Introduction to

Insurance Risk and

Insurance
UNIT: 3
 The life and property of an individual are
surrounded by the risk of death, disability
or destruction. These risks may result in
Introduction financial losses. Insurance is a prudent way
to Insurance to transfer such risks to an insurance
company. Insurance is a means of
protection from financial loss. It is a form
of risk management, primarily used
to hedge against the risk of a contingent or
uncertain loss.
 Definition of Insurance
A contract (policy) in which an
individual or entity receives financial
protection or reimbursement against
losses from an insurance company. The
company pools clients' risks to make
payments more affordable for the
insured.
 Basic 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 considered as a device to share the financial 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.
Nature of Insurance
• Sharing of Risks
• Co-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
 The functions of insurance can be
studied into three parts

Functions (i) Primary Functions,

of
Insurance
(ii) Secondary Functions,

iii) Other Functions.

Insurance provides protection:

Risk-Sharing: Primary
Functions
Assessment of Risk:

Insurance provides certainty:

 Prevention of loss

It provides Capital
Secondary
functions It improves Efficiency

It helps Economic Progress

Savings and Investments

Medium of Earning Other Functions

Foreign Exchange

Risk Free Trade

A large number of homogeneous exposures

Loss must be definite and measurable

Requirements
Loss must be fortuitous or accidental
of Insurable
Risk

Loss must not be an exposure to catastrophic loss

Premium must be reasonable in relation to the

potential loss
 Adverse Selection and Insurance

Adverse selection is a phenomenon wherein the insurer is

confronted with the probability of loss due to risk is not factored at
the time of sale. Insurance companies grant life insurance coverage
to applicants on the basis of such factors as age, health condition
and occupation. Policy holders are granted levels of coverage in
return for a periodic cost called premium.
In adverse selection, life insurance applicants successfully foil a
company’s evaluation system in order obtain higher coverage at
lower premium. This is accomplished by withholding or providing
false information so that the applicant is characterized as being a
significant lower risk than in reality.
I NS U R AN C E GAMBLI NG

Insurance deals with pure risk. With pure Gambling creates a risk situation that
risk there is the possibility that a certain offers an opportunity for gain as well as
event will occur, example accident or for loss. The risk in gambling speculative
sickness. risk.

In insurance there is no possibility of There might be gain in gambling

Insurance
gain.
Vs
Insurance helps to minimise
uncertainty and risks in the society;
the Gambling increases uncertainty risks and
conflicts in the society. It does not
Gambling
hence it promotes industrialization and promote industrialization.
economic development.

Insurance contract restore the insured Consistent gambling transaction

financially in completely of partially if a generally never restore the losers to their
loss occurs. former financial position.
Insurance Hedging

Insurance is a risk management strategy Hedging is an investment strategy one can

one can use to cover the risk of loss from use to protect from losses and increase the
theft, fire, accidents, sickness, injury, flood, potential gain in the stock market.
weather and many other factors.

Insurance transaction reduces the risk. Hedging typically involves only risk transfer,
not risk reduction.

Insurance is a win- win transaction. Hedging is a win- loss transaction

An insurance transaction involves the Hedging is a technique for handling risks

transfer of insurable risks. that are typically uninsurable.

Insurance Vs Hedging
 Types of Insurance

In India, insurance is broadly categorized under two

groups:
•Life Insurance: It is a contract that offers financial
compensation in case of death or disability.

• General Insurance: A general insurance is a contract

that offers financial compensation on any loss other than
death. It insures everything apart from life.
 Types of Life Insurance

-It is the most basic type of insurance.

-It covers you for a specific period.
- Your family gets a lump-sum
Term Insurance amount in the case of your death.
- If, however, you survive the term, no
money will be paid to you or your
family.
 Types of Life Insurance

-It covers you for a lifetime.

- Your family receives a

certain sum of money after
Whole Life Insurance your death.
- They will also be entitled to
a bonus that often accrues on
such amount.
 Like a term policy, it is also valid for
a certain period.
- A lump-sum amount will be paid to
your family in the event of your
Endowment Policy
death.
- Unlike a term plan, you get the
maturity proceeds after the term
period.

Types of Life Insurance

 Types of Life Insurance

- A certain percentage of the sum

assured will be paid to you periodically
throughout the term as survival benefit.
- After the expiry of the term, you get
the balance amount as maturity
Money-back Policy
proceeds.
- Your family gets the entire sum
assured in case of death during the
policy period. This is regardless of the
survival benefit payments made.
 Types of Life Insurance

Such products double up as investment tools.
- A part of your premium goes towards your
insurance cover.
Unit-linked Insurance Plans
- The remaining amount is invested in Debt
(ULIPs)
and Equity.
- A lump-sum amount will be paid to your
family in the event of your death.
 -This ensures your child’s financial security.
- In the event of your death, your child gets a
lump-sum amount.
Child Plan -The insurer pays the premium amounts after
your death.
- Your child will continue to get a certain sum of
money at specific intervals.

Types of Life Insurance

 Types of Life Insurance

-This helps build your retirement fund.
-You can get a regular pension amount
Pension Plans after retirement.
- In the case of your death, your family can
claim the sum assured.
 1. Health Insurance

• This type of general insurance covers the cost

of medical care. It pays for or reimburses the
Types of amount you pay towards the treatment of
any injury or illness. It usually covers:
General
Insurances • Hospitalisation
• The treatment of critical illnesses
• Medical bills prior to or post hospitalisation
• Day care procedures like Cataract operations
 2. Motor Insurance
• Motor insurance is for our car or bike what
health insurance is for your health. It is a
Types of general insurance cover that offers
General financial protection to your vehicles from
Insurances loss due to accidents, damage, theft, fire or
natural calamities. We can also get motor
insurance for your commercial vehicles. In
India, you cannot drive or ride without
motor insurance.
 Types of General
Insurances
Single Trip Policy Annual Multi Trip
3. Travel insurance

• Acompensates
travel insurance
you or pays for
It covers you during a
trip that lasts under
It covers you for several
trips you take within a
any financial liabilities arising 180 days. year.
out of medical and non-
medical emergencies during
your travel abroad or within the
country.
• There are two types of Travel
Insurance.
 Types of General Insurances

4. Home insurance

• As the name suggests, a home insurance

policy protects our home and its
belongings from the damages suffered
due to man-made or natural disasters.
Some home insurance policies also
provide coverage for temporary living
expenses in case you are living on rent,
due to our home undergoing renovation.
 5. Fire Insurance

• Fire insurance pays or compensates for the

damages caused to your property or goods
Types of due to fire. It covers the replacement,
General reconstruction or repair expenses of the
Insurances insured property as well as the surrounding
structures. It also covers the damages caused
to a third-party property due to fire. In
addition to these, it takes care of the expenses
of those whose livelihood has been affected
due to fire.
 • 6. Marine Insurance
• Marine insurance covers the loss or damage of
ships, cargo, terminals, and any transport by
Types of which the property is transferred, acquired, or
General held between the points of origin and the
Insurances destination. Marine insurance is important in
case of import and export of goods which is an
integral part of the economy. By
compensating against the loss of goods and
ship, the policy helps exporters and importers
bear any losses incurred during transit.
 7. Weather Insurance

• Weather insurance is a type of protection

against a financial loss that may be incurred
Types of because of rain, snow, storms, wind, fog,
General undesirable temperatures or other adverse,
Insurances measurable weather conditions. Weather
insurance is used to ensure an expensive event
that could be ruined by bad weather, like an
outdoor wedding or an outdoor film
production.
 Difference between Life Insurance and General Insurance

Key Points Life Insurance General Insurance.

It is an insurance contract, which covers the life- It is an insurance that is not covered under Life
Meaning
risk of the person insured. insurance.

Form It is a form of investment. It is a contract of indemnity.

Term of Contract. It’s a long-term contract. It’s a short-term contract.

Premium Premium has to be paid over the year. Premium has to be paid lump sum.

Insurable amount is paid either on the occurrence Loss is reimbursed, or liability will be repaid on the
Insurance claim
of the event, or on maturity. occurrence of uncertain event.

Insurable
Must be present at the time of contract. Must be present, at the time of contract and loss both.
Interest.

It can be done for any value based on the premium The amount payable under general insurance is
Policy Value.
policy. confined to the actual loss suffered.
 Essentials of Insurance Contract

Offer and Competent to Legal

Free consent Lawful object
acceptance make contact consideration

Agreement Certainty and Legal

Legal
not declared Possibility of formalities
relationship
void Performance
 Protection against risk of loss
Distribution of risk
Capability of facing cut-throat competition
SIGNIFICANCE / Specialisation of labour
IMPORTANCE/ Optimum utilisation of capital.
ADVANTAGES OF
INSURANCE Formation of capital
Advancement of loans
Aid to foreign trade
Mobilization of small savings
Social security
 The insurance industry

• The insurance industry of India consists of 57 insurance companies of which 24

are in life insurance business and 33 are non-life insurers. Among the life
insurers, Life Insurance Corporation (LIC) is the sole public sector company.
Apart from that, among the non-life insurers there are six public sector insurers.
In addition to these, there is sole national re-insurer, namely, General Insurance
Corporation of India (GIC Re). Other stakeholders in Indian Insurance market
include agents (individual and corporate), brokers, surveyors and third-party
administrators servicing health insurance claims.
 Investments and Recent Developments in Insurance Sector

The following are some of the major investments and developments in the Indian
insurance sector.
• The non-life insurance companies witnessed a rise of 13.1 per cent in their
collective premium in November to Rs 14,590.50 crore (US$ 20.09 billion).
• In November 2019, Airtel partnered with Bharti AXA Life to launch prepaid bundle
with insurance cover.
• In September 2019, Competition Commission of India (CCI) approved acquisition of
shares in SBI General Insurance by Nepean Opportunities LLP and Honey Wheat.
• As of November 2018, HDFC Ergo is in advanced talks to acquire Apollo Munich
Health Insurance at a valuation of around Rs 2,600 crore (US$ 370.05 million).
• In October 2018, Indian e-commerce major Flipkart entered the insurance space in
partnership with Bajaj Allianz to offer mobile insurance.
 Investments and Recent Developments in Insurance Sector

• In August 2018, a consortium of WestBridge Capital, billionaire investor Mr

Rakesh Jhunjunwala announced that it would acquire India’s largest health
insurer Star Health and Allied Insurance in a deal estimated at around US$ 1
billion.
• In September 2018, HDFC Ergo launched ‘E@Secure’ a cyber insurance policy for
individuals.
• Insurance sector companies in India raised around Rs 434.3 billion (US$ 6.7
billion) through public issues in 2017.
• In 2017, insurance sector in India saw 10 merger and acquisition (M&A) deals
worth US$ 903 million.
• India's leading bourse Bombay Stock Exchange (BSE) will set up a joint venture
with Ebix Inc to build a robust insurance distribution network in the country
through a new distribution exchange platform.
 Future of Insurance Industry

• The future looks promising for the life insurance industry with several changes
in regulatory framework which will lead to further change in the way the
industry conducts its business and engages with its customers.
• The overall insurance industry is expected to reach US$ 280 billion by 2020. Life
insurance industry in the country is expected grow by 12-15 per cent annually
for the next three to five years.
• Demographic factors such as growing middle class, young insurable population
and growing awareness of the need for protection and retirement planning will
support the growth of Indian life insurance.
 THE INSURANCE REGULATORY AND
DEVELOPMENT AUTHORITY ( IRDA)

• The Insurance Regulatory and Development Authority,

constituted under the IRDA Act, 1999, provide for the
establishment of an authority to protect the interest
policyholders, to regulate, promote and ensure orderly
growth of the life insurance industry.
Scope of Insurance Regulatory and Development
Authority:
• The Insurance Regulatory and Development Authority has been authorized to
register the new insurance companies in India. The list of new insurance
companies also includes the collaborations of the renowned insurance
companies overseas with the existing Indian companies. The insurance
companies in India are required to approach the Insurance Regulatory and
Development Authority for the purpose of renewal of the of the insurance
registration. The Insurance Regulatory and Development Authority are allowed
to withdraw registration of the companies and even cancel the registration of a
company if required. It is also authorized to modify the registration procedure
for a company.
Function of • Nomination by Policyholders
• Settlement of insurance claim
Insurance
• Practical training for Insurance agents and other intermediaries
Regulatory • Surrender value of Policyholders
and • Code of conduct of Insurance intermediaries
Development • Assistance in gaining correct information about policies
Authority • Creation of management information system.
• Promotion of Self-regulation within the insurance sector
• Issue to the applicant a certificate of
registration, renew, modify, withdraw,
suspend or cancel such registration.

DUTIES
• Protection of the interests of the policy holders in
matters concerning assigning of policy, nomination by AND
policy holders, insurable interest, settlement of
insurance claim, surrender value of policy and other
terms and conditions of contracts of insurance.
POWERS
OF IRDA
• Specifying requisite qualifications,
code of conduct and practical training
for intermediary or insurance
intermediaries and agents
• Specifying the code of conduct for
surveyors and loss assessors.

DUTIES
• Promoting efficiency in the conduct of AND
insurance business.
POWERS
OF IRDA
• Promoting and regulating professional
organisations connected with the
insurance and re-insurance business.
 • Levying fees and other charges for carrying
out the purposes of this Act.

DUTIES
• Calling for information from, undertaking
inspection of, conducting enquiries and
AND
investigations including audit of the insurers,
intermediaries, insurance intermediaries and POWERS
other organisations connected with the insurance
business. OF IRDA

• Control and regulation of the rates, advantages, terms

and conditions that may be offered by insurers in respect
of general insurance business.
• Specifying the form and manner in which
books of account shall be maintained and
statement of accounts shall be rendered by
insurers and other insurance intermediaries.

DUTIES
• Regulating investment of funds by AND
insurance companies.
POWERS
OF IRDA
• Regulating maintenance of margin of
solvency.
Adjudication of disputes between insurers
and intermediaries or insurance
intermediaries.

DUTIES
• Supervising the functioning of the Tariff
AND
Advisory Committee. POWERS
OF IRDA
• Specifying the percentage of life
insurance business and general insurance
business to be undertaken by the insurer
in the rural or social sector; and