MODULE 1

INSURANCE MANAGEMENT
CONCEPT OF INSURANCE
Insurance: in law and economics, is a form of risk
management primarily used to hedge against the risk of a
contingent, uncertain loss.
Insurance is defined as the equitable transfer of the risk of a
loss, from one entity to another, in exchange for payment.
Insurance is a contract by which one party, for a
compensation called the premium assumes particular risk of
the other party and promises to pay to him or his nominee a
certain or ascertainable sum of money on a specified
contingency. E.W. Patterson

Financial definition


Insurance is a financial arrangement that
redistributes the costs of unexpected losses.
Insurance involves the transfer of potential
losses to an insurance pool, the pool
combines all the potential losses and then
transfers the cost of the predicted losses back
to those exposed. Thus, insurance involves
the transfer of loss exposures to an insurance
pool, and redistribution of losses among the
members of the pool---by Mark S. Dorfman

FINANCIAL DEFINITION

Insurance is the pooling of fortuitous losses
by transfer of such risks to insurers, who
agree to indemnify insured for such losses,
to provide other pecuniary benefits on their
occurrence, or to render services connected
with the risk.
LEGAL DEFINITION
Insurance is a contractual arrangement
whereby one party agrees to compensation
another party for losses. We call the party
agreeing to pay for the losses the insurer,
call the party whose loss causes the insurer
to make a claims payment the insured. We
call the payment the insurer receives a
premium, call the insurance contract a
policy. Call the insureds possibility of loss
the insureds exposure to loss.
SUMMARY
Insurance is a form of risk management in which the insured
transfers the cost of potential loss to another entity in exchange
for monetary compensation known as the premium.
Insurance allows individuals, businesses and other entities to
protect themselves against significant potential losses and
financial hardship at a reasonably affordable rate. We say
"significant" because if the potential loss is small, then it doesn't
make sense to pay a premium to protect against the loss. After
all, you would not pay a monthly premium to protect against a $50
loss because this would not be considered a financial hardship for
most.
Premium contribution which is the consideration an insured
pays to the insure fro an insurance coverage of a specified nature
for a specified policy period

CHARACTERISTICS OF INSURANCE
It is a contract for compensating losses.
Premium is charged for Insurance Contract.
The payment of Insured as per terms of agreement in the event of
loss.
It is a contract of good faith.
It is a contract for mutual benefit.
It is a future contract for compensating losses.
It is an instrument of distributing the loss of few among many.
The occurrence of the loss must be accidental.
Insurance must be consistent with public policy.
Payment of fortuitous losses
Risk transfer
Indemnification

POOLING OF LOSSES

Pooling or sharing losses is the heart
of insurance.

Pooling is the spreading of losses
incurred by the few over the entire
group, so that in the process, average
loss is substituted for actual loss.

POOLING OF LOSSES


Pooling implies:
the grouping of a large number of
exposure units, so that the law of large
numbers can operate to provide a
substantially accurate prediction of future
losses.
The sharing of losses by the entire group

POOLING OF LOSSES

The Law of Large numbers
it states that the greater the number of
exposure, the more closely will the actual
results that are expected from an infinite
number of exposures.

The insurer can predict future losses with
a greater degree of accuracy as the
number of exposures increases.
(explains it by examples)
For most insurance lines, estimates of both
average frequency and the average severity
of loss must be based on previous loss
experiences
The insurer must charge a premium that will
be adequate for paying all losses and
expenses during the policy period.
PAYMENT OF FORTUITOUS LOSSES


A fortuitous loss is one that is unforeseen and
unexpected and occurs as a result of chance.
Thats the loss must be accidental.

Insurance policies do not cover intentional
losses.
RISK TRANSFER

Risk transfer means that a pure risk is
transferred from the insured to the insurer, who
typically is in a stronger financial position to
pay the loss than the insured.
RISK TRANSFER
Pure risk that typically transferred to
insurers includes:
Premature death
Poor health
Disability
Destruction and theft of property
Liability lawsuits
INSURANCE- RISK TRANSFER MECHANISM
Risk-transfer mechanism that ensures full or
partial financial compensation for the loss or damage caused by event(s)
beyond the control of the insured party. Under an insurance contract, a
party (the insurer) indemnifies the other party (the insured) against a
specified amount of loss, occurring from specified eventualities within a
specified period, provided a fee called premium is paid.
In general insurance, compensation is normally proportionate to the
loss incurred, whereas in life insurance usually a fixed sum is paid.
Some types of insurance (such as product liability insurance) are an
essential component of risk management, and are mandatory in
several countries. Insurance, however, provides protection only
against tangible losses. It cannot ensure continuity of business, market
share, or customer confidence, and cannot provide knowledge, skills,
or resources to resume the operations after a disaster.



16
THE NATURE OF INSURANCE
Insurance involves not only risk transfer but also pooling
and risk reduction
Pooling: The sharing of total losses among a group
Risk reduction: A decrease in the total amount of uncertainty present
in a particular situation
Insurers accomplish this by combining a group of objects situated so that
the aggregate losses become predictable within narrow limits
Overall risk for the group is reduced, and losses that result
are pooled
Usually through the payment of an insurance premium
Insureds transfer various risks to the group and exchange a
potentially large uncertain loss for a relatively smaller certain
payment (the premium)
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THE NATURE OF INSURANCE
Gambling and insurance are exact opposites
Gambling creates a new risk where none existed before
Insurance is a method of eliminating or greatly reducing
an already existing risk
Insurance is usually implemented through legal
contracts, or policies
Insurer promises to reimburse the insured for losses
suffered during the term of the agreement
Implicit is the assumption that the insurer will be able to
pay whatever losses may occur
Important to consider the financial condition of the insurer
NATURE OF INSURANCE
Sharing of Risks
C0-operative Device
Valuation of Risk
Payment made on contingency
Amount of Payment
Large Number of Insured Persons
Insurance is not gambling
Insurance is not charity

FUNCTIONS OF INSURANCE
Primary Function
Provision of certainty of payment at the time of
loss
Provision of protection
Risk sharing risk transfer mechanism
Secondary Function
Prevention of loss
Provision of Capital
Improvement of efficiency
Ensuring welfare of the Society

FUNCTIONS OF INSURANCE
Secondary function
Releasing funds otherwise tied up in reserves
Stimulate business enterprise
Insurance also stimulates business
Remove fear and worry
Reduction of losses
Savings
Investment of funds
Invisible exports


PURPOSE AND NEED OF INSURANCE
PURPOSE AND NEED OF INSURANCE
MECHANISM OF INSURANCE
An insurer is a company selling the insurance; an insured or policyholder is
the person or entity buying the insurance policy.
The insurance rate is a factor used to determine the amount to be charged
for a certain amount of insurance coverage, 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 insurers promise to compensate (indemnify) the insured in the case
of a large, possibly devastating loss.
The insured receives a contract called the insurance policy which details
the conditions and circumstances under which the insured will be
compensated.
COMMON POOL
LAW OF LARGE NUMBERS
CALCULATION OF PREMIUM
CALCULATION OF PREMIUM
DOUBLE INSURANCE AND REINSURANCE
Every insurer has a limit to the risk he can undertake. If a profitable
proposal comes his way he may insure it even if the risk involved is
beyond his capacity. Then, in order to safeguard his own interest, he may
insure the same risk, either wholly or partially, with other insurers, thereby
spreading the risk. This is called -re-insurance.
Re-insurance can be resorted to in all kinds of insurance and a contract
of re-insurance is also a contract of indemnity. The re-insurers are liable to
pay the amount to the original insurer only if the latter has paid to the
insured.
Re-insurance is subject to all the conditions in the original policy and the
re-insurer is entitled to all the benefits, which the original insurer enjoys
under the policy.


DOUBLE INSURANCE AND REINSURANCE
When the insured insures the same risk with two or more independent
insurers, and the total sum insured exceeds the value of the subject
matter, the insured is, said to be over insured by double insurance.
Both double insurance and over-insurance are perfectly lawful, unless
the policy otherwise provides. A man may insure with as many insurers as
he pleases and up to the full value of his interest with each one of them.
If a loss occurs, he may claim payment from the insurers in such order
as he thinks fit; but in no case he shall be entitled to recover more than his
loss, because a contract of insurance is a contract of indemnity only.
The re-insurance may be for the full amount of the policy or for a part of
it. In case of loss the first company will get compensation from the second
company. The insured will be concerned only with the company from which
it purchased insurance policy. Re-insurances is between insurance
companies only.


DIFFERENCE


Double Insurance Re-insurance
the insurer remains as the insurer
of the original insured
the insurer becomes the insured,
in so far as there insurer is
concerned
the subject of the insurance is
property
it is the original insurers risk
is an insurance of the same interest


is an insurance of a different
interest
the insured is the party in interest
in all the contract
the original insured has no interest
in the contract of reinsurance
which is independent of the
original insurance contract
the insured has to give his consent the consent of the original insured
(who is hardly even aware of the
reinsurance transaction) is not
necessary
http://www.scribd.com/doc/49091978/Double-Insurance-Reinsurance-Notes
INSURANCE AS SOCIAL SECURITY TOOL
Tool for asset protection
Social security tool-
Government program aimed
at providing basic needs to citizens who
are retired, unemployed, or
unemployable due to
a disability or disadvantage. It is funded usually
by mandatory payroll contributions (typically 5
to 8 percent of a paycheck) from both
the employees and the employers, and from
the government's tax revenue.
Tax efficient investment
http://www.scribd.com/doc/76718597/Insurance-Ppt

BENEFITS OF INSURANCE TO SOCIETY
The major social and economic benefits
of insurance include the following:
indemnification for loss
less worry and fear
source of investment funds
loss prevention
enhancement of credit
INSURANCE AS SOCIAL SECURITY TOOL

Life insurance is one of the most effective tools of social security across
the globe. In the absence of such a provision to the common people, the
society will have no redressal for pitiful elderly masses, helpless widows,
unprotected orphans; the factories will have to be scrapped after a fire; the
houses will not be rebuilt after being struck by any calamity. With such
events and more any economy cannot be stable leave alone the growth.
Our state, unlike the socialist or a developed capitalist society where
states are responsible for the deprived and destitute, is ill-equipped to do
so. Constitution of India has relevant clauses under the directive principles
of the state policy. In article 41, it clearly dictates the state within its
monetary and development capacity shall take effective measures to
secure the elementary right of work, education, employment, health and
any other undeserved want of every citizen.
INSURANCE AS SOCIAL SECURITY TOOL
Nevertheless, the failure of states is evident to all, with only a few
schemes floated like the one for socially disadvantaged. Providing equal
rights and opportunities for all is easier said than done. In the absence of
the bread winner of the family there is little that the government or other
social agencies can do to look after the welfare of those left behind. The
same is true even in the most economically advanced nations.
Thus in order to ensure that the people left behind continue to enjoy the
same privileges in society as before and thus stay with the mainstream, life
insurance is a probably the best and only social security tool against
unforeseen eventualities. It not only creates security but also goes ahead
to foster a respect for savings to be able to secure future of the entire
family.


COSTS OF INSURANCE TO SOCIETY
Although the insurance industry provides enormous social and
economic benefits to society, the social costs of insurance
should also be recognized.
The major social costs of insurance include the following:
cost of doing business
fraudulent claims
inflated claims


INSURANCE VERSUS GAMBLING
Insurance is often confused with gambling.
Actually they are quite different from the
following viewpoints:
Gambling creates a new speculative risk,
while insurance is a technique for handling an
already existing pure risk. (examples)
gambling is socially unproductive, while
insurance is always socially productive.
Gambling is illegal in China.

INSURANCE IN INDIA
INSURANCE IN INDIA
INSURANCE IN INDIA
INSURANCE IN INDIA
QUESTIONS TO BE ASKED FOR INSURANCE
POLICY
http://www.moneycontrol.com/glossary/insurance
/salvage_1478.html