Pooling of Risks

Pooling is sharing of total losses among a group. Pooling within a group facilitates risk reduction, which is a decrease in the total amount of uncertainty present in a particular situation.

Insurance
A social device Group of individuals (insured) transfer risks to another party (insurer) to combine loss experience
A contract by which one party in consideration of the price paid to him proportionate to the risk provides security to the other party that he shall not suffer loss by the happening of certain specified events.

 A risk transfer mechanism Does not prevent the risk or perils Does not protect the assets Only helps to reduce the adverse financial effects of loss to assets Based on sharing, spreading of losses of the few amongst the contribution of many Pooling of risks

 Calculates risk in advance Payment is paid only on the occurrence of contingency Neither charity nor gambling

 Insured : An insured is a person, business or organization that is covered by an insurance policy.

Insurance Policy: A contract that states the rights and duties of the insurance company and the insured.

 Premium - The fee paid by the insurance buyer to

the insurer to purchase an insurance policy - Is a periodic payment by the insured to the insurance company in exchange for insurance coverage.

Law of Large numbers

States that while some events appear to be a matter of chance they actually occur with regularity The greater the number of similar units exposed to a similar loss, the more accurate the loss predictions based on that data will be.

Equitable Premium
As every member does not represent an equal risk, not all members of the fund are asked to pay the same fee
The insurer must calculate a fair premium for each contributor which reflects the proportionate burden on the fund that the member represents.

The premium amount differs according to the level of risk represented by each member. Higher the risk, higher the premium
Made with wood More risk is involved. Fire, Earth quake, Floods and other things can damage this very easily. More risk = More Premium Made with Iron & Concrete,so less risk. Normal risk = Normal premium.

Requirements of insurable risks

There must be sufficient numbers of similar risks It must be possible to assess the chance of loss (e.g with past data) The loss must be financially measurable Concerned only with pure risks Insurable interest should exist

 The specific loss must be an unforeseen (fortuitous) one (e.g. - normal wear and tear
cannot be covered)

The loss must not be against the public interest (e.g fine paid for traffic offences) The loss must not be excessive The object of the contract must be legal

Origin History and Development of Insurance

Insurance started in the year 1583 Lloyds Coffee Shop Insurance -also referred to as Assurance. Origin - Ensurance (French) Started with Marine Business. The merchants started Insurance based on risk sharing among themselves

Historical Framework of Insurance:

Global Perspective: Indian Perspective:
Oriental Life Insurance Company in Kolkata in 1818 Followed by Bombay Life Insurance Company and Madras Equitable Society Triton General Insurance Company Ltd was the first General Insurance Company in India (in 1850

Milestones in Life Insurance Industry:

1912 : The Indian Life Assurance Companies Act to regulate the Life Ins. Business

1928 : The Indian Insurance Companies Act to enable govt. to collect statistical information about life and nonlife insurance business

 1938 : Amendment of the earlier legislation, with the objective of protecting the interests of the insuring public 1956 : 245 Indian and foreign insurers and provident societies taken over by the central govt. and nationalized, LIC Act of 1956 led to the formation of LIC, with a capital contribution of Rs 5 Crore from the Govt. of India

Milestones in Non Life Insurance Industry:

1907- The Indian Mercantile Insurance Ltd was set up to transact all classes of General Insurance 1957 General Ins. Council frames a code of conduct for ensuring fair conduct and sound business practices

 1968-Ins Act was amended to regulate investments and the Tariff Advisory Committee was set up 1972-The General Ins. Business Nationalization Act to nationalize general ins business in India. 107 insurers amalgamated and grouped into 4 companies.

Insurance Sector Reforms:

1993 Malhotra Committee was set up to evaluate Indian Ins. Industry and to recommend future direction.
To suggest the structure of ins. industry To assess strengths and weaknesses To make recommendations for changing structure of ins industry For changing general policy frame work etc

 To take specific suggestions regarding LIC and GIC To make recommendations on regulation and supervision of ins sector To make recommendations on role and functioning of surveyors and intermediaries To make recommendations for the development of Indian Ins. industry

Recommendations
Structure:

(Malhotra committee submitted the report in 1994)

Govt. stake in ins companies to be reduced to 50% Govt. should take over the holdings of GIC and its subsidiaries Greater freedom of operation for ins companies

Competition:
Private Companies with a minimum paid up capital of Rs. 1 billion should be allowed to enter the industry Foreign companies may be allowed in collaboration with domestic companies The Ins. Act should be changed An Ins. regulatory body should be set up

 Investments:
Mandatory investments of LIC Life fund in Govt. securities to be brought down to 50% GIC and its subsidiaries are not to hold more than 5% in any company

Customer service:
LIC should pay interest on delays in payments beyond 30 days Ins companies must be encouraged to set up Unit Linked Pension Plans Computerization of operations, updating of technology to be carried out

The IRDA Bill:

Passed in 1999 Led to the formation of IRDA Allowed Pvt. Players Allowed foreign participation upto 26% A bill to raise FDI to 49% is still awaiting Parliament approval

BENEFITS OF PRIVATISATION
Creation of jobs New and innovative business Greater management skill Greater operation of freedom International experience Cutting edge technology New products Expansion of insurance market

Developments in Indian Insurance industry

Entry of private players Foreign collaboration New products New training institutions New employment generation Flexibility in products New marketing channels Establishment of Insurance Ombudsman New marketing concepts and strategies Stand alone health insurers

Benefits of Insurance
Reimbursement for losses Reduction in tension and fear Avenue for investment Can promote efficiency in the financial systems

Role of insurance in financial system:

Accepts risk from people and corporate bodies who are exposed to them. Collects small amounts of premium which are pooled together to be called an insurance fund, This fund is used for investment purpose. Organises compulsory insurance in certain areas Sells voluntary ins through sales force Settles claims arising out of insured losses

Detariffing
A major milestone in the Indian general insurance industry Withdrawal of premium pricing restrictions Tariff Advisory Committee - a part of the IRDA who was entrusted in formulating all the rules & governing certain classes of business in India like Fire, Motor, Engineering etc

 Prior to detariffing, Companies could charge the premium as per the tariff only There was no application of minds Detariffing aimed at improving the efficiency of the insurers through;
competitive pricing good quality service levels creativity innovation

Detariffing
Pricing has become market-based Customer gets maximum advantage Detariffing had initial problems Requirement of intensive monitoring of companies

Transition from tariff to detariff

Severe competition
Companies started underwriting risks which they cannot bear at a later stage

 Insurers started giving huge discounts Drastic reduction in the premium rates Rise in the claim costs and other expenses Reduction in the profits Insurers have now become selective In India, detariffing took place in three phases