BASIC FUNCTIONS OF THE INSURANCE INDUSTRY 1.

Risk Perception and Evaluation: The fundamental function of an insurer is to provide a cover against the detriment caused to the insured due to the happening of certain specified and agreed events. Thus, prior to providing such umbrella through a product, the insurer has to assess the risk involved in the transaction. The insurer has to identify the element of risk prevalent in the concerned industry or a particular unit. The perception of risk requires the study of variables through various methods including the application of scientific and statistical techniques and correlation thereof with the industry or unit under study in light of their basic environmental and infra-structural characteristics. After the identification and categorisation of the risks perceived, the probability of happening of the loss-causing events and the severity of the loss has to be assessed. 2. Designing the Insurance Product: On the basis of the risks perceived, the insurer develops a product to cover the stipulated risks. While designing an insurance product, an insurer decides its cost to be charged from the insured in the form of premium, reduction thereof in certain cases like not lodging any claim during the previous covered period(s), suggesting the implementation of risk-mitigating measures, etc. The features of a product should be flexible enough to provide for the determination of premiums, rebates, additional premiums, etc. depending upon the risk benchmarks as determined. 3. Marketing of the Product: The core function of the marketing force of an insurance company is to generate awareness about the insurance products among the target market. But in the Indian scenario, where the insurance penetration is too low as compared to the other nations, the marketing force needs to perform the pro-active role in developing an insurance culture. It is through the efficiency of the sales force of an insurance company that the desirability and the success of a product are determined. In Indian insurance market, the function is, basically performed by the agents. The persons desiring to function as insurance agents have to obtain license to act as such from the IRDA or an officer authorized by the Authority in this behalf. The agents approach the prospective buyers and apprise them of the basic features of

the products. In order to dispense with the functions, the agents need to possess adequate knowledge of the insurance industry, products and the modalities attached therewith. Further, the marketing personnels should be adequately backed by the back-office setup. 4. Selling of the Products: The term selling in the context of insurance industry denotes the issuance of policies to the applicant proposer. The non-life insurance policy basically embodies the covenant between the insurer and the insured wherein the former agrees to indemnify the latter for the loss caused to him on the happening of the certain agreed events up to a specified limit. The life insurance policy generally contains the agreement whereby the insurer agrees to pay to the insured or the beneficiary of the policy an agreed amount on the expiry of the term of the policy or in the event of the death of the insured respectively. The additional benefits in the shape of Riders viz. Accidental Death Benefit, Double Sum Assured, Critical Illness benefits, Waiver of Premiums, etc. can also be appended with the policy on the payment of an additional premium. In Indian industry, the function is, generally performed by the insurer. In addition, the insurance companies depute their Direct Selling Representatives to look after the function. They receive the proposal documents, vet them and issue policies to the proposers. 5. Management of Portfolio: The management of the portfolio includes the assessment of requirement of funds, identification of various sources of finance, the evaluation of the sources in the light of their cost, availability, timing, etc., reconciling the features of various sources with the needs of the company and the selection of appropriate conjunction of sources. The insurer possesses huge amount of funds, which need proper management. The management of the portfolio of an insurance company requires the identification of investment avenues, evaluation thereof and the selection of the most appropriate mix of alternatives where the funds of the company can be invested. The selection requires the knowledge of finance related functions and techniques apart from the indepth know of the patterns of requirement of funds in the company as well as in the industry as a whole