Professional Documents
Culture Documents
Chapter 1906
Chapter 1906
INSURANCE AND
RISK MANAGEMENT
[As per New Syllabus (CBCS) for First Semester, B.Com. (Hons.),
Delhi University w.e.f. 2015-16]
Disclaimer – The material in this book has been compiled from many sources including books, magazines,
report of various agencies, websites, research article etc. nationally and globally. These sources have
been quoted appropriately. If there is any resemblance to the material in the book, the author shall not be
responsible in any manner what so ever. The ideology behind this book is to provide a study material for
the students and readers and not for any commercial purpose.
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Dedicated to the
Sacred Memory of my father
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Preface
With the increasing dynamism of risk and the growth of professional risk
management, the insurance device has become more and more popular these days.
Looking at the recent catastrophic events, demand for insurance has increased
tremendously with more and more demand for complex and sophisticated products.
Also, the liberalization of markets especially in developing countries has accentuated
the need for risk products. Also the recent government policy initiatives like crop
insurance, financial guarantee schemes for unemployed, various social security
programmes and raising limits of FDI in insurance has resulted into a sudden spurt
in the demand of insurance professionals. More and more academic institutions all
over the countries are offering highly specialized insurance programmes to cater to
this demand.
Recently, the universities in India and abroad have introduced insurance as a
specialized study both at graduate and postgraduate level. This has accentuated the
dire demand for the literature on insurance in the Indian context. It is expected that
the book shall be useful to the students and as well as the trainers. I would be highly
obliged for comments from the readers that would further help me in improving the
book.
ORGANIZATION OF THE BOOK
The book has been organized into five modules.
Part 1 introduces the concept of risk management to the readers. It conceptualizes
the risk definitions, classes of risk; risk management process also discusses the
various aspects of disaster risk management.
Part 2 discusses the concept of insurance, its need and presents a global view of
insurance. Also, various reinsurance strategies have been discussed.
Part 3 enumerates the underlying principles of insurance. Legal aspects of insurance
and various non-life insurance categories, viz., Fire, Marine, Motor and Health
insurance have been discussed.
Part 4 deals with IRDA legislation, rules and regulations and other important aspects
of insurance.
I hope that book shall definitely be useful to the readers and provide an in-depth
insight into the various facets of insurance business in India.
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Acknowledgements
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Syllabus
Duration: 3 Hrs
Unit I:
Concept of Risk, Types of Risk, Managing Risk, Sources and Measurement of Risk, Risk
Evaluation and Prediction. Disaster Risk Management, Risk Retention and Transfer.
Unit II:
Concept of Insurance, Need for Insurance, Globalization of Insurance Sector, Reinsurance,
Co-insurance, Assignment. Endowment.
Unit III:
Nature of Insurance Contract, Principle of Utmost Good Faith, Insurable Interest,
Proximit Cause, Contribution and Subrogation, Indemnity, Legal Aspects of Insurance
Contract, Types of Insurance, Fire and Motor Insurance, Health Insurance, Marine
Insurance, Automobile Insurance.
Unit IV:
Control of Malpractices, Negligence, Loss Assessment and Loss Control, Exclusion of
Perils, Actuaries, Computation of Insurance Premium.
Regulatory Framework of Insurance: Role, Powers and Functions of IRDA, Composition
of IRDA, IRDA Act, 1999.
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Contents
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Chapter 4 Disaster Risk Management 61 – 70
4.1 Disaster – Meaning and Types
4.2 Disaster Risk Management Strategies
4.3 Disaster Risk Transfer Strategies
4.4 Disaster Risk Management – Changing Philosophy
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Part III INSURANCE CONTRACTS, PRINCIPLES AND TYPES
Chapter 9 Insurance Contracts 131 – 145
9.1 Regulation of Insurance Business in India
9.2 Legal Framework of Insurance Business
9.3 Indian Contract Act, 1872 Applied to Insurance Contacts
9.4 Insurance Contracts – Important Features
9.4.1 Elements of Insurance Contract
9.4.2 Maxims Applicable to Insurance Contracts
9.5 Laws Relevant to Insurance
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Chapter 12 Fire Insurance 205 – 229
12.1 Fire Insurance Contracts
12.1.1 Features of a Fire Insurance Contract
12.1.2 Application of Insurance Principles to Fire Insurance
12.2 Fire Insurance Proposals
12.2.1 Warranties
12.3 Fire Insurance Coverages
12.3.1 Standard Fire Policy
12.3.2 Standard Policy Coverages
12.4 Special Coverages
12.4.1 Reinstatement Value Policies
12.4.2 Policies for Stocks
12.4.3 Consequential Loss Policies
12.5 Fire Underwriting and Rating
12.5.1 Rate Fixation in Fire Insurance
12.5.2 Fire Insurance Documents
12.5.3 Cancellation of Policies
12.5.4 Mid-term Cover
12.5.5 Claims Experience Discount
12.5.6 FEA Discount
12.6 Fire Insurance Claims
12.6.1 Fire Claims Procedure
12.6.2 Extent of Indemnity
12.6.3 Valuation under Valued Policies
12.6.4 Valuation under Unvalued Policies
12.7 Progress of Fire Insurance
12.7.1 Profitability Before Privatization
12.7.2 Post-liberalization Progress
12.8 Fire Reinsurance – An Illustration
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Part I
Introduction to
Risk Management
2 Insurance and Risk Management
CHAPTER 1 UNDERSTANDING RISK
Objectives
After reading this chapter, you will be able to understand
● Concept of Risk
● Risk vs. Uncertainty
● Loss, Perils and Hazards
● Types of Risks
● Risk for Banks and Financial Institutions
● Categories of Pure Risks
● Risk Perception and Misconceptions
Human beings are considered the most intelligent creatures on this earth. The thinking power
available to human beings is enormous and this has led human beings to define their style of
living and distinguish between good and bad situations. The criteria for deciding whether the
situation is good or bad depend upon individual’s perception. However, one thing is sure —
that human beings always prefer and strive for happy situations and wants to avoid the
adverse ones. Actually, the zeal to be happy always has given birth to the jargon risk!
3 Harrington S.E. and G.R. Michaus, Risk Management and Insurance, McGraw-Hill, 1999, p. 3.
4 Vaughan, op. cit., p. 3.
Risk Uncertainty
Quantifiable Non-quantifiable
Statistical Assessment Subjective Probability
Hard Data Informed Opinion
8 Dorfman, op.cit., p. 5.
9 Oxford Advanced Learner Dictionary, op.cit., p. 622.
10 Lam James (2001), Enterprise Risk Management – From Incentives to Controls, Wiley.
Personal Risks
Personal risks are risks that directly affect an individual. They involve the possibility
of the complete loss or reduction of earned income. There are four major personal
risks.
Risk of Premature Death: Premature death is defined as the death of the household
head with unfulfilled financial obligations. If the surviving family members receive
an insufficient amount of replacement income from other sources or have insufficient
financial assets to replace the lost income, they may be financially insecure.
Premature death can cause financial problems only if the deceased has dependents to
support or does with unsatisfied financial obligations. Thus, the death of a child aged
5 is not premature in the economic sense.
Risk of Insufficient Income during Retirement: It refers to the risk of not having
sufficient income at the age of retirement or the age becoming so that there is a
possibility that individual may not be able to earn the livelihood. When one retires,
he loses his earned income. Unless he has sufficient financial assets from which to
draw or has access to other sources of retirement income such as social security or a
private pension, he will be exposed to financial insecurity during retirement.
Risk of Poor Health: It refers to the risk of poor health or disability of a person to
earn the means of survival. For example, losing the legs due to accident, heart
surgery that is costly. Unless the person has adequate health insurance, private
savings or other sources of income to meet these losses, he will be financially insecure.
The loss of insecurity is significant if the disability is severe. In case of long-term
Misconceptions of Risk
Risk can be eliminated.
Risk management is always better.
Risk set is finite.
Risk management is implied/automatic.
Top valued (rated) organizations have best risk management practices.
Key Terms
Credit Risk Market Risk
Risk Dynamic Risk
Suggested Readings
Carl L. Pritchard (2005), Risk Management: Concepts and Guidance, Third
Edition, CRC Press.
Emmett Vaughan and Therese Vaughan (2002), Essentials of Risk Management
and Insurance, John Wiley and Sons Inc.
Harold D. Skipper and W. Jean Kwon (2008), Risk Management and Insurance
Perspectives in Global Economy, Dreamtech Press.
Hull (2016), Risk Management and Financial Institutions, Wiley.
Web Resources
www.erisks.com
www.rims.org
www.risk.net
www.bimaonline.com