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MF0018 & INSURANCE AND RISK MANAGEMENT

Q.No.1- Explain the risk management methods


Ans- Loss Control Loss Control is an organized and usually continuous effort to help decrease the possibility of
unforeseen losses and the impact of those that do occur. Loss control can be applied to all kinds of losses such as
those caused by fires, electrical surges, burglary, car crashes, hurricanes, or just about anything that causes
unexpected harm, injuries or damage. most effective method to control insurance costs is to prevent losses from
occurring Pre loss -- and to also contain the extent of losses after they occurpost loss Any accident, fire or
explosion in a home or place of business may mean family disruption or the loss of community prestige, employee
morale, and customer goodwill. The object is to assist in minimizing possible accident situations and fire and
explosion hazards. Improving operating efficiency and safety can also add to increased production and reduced
insurance costs.
Loss Financing Loss financing is one of these techniques and is a method used to obtain funds to pay for or
offset losses that occur (Risk Management Methods). Loss financing covers four different areas that help to
achieve its end goal; retention and self-insurance, insurance, hedging, and other contractual risk transfers.
Retention is when the business or an individual takes responsibility to pay back losses that have occurred. Chase
bank holds many accounts and if a risk they took fails, this bank could pay back part or all of the finances
individuals lost by investing with this company. Insurance is the second form of loss financing and takes place
when funds are paid towards a specific loss and in return the buyers risk is reduced.
Risk reduction This strategy aims to decrease the number of losses by reducing the occurrence of loss, which can
be done in two ways namely loss prevention and loss control. Loss prevention is a desirable way of dealing with
risks. It eliminates the possibility of loss and hence risk is also removed. The examples of this are safety programs
like medical care, security guards, and burglar alarms.
Q.No.2 Explain the elements of life insurance organization?
Ans :- Elements of a Life Insurance Organization An organization is a legal entity which is created to do
some activity or to achieve some purpose. It is created under some law, which gives it a status and
identity. Because of the identity, the organization is considered to be a person in law. Therefore, it can
enter into contracts, be sued in courts, accumulate property and wealth, and do business, in the same
manner as any individual can do.
Important activities
The important activities in a life insurance company are:
1 Procuring or proposals from prospective buyers of life insurance.

2 Scrutinizing and making decisions on the proposals for insurance. This is called underwriting.

3 Issuing the policy document, incorporating the terms and conditions of the insurance cover.

4 Keeping track of the performance of the insurance contract by either party, like payment of premium or
payment of benefits.

5 Attending to the various requirements that may arise during the term of the contract like nominations,
assignment, alteration of terms, surrenders and payment of claims.

6 Other supporting activities like advertising, investment of funds, maintenance of accounts, management
of personnel, processing of data, compliance with regulations and laws.

Internal organization

Within an insurance office, the following departments are likely to exist. These may be located in the
branch office (as in the LIC now) or in the Divisional / Head offices (as in the LIC earlier and new
companies now). These departments are to be identified by the activities being carried out, although they
may be called by different names.

1 Business development or agency or marketing concerned with the development of agency force, market
development and business growth.

2 New business, which would receive, scrutinize and take underwriting decisions on the new proposals
for insurance and also issue the policy.

3 Policy-holders servicing which would be concerned with administration of the policy, monitoring
premium payments, lapses and revivals, attending to alterations, nominations, assignments, surrenders,
loans and claims.

4 Accounts to handle the financial flows. The following departments are likely to be centralized in the
Head Offices, as they require specialized skills and also because they impact the whole
organization.

5 Actuarial, studying the experience, doing valuations, declaring bonuses, monitoring the adequacy of
premiums, setting underwriting standards, studying mortality rates, etc.

6 Investments of funds, studying the opportunities for maximizing returns.

7 Advertisement, publicity and public relations.

The distribution system

Life insurance is not compulsory under law. General insurance is frequently purchased due to
compulsions under the law (Motor Vehicles Act) or from the financiers demanding insurance as collateral
security. In the case of life insurance, the compulsion is negligible. There is often a tendency of deferring
the decision. Death as a practical possibility is either ignored or not considered imminent. The
requirements of today take priority over the requirements of tomorrow. Even if not absolutely essential,
the requirements of today seem to be more compelling. Life insurance has to be secured when in the best
of health. Otherwise, the insurer will refuse to grant the insurance cover.

Functions of the agent

The major function of the agent is to solicit and acquire life insurance business for the insurer, which has
appointed him as an agent. While proposing a person for insurance, the agent has to assess his needs
and his paying capacity, make all reasonable enquiries about the health and habits of the life to be
insured and get proof of his age to be admitted at the commencement of the policy. If medical
examination is required, the agent has to arrange for the same. After the proposal becomes a policy, the
agent has to ensure continuance of the policy by the means of timely payment of renewal premiums, get
nomination or assignment effected and help in prompt settlement of claims. Agents of the LIC are not
authorized to collect premiums other than the first premium along with the proposal. If a policyholder pays
premium to an agent, the LIC does not accept any liability for the same. The premium is treated as paid
only when it is paid into the office. However, in practice agents do collect premiums from policyholders to
ensure promptness in payment.

Q.NO3 :- insurance is the important industry .elaborate the different types of mediclaims and
liability policies.

Ans:- Types of Mediclaim /Health Policy
Broadly speaking, health insurance policies in India are of the following types:
1 Individual Mediclaim Policy
2 Group Mediclaim Policy
3 Deferred Mediclaim Policy
4 Overseas Mediclaim Policy
5 Innovative Mediclaim Policy

Individual mediclaim policy
Individual and group mediclaim policies are similar in scope and nature. These policies provide for
reimbursement of hospitalization/domiciliary hospitalization expenses for illness/disease suffered or
accidental injury sustained during the policy period.
The policy covers for expenses incurred under the following heads:
(a) Room, boarding expenses in the hospital/nursing home
(b) Nursing expenses
(c) Surgeon, anaesthetist, medical practitioner, consultant, specialist fees
(d) Anaesthesia, blood, oxygen, operation theatre charges, medicines,
diagnostic materials, etc.

Group mediclaim policy
The group mediclaim policy is available to any group/association/institution/ corporate body, provided it
has a central administration point and subject to minimum number of 100 persons to be covered.
The group policy is issued in the name of group/association/institution/ corporate body (called insured)
with a schedule of names of the members including his/her eligible family members (called insured
person) forming part of the policy.

Deferred mediclaim policy
Also widely known as Bhavishya Arogya Policy, this policy can be taken at any age from 25 years
onwards up to 55 years. The insured at the time of taking the policy has to select a retirement age
between fifty-five and sixty years after which the coverage for hospitalization expenses will commence.
The coverage under the policy is similar to what is available under a standard mediclaim policy with the
following differences:
1 Pre- and post-hospitalization expenses are not covered under the policy.
2 The following exclusions of the mediclaim policy are not applicable.
3 Thirty days waiting period
4 First year exclusions
5 Pre-existing diseases exclusion
6 Circumcision, pregnancy, etc.

Overseas mediclaim policy
This policy provides for medical expenses in respect of illness suffered or accident sustained by Indian
residents during their overseas visits for official or personal purpose. First started in 1984, this insurance
policy has been since modified to provide for additional benefits such as in-flight personal accident
coverage, compensation for the loss of passport, personal liability, etc.

Videsh Yatra Mitra policy
The widest coverage available under a variation of the overseas mediclaim policy is known as Videsh
Yatra Mitra policy. There are five sections under the policy and the insured has the option to choose
minimum three and maximum all six sections by paying appropriate premium. The six sections are as
under:

Section A (personal accident): This section covers death or bodily injury resulting in total or partial
permanent disablement to the insured.

Section B (medical expenses and repatriation): This section covers medical related expenses during
and in course of the overseas stay.

Section C (loss of checked baggage): Total loss of a baggage during the course of travel is covered in
this section.

Section D (delay of checked baggage): This section covers emergency purchase of replacement items
if there is a delay in delivery of checked baggage of more than 12 hours from the scheduled arrival time at
the destination.

Section E (loss of passport): This section covers actual expenses necessarily and reasonably incurred
by the insured person in connection with obtaining a duplicate or fresh passport.

Section F (personal liability): This section covers legal liability that may attach to the insured person for
any bodily injury or property damage to a third party accidentally caused by any act of the insured.

Liability Insurance
Liability insurance is broadly classified into two categories: (i) Public liability insurance and (ii) Product
liability insurance. Public liability insurance is broadly classified into two categories: Compulsory public
liability insurance and Voluntary public liability insurance policies.

Types of Liability Policies

Compulsory public liability policy
The Public Liability Insurance Act, 1991 imposes no fault liability, i.e., irrespective of any wrongful act,
neglect or default on the part of the owner of any hazardous substance, he has to pay relief in the event
of death or injury to any person other than a workman or damage to property of any person arising out of
an accident involving the hazardous substance.

Voluntary public liability policy
The owner of any industrial risk or non-industrial risk may take a voluntary public liability policy to cover
his legal liability in respect of accidental physical death/ injury/property damage of a third party arising out
of his property. Industrial risks are manufacturing premises including godowns and warehouses. Non-
industrial risks are hotels, restaurants, cinema halls, auditoriums, residential premises, office premises,
schools, amusement parks and film studios.

Products liability policy
Products sold to their users/consumers, if defective, may cause death, bodily injury, illness or property
damage. The manufacturers/marketers of such products are liable to pay relief to the accidental victims of
their products under law. The product liability insurance policy provides insurance cover to manufacturers/
marketers. The structure of the policy is similar to voluntary public liability policy with differences relating
to only the coverage and some exclusion. The indemnity is available to claims arising out of accidents
during the period of accident and first made in writing against the insured during the policy period arising
out of any defects in the products specified in the policy schedule.

Professional indemnity policy
Professional indemnities are designed to provide insurance protection to professional people such as
doctors, solicitors, chartered accountants, architects, etc., against their legal liability to pay damages
arising out of negligence in the performance of their professional duties.

Directors and officers liability policy
Directors and officers of an organization hold positions of trust and responsibility. They may become
liable to pay damages to shareholders, employees, creditors, etc., of the company for wrongful acts
committed by them in the management and supervision of the affairs of the company. The policy is
designed to provide protection to directors and officers against their personal civil liability.

Employers liability policy
Also known as workmens compensation insurance, the policy provides protection to the employers
against their legal liability for payment of compensation in case of death or disablement of the employees
arising out of and in the course of employment.

Q.No 4:- Give short notes on:-
Ans- Pricing objectives

I. Rate adequacy
To avoid financial problems and insolvency, insurance company rates must be adequate in the light of
benefits promised under the companys insurance products. Rate adequacy means that for a given block
of policies, total payments collected now and in the future by the insurer plus the investment earnings
attributable to any net retained funds are sufficient to
fund the current and future benefits promised plus cover-related expenses.

II. Rate equity
Equity means charging premiums commensurate with the expected losses and other costs that insured
bring to the insurance pool. The pursuit of equity is one of the goals of underwriting (classification and
selection of insured).

III. Rates not excessive
Rates should not be excessive in relation to the benefits provided. This objective is achieved by
establishing a ceiling on the rates. Competition discourages excessive pricing.

Pricing elements
The pricing elements underlying the pricing of life and health insurance contracts are:

expected mortality or morbidity experience
expected investment return
expenses

1. The probability of the insured event occurring It is shown by mortality tables in life insurance and
morbidity tables in health insurance. The part of risk premium can be calculated by multiplying the sum
assured with relevant information in these tables.


2. The time value of money The time value of money through rate of interest is the second factor taken
into account for the calculation of premium. Net premium can be calculated by deducting interest
component from risk premium.

3. Loading to cover expenses, taxes, profits and contingencies Tabular premium can be calculated
by adding all these office expenses to net premium.

4. The benefits promised The fourth factor is the benefits promised under the contract. A loading in this
respect is also included to arrive at the actual premium payable. Office premium is the sum of tabular
premium and the promised benefits.








Q.No:5- Explain the creation and application of insurable interest. give the differences between
wagering and insurance.
Ans:- Creation of insurable interest
There are a number of ways in which insurable interest will arise or be limited:

(a) By common law: Where the essential elements of insurable interest are automatically present, the
same can be described as having arisen at common law. The common law duty of care which one owes
to the other may give rise to a liability, which again is insurable.

(b) By contract: In some contracts a person will agree to be liable for something which he or she would
not ordinarily be liable for.

(c) By statute: Sometimes an Act of the Parliament will create an insurable interest either by granting
some benefit or imposing a duty. While the statute may create insurable interest where none would
otherwise exist, there can be statutes which restrict liability and thereby also restrict insurable
interest.

Application of insurable interest
There are three main categories of application of insurable interest as follows:
1 life
2 property
3 liability
Every person has an unlimited insurable interest in his or her own life. However, the obvious restriction in
the application of this is the means with which to pay the premium. If a person is married then there is an
automatic unlimited insurable interest in the life of the persons husband or wife. However, no other family
relationship will give rise to insurable interest by itself. If family members are involved in business together
or in the case of some other financial relationship, then in these circumstances, it is not the family ties,
which create insurable interest, but it is the extent of the financial involvement. There is a basic rule that
insurable interest will exist to the extent of the financial interest in another person or other persons. Thus,
partners are capable of insuring each others lives as they incur loss in the event of the demise of any of
them. A creditor may incur financial loss in case a debtor meets with death prior to the repayment of a
loan.

Difference between Wagering and Insurance

Contract of Insurance Wagering Agreement
1. A contract of insurance is a contract to make good
the loss of property (or life) of another person against
some consideration called premium.

1. A wagering agreement is an agreement to pay
money or money's worth on the happening of
an uncertain event.
2. In a contract of insurance the insured must have
insurable interest. Without insurable interest it
will be a wagering agreement.
2. No insurable interest is necessary in case of a
wagering agreement
3. In a contract of insurance both the parties are
interested in the protection of the subject matter, i.e.,
there is mutuality of interest.
3. In a wagering agreement, there is conflict of
interest and in reality there is no interest at all to
protect.
4. Except life insurance, a contract of insurance is a
contract of indemnity, i.e., a contract to make good
the loss.
4. In case of a wagering agreement there is no
question of indemnity. On the happening of the event
fixed amount becomes payable.
5. Contracts of insurance are based on scientific and
actuarial calculation of risks.
5. Wagering agreements are not based on such
calculations and are in the nature of gambling.
Q.No 6 identify the role of insurance in managing risk financing. Explain the important of
insurance transaction .discuss in different perspectives of insured and insurer.

Ans:- Role of insurance in managing risk financing
Business organizations and individuals take insurance policies. These insurance policies help them to
cover the losses in case of any emergency. Here, the idea is to transfer the risk involved with the
business to the insurance provider by taking an insurance policy. This insurance policy will honour claims
in case certain emergencies disrupt the working of the organization. This type of financing strategy offers
the benefit of knowing that even if the project faces financial trouble due to unseen events, the losses will
be settled without having to use
other company assets. However, these events will have to be mentioned in the insurance papers that the
organization signs with the insurer. If an insurance policy does not cover theft, the organization cannot
claim the amount from his insurer. The organization should maintain an adequate insurance to cover all
insurance risks relating to the calamities that can happen. Insurance should be maintained in at least the
following major areas of coverage such as:

Real and personal property
Machinery
Crime coverage
Extra expense and valuable papers
Workers compensation
Comprehensive general liability
Automobile liability and physical damage

Insurance Transaction
Insurance is a contract. One party, namely, the insurer, contracts with another, the policyholder, to
perform a particular service. The nature of insurance transaction can be represented by the following
triangle:
The risk

The insured The insurer


At the apex of this triangle there is the risk insured against. The insured policyholderis the person or
company entering into the insurance contract and the insurer is the insurance company which has
contracted with the insured to provide cover for the risk insured against.



From the perspective of the insurer

(a) It will be told about the risk by the proposer;

(b) In many cases the insurer will not rely on this source of information alone but will make its own
inquiries. This may imply using skilled risk surveyors to look at pro-posals and make physical inspection
or doctors to carry out medical examination for a life or permanent health insurance proposal;

(c) The insurer will decide on the level of cover which it is prepared to offer to
the proposer;

(d) Finally, the insurer will have to determine the price to be charged for the cover it is willing to offer. This
price will have to reflect a number of relevant factors.

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