Insurance Planning

Learning Goals
6.1. Risk management, Meaning and objective, law of large numbers
6.2. Personal risk management, Risk control and risk financing
6.3. Nature and Function of Insurance; Categories of insurance, features:
Insurance of Assets, Insurance of Liabilities, Term, and Health
6.4. Life insurance Needs analysis (Human life approach, Needs approach,
Multiple Approach, Capital needs analysis approach)
6.1 Risk Management, Law of Large
Numbers
Meaning of Risk
Risk implies a condition where there is a possibility of an adverse deviation
from a desired outcome that is expected or hoped for.
Meaning of Risk Management
Identifying potential risks and making decisions so as to reduce the possibility
and/ or impact of the risks. It is overall a systematic approach to
analysing risk and evaluating methods that will reduce the impact in the
event the risk turns into reality, e.g. Loss of life, damage to an asset (house,
car etc).
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Objective
The objective of Risk Management is to avoid, minimize or control the impact
of losses to an individual due to any accident/ catastrophe that may
be caused to him.
Methods of Risk Management
1. Avoidance – Trying to avoid the risk as far as possible through measures
which are non hazardous.
2. Reduction – Steps taken for reduction in chances and severity of the
losses.
3. Retention – Keeping or retaining the risk with oneself.
4. Transfer – Handing over one’s risk to someone else. A commercial and
the most important form of ‘transfer’ of risk is through insurance.
5. Sharing – Having common pools called ‘risk sharing pools’ to which
every member would contribute his share. It is a private arrangement.
Characteristics of Insurance
• Pooling of losses - Spreading of losses incurred by a few over the entire
group, so that in the process, average loss is substituted for actual
loss. Grouping of large number of similar exposure units helps operation
of law of large numbers, exposing to similar perils.
• Law of Large Numbers: “Greater the number of exposures, the more
closely will the actual results approach the probable results that are
expected from an infinite number of exposures”
Advantage of Law of large numbers is sharing of losses & prediction of
future losses.
• Fortuitous losses – A fortuitous loss is unforeseen & unexpected and
occurs as a result of chance. This could be accidental and at random.
• Risk transfer - Risk which involves the chances of loss or no loss but
never a gain is referred to as Pure Risk. It is transferred from insured to
insurer, who typically is in a stronger financial position to pay the loss
than the insured.
• Indemnification - Insured is restored to his or her approximate financial
position prior to the occurrence of the loss.

Source:ncfm_cpfa