Vous êtes sur la page 1sur 14

Module 1

Risk management

Risk is defined in as the effect of uncertainty on objectives (whether positive or negative). Risk management
can therefore be considered the identification, assessment, and prioritization of risks followed by coordinated
and economical application of resources to minimize, monitor, and control the probability and/or impact of
unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in
financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well
as deliberate attacks from an adversary. Methods, definitions and goals vary widely according to whether the
risk management method is in the context of project management, security, engineering, industrial processes,
financial portfolios, actuarial assessments, or public health and safety.

The strategies to manage risk include transferring the risk to another party, avoiding the risk, reducing the
negative effect of the risk, and accepting some or all of the consequences of a particular risk.

Certain aspects of many of the risk management standards have come under criticism for having no
measurable improvement on risk even though the confidence in estimates and decisions increase.

In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the
greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower
loss are handled in descending order. In practice the process can be very difficult, and balancing between risks
with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of
occurrence can often be mishandled.

Intangible risk management identifies a new type of a risk that has a 100% probability of occurring but is
ignored by the organization due to a lack of identification ability. For example, when deficient knowledge is
applied to a situation, a knowledge risk materializes. Relationship risk appears when ineffective collaboration
occurs. Process-engagement risk may be an issue when ineffective operational procedures are applied. These
risks directly reduce the productivity of knowledge workers, decrease cost effectiveness, profitability, service,
quality, reputation, brand value, and earnings quality. Intangible risk management allows risk management to
create immediate value from the identification and reduction of risks that reduce productivity.

Method

For the most part, these methods consist of the following elements, performed, more or less, in the following
order.

1. Identify, characterize, and assess threats


2. Assess the vulnerability of critical assets to specific threats
3. Determine the risk (i.e. The expected consequences of specific types of attacks on specific assets)
4. Identify ways to reduce those risks
5. Prioritize risk reduction measures based on a strategy

Principles of risk management

• Create value.
• Be an integral part of organizational processes.
• Be part of decision making.
• Explicitly address uncertainty.
• Be systematic and structured.
• Be based on the best available information.
• Be tailored.
• Take into account human factors.
• Be transparent and inclusive.
• Be dynamic, iterative and responsive to change.
• Be capable of continual improvement and enhancement.

Process

1. Identification of risk in a selected domain of interest


2. Planning the remainder of the process.
3. Mapping out the following:
o The social scope of risk management
o The identity and objectives of stakeholders
o The basis upon which risks will be evaluated, constraints.
4. Defining a framework for the activity and an agenda for identification.
5. Developing an analysis of risks involved in the process.
6. Mitigation of risks using available technological, human and organizational resources.

Identification

After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks
are about events that, when triggered, cause problems. Hence, risk identification can start with the source of
problems, or with the problem itself.

• Source analysis Risk sources may be internal or external to the system that is the target of risk
management.

Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an
airport.

• Problem analysis Risks are related to identified threats. For example: the threat of losing money, the
threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist
with various entities, most important with shareholders, customers and legislative bodies such as the
government.

When either source or problem is known, the events that a source may trigger or the events that can lead to a
problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding
of the project; privacy information may be stolen by employees even within a closed network; lightning
striking a Boeing 747 during takeoff may make all people onboard immediate casualties.

The chosen method of identifying risks may depend on culture, industry practice and compliance. The
identification methods are formed by templates or the development of templates for identifying source,
problem or event.

Assessment

Once risks have been identified, they must then be assessed as to their potential severity of loss and to the
probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost
building, or impossible to know for sure in the case of the probability of an unlikely event occurring.
Therefore, in the assessment process it is critical to make the best educated guesses possible in order to
properly prioritize the implementation of the risk management plan.

The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical
information is not available on all kinds of past incidents. Furthermore, evaluating the severity of the
consequences (impact) is often quite difficult for immaterial assets. Asset valuation is another question that
needs to be addressed. Thus, best educated opinions and available statistics are the primary sources of
information. Nevertheless, risk assessment should produce such information for the management of the
organization that the primary risks are easy to understand and that the risk management decisions may be
prioritized. Thus, there have been several theories and attempts to quantify risks. Numerous different risk
formulae exist, but perhaps the most widely accepted formula for risk quantification is:

Rate of occurrence multiplied by the impact of the event equals risk

Later research has shown that the financial benefits of risk management are less dependent on the formula
used but are more dependent on the frequency and how risk assessment is performed.

In business it is imperative to be able to present the findings of risk assessments in financial terms. Robert
Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financial terms. The Courtney formula
was accepted as the official risk analysis method for the US governmental agencies. The formula proposes
calculation of ALE (annualised loss expectancy) and compares the expected loss value to the security control
implementation costs (cost-benefit analysis).

Potential risk treatments

Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these
four major categories:

• Avoidance (eliminate)
• Reduction (mitigate)
• Sharing (outsource or insure)
• Retention (accept and budget)

Ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable
to the organization or person making the risk management decisions.
Risk avoidance

Includes not performing an activity that could carry risk. An example would be not buying a property or
business in order to not take on the liability that comes with it. Another would be not flying in order to not
take the risk that the airplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding
risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not
entering a business to avoid the risk of loss also avoids the possibility of earning profits.

Risk reduction

Involves methods that reduce the severity of the loss or the likelihood of the loss from occurring. For
example, sprinklers are designed to put out a fire to reduce the risk of loss by fire. This method may cause a
greater loss by water damage and therefore may not be suitable. Modern software development methodologies
reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact
that they only delivered software in the final phase of development; any problems encountered in earlier
phases meant costly rework and often jeopardized the whole project. By developing in iterations, software
projects can limit effort wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher capability at
managing or reducing risks. For example, a company may outsource only its software development, the
manufacturing of hard goods, or customer support needs to another company, while handling the business
management itself. This way, the company can concentrate more on business development without having to
worry as much about the manufacturing process, managing the development team, or finding a physical
location for a call center.

Risk retention

Involves accepting the loss when it occurs. True self insurance falls in this category. Risk retention is a viable
strategy for small risks where the cost of insuring against the risk would be greater over time than the total
losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that
are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible.
War is an example since most property and risks are not insured against war, so the loss attributed by war is
retained by the insured. Also any amount of potential loss (risk) over the amount insured is retained risk. This
may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage
amounts is so great it would hinder the goals of the organization too much.

Risk sharing

The term of 'risk transfer' is often used in place of risk sharing in the mistaken belief that you can transfer a
risk to a third party through insurance or outsourcing. In practice if the insurance company or contractor go
bankrupt or end up in court, the original risk is likely to still revert to the first party. As such in the
terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as a
"transfer of risk." However, technically speaking, the buyer of the contract generally retains legal
responsibility for the losses "transferred", meaning that insurance may be described more accurately as a post-
event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of
a car accident to the insurance company. The risk still lies with the policy holder namely the person who has
been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the
policy holder then some compensation may be payable to the policy holder that is commensurate to the
suffering/damage.

Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the
risk for the group, but spreading it over the whole group involves transfer among individual members of the
group. This is different from traditional insurance, in that no premium is exchanged between members of the
group up front, but instead losses are assessed to all members of the group.

Create a risk-management plan

Select appropriate controls or countermeasures to measure each risk. Risk mitigation needs to be approved by
the appropriate level of management. For example, a risk concerning the image of the organization should
have top management decision behind it whereas IT management would have the authority to decide on
computer virus risks.

The risk management plan should propose applicable and effective security controls for managing the risks.
For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing
antivirus software. A good risk management plan should contain a schedule for control implementation and
responsible persons for those actions.

The stage immediately after completion of the Risk Assessment phase consists of preparing a Risk Treatment
Plan, which should document the decisions about how each of the identified risks should be handled.
Mitigation of risks often means selection of security controls, which should be documented in a Statement of
Applicability, which identifies which particular control objectives and controls from the standard have been
selected, and why.

Implementation

Follow all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for the
risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without
sacrificing the entity's goals, reduce others, and retain the rest.

Review and evaluation of the plan

Initial risk management plans will never be perfect. Practice, experience, and actual loss results will
necessitate changes in the plan and contribute information to allow possible different decisions to be made in
dealing with the risks being faced.

Risk analysis results and management plans should be updated periodically. There are two primary reasons
for this:

1. To evaluate whether the previously selected security controls are still applicable and effective, and
2. To evaluate the possible risk level changes in the business environment. For example, information
risks are a good example of rapidly changing business environment.

There are essentially four ways to deal with each risk:

• Reject the Risk – Rejecting risk is the head-in-the-sand approach. Some managers tend to ignore
difficult challenges with the hope that they will simply disappear. This approach will rarely result in a
successful defense against security incidents.
• Accept the Risk – A common action to take is to accept the stated risk. For example, if the controls
necessary to eliminate or mitigate key vulnerabilities are a greater financial burden than the actual risk
impact, then it’s probably a good idea to use the security budget dollars in other areas.
• Transfer the Risk – An alternative to accepting higher than reasonable risk when the cost of controls is
too high is to purchase insurance to lower the business impact of an incident. This is also a common
risk management step.
• Mitigate the Risk – Risk mitigation typically focuses on vulnerability management. The reasonable
and appropriate implementation of administrative, technical, and physical controls can serve to
significantly reduce business risk.
Risk analysis

Risk analysis is a technique to identify and assess factors that may jeopardize the success of a project or
achieving a goal. This technique also helps to define preventive measures to reduce the probability of these
factors from occurring and identify countermeasures to successfully deal with these constraints when they
develop to avert possible negative effects on the competitiveness of the company.
Risk Control

Mitigate Risks.

We can mitigate risks by reducing either the probability or the impact. Remember that we identified the risk
by seeking uncertainty in the project. The probability can be reduced by action up front to ensure that a
particular risk is reduced. An example is to employ a team to run some testing on a particular data base or data
structure to ensure that it will work when the remainder of the project is put together around it. The technique
of building a pilot phase of the project is an example of risk mitigation.

Plan for Emergencies.

By performing the risk assessment, we know the most likely areas of the project which will go wrong. So the
project risk plan should include, against each identified risk, an emergency plan to recover from the risk. As a
minimum, this plan will name the person accountable for recovery from the risk, the nature of the risk and the
action to be taken to resolve it, and the method by which the risk can be spotted. A risk which has been
mitigated may still be a significant and dangerous risk - it is rare for a tiger to be converted to a kitten by
action before the event. These will require emergency plans as well as alligators and puppies.

Measure and Control.

The owner of each risk should be responsible to monitor his risk, and to take appropriate action to prevent it
from going on, or to take recovery action if the problem does occur.

Financial asset risk exposure

It is the practice of creating economic value in a firm by using financial instruments to manage exposure to
risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector,
Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires
identifying its sources, measuring it, and plans to address them. Financial risk management can be qualitative
and quantitative. As a specialization of risk management, financial risk management focuses on when and
how to hedge using financial instruments to manage costly exposures to risk.

Finance theory also shows that firm managers cannot create value for shareholders, also called its investors,
by taking on projects that shareholders could do for themselves at the same cost. When applied to financial
risk management, this implies that firm managers should not hedge risks that investors can hedge for
themselves at the same cost. This notion is captured by the hedging irrelevance proposition: In a perfect
market, the firm cannot create value by hedging a risk when the price of bearing that risk within the firm is
the same as the price of bearing it outside of the firm. In practice, financial markets are not likely to be perfect
markets. This suggests that firm managers likely have many opportunities to create value for shareholders
using financial risk management. The trick is to determine which risks are cheaper for the firm to manage than
the shareholders. A general rule of thumb, however, is that market risks that result in unique risks for the firm
are the best candidates for financial risk management.

Risk Exposure to human asstes

The loss of critical human assets or failure to minimize staff vulnerabilities can cause a serious threat to
companies or organizations. Some businesses find this out about the hard way. Others know the possibilities
and take steps to prevent the occurrence or to minimize the damage.

TYPES OF MARKET RISK

 Interest Rate Risk is the risk that the relative value of a security, especially a bond, will worsen due to an
interest rate increase. This risk is commonly measured by the bond's duration.

 Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the
principal or interest (coupon) or both)

 Liquidity risk arises from situations in which a party interested in trading an asset cannot do it because
nobody in the market wants to trade that asset. Liquidity risk becomes particularly important to parties who
are about to hold or currently hold an asset, since it affects their ability to trade.

 Volatility risk in financial markets is the likelihood of fluctuations in the exchange rate of currencies.
Therefore, it is a probability measure of the threat that an exchange rate movement poses to an investor's
portfolio in a foreign currency. The volatility of the exchange rate is measured as standard deviation over a
dataset of exchange rate movements.

 Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes,
people and systems, or from external events.
 Market risk is the risk that the value of an investment will decrease due to moves in market factors. The
four standard market risk factors are:

 Equity risk or the risk that stock prices will change.


 Interest rate risk or the risk that interest rates will change.
 Currency risk or the risk that foreign exchange rates will change.
 Commodity risk or the risk that commodity prices (i.e. grains, metals, etc.) will change.

TYPES OF BUSINESS RISKS


1. Strategic
2. Compliance
3. Financial
4. Operational
5. Other
 Strategic risks
The risks associated with operating in a particular industry.

They include risks arising from:

 merger and acquisition activity


 changes among customers or in demand
 industry changes
 research and development

 Compliance Risk
Compliance risks are those associated with the need to comply with laws and regulations.

 Financial risks
Financial risks are associated with the financial structure of your business, the transactions your business
makes, and the financial systems you already have in place.

 Identifying financial risk involves examining daily financial operations,


 Watching cash flow.

 Operational risks
Operational risks are associated with your business' operational and administrative procedures. These include:

 recruitment
 supply chain
 accounting controls
 IT systems
 internal rules, policies & procedures
 board composition

 Other Risks
 environmental risks, including natural disasters
 employee risk management, such as maintaining sufficient staff numbers and cover, employee safety and
up-to-date skills
 political and economic instability in your foreign markets - if you export goods
 health and safety risks

INTERNATIONAL MARKET RISKS


Economic risks
 Risk of insolvency of the buyer,
 Risk of protracted default - the failure of the buyer to pay the amount due within six months after the due
date
 Risk of non-acceptance
 Surrendering economic sovereignty

Political risks
 Risk of cancellation or non-renewal of export or import licences
 War risks
 Risk of expropriation or confiscation of the importer's company
 Risk of the imposition of an import ban after the shipment of the goods
 Transfer risk - imposition of exchange controls by the importer's country or foreign currency shortages
 Surrendering political sovereignty
Risk and Insurance

Insurance will not reduce your business' risks but you can use it as a financial tool to protect against losses
associated with some risks. This means that in the event of a loss you will have some financial recompense.
Insurance, is a form of risk management primarily used to hedge against the risk of a contingent loss.
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a
premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating
loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying
the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount
of insurance coverage, called the premium.

:: Insurarable Risk: What is insurable?


Insurable risk is a risk that meets the ideal criteria for efficient insurance. The concept of insurable risk
underlies nearly all insurance decisions.

For a risk to be insurable, several things need to be true:

 The insurer must be able to charge a premium high enough to cover not only claims expenses, but also to
cover the insurer's expenses. In other words, the risk cannot be catastrophic, or so large that no insurer
could hope to pay for the loss.

 The nature of the loss must be definite and financially measurable.

 The loss should be random in nature, else the insured may engage in adverse selection

Insurance:-
basic characteristics
1. Pooling of losses.

2. Payments of fortuitous losses.

3. Risk transfer.

4. Indemnification of losses.

1. POOLING OF LOSSES:-this is the spreading of losses incurred by the few over the entire group so that in
the process average loss is substituted for actual loss.
It involves grouping of a large number of exposure units so that the law of large numbers can operate to
provide a substantially accurate prediction of future losses. Ideally there should be a large number of similar
but not necessarily identical exposure units that are subject to the same peril.

2. PAYMENT OF FORTUITOUS LOSS


A fortuitous loss is one that is unforeseen and unexpected and occur as a result of chance. That means the loss
must be accidental and occur randomly. Insurance policies cover only accidental losses and not intentional
losses.

3. RISK TRANSFER.
Risk transfer means that a pure risk is transferred from the insured to the insurer who typically is in a stronger
financial position to pay the loss than insured. From the point of individual pure risks are premature deaths,
poor health, destruction of property personal lawsuits etc.
4. INDEMNIFICATION
Indemnification means that the insured is restored to his or her approximate financial position prior to the
occurrence of loss. This is feasible only in case of non life insurance like fire, marine and other non life
policies.

Classification of insurance:
The insurance industry in India can broadly classify in two parts. They are.
1) Life insurance.
2) Non-life (general) insurance.

1) Life insurance:-
Life insurance can be defined as “life insurance provides a sum of money if the person who is insured
dies while the policy is in effect”.
In 1818 British introduced to India, with the establishment of the oriental life insurance company in
Calcutta. The first Indian owned Life Insurance Company; the Bombay mutual life assurance society was set
up in 1870. The life insurance act, 1912 was the first statuary measure to regulate the life insurance business
in India. In 1983, the earlier legislation was consolidated and amended by the insurance act, 1938, with
comprehensive provisions for detailed effective control over insurance. The union government had opened the
insurance sector for private participation in 1999, also allowing the private
Companies to have foreign equity up to 26%. Following the opening up of the insurance sector, 12
private sector companies have entered the life insurance business.

Benefits of life insurance:


℘ Life insurance encourages saving and forces thrift.
℘ It is superior to a traditional savings vehicle.
℘ It helps to achieve the purpose of life assured.
℘ It can be enchased and facilitates quick borrowing.
℘ It provides valuable tax relief.

Thus insurance is found to be very useful in the lives of the person both in short term and long term.
2) Non-life (general) Insurance:-
Triton insurance co. ltd was the first general insurance company to be established in India in 1850,
whose shares were mainly held by the British. The first general insurance company to be set up by an Indian
was Indian mercantile insurance co. Ltd., which was stabilized in 1907. There emerged many a player on the
Indian scene thereafter.
The general insurance business was nationalized after the promulgation of General Insurance
Corporation (GIC) OF India undertook the post-nationalization general insurance business.
• The Insurance Regulatory and Development Authority (IRDA)
The Insurance Act, 1938 had provided for setting up of the Controller of Insurance to act as a strong and
powerful supervisory and regulatory authority for insurance. Post nationalization, the role of Controller of
Insurance diminished considerably in significance since the Government owned the insurance companies.
But the scenario changed with the private and foreign companies foraying in to the insurance sector.
This necessitated the need for a strong, independent and autonomous Insurance Regulatory Authority was felt.
As the enacting of legislation would have taken time, the then Government constituted through a Government
resolution an Interim Insurance Regulatory Authority pending the enactment of a comprehensive legislation.
The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for the
establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and
ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and
further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General insurance
Business (Nationalization) Act, 1972 to end the monopoly of the Life Insurance Corporation of India (for life
insurance business) and General Insurance Corporation and its subsidiaries (for general insurance business).
The act extends to the whole of India and will come into force on such date as the Central Government
may, by notification in the Official Gazette specify. Different dates may be appointed for different provisions
of this Act.
The Act has defined certain terms; some of the most important ones are as follows:
Appointed day means the date on which the Authority is established under the act. Authority means the
established under this Act.
Interim Insurance Regulatory Authority means the Insurance Regulatory Authority set up by the Central
Government through Resolution No. 17(2)/ 94-lns-V dated the 23rd January, 1996.
Words and expressions used and not defined in this Act but defined in the Insurance Act, 1938 or the
Life Insurance Corporation Act, 1956 or the General Insurance Business (Nationalization) Act, 1972 shall
have the meanings respectively assigned to them in those Acts
A new definition of "Indian Insurance Company" has been inserted. "Indian insurance company" means
any insurer being a company
(a) Which is formed and registered under the Companies Act, 1956
(b) In which the aggregate holdings of equity shares by a foreign company, either by itself or through its
subsidiary companies or its nominees, do not exceed twenty-six percent, Paid up capital in such Indian
insurance company
(c) Whose sole purpose is to carry on life insurance business, general insurance business or re-insurance
business?

Principles of Insurance
• Insurable Interest
• Utmost Good Faith
• Indemnity.
• Subrogation
• Proximate Cause
• Warranties.

Insurable Interest
For an insurance contract to be valid, the insured must posses an insurable interest in the subject matter of
insurance. The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the
existence of the subject-matter and is prejudiced by the death or damage of the subject-matter.

• The essential of a valid insurable interest are the following


• There must be a subject-matter to be insured.
• The policy-holder should have monetary relationship with the subject-matter
• The relationship between the policy-holders and the subject-matter should be recognized by law.
• The financial relationship between the policy-holders and subject-matter be such that the policy holder
is economically benefited by the survival or existence of the subject-matter and/or will suffer
economic loss at the death or existence of the subject-matter
• When a person fulfils the above criteria or when a person has such a relationship with the subject-
matter, it is said that he has insurable interest and it is only then that he can insure.

Utmost Good Faith

The doctrine of disclosing all material facts in embodied in the important principle ‘utmost good faith’ which
applies to all forms of insurance. Both parties of the insurance contract must be of the same mind (ad item) at
the time of contract. There should not be any misrepresentation, non-disclosure or fraud concerning the
material facts.

An insurance contract is a contract of uberrimae fidei, i.e., of absolute good faith where both parties of the
contract must disclose all the material facts truly and fully.

A material fact is one which affects the judgment or decision of both parties in entering to the contract. Facts
which count materially are those which knowledge influences a party in deciding whether or not to offer or to
accept such risk and if the risk is acceptable, on what terms and conditions the risk should be accepted. In case
of life insurance, the material facts or factors affecting the risk will be age, residence, occupation, health,
income etc, and in case of property insurance, it would be use, design, owner and situation of the property.

The utmost Good Faith says that all the material facts should be disclosed in true and full form. It means that
the facts should be disclosed in that form in which they really exist. There should be no concealment,
misrepresentation, mistake or fraud about the material facts. There should be no false statement and no half
truth nor any silence on the material facts.

PRINCIPLE OF INDEMNITY

Insurance is usually a contract of indemnity. The insurer agrees to pay for actual loss suffered by the insured,
and no more. The purpose of the contact is to shift the burden of risk from the insured to the insurer.

So, according to this principle, the insurer undertakes to put the insured, in the event of loss, in the same
position that occupied immediately before the happening of the event insured again.

DOCTRINE OF SUBROGATION

The principle of indemnity is also implemented by the principles of subrogation. This principle gives the
insurance company whatever right against third parties the insured may have as a result of the loss for which
the insurer paid him.

So the doctrine of subrogation refers to the right of the insurer to stand in the place of the insured, after
settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved.

PROXIMATE CAUSE

The rule is than immediate and not the remote cause in to be regarded. The maxim is sed causa proxima non-
remote spectature i.e., see the proximate cause and not the distant cause. The real cause must be seen while
payments of the loss. If the real cause of loss is insured, the insurer is liable to compensate the loss; otherwise
the insurer may not be responsible for loss.
So, Proximate cause means the active efficient cause that acts in motion a train of events which brings about
result, without intervention of any force started and working activity from a new and independent source.

PRINCIPLE OF CONTRIBUTION

Contribution is a right that an insurer has, who has paid under a policy, of calling other interested insurers in
the loss to pay or contribute ratably to the payment.

This means that if at the time of loss it is found that there is more than one policy covering the same loss then
all policies should pay the loss proportionately to the extent of their respective liabilities so that the insured
does not get more than one whole loss from all these sources.

If a particular insurer pays the full loss than that insurers shall have the right to call all the interested insurers
to pay him back to the extent of their individual liabilities, whether equally or otherwise.

WARRANTIES

There are certain conditions and promises in the insurance contract which are called warranties. A warranty is
that by which the assured undertakes that some particulars thing shall or shall not be done, or that some
conditions shall be fulfilled, or whereby he affirms or negatives the existence of a particular state of facts.

Warranties which are mentioned in the policy are called express warranties. There are certain warranties
which are not mentioned in the policy. These warranties are called express warranties.