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FUNDAMENTALS OF INSURANCE & INSURANCE INDUSTRY

Insurance
Insurance the business of insurance is related to the protection of economic values of assets System of combining many loss exposures so that the cost of unexpected losses are shared by all participants. A mutual cover of numerous independent, assessable, economic (exposure )units facing similar hazards. Insurance is a method in which a large number of people exposed to a similar risk make contributions to a common of few are spread losses suffered Risks fund out of which the over 2 by the unfortunate few due to accidental events are

System of insurance deals with risk.

Risk means uncertainty about future loss or in other

words, the inability to predict the occurrence or size of a loss; all accidental happenings which produce a monetary loss. Classification of Risks
Critical/ Important Catastrophi Vs. c Risk Unimportan t Risk 3 Dynamic Vs. Static Risk Pure Vs. Fundamenta Speculativ l e Risk Vs. Particular Risk

CATASTROPHIC RISK Classification is based on the


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

IMPORTANT RISK May not spell doom, but may upset


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

UNIMPORTANT RISK-Temporary illness or accident


which are less damaging.

DYNAMIC Vs. STATIC RISK-Dynamic risk arise from


the changes that take place in society like economically, socially, technologically, environmentally and politically. Such risks are caused by perils which have national consequence whereas static risks are caused by perils which have no consequence on the national economy.

PURE/SPECULATIVE RISKS- if the occurrence of an


event results in no change in the situation or a loss with no possibility of a gain, it is k/as pure risks otherwise termed as RISK OF TRADE.Eg. Fire, storm etc. Where the outcome may be either a loss or profit, the risk is k/as speculative risks (all business risks) otherwise termed as TRADE RISK.

FUNDAMENTAL/PARTICULAR RISKS
Fundamental Risk are those which affect the whole society. They are impersonal in both cause and effect. Particular risk affect mainly the individual or the firm and arise from factors which are to some extent controllable.
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Several commonly used words have rather precise meanings

when they are used in connection with insurance


LOSS, PERIL, HAZARD
LOSS an unexpected reduction or disappearance of

economic 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

HAZARD S

Increases PERIL the likelihood of S

Causin g

LOSS ES

Cigarette
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Fire
Fig.: Hazards, Perils and Losses

Fire Damage

Methods of Handling Risk

Risk Avoidance,
Risk Retention, Loss Control- Loss frequency and loss severity
Loss prevention and reduction

Risk Transfer - Insurance

Functions of insurance
To provide protection against financial losses

caused by unforeseen events, Provides assistance to business enterprise, Provides financial stability to trade and industry and thus benefits the entire community, Provides financial stability to a family, Insurance encourages invisible export, Indirectly encourages loss-prevention and lossreduction, Provides capital for the economic development of the country, Earns valuable foreign exchange for the country by

How insurance handles risk

Insurance companies or insurers accepts the risk which are transferred to them. This process involves 3 other concepts: 1)Chance Of Loss (probability) can be defined as the probable number of losses out of a given number of loss exposures. 2)Degree Of Risk it is the extent of uncertainty about the future losses; it is the extent to which the losses are unpredictable

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3)Law Of Large Numbers The law of large numbers is a mathematical principle stating that as the number

A risk becomes insurable if the following requirements

are complied with: 1)the insured must suffer financial loss if the peril operates, 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 of insurance 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 to property Division on organizational basis whether provided by Govt. or pvt. insurance companies or by public sector insurance 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 insurance are considered as separate divisions under miscellaneous insurance group

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In modern times general insurance is classified


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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

Non-Life

Marine Miscellaneou s Insurance Insurance Insurance Insurance of of of Liability of Interest Persons Property

Fire

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American way of classification of insurance

INSURANCE
Health Property & Casualty

Life

Life Annuity Insurance

Marine NonMarine Anything which does not fall under Medical Disability property Expenses Income Insurance Insurance

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Insurance operations
Starts with Marketing

Through 1)Intermediaries 2)Direct 3)Bancassurance 4)Tie ups Pricing - done with the help of actuaries based on the following: 1)Classification 2)Discrimination; and 3)Experience
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Underwriting involves 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/byelaws, rules/regulations set by the Govt. The main purpose of insurance regulations is to safeguard the financial stability of the insurance companies so that they will be in a position to pay the claims 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 report
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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 payment

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