERTY,
PLANT OR EQUIPMENT OF ANY COMPANY .....

5. ...WHICH HAS PAID INTEREST IN FULL FOR

FIVE YEARS IMMEDIATELY PRECEDING
OR
FOR AT LEAST FIVE OUT OF THE SIX OR
SEVEN YEARS IMMEDIATELY PRECEDING ON
SUCH OR SIMILAR DEBENTURES ISSUED BY
IT..

SECTION 32B :
INSURANCE BUSINESS IN RURAL OR SOCIAL
SECTOR.
SECTION 32C:
OBLIGATIONS OF INSURER IN RESPECT OF
RURAL OR UNORGANISED SECTOR AND
BACKWARD CLASSES

DEFINITION OF RURAL :
HAVING A POPULATION NOT MORE THAN
5,000.
DENSITY OF POPULATION LESS THAN 400 PER
SQUARE KILOMETER .
MORE THAN 25 % OF THE MALE WORKING
POPULATION IS ENGAGED IN AGRICULTURAL
PURSUITS.

AGRICULTURAL PURSUITS BEING

CULTIVATION,
AGRICULTURAL LABOUR,
WORK IN LIVESTOCK, FORESTRY,FISHING,
HUNTING PLANTATION, ORCHARDS AND
ALLIED ACTIVITIES.

SOCIAL SECTOR :
DEFINED AS INCLUDING THE UNORGANISED
SECTOR, INFORMAL SECTOR, ECONOMICALLY
VULNERABLE OR BACKWARD CLASSES AND
OTHER CATEGORIES OF PERSONS BOTH
IN RURAL AND URBAN AREAS.

UNORGANISED SECTOR :
ALL SELF EMPLOYED PERSONS INCLUDING
THE AGRICULTURAL LABOUR.
INFORMAL SECTOR :
SMALL SCALE, SELF EMPLOYED WORKERS AT
A LOW LEVEL OF TECHNOLOGY AND
ORGANISATION.

OBLIGATIONS OF INSURER
RURAL SECTOR
SOCIAL SECTOR
FIRST FINANCIAL YEAR
5% OF TOTAL POLICIES
WRITTEN DIRECT,GOING
UPTO

5000 LIVES IN 1ST. FIN.YEA

9% IN SECOND FIN.YEAR

7500 LIVES IN 2ND FIN.YEAR

12% IN THIRD FIN. YEAR

10000 LIVES IN 3RD FIN.YEAR

14%IN FOURTH FIN.YEAR

15000 LIVES IN 4TH FIN.YEAR

16% IN SIXTH FIN.YEAR.

20000 LIVES IN 5TH FIN.YEAR

SOME IMPORTANT SECTIONS OF INSURANCE ACT

1938

SECTION 33:
POWER OF INSPECTION & INVESTIGATION
BY THE AUTHORITY
CONTROL OVER THE MANAGEMENT.

SOME IMPORTANT SECTIONS OF INSURANCE ACT

1938

SECTION 38:
TRANSFER AND ASSIGNMENT OF LIFE
INSURANCE POLICY EITHER BY AN
ENDORSEMENT OR BY SEPARATE STAMPED
DEED .
NOTICE WILL DECIDE PRIORITY.
CAN BE CONDITIONAL OR ABSOLUTE .
CANNOT BE IN FAVOUR OF JUDGE,AGENT,
DOCTOR OR LAWYER.

SOME IMPORTANT SECTIONS OF INSURANCE ACT

1938

SECTION 39:
NOMINATION
NO NOTICE FOR FIRST NOMINATION.
NOTICE MUST FOR SUBSEQUENT ONES .
WHERE MORE THAN ONE NOMINEE, SPECIFYING
SHARES NOT ALLOWED.
AT THE END OF THE TERM MONEY PAID TO LIFE
ASSURED AND IN CASE OF HIS DEATH BEFORE
THE TERM TO THE SURVIVING NOMINEES .
RECOGNISED IN FIJI,SRILANKA AND PAKISTAN
ALSO.

SOME IMPORTANT SECTIONS OF INSURANCE ACT

1938

SECTION 40 :LIMITATION ON EXPENSES

SECTION 41: PROHIBITION OF REBATES
SECTION 45: INDISPUTABILITY CLAUSE
SECTION 64U: ESTABLISHMENT OF THE
TARIFF ADVISORY COMMITTEE

LIFE INSURANCE CORPORATION OF

INDIA ACT, 1956.

LIFE INSURANCE BUSINESS NATIONALISED

WITH EFFECT FROM 19-01-1956.
154 INDIAN COMPANIES
16 NON INDIAN COMPANIES AND
75 PROVIDENT SOCIETIES
ALL TAKEN OVER BY THE GOVERNMENT OF
INDIA.

LIC OF INDIA ACT PASSED BY PARLIAMENT

ON 18-6 1956.
LIC OF INDIA CAME INTO EXISTENCE FROM
1-9-1956.
ORIGINAL CAPITAL Rs. FIVE CRORES.
THE ACT HAS 49 SECTIONS AND THREE
SCHEDULES

SECTION 26 : ACTUARIAL VALUATION

CORPORATION SHOULD MAKE ACTUARIAL
VALUATION ONCE IN EVERY TWO YEARS.
(EFFECTIVE 1986 , IN LIC VALUTION IS
DONE EVERY YEAR.)
95% OF THE VALUATION SURPLUS IS
DISTRIBUTED AMONG THE WITH PROFIT
POLICY HOLDERS.
REMAINING 5% TO THE CENTRAL GOVT. AS
AS ITS SHARE OF PROFIT.

SECTION 30:
LIC SHALL HAVE THE EXCLUSIVE PRIVILEGE TO
TRANSACT LIFE INSURANCE BUSINESS.
(CEASED AS A RESULT OF THE AMENDMENT IN
1999.)

GENERAL INSURANCE BUSINESS

(NATIONALISATION )ACT,1972
(GIBNA)

THE ACT WAS PASSED IN 1972

THE ACT HAS 39 SECTIONS AND ONE
SCHEDULE.
GENERAL INSURANCE CORPORATION OF
INDIA (GIC) AND ITS FOUR SUBSIDIARIES
SET UP WITH EXCLUSIVE PRIVILEGE FOR
TRANSACTING GENERAL INSURANCE
BUSINESS IN INDIA

NO DEDUCTION OF INCOME TAX SHALL BE

MADE ON ANY INTEREST OR DIVIDEND
PAYABLE TO THE GIC OR ANY OF THE FOUR
SUBSIDIARIES IN RESPECT OF THE SHARES
OWNED (SECTION 35A)
AMENDMENT BILL 2001 MODIFIES THE ROLE
OF GIC AS REINSURER AND THE FOUR
SUBSIDIARIES WILL BE INDEPENDENT
COMPANIES

INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY ACT, 1999.

THE ACT WAS PASSED WITH A VIEW TO

REGULATE, PROMOTE AND ENSURE
ORDERLY GROWTH OF INSURANCE
INDUSTRY
A NEW SECTION SECTION114A HAS BEEN
ADDED IN THE INSURANCE ACT, 1938
WHICH PROVIDES FOR POWER TO MAKE
REGULATIONS IN RESPECT OF
REGISTRATION OF INSURERS.

MANNER OF SUSPENSION OR
CANCELLATION OF REGISTRATION
ISSUE OF DUPLICATE CERTIFICATE OF
REGISTRATION
RENEWAL OF REGISTRATION
MANNER AND PROCEDURE FOR DIVERTING
EXCESS SHARE CAPITAL
PREPARATION OF BALANCE SHEET,
P&L ACCOUNT

SUBMISSION OF ABSTRACT OF REPORT

BY AN ACTUARY.
TIME, MANNER AND CONDITIONS OF
INVESTMENTS OF ASSETS.
LICENSING OF INSURANCE AGENTS AND
INTERMEDIARIES RENEWAL OF
LICENCES TRAINING EXAMINATIONS
CODE OF CONDUCT.
TARIFF ADVISORY COMMITTEE.
LICENSING OF SURVEYORS AND LOSS
ASSESSORS.
VALUATION OF ASSETS AND LIABILITIES.

REINSURANCE MATTERS.
POLICYHOLDER GRIEVANCES.
ANY OTHER MATTERS .
PERMISSION OF GOVERNMENT NOT
NECESSARY.
IRDA SO FAR HAS COME OUT WITH THE
FOLLOWING MEASURES
ACTUARIAL VALUATION
OBLIGATIONS IN RURAL AND SOCIAL
SECTORS

 LICENSING OF INSURANCE AGENTS

APPOINTMENT OF ACTUARY
ENSURING COMPLIANCE OF SOLVENCY
MARGINS
REINSURANCE LIFE
REGISTRATION OF INDIAN INSURANCE
COMPANIES
INVESTMENT REGULATIONS

 PREPARATION OF FINANCIAL STATEMENTS

PROTECTION OF POLICYHOLDERS
INTEREST
THIRD PARTY ADMINISTRATORS HEALTH
SERVICES
REINSURANCE GENERAL INSURANCE
LICENSING OF CORPORATE AGENTS,
BROKERS REGULATIONS
ENABLING PROVISIONS ON THE MANNER
OF RECEIPT OF PREMIUMS