Risk in insurance terms:

Risk is the chance something harmful or unexpected could happen.

Life is full of risks:
loss
theft
damage of valuable property and belongings,
or it may involve someone being injured.
Premature death

What's important to know about risk is the type of risk, the effect of that risk, the
cost of the risk and what you can do to mitigate the risk.

Example:

Let's take the example of driving a

car:

1. Type of risk: Accident

Bodily injury,
total loss of vehicle,

3. The costs:

having to fix your car

4. Mitigating risk:

2. The effect:
Spending time in the hospital,
having to rent a car
and having to make car payments
for a car that no longer exists

Can range from small to very large

Not driving at all (risk avoidance),
becoming a safe driver (you still have
to contend with other drivers), or
transferring the risk to someone else
(insurance).

History of Insurance
ancient Romans ( 100 BC )
Believed to avoid being a tortured ghost the dead need
proper Burial ceremonies.
Burial Clubs pay for funeral expenses and to families
of deceased.

1706 (London)
First company to offer life insurance
Amicable Society for a Perpetual Assurance Office
Chinese traders 3rd millennia BC.
These merchants travelling through seas distribute their
wares across many ships to spread the loss

History of
Insurance
The Greeks and Romans - origins of
health and life insurance - 600 AD
organized guilds called "benevolent societies"
which cared for the families and paid funeral
expenses of members upon death.

Great Fire of London, which in 1666

devoured 13,200 houses. (88% of
population)
In the aftermath of this disaster in
1680
established first fire insurance company, "The
Fire Office," to insure homes.

Vehicles 20th Century

car insurance is of more recent origin

Insurance policy
The insurance policy is a contract in which an individual
receives financial protection against losses caused by
perils covered under the policy from an insurance
company In exchange for a payment, known as the
premium .
Transfer of economic risk of loss to an insurance
company.
A peril is something that can cause a loss. Examples
Theft
crashing your car
fire
Wind
Lightning
choking.

insurance
Insurance is based on the law
of large numbers. By
combining a large number of
homogeneous units, the
insurer is able to make
predictions of possible loss.
Pooling of loses, or a
group sharing of losses.
The company pools clients' risks
to make payments more
affordable for the insured.

How Insurance Works?

Each policyholder pays a premium
Insurance company collects and pools the premiums of thousands of
people spreading the risk of losses across the entire pool.
At occurrence of unexpected loss the policyholder is paid from the
pool to return him partially or completely to his position prior to
loss.( Indemnification )
Premiums

Claim paid on
loss

How
Insuranc
e Works?
Example 1:
1. Suppose:
a. Houses in a colony = 1000

3. Procedure:
All owners contribute Rs. 300/- each as premium
to the pool of funds

b. Value of 1 House = Rs. 40,000/-

Total value of the fund = Rs. 3,00,000 (i.e. 1000

houses x Rs. 300)

c. Houses burning in a year = 5

5 houses get burnt during the year

d. Total annual loss due to fire = Rs. 200,000/-

Insurance company pays Rs. 40,000/- per head out

of the pool to all 5 house owners whose house got
burnt

e. Contribution of each house owner = Rs. 300/-

2. Underlying assumption:
All 1000 house owners are exposed to a
common risk, i.e. fire

4. Effect of insurance:
Risk of 5 house owners is spread over 1000 house
owners in the village, thus reducing the burden on
any one of the owners

How insurance company

works?
Underwriting : refers to the
process of evaluating the risk
to be insured.
To generate a profit

By calculating risk insurance companies decide:

How much premiums to charge and

which policy to offer
premium collected-( claims + expenses ) =
profit (Underwriting income)
Due to poor underwriting in 1960 EFU
almost bankrupted itself.

Premiu
ms
Cost of the
Claim Profit
for losses
company

Reinsurance
The transfer of risk by insurance company to a reinsurer.
Reinsurance companies of EFU:
Munich Re group
Swiss reinsurance

Retention Limit: The amount insurance company can

cover on its own
EFU health retention limit 50%
50% Premiums

50% Claims
Insurance company

Reinsurer

 Sources of income
Premiums
[Underwriting income premium collected-( claims + expenses ) =
profit ]

Investment:
stocks bonds , real estate and high quality assets.
EFU life invests 40% of funds in securities.
Sources
ofin high quality assets.
EFU General Insurance invests
Mostly
income
Premiums
premium
Investment
Real estate
Stocks and bonds
Polic
Mostly fixed interest
y
risk
investment
bearing securities
holde
High quality assets
r
Claim settlement

profit