NAME: VAISHALI NALE ;ROLL NO.

31
PROJECT: INNOVATIONS OF INSURANCE

MEANING AND DEFINITION OF INSURANCE:

Business of insurance is related to the protection of the economic values of assets.Every asset has a value.
The asset would have been created through the efforts of t he ow ne r. The a s s e t i s v a l u a bl e t o t he
o wn e r, be c a u s e he e xpe c t s t o g e t s o me benefits from it. The benefit may be an income or
something else. It is a benefitbecause it meets some of his needs. In the case of a factory or a
cow, the productgenerated by is sold and income generated. In the case of a motor car, it
providescomfort and convenience in transportation. There is no direct income.Every asset is expected
to last to last for a certain period of time during which it will perform. After that, the benefit may
not be available. There is a life-time for amachine in a factory or a cow or a motor car. None of them will
last forever. Theo wn e r i s a wa r e of t hi s a n d h e c a n s o ma na ge hi s a ff a i r s t ha t b y t he e n d
o f t ha t period or life-time, a substitute is made available. Thus, he makes sure that the value or
income is not lost. However, the asset may get lost earlier. An accident or some other unfortunate event
may destroy it or make it non-functional. In that case, the owner and those deriving benefits there from,
would be deprived of the benefita nd t h e pl a n ne d s u bs t i t ut e w ou l d n ot ha ve be e n r e a d y.
T he r e i s a n a dv e r s e or unpleasant situation. Insurance is a mechanism that helps to reduce
the effect of such adverse situations.

DEFINITIONS:

Insurance may be defined as a social device providing financial compensation for t h e e f fe c t s of

mi s f or t u ne , t he pa yme n t s be i ng ma d e f r o m t he a c c u mul a t e d contribution of all parties
participating in the scheme- D . S . H a n s e l l .
 NATURE & CHARACTERISTICS OF INSURANCE

Nature of Insurance Sharing of Risks:

Insurance is a co-operative device for division of risk which may fall on individual or his family
on the happening of some unforeseen eventssuch as sudden death of earning member, marine perils in
marine insurance, fire infire insurance and theft in case of general insurance.
1) Co-operative Device:
L a r g e n u m b e r s o f p e r s o n s s h a r e l o s s a r i s i n g d u e t o a particular risk. No doubt that
insurance is a co-operative device.

2)Valuation of Risk:
Before the insurance contract is entered into the evaluation of risk is made by which premium is
calculated which forms the basis of insurance contract.

3)Payment made on contingency:

T he i ns ur e r i s b ou nd t o p a y t o i ns u r e d wh e n certain contingency arises. The happening may be
due to death, fire, marine perilsetc

4) Amount of Payment:
T h e a m o u n t o f p a y m e n t d e p e n d s o n t h e v a l u e o f l o s s occurred due to the particular
provided insurance is there up to that amount.

5) Large Number of Insured Persons:

To make the insurance cheaper it is essentialto insure a large number of persons property.
6)Insurance is not Gambling:
In Insurance, uncertainty is covered into convertedinto certainty because the insurer promises
to pay a definite sum at damage or death.

7)Insurance is not charity:

Charity is given without consideration but insurance isnot possible without premium and thus insurance is
not charity.

Characteristics of Insurance:

1) It is a contract for compensating losses

2) Premium is charged for Insurance contract
3) The payment of Insured as per terms of agreement in the event of loss.
4) It is a contract of good faith
5) It is a contract for mutual benefit
6) It is an instrument of distributing the loss of few among many.
7) The occurrence of the loss must be accidental
8) Insurance must be considered with public policy
 IMPORTANCE OF INSURANCE:
Insurance provides security against loss of a given contingency. A sense of securityr e mo ve s t e ns i on
a nd f e a r s . I t s t i mul a t e s mo r e a n d be t t e r wo r k. The i n s ur a n c e p r o vi d e s a d e q ua t e
a mo un t t o t he d e pe nd e nt s a t t he e a r l y de a t h o f t he pr ope r t y owner to pay off the unpaid
loan. The insurance assists the family and provides adequate amount at the time of need. Systematic
saving is possible because regular premiums are required to be compulsory paid. Life Insurance
is a best media of saving. In India, the Insurance policies carry a special exemption from income
taxa n d e x c i s e d ut y. Al l t he n e e ds o f t h e i n di vi du a l s uc h a s f a mi l y ne e d s , ol d
a ge needs, re-adjustment needs, special needs are helped by insurance for meeting requirements
and necessary needs.Insurance provides against loss of human wealth. Loss of damage of property
canalso be indemnified by the insurance company. As insurance provides protection a ga i ns t
l o s s of pr op e r t y, i f a n y s u c h da ma g e a r i s e s , t h e a s s e t s c a n be r e pl a c e d without loss of
production. Thus, Economic development of the country is not affected. Adequate capital from
insurance company accelerates production cyclei n t h e c ou nt r y. Ec on o mi c gr o wt h o f t h e
c ou nt r y i s a s s u r e d a nd t h e pr o c e s s of g r o w t h i s a c c e l e r a t e d w h i c h i s e s s e n t i a l i n
a c o u n t r y l i k e I n d i a w h e r e t h e population is increasing very fast. In the form of premium the
Insurance Company gets lot of money supply from the public which insurance corporation put
intoproduction. Thus the money which would have come into circulation might havegone for productive
purposes.
 Re-ShapingtheInsuranceIndustry:
Considering innovation and insurance together are viewed by many as oxymoronic.
While the insurance industry demonstrated innovation during the 1960s and 1970s by
creating new products, services and distribution methods using technology, innovation
slowed measurably. But during this period of innovation, early-adoption fueled growth,
expanded customer access and competitive pricing through more efficient operations
enabled by technology. This value has diminished due largely to the Achilles heel of
legacy solutions and models. Once again, innovation and disruption are needed for a new
round of competition.

Increased competition, cost inflation, changing customer loyalty, and decreasing premium
growth are pushing the industry to change its paradigm again. Insurance companies must re-
assess business models and focus on insurance profitability fundamentals. Customer
expectations, as well as product/services access, are influenced by the Internet and by businesses
operating on it. Information transparency, product choices, behavioral/life-style shifts, and social
media providing recommendations are changing consumer mind-sets.

A fundamental power shift is underway, and the shift is moving away from the agent/broker and
insurance company to the consumer. The emergence of consumerization requires innovation.
Recent research from Global Futures and Foresight, Gartner and Celent highlight the current
focus on innovation and on how new thinking is identifying ways to use technology to unleash
opportunities. Some of these analyst insights indicate:

Innovation is a key differentiator, high priority and discussion point among insurers.
Mash-up business models, combining elements of multiple platforms and/or existing
models are increasingly viable.

The Internet is a critical thread through business strategies and innovation and must be
embraced.
 The Internet radically changed the way people communicate, interact and reconfigure
their relationship to business entities.

Product innovation will be a top priority among leading P&C insurers during the next
five years.

The customer is increasingly powerful relative to the company. Customers are

empowered through information transparency, social-network interactions and
information availability. Customer intelligence is critical to determine product and
service needs.

Customer experience of convenience and quality service levels are expected not desired.
Customer innovation and use of new technologies will be critical to support the
"consumer of the future."

Long-held, traditional business and technology strategies inhibit future success. Insurance
companies must embrace new technology to unleash innovation in critical areas, including:

Customer Innovation
Product Innovation

Service/Claims Innovation

Business Model Innovation

How can your company survive the shift underway? By innovating through new technologies
and ideas insurance companies can create a new foundation that leverages the shift and which
will enable future growth and transformation

Customer Innvation:
There has been a fundamental shift in consumer spending patterns, as restraint has
become the new mantra. Over the next 18 months to two years, consumers will make
critical decisions about discretionary spending, saving, or paying down debt, which will
have long-term bottom line implications. Nielsen Chairman and CEO David Calhoun
(July 30th 2009)
Increasingly, researchers find consumer social attitudes and behaviors have been irrevocably
altered by the financial crisis. Insurance companies are seeing decreased premiums from
customers who are switching policies to find lower cost/more value. Brand loyalty is becoming
a casualty of cost-comparisons.

Furthermore, the emergence of the Net-Generation is fundamentally changing businesses notes

Don Tapscott in Growing up Digital. As identified by Tapscott, the net-generation represents
88 million offspring produced by 85 million baby-boomers. The net-generation eclipses their
parents in terms of both size and impact. Members of the net-generation are the first to grow-up
surrounded by digital media, with technology incorporated into all aspects of their lives. This
fact alone will change their expectations of society, resulting in social transformation. They live
and breathe innovation.

Mary Meeker of Morgan Stanley identified one aspect of this innovation in her recent research.
Meeker notes the dramatic adoption of mobile Internet computing which is creating new
communication options for distribution and interaction within a fast-growing user-base.

Leading insurers are proactively responding, recognizing a new dynamic of interaction between
customers, mobile computing and online networks, re-constructing the marketplace with new
solutions. Recent Celent research identified that most of the top 10 U.S. insurers have a social
media presence. However, by contrast, very few UK insurers have a presence on social networks.

These innovative companies obviously recognize the fast-changing market dynamics and
opportunities that the Internet and social media provide. These opportunities include the facts
that:

People will share significantly more data online via communities and networks.
Insurance schemes based on groups will become more common as their popularity
increases.

Insurance companies will increasingly use public, shared data when assessing potential
customers using sophisticated analytics.
 Social networks are here to stay, and will have an increasing impact on how people
experience the Internet and other media.

Today, financial services aggregators make the best use of social networks which divert
customers from insurers.

Social networks currently offer an inexpensive route to the customer, one that customers
will actively promote if the content is right.

Insurance companies must decide how they can best use this opportunity to first advertise
and then to actively engage with their customers.

One leader in this new area of innovation is Geico. In business more than 70 years, ranked a top
5 U.S. auto insurer, and a leader in online quoting/selling, Geico expanded customer interaction
by connecting the companys website with Facebook, allowing customers to tell their stories,
including product reviews and cost savings by switching powerful customer
recommendations.

ProductInnovation
Product innovation, a key focus, includes both the product and how it is developed.
Technology innovations such as Web 2.0 allow customers to participate in product
innovation by co-creating products. This approach uses technology to link partners,
suppliers, and customers to co-create targeted, richer products quicker than traditional
methods.

While new products have been slow to market the last ten years, this co-creation or co-
development approach and the emerging new products and services are poised to disrupt market
dynamics. Products with built-in customer input and value will challenge product price wars
and redefine customer relationships. Examples include:

Accident Forgiveness, which keeps rates from going up because of an accident;

Safe Driving Bonus, which rewards consumers with up to 5 percent of their premiums
back for every 6 months of accident-free driving;
 New Car Replacement, which replaces a car if a policyholder has an accident during the
first three years of owning a new car;

Recover Care, which pays for assistance with cooking, cleaning, shopping, transportation
and yard work if the policyholder is injured in a car accident;

Lifetime Car Repair Guarantee; which reduces costs by using authorized repair shops to
guarantee all repairs; and

Disappearing Deductible, which rewards good driving with a reduction in the collision
deductible by $150 and which continues to provide reductions of $50 for each year of a
policyholders good driving record.

Service/ClaimsInnovation
Service is the moment of truth for insurance companies. Customer preferences are
changing and new access options are expanding beyond website self-service to ease-
of-access with any device.

With a growing mobile market, consumers want innovative ways to shop for and manage their
insurance. Insurance companies are expanding the online experience using mobile Internet
devices with mobile apps that:

Quote;
Pay bills;

Report claims;

Find repair-shops with Google maps;

Provide ID card access; and

Offer daily repair monitoring.

Today, service is about insurance companies being able to provide 24 X 7 X 365 access, all based
on customer preference.
Esurance, a direct-to-consumer auto insurer, is another example of innovation in insurance. The
company expanded their online services by offering self-service claims. Esurances solution
provides a revolutionary claims experience through reflexive, conditional questioning, real-time
triaging, assignment and scheduling repairs.

BusinessModelInnovation:
Insurance companies are reinventing their business models by transforming/optimizing
existing business capabilities to create a new business model. Consider the example of
one leading insurance company which launched a new auto brand that is 100 percent
Internet-based. The companys virtual operation is uniquely positioned to serve the
mobile/portable, Generation Y or Net-Generation insured. Customer demand is
highlighted by significant growth on the order of more than 1000 new customers per
month since the companys launch.

The operation captures, prepares and processes insurance from quote through claims, repair and
renewals to transact ALL insurance needs electronically, much like banking. The results are
impressive: The company reports double-digit new business conversions, as well as business
growth, decreased expense ratio and claims costs, better-than-average customer service and
repair quality exceeding expectations. This virtual insurance company has created an innovative,
relevant, modern operation by embracing trends and customer expectations to deliver top-tier
value and service.

SAASMODEL:

Innovation comes in many forms. Consider a leading workers compensation insurance company
which utilized a SaaS (software as a service) model to deliver new technologies which
transformed the companys business model. This innovation not only enhanced the companys
competitive position, but successfully mitigated and managed the companys risk exposure,
supported profitable growth, and provided a platform for expansion.

The companys approach included using a functionally-rich, modern solution with a SaaS
delivery model, thereby creating economic benefit by reallocating capital to expand their product
and service offerings. The SaaS deployment was critical to enhance the companys disaster
recovery capabilities, given their U.S. Gulf Coast location along hurricane alley. With a
multiple-hosted site strategy, the company was insulated from business disruptions.

This virtual insurance company believes insurance consumers will greatly influence SaaS-based
operations. As customers demand more, insurance companies must have quick deployment of
products, achievable in a Sass model. Access to current solution releases, enables continuous
innovation.

Five Top Technology Trends for the Insurance

Industry

Technology is certain to continue changing the way insurance firms operate, communicate and relate to
their customers and each other. Over the coming months, watch for these five trends to make a particular
impact on the U.S. insurance industry:

1. Mobility - Sales and Service in Motion

Insurers are setting strategies to take advantage of the proliferation of mobile communications-delivering
relevant and useful information and services via mobile devices. GEICO announced the launch of a new
Windows Phone 7 app called GEICO GloveBox that enables customers to pay bills, access insurance
policy information and even call for help when they get stuck on the road. For further details on GEICO's
plans to connect with customers via Windows Phone 7 smartphones, check out this video.

2. Data, Data, Data - Business Insights for the Masses

The lifeblood of the Insurance industry is data. The increased emphasis on data visualization is an
opportunity for insurers to extend BI and analytics from a small group of quantitative analysts to a broad
employee base. To help ensure consistent data collection and analysis, Zurich Financial Services built the
Global Risk Engineering Workstation (GREW), with the assistance of Wipro Technologies, based on the
xRM application development framework in Microsoft Dynamics CRM. The Risk Engineering team
now adds greater value to the overall organization, especially by helping the policy-underwriting group
and customers better understand risk exposure and identify potential solutions.

3. Multi-Channel Experience - Advisory Services for Growth

Over the past decade, insurers invested in single-channel approaches, such as direct, online self-service,
and agent portals-a strategy that worked well one channel at a time. Today's opportunity exists in
bringing these strategies together and investing in agency-related technologies to improve how an insurer
conducts business with its agents. Insphere Insurance Solutions serves the middle-income individual and
small-business markets in the United States by offering insurance from multiple carriers. In this case
study, the company details how the Microsoft Dynamics CRM in integration with VUE Software sales
performance management solutions makes the agent experience as productive and streamlined as
possible. This foundation will help Insphere double its field sales force over the next few years.

4. Social Media - Digital Marketing to Build Brand and Presence

The potential business value for insurers in such social media outlets as blogs, Facebook, and Twitter, is
growing for sales, brand development and staffing. While having a presence in key social networks is
increasingly important, a fresh, polished and interactive website is still fundamental to any online
sources. Financial services company Northwestern Mutual, with the help of Infosys Technologies,
upgraded its online brand and content management with Microsoft Office SharePoint Server to provide
a more engaging experience through a more polished online presence, enhanced search and improved
content management. The Northwestern Mutual case study is found here.

5. Simplification - Operations System Integration/Consolidation

Modernization of core systems using a phased approach to consolidate and retire redundant ones is a
priority for insurers of all sizes. While modernization is no small undertaking, the numerous options
today in packaged solutions and application development can reduce the cost, time and difficulty for
getting it done. Axa Seguros, part of the Axa Group, had a claims management system that lacked
development flexibility and could not easily be adapted to meet changing business needs. In addition,
because the system was obsolete, it required extensive maintenance and support, which was costly. Read
the AXA Seguros case study on how it decided to implement the Windows Azure Platform in a pilot
deployment for a new claims-management system.
 risk management. :

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange
for payment. It is a form of risk management primarily used to hedge against the risk of a
contingent, uncertain loss.

An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder,
is the person or entity buying the insurance policy. The amount to be charged for a certain
amount of insurance coverage is called the premium. Risk management, the practice of
appraising and controlling risk, has evolved as a discrete field of study and practice.

The transaction involves the insured assuming a guaranteed and known relatively small loss in
the form of payment to the insurer in exchange for the insurer's promise to compensate
(indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract,
called the insurance policy, which details the conditions and circumstances under which the
insured will be financially compensated.

Principles :

Insurance involves pooling funds from many insured entities (known as exposures) to pay for the
losses that some may incur. The insured entities are therefore protected from risk for a fee, with
the fee being dependent upon the frequency and severity of the event occurring. In order to be
insurable, the risk insured against must meet certain characteristics in order to be an insurable
risk. Insurance is a commercial enterprise and a major part of the financial services industry, but
individual entities can also self-insure through saving money for possible future losses.[

Insurability:
Risk which can be insured by private companies typically share seven common characteristics:
Large number of similar exposure units: Since insurance operates through pooling resources,
the majority of insurance policies are provided for individual members of large classes, allowing
insurers to benefit from the law of large numbers in which predicted losses are similar to the
actual losses. Exceptions include Lloyd's of London, which is famous for insuring the life or
health of actors, sports figures and other famous individuals. However, all exposures will have
particular differences, which may lead to different premium rates.

1. Definite loss: The loss takes place at a known time, in a known place, and from a known
cause. The classic example is death of an insured person on a life insurance policy. Fire,
automobile accidents, and worker injuries may all easily meet this criterion. Other types
of losses may only be definite in theory. Occupational disease, for instance, may involve
prolonged exposure to injurious conditions where no specific time, place or cause is
identifiable. Ideally, the time, place and cause of a loss should be clear enough that a
reasonable person, with sufficient information, could objectively verify all three
elements.
2. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or
at least outside the control of the beneficiary of the insurance. The loss should be pure, in
the sense that it results from an event for which there is only the opportunity for cost.
Events that contain speculative elements, such as ordinary business risks or even
purchasing a lottery ticket, are generally not considered insurable.

3. Large loss: The size of the loss must be meaningful from the perspective of the insured.
Insurance premiums need to cover both the expected cost of losses, plus the cost of
issuing and administering the policy, adjusting losses, and supplying the capital needed to
reasonably assure that the insurer will be able to pay claims. For small losses these latter
costs may be several times the size of the expected cost of losses. There is hardly any
point in paying such costs unless the protection offered has real value to a buyer.

4. Affordable premium: If the likelihood of an insured event is so high, or the cost of the
event so large, that the resulting premium is large relative to the amount of protection
offered, it is not likely that the insurance will be purchased, even if on offer. Further, as
 the accounting profession formally recognizes in financial accounting standards, the
premium cannot be so large that there is not a reasonable chance of a significant loss to
the insurer. If there is no such chance of loss, the transaction may have the form of
insurance, but not the substance. (See the US Financial Accounting Standards Board
standard number 113)

5. Calculable loss: There are two elements that must be at least estimable, if not formally
calculable: the probability of loss, and the attendant cost. Probability of loss is generally
an empirical exercise, while cost has more to do with the ability of a reasonable person in
possession of a copy of the insurance policy and a proof of loss associated with a claim
presented under that policy to make a reasonably definite and objective evaluation of the
amount of the loss recoverable as a result of the claim.

6. Limited risk of catastrophically large losses: Insurable losses are ideally independent
and non-catastrophic, meaning that the losses do not happen all at once and individual
losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their
exposure to a loss from a single event to some small portion of their capital base. Capital
constrains insurers' ability to sell earthquake insurance as well as wind insurance in
hurricane zones. In the US, flood risk is insured by the federal government. In
commercial fire insurance it is possible to find single properties whose total exposed
value is well in excess of any individual insurer's capital constraint. Such properties are
generally shared among several insurers, or are insured by a single insurer who
syndicates the risk into the reinsurance market.

Insurers' business model

Underwriting and investing:

The business model is to collect more in premium and investment income than is paid out in
losses, and to also offer a competitive price which consumers will accept. Profit can be reduced
to a simple equation:

Profit = earned premium + investment income - incurred loss - underwriting expenses.

Insurers make money in two ways:

1. Through underwriting, the process by which insurers select the risks to insure and decide
how much in premiums to charge for accepting those risks;
2. By investing the premiums they collect from insured parties.

The most complicated aspect of the insurance business is the actuarial science of ratemaking
(price-setting) of policies, which uses statistics and probability to approximate the rate of future
claims based on a given risk. After producing rates, the insurer will use discretion to reject or
accept risks through the underwriting process.

At the most basic level, initial ratemaking involves looking at the frequency and severity of
insured perils and the expected average payout resulting from these perils. Thereafter an
insurance company will collect historical loss data, bring the loss data to present value, and
compare these prior losses to the premium collected in order to assess rate adequacy. [8] Loss
ratios and expense loads are also used. Rating for different risk characteristics involves at the
most basic level comparing the losses with "loss relativities" - a policy with twice as many losses
would therefore be charged twice as much. More complex multivariate analyses are sometimes
used when multiple characteristics are involved and a univariate analysis could produce
confounded results. Other statistical methods may be used in assessing the probability of future