INSURANCE AND RISK MANAGEMENT

UNIT III,IV

INTRODUCTION
The amount you pay for your health insurance every month. In addition to your premium, you
usually have to pay other costs for your health care, including a deductible, copayments, and
coinsurance. If you have a Marketplace health plan, you may be able to lower your costs with a
premium tax credit.
DEFINITION
An insurance premium is the amount of money an individual or business pays for an
insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home,
and life insurance. Once earned, the premium is income for the insurance company. It also
represents a liability, as the insurer must provide coverage for claims being made against the
policy. Failure to pay the premium on the individual or the business may result in the
cancellation of the policy.

 An insurance premium is the amount of money an individual or business must pay for an
insurance policy.
 Insurance premiums are paid for policies that cover healthcare, auto, home, and life
insurance.
 Failure to pay the premium on the part of the individual or the business may result in the
cancellation of the policy and a loss of coverage.
 Some premiums are paid quarterly, monthly, or semi-annually depending on the policy.
 Shopping around for insurance may help you find affordable premiums.

Factors Affecting Insurance Premiums

Insurance premiums depend on a variety of factors including the type of coverage being
purchased by the policyholder, the age of the policyholder, where the policyholder lives, the
claim history of the policyholder, and moral hazard and adverse selection. Insurance premiums
may increase after the policy period ends, or if the risk associated with offering a particular
type of insurance increases. It may also change if the amount of coverage changes.

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 1
Manaagne===
One of the most crucial financial decisions in one’s life is to invest in insurance policies. Life
insurance, to be precise, acts as a safeguard for your family’s well-being after you. As a
policyholder, it is crucial for you to understand insurance premium meaning and recognize your
specific requirements to determine the sum assured accurately. Life insurance premiums are in
place to keep the policy in force. These insurance premiums are carefully determined based on
several factors related to the insured’s life. Therefore, you must understand these factors that
may affect the amount, making it higher or lower, including the possible discount on insurance
premium payment.
 Age
It is often suggested to purchase an insurance policy at a younger age to avoid higher life
insurance premiums. Insurance providers consider age to be one of the primary factors
while stipulating the amount.

 Gender
The gender of the insured is also significant for insurers. It is so because studies suggest
that women, on average, live nearly five years longer than men. Therefore, women might
enjoy slightly lower life insurance premiums.

 Habits
As a part of insurance premium meaning, you should know that habits such as smoking
or drinking also affect the life insurance premium as they put the individual at a higher
risk of ailments.
 Medical History
The medical history is an essential factor since it dictates the life risks associated with the
insured. In case of family history of critical illnesses such as cancer and heart diseases,
the insurance premium might be higher.
 Profession
The nature of your work also determines the insurance premium. Individuals employed in
high-risk occupations such as the mining industry, oil and gas may have to pay a higher
amount.

 Lifestyle Choices
IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 2
Manaagne===
 People who regularly engage in life-risking activities such as mountain climbing, racing, and
other such activities may cause the insurer to stipulate a higher insurance premium

INSURANCE DISTRIBUTION CHANNEL

Distribution is the process of delivering your products or services into your target markets.
Distribution channels are keys to success for all insurance companies. They ensure that
products and services provided by insurers reach target customers in the most linear and cost-
efficient manner. A variety of distribution channels with various strategies and positions are
available in the market. Distribution channels are divided into the following two types:

1. Direct channels:
These channels make direct contact between insurers and customers. In the direct channel
total control over how the product is marketed and sold is in the hands of the insurer.

2. Indirect channels:
Indirect channels are those in which there is no direct contact between insurers and
customers. It includes insurance brokers, reinsurance brokers, financial organizations,
independent financial advisers, managing general agents, retail organizations, affinity groups,
peer-to-peer, broker networks, and aggregators.
In today’s world, Insurance companies have a lot of delivery methods for their products and
services. Digital marketing is substantially on the rise but along with this, we can’t undermine
the efforts of agents or brokers in insurance marketing. A variety of distribution channels are
currently used in the market place, and some insurers utilize a combination of distribution
channels. The following are some distribution channels of insurance products in the US:
 Bank-led channel
The bank-led distribution channel is also known as ‘Banc assurance’. In this channel, banks
and insurance carriers join together to sell insurance products to consumers. The passage of
the Financial Modernization Act of 1999, was predicted for the U.S. market which ensured the
growth of the bank-led channel in the U.S. The channel utilizes the strengths of both the
insurance carriers and banks to not just distribute insurance policies but also to increase
customer satisfaction and maximize their own profits by minimizing the costs. Banks with
their expanded reach in the financial services market were the perfect vehicle to assist the
insurance carriers. Thus banc assurance channel appeared like a boosting fuel for insurance
companies.
 Peer to peer (P2P) groups
Peer to peer (P2P) group is a recent innovation in the insurance industry which attracts many
customers towards itself. P2P insurance is a risk-sharing network where a group of people
pools their premiums together to insure against a risk. Peer-to-Peer Insurance reduces the
conflict that inherently arises between a traditional insurer and a policyholder when an insurer

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 3
Manaagne===
 keeps the premiums and it doesn’t pay out in claims. The P2P insurance pool is comprised of
family members, friends, or individuals with similar interests who team up to contribute to
each other’s losses. This type of insurance may also be known as “social insurance.”
 Direct response marketing
Direct response marketing may be defined as the use of mass media advertising to generate
inquiries directly to insurers. It does not involve the sale of insurance through local agents. In
direct response marketing, employees of the insurer deal with applicants and customers
through telephone, by personal meeting or more frequently via the Internet. Direct selling
continues to be the dominant channel of distribution for insurance companies.
 The Internet channel
The Internet is likely to be the latest and important of the new forms of insurance distribution
channel. It is already apparent that customers are using new Internet technology in almost all
business fields. Web technology supports multiple marketing channels, including agents, sales
of insurance products and call centers. However, insurers have been slow to get to this
distribution channel.
 Direct mail marketing
It means selling insurance products by dealing directly with consumers rather than through
intermediaries. Direct mail campaigns deliver better overall response than digital channels. In
this marketing channel, there is no need to share profit margins and the insurer has complete
control over the sales process.

CLAIM SETTLEMENT IN LIFE INSURANCE AND NON- LIFE INSURANCE

Life insurance claim settlement is a process where the claimant/beneficiary
can make a request to the policyholder's insurance company to avail the death
benefits under the life insurance of the insured in case of the policyholder's
death.
Documents Required for Life Insurance Claims
Following is the list of some of the mandatory documents required for life insurance claims:

 Claim Forms (Duly signed and attested)

 Original Policy Documents
 Death Certificate attested by the local authorities
 Copy of FIR/Post Mortem Reports/Punchnama
 Medical Records (including hospital discharge summary)
 Claimant’s Photo ID Proof
 Claimant’s Address Proof
 Copy of Cancelled Cheque/Bank Statement/Bank Passbook

Claim Settlement Process of Life Insurance Policy Claims

Listed below is the process of life insurance claim settlement followed by most of the insurance
companies. However, every insurance operates differently hence the claim settlement process for
IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 4
Manaagne===
a life insurance claim can differ from insurer to insurer:

Step 1: Claim Intimation: The beneficiary is required to intimate the claim either in a written
format or online (on the insurance company’s official website) to the insurance company as soon
as possible. The claim intimation should have the information of the policyholder and the
claimant such as policy number, name of the policyholder, cause of death, place of death, and
claimant details. The beneficiary can visit the insurance company for claim intimation or
download the forms online from the insurance company’s website.

Step 2: Submission of Documents: The insurance company requires some documents to settle
the claim, which the beneficiary is required to submit within the stipulated time. With help of the
relevant documents, the insurance company will be able to carry out an investigation if required
or ask for any additional documents required. Submission of relevant documents at this stage is
necessary to avoid any possibility of fraud.

Step 3: Claim Evaluation and Settlement: After all the documents have been submitted to the
insurance company and the claim is thoroughly evaluated a settlement decision is taken by the
insurance company. Usually, it takes 30 days for an insurance company to settle a claim upon
receiving the documents submitted. If an investigation is required in any case the insurance
company takes 120 days to settle a claim.

Common Reasons For Rejection of Life Insurance Claims

Here is some common reason for rejection of life insurance claims:

1. Mentioning false inaccurate or false information in the application for a life insurance plan.

2. Not paying premiums on the due date or during the grace period.

3. Causes of death that are not covered by the insurance policy such as suicide before the
completion of the first policy term, accidental death caused by overconsumption of
alcohol/drugs.

4. A fraudulent claim made by the beneficiary.

Insurance in India can be divided into life and non-life. General insurance is highly popular as

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 5
Manaagne===
these policies provide financial compensation when losses occur. These losses can be caused due
to various incidents like accidents, diseases, fire, natural or man-made mishaps, etc.

Non-life insurance is, the losses that are incurred from a specific financial event are
compensated to the insured this is called non-life insurance. General insurance, property
insurance and casualty insurance are other names of non-life insurance. It can be defined as
any insurance that is not related to life insurance. People, legal liabilities and properties are
covered under a non-life insurance policy.

Non-life policies features include the following:

 The amount specified in the policy is the sum insured which, during the policy period,
symbolizes the insurer’s maximum liability for claims. The insurer may specify the
available amount of sum insured.

 The policy period of a non-life insurance plan is usually short, i.e., one year. The duration
can be longer depending upon the type of insurance.

 The premium of the policy is paid right before the insurance company issues the policy.
When an application for insurance is received by the company, they assess the risk
involved depending upon the type of cover required. For example, under health insurance,
the age, medical history, and current medical status of a person will be taken into account
before the insurance policy is issued.

 Any claim is not fully borne by the insurance company. The policyholder needs to pay a
small share; this share is called a deductible.

 If no claims are made under a general insurance policy, then the policyholder is awarded a
discount called No Claim Bonus. This is a cumulative discount on the premium of the
policy that increases till it reaches a certain number.

Importance of Non-Life Insurance Policy:

Here are the reasons why buying a non-life insurance policy is important:

 Financial security at the time of need is one of the major upsides of buying a non-life
insurance policy.

 The insurance company will bear the cost of a financial liability. Thus, such risks are
carried over to the insurance company from the policyholder.

 Peace of mind related to possible financial crises.

Non-Life Insurance Claim Settlement Process:

The insurance company will review the claim application and begin an investigation into the
IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 6
Manaagne===
matter. They may ask for more documents and evidence of the incident, for example, an accident
claim, to help them understand the event better. Once all the process is complete the insurance
company will settle the claim as per terms and conditions of the insurance policy.

Documents Required for Claiming Non-Life Insurance:

Usually the following set of documents will be required to claim against a non-life insurance
policy:

1. Proposal form

2. Age proof

3. Address proof

4. Medical examination report for health and RC book of the vehicle for the motor insurance.

5. Income proof

6. Invoice of the vehicle

RISK AND ITS MANAGEMENT

Risk management is a process carried out by an organization that seeks to identify measure,
monitor and control risks an organization faces. Business is complex and where there is
complexity there is risk. Business managers find them self with many decisions to make,
constrained resources, competing priorities and environmental factors to consider as well.
Businesses face many different risks such as environmental risk, political risk, business risk,
financial risk and more.

Objectives of Risk Management

Risk managements objective is to find out which risks a business faces, find ways to quantify
and measure those risks, create methods to monitor risks and finally come up with treatment
methods which mitigate or eliminate risk. The overall objective to create a business that is less
susceptible to risks and therefore enhance the safety of investors in the business.

 Identify: Identification of risks is the first objective of risk management. Risk exists
because the future is never certain. In any given aspect of businesses operations there are
always variables at play. While it is possible for variables to move positively it is the
potential of a negative movement that risk management is mostly concerned with. Let’s
take the simple example of a farmer who plants crops. Among the risks that can be
identified by this farmer are drought, conversely floods, insects, disease, theft and price
drops. Through all these things the plans for harvest and income can be affected
adversely much to the detriment of the farmer. As a primary objective risk management
must identify all possible risks to the future viability of a venture.

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 7
Manaagne===
  Measure: Measurement of risks is the next step in the objectives of risk management.
Once the risks have been identified it is then important to create a system through which
the risks can be measured and their potential impact quantified. ISO 31000 on Risk
Management updates the standard for the risk register. The risk register is a document
that is used to quantify risk values in monetary terms and identify the likelihood of the
risk occurring. Let us continue with our crop farmer example. The probability of drought
or floods is based on weather patterns in the past while the impact is based on the
sensitivity of the crop to the conditions. These details would be kept in a risk register and
this would give our farmer an overview of the degree of risk involved with each variable
and the value at risk; the potential amount that can be lost through that risk. This
information will be important later on. Measuring risks is important for any business.

 Monitor: Once we have both identified and measured the risks that are present in a
business the next risk management objective to fulfill is to continuously monitor risks.
Risks are not static things, in reality the probability of risk events occurring fluctuates
from time to time. Our farmer makes a perfect example of this through weather related
risks. At the time of planning and planting the weather department would have given an
outlook on their expectation of the weather that will prevail. Through the cropping season,
it is customary for the department to continue updating people on the expected weather
patterns as it is very difficult to accurately predict weather, especially for longer periods.
Continually checking the weather is a form of monitoring the risk. In the case of theft the
farmer may join other farmers in the community to share information about patterns of
theft in the area and also carry out an assessment of the security at his premises and see
how effective it is at preventing theft. The farmer may also keep an eye on market prices
for his crops to monitor price risk.

 Control: Finally risk managements objective is to control risk. When risks are identified,
measured and monitored the final objective is to assess just how the risk can be dealt
with or controlled. The various risk management methods available to businesses and
people come at a cost and this is where the aforementioned value at risk becomes
important again. A business must consider the size of the risk and compare it with the
cost of controlling the risk to evaluate if it is worth it. Risk is controlled through one. Of
four methods namely transferring, tolerating, treating or terminating.

 Transfer: Risk is transferred through the use of contracts such as sale or insurance
contracts. We discussed before that the farmer has risks of theft and adverse weather. In
the case of drought or floods the farmer can take an insurance policy against adverse
weather. As mentioned before this comes at a cost of premiums and whether or not these
are worth paying will.be determined by the probability of the occurrence and the value at
risk. Another example of transferring the risk would be entering into a sale contract for
the crop at a prearranged price. This will transfer the price risk that the farmer faces. This
method is usually suitable for high value low probability risks.

 Tolerate: In some cases it is perfectly acceptable to tolerate risks as a part of doing

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 8
Manaagne===
 business. This treatment method is usually preferred where the risks are low value and
low probability. Say our farmer assesses through monitoring that the possibility of crop
theft is very low and as such decides to invest in security for his farm but determines that
the cost of say theft insurance is too high a price to pay for a low risk occurrence.

 Treat: Treating risks is a method of risk control that seeks to insulate a business from the
risk. This is done by adapting the systems within the business to prevent the identified
risk from becoming a threat down the line. As a risk management objective controlling
risk involves changing the business if need be. Turning back to our farmer let’s assume
that through monitoring we learn that there is a high risk of drought this season. If the
farmer receives this information before planting he can switch to a drought resistant
variety of the same crop. This treats the risk in the sense that if it transpires there is
drought the effect will be low. It is not a simple undertaking and is recommended for
moderate probability and high risk situations.

 Terminate: Finally termination can be used as a risk control method. The objective of risk
management is preventing loss of value to investors through adverse occurrences. In
some cases, particularly where the value at risk and probability are both very high, the
best alternative may be to terminate the risk altogether. This may take many forms but to
continue with our farmer example we may elect to cancel the cropping project altogether
and go into another form of farming.

Identification, measurement, evaluation, monitoring and reporting of risk and

implemented management actions ensure ongoing adequacy and effectiveness of the risk
management system.

 Identification – beginning with the proposal to commence the creation of an insurance

product, acquire a financial instrument, and change the operating process, as well upon
the occurrence of any other event which potentially results in a risk. The identification
process takes place until the expiry of the liabilities, receivables or activities related to the
given risk. Identification of risk consists in the identification of actual and potential
sources of risk, which are later analyzed in terms of significance;

 Measurement and evaluation of risk – depending on the characteristics of the given risk
type and the level of its significance. Risk is measured by specialized units. The risk unit
in each company is responsible for the development of tools and measurement of risk in
terms of risk appetite, risk profile and tolerance limits;
 Monitoring and control of risk – consist of ongoing analysis of deviations from
benchmarks, i.e. limits, thresholds, plans, prior period values as well as recommendations
and guidance issued, conducted by dedicated units;
 Reporting – it allows for effective communication on risk and supports risk management
on various decision-making levels;
 Management actions: including risk avoidance, risk transfer, risk mitigation,
determination of risk appetite, risk level acceptance as well as supporting tools, such as
IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 9
Manaagne===
 limits, reinsurance programs as well as underwriting policy reviews.

RISK POOLING ARRANGEMENT AND DIVERSIFICATIONS

Pooling arrangement means sharing loss and risks equally or split evenly any accident costs. As
a result pooling arrangements reduce risks (standard deviation) for each participant. In pooling
arrangements the average loss is paid by each person. The probability distribution of accident
costs facing each person is reduced by pooling arrangements. The pooling arrangement
decreases the probabilities of the extreme outcomes. In pooling arrangements each person’s risk
is reduced but each person’s expected accident cost is unchanged. The pooling arrangement
reduces risks through diversification. In pooling arrangements, the cost has become more
predictable. Normally the average loss is much more predictable than each individual’s loss.
Pooling arrangement also decreases the additional risks by adding people. By adding more
people the probability distribution of each person accident cost will continue to be changed.

In all the factors being held constant the risk that can be reduced through pooling arrangement
it increases the number of participant’s. In this case the pooling arrangement decreases risk for
each participant. The probability distribution would become more and more bell shaped if more
participants are added.

RISK MANAGEMENT PROCESS

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 10
Manaagne===
A risk management process is the framework of identifying, evaluating and controlling potential
threats to the business. It will consider different strategies to address exposures within a
tolerance level acceptable to the business.

1. Identify risks to your business

The first step of a risk management process is to investigate and detail risks that might affect
your business or objectives. There are a number of risk management tools available such as risk
assessments and risk reviews that can assist with identifying & recording risks.

2. Analyze and measure the impact

The second step of a risk management process is to determine the likelihood and consequence of
each risk. By evaluating each risk, it is possible to quantify the potential to impact your business
or objectives. A risk register is a valuable risk management tool to record and score the potential
risks.

3. Decide which risks are unacceptable

The third step of a risk management process is to take decisions concerning which risks are
unacceptable compared with your risk appetite. Risks that are acceptable should be monitored
and reviewed on a regular basis. Whereas risks that are unacceptable should either be avoided,
reduced or transferred.

4. Mitigate or transfer any unacceptable risks

The fourth step of a risk management process is to action risks that cannot be avoided should
either be reduced or transferred to an acceptable risk tolerance level for the business. You
should consider ways to mitigate the exposure by transferring unacceptable risks from your
balance sheet.

5. Contingency planning
The fifth step of a risk management process is to consider risks that cannot be managed. If your
initial plan to control the risk fails, what is your plan B? For example, in the event of a cyber
breach, what are the steps to effectively respond and mitigate the impact after the incident has
occurred?

6. Monitor and review regularly

The sixth step of a risk management process is to continually monitor, review and report on
risks to your business and objectives. The risk management framework does not finish once the
risks have been identified, analyzed and controlled. Your business and its objectives will
continue to be exposed to new and emerging risks.

RISK MANAGEMENT AND SHAREHOLDER WEALTH

The process of risk management constitutes the following steps:
 Identifying relevant risks in the organization.
 Evaluating key risks.
 Mapping and scoring of risk exposure to enable prioritization of management action.
IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 11
Manaagne===
  Quantifying risk exposure in terms of impact and likelihood.
 Establishing a company risk appetite given its overall corporate strategy.
 Developing a risk management framework and implementing effective infrastructure and
process.
As business leaders seek new ways to build shareholder value, they are discovering a
connection between value creation and risk management. Many are realizing that risks are
no longer just hazards to be avoided. Risk creates opportunity, opportunity creates value,
and value ultimately creates shareholder wealth. The critical question now is how to best
manage risks to extract that value. Efficient risk management can contribute to
shareholder value enhancement by enhancing capital allocation and improving returns
through value based management. Further, studies have clearly shown that risk reduction
directly impacts future cash flows and in turn business valuations and shareholder value.

PROCESS OF RISK CONTROL

1. Identify the Risk

2. Analyze the Risk
3. Evaluate or Rank the Risk
4. Treat the Risk
5. Monitor and Review the Risk

Step 1: Identify the Risk

The initial step in the risk management process is to identify the risks that the business is
exposed to in its operating environment.

There are many different types of risks:

 Legal risks
 Environmental risks
 Market risks
 Regulatory risks etc.

It is important to identify as many of these risk factors as possible. In a manual environment,

these risks are noted down manually. If the organization has a risk management solution
employed all this information is inserted directly into the system.

The advantage of this approach is that these risks are now visible to every stakeholder in the
organization with access to the system. Instead of this vital information being locked away in a
report which has to be requested via email, anyone who wants to see which risks have been
IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 12
Manaagne===
identified can access the information in the risk management system.

Step 2: Analyze the Risk

Once a risk has been identified it needs to be analyzed. The scope of the risk must be
determined. It is also important to understand the link between the risk and different factors
within the organization. To determine the severity and seriousness of the risk it is necessary to
see how many business functions the risk affects. There are risks that can bring the whole
business to a standstill if actualized, while there are risks that will only be minor inconveniences
in the analysis.

In a manual risk management environment, this analysis must be done manually. When a risk
management solution is implemented one of the most important basic steps is to map risks to
different documents, policies, procedures, and business processes. This means that the system
will already have a mapped risk management framework that will evaluate risks and let you
know the far-reaching effects of each risk.

Step 3: Evaluate the Risk or Risk Assessment

Risks need to be ranked and prioritized. Most risk management solutions have different
categories of risks, depending on the severity of the risk. A risk that may cause some
inconvenience is rated lowly, risks that can result in catastrophic loss are rated the highest. It is
important to rank risks because it allows the organization to gain a holistic view of the risk
exposure of the whole organization. The business may be vulnerable to several low-level risks,
but it may not require upper management intervention. On the other hand, just one of the
highest-rated risks is enough to require immediate intervention.

There are two types of risk assessments: Qualitative Risk Assessment and Quantitative Risk
Assessment.

Qualitative Risk Assessment

Risk assessments are inherently qualitative – while we can derive metrics from the risks, most
risks are not quantifiable. For instance, the risk of climate change that many businesses are now
focusing on cannot be quantified as whole, only different aspects of it can be quantified. There
needs to be a way to perform qualitative risk assessments while still ensuring objectivity and
standardization in the assessments throughout the enterprise.

Quantitative Risk Assessment

Finance related risks are best assessed through quantitative risk assessments. Such risk
assessments are so common in the financial sector because the sector primarily deals in
numbers – whether that number is the money, the metrics, the interest rates, or any other data
point that is critical for risk assessments in the financial sector. Quantitative risk assessments
are easier to automate than qualitative risk assessments and are generally considered more

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 13
Manaagne===
objective.

Step 4: Treat the Risk

Every risk needs to be eliminated or contained as much as possible. This is done by connecting
with the experts of the field to which the risk belongs. In a manual environment, this entails
contacting each and every stakeholder and then setting up meetings so everyone can talk and
discuss the issues. The problem is that the discussion is broken into many different email
threads, across different documents and spreadsheets, and many different phone calls. In a risk
management solution, all the relevant stakeholders can be sent notifications from within the
system. The discussion regarding the risk and its possible solution can take place from within
the system. Upper management can also keep a close eye on the solutions being suggested and
the progress being made within the system. Instead of everyone contacting each other to get
updates, everyone can get updates directly from within the risk management solution.

Step 5: Monitor and Review the Risk

Not all risks can be eliminated – some risks are always present. Market risks and environmental
risks are just two examples of risks that always need to be monitored. Under manual systems
monitoring happens through diligent employees. These professionals must make sure that they
keep a close watch on all risk factors. Under a digital environment, the risk management system
monitors the entire risk framework of the organization. If any factor or risk changes, it is
immediately visible to everyone. Computers are also much better at continuously monitoring
risks than people. Monitoring risks also allows your business to ensure continuity. We can tell
you how you can create a risk management plan to monitor and review the risk.

Loss prevention looks to reduce the possibility of damage and lessen the severity if such a loss
should occur. According to the Texas Department of Insurance, or TDI, loss prevention programs
should help clients lower their claims through safety and risk management informational
services.

TECHNIQUES OF RISK RETENTION AND REDUCTION

 Avoidance
Avoidance is a method for mitigating risk by not participating in activities that may incur injury,
sickness, or death. Smoking cigarettes is an example of one such activity because avoiding it
may lessen both health and financial risks.

 Retention
Retention is the acknowledgment and acceptance of a risk as a given. Usually, this accepted
risk is a cost to help offset larger risks down the road, such as opting to select a lower premium
health insurance plan that carries a higher deductible rate. The initial risk is the cost of having
to pay more out-of-pocket medical expenses if health issues arise. If the issue becomes more
serious or life-threatening, then the health insurance benefits are available to cover most of the
IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 14
Manaagne===
costs beyond the deductible. If the individual has no serious health issues warranting any
additional medical expenses for the year, then they avoid the out-of-pocket payments,
mitigating the larger risk altogether.

 Sharing
Sharing risk is often implemented through employer-based benefits that allow the company to
pay a portion of insurance premiums with the employee. In essence, this shares the risk with
the company and all employees participating in the insurance benefits. The understanding is
that with more participants sharing the risks, the costs of premiums should shrink
proportionately. Individuals may find it in their best interest to participate in sharing the risk by
choosing employer health care and life insurance plans when possible.

 Transferring
The use of health insurance is an example of transferring risk because the financial risks
associated with health care are transferred from the individual to the insurer. Insurance
companies assume the financial risk in exchange for a fee known as a premium and a
documented contract between the insurer and individual. The contract states all the
stipulations and conditions that must be met and maintained for the insurer to take on the
financial responsibility of covering the risk.

 Loss Prevention and Reduction

This method of risk management attempts to minimize the loss, rather than completely
eliminate it. While accepting the risk, it stays focused on keeping the loss contained and
preventing it from spreading. An example of this in health insurance is preventative care.

IM
IMT FARIDABAD : Ms. SURBHI RATTAN Insurance and Risk Page 15
Manaagne===