Unit- 4

Introduction to Insurance
 What is Risk?
• We all take risks everyday quite happily.
• We do things knowingly that there is a risk involved.
– We know that there is a risk involved in driving a car, or riding
a bike, or going on a skiing holiday.
– We accept the level of risk because in our minds, although the
potential consequences can be death or serious injury.
– We think that if we are careful, the chances of something
dreadful happening is very low.
• we take into account two factors (Choose to accept or decline)
– the probability of something happening that we don't want,
– the consequences if it does.
 What is Risk?
• Identifying, evaluating and understanding risks is a very
important aspect
• The most widely understood risks are occupational health
and safety risks.
• People associate the word 'risk' with injury, health risks
and death, but other types of risk faced by any business.
• Risk falling into TWO categories
– Risk of Harm: Associate with living - personal injuries (sports)
– Risk of Detriment: Associate with economic loss (event mgmt)
• Business decisions based on –
– Assumptions, expectations, estimates and forecasts
 What is Risk?
• Different people defined risk differently – most of term
risk include exposure to adverse situations.
• Macmillan Dictionary Meaning: The possibility that
something unpleasant or dangerous might happen.
• LIC: A condition where there is a possibility of an
adverse deviation from a desired outcome that is
expected or hoped for; there is no requirement that the
possibility be immeasurable, only that it must exist.
• In simply, risk can be explained as the possibility of
unfavorable results or occurrence.
• Risk can be arise due to UNCERTAINTY
 Risk and Uncertainty
• Uncertainty: it is a situation where the outcome or result
can only be estimated but not predicted with precision.
• The concept of risk may also be distinguished from the
concept of perils and hazards
• Perils: It refers to the cause of loss or a happening
causing a loss.
• Hazards: it refer to the conditions that increase the
severity of loss or the conditions affecting perils.
– It can be Physical hazards (property), Moral Hazards (ethics)
and Morale Hazards (Self confidence)
 Nature of Business Risk
• Risk, an essential element of business
• Business risk are caused due to uncertainties
• Business risks vary according to the nature and size of
business
• Profit is the reward for risk bearing
• Evaluation of business risk is very difficult- competitions
• Business risk cannot be eliminated
 Causes of Business Risks
• Natural causes:
• Political causes: Govt. policies, communal violence, etc.
• Social causes: change in social values, preference, etc.
• Economic causes: economic variables
• Managerial causes: efficiency and competence mgmt.
• Competitive causes: entry- domestic and internationally
• Technological causes:
 Types of Business Risks
• Pure Risks and Speculative Risks
– Pure risk refers to a chance of loss without any possibility of
gain to the individual.
– Speculative risk, implies a situation which involve not only the
chance of loss but also a possibility of gain as well- Stock
market
– Classification of pure risks
Pure Risk

Personal Property Liability

Risks Risks Risks

Premature Sickness or Unemployme Possibility of Legal

Old age
death disability nt loss Provisions
 Types of Business Risks
• Internal and External Risks
– Internal – is associated with internal working conditions,
• It can be controlled
– External- it depends on external factors – market condition, etc.
• Cannot be controlled or controlled with great difficulty ….
• Fundamental and Particular Risks
– Fundamental – at macro level as well as natural calamities
– Particular – personal in origin, theft, etc.
 Types of Business Risks
• Static and Dynamic Risks
– Static- occur irrespective of any changes in the economy, it can be
insured, predicted,
– Dynamic – consequence of changes in the economy, - do not
define proper pattern, less predictable, etc. not insurable. (OMG)
• Financial and Non-Financial Risks
• Insurable and Non-insurable Risks
– Insurable are pure risk, which can be predicted and chance of
occurrence can be predicted
• Risks can be shifted through different insurance polices
– Non-insurable which cannot be covered or shifted through
insurance policy
• It is in speculative in nature
• They can not be perfectly forecasted, e.g. changes in consumer behavior
 Types of Business Risks
• Essentials for insurable risks
– It must be out of the ordinary course of business, accidental or
occur by chance
– The risk must be a common one
– There must be an element of uncertainty regarding the chances
of occurrence of the risk and also the time of its occurrence
– The risk must be predictable and measurable with a fair degree
of accuracy.
– The party must have genuine interest in the avoidance of risk
– The risk must be capable of causing substantial loss of damage.
 Meaning and Definition of Insurance
• In financial Sense
– A Social device providing financial compensation for the
consequences of adversity, the payments being made from the
accumulated contributions of all parties participating in the
arrangement. The essence of insurance thus, it collective
bearing of risks as it involves pooling of risk.
 In Legal Sense
• A contract under which the insurer (insurance company)
in consideration of a sum of money paid (premium) by
the insured (the person whose risk is insured) agrees to:
– make good the loss suffered by the insured against a specific
risk 9for which the insurance is effected), or
– To pay a prefixed amount to the insured or his/her beneficiaries
on the happening of a specified event.
 Insurance Terminology
• The instrument containing the contract of insurance is
called a policy.
• The amount charged on insurance termed as a premium
• Assurance: The term used for life insurance contracts.
• Insurer - The insurance company.
• Insured - The person or organization covered by an
insurance policy. Also called policy holders.
• Waiver of Premium: A provision in life or health
insurance policy stating that premiums will not be
charged.
 Nature of Insurance
• The purpose of any insurance is to provide economic
protection against the losses that may be incurred due
to chance events such as:
– 1. Death
– 2. Disability
– 3. Medical expenses
– 4. Home or automobile damage, etc.
• One party (the insurer), for a set amount of money
(premium), agrees to pay the other party (the insured or
beneficiary), a sum of money (benefit) upon the occurrence
of an event which may or may not occur, during the
effective time of the contract, which is called a policy.
 Characteristics of Insurance
• Insurance is a cooperative device- share the monetary
loss
• Insurance is preceded by evaluation of the risk
• The amount of compensation is contingent on the
extent of the loss
• Contractual relationship between the insured and the
insurer
• A contract of insurance is contract of indemnity
• Insurance is a means of converting uncertainty into
certainty
 Insurance: Purpose & Need
• Transferring risk- economic protection against the losses
• Reduction in worries
• Reimbursement of losses
• Opportunity for investment
• Credit enhancement
• Opportunity for employment
• Temporary needs
• Regular savings
• Investment
• Retirement
 Benefits of Insurance
• Shifting of risks
• Providing pecuniary security
• Assuring expected profits
• Safeguarding interest of consumers
• Improving credit standing
• Providing investment opportunity
• Encouraging saving
• Capital formation
• Generating employment opportunities
• Promoting social welfare
• Helps controlling inflations
 Functions of Insurance
• Diffusion of Risks
• Providing protection
• Encouragement of Savings
• Promotion of Efficiency and Motivation
• Prevention of Losses
• Providing Funds for Investment
• Solution to Social Problems