The Assignment of Insurance and Risk Management

Introduction:
East West Insurance Company Limited appeared on the horizon of Insurance Industry
in Pakistan in 1983, Fouded by late Mr.
Unus Khan woh was its first Chairman.
Over the years the Company, with the
half of its management and diligent
staff, has successfully accomplished the
essential task of gaining the good will and confidence of its policyholders as one of
the leading insurance Companies with a vast network of branches all over the country.
Besides transacting traditional Insurance business like Fire, Marine & Motor, East
West Insurnace underwrites specialized portfolios for which it has created specialized
divisions within the company namely, Engineering, Crops & Livestock’s divisions.
The Company business is thus well diversified and provides coverage to a wide range
of Agricultural and commercial business activities.

Our Vision
Quality Services, Innovative Solutions and comprehensive risk cover Developing a
Culture based upon the 'philosophy ‘of absolute
Customer focus, by providing quality service,
innovative product and comprehensive risk cover.

Our Mission
Long term commitment to our valued clients Commitment for the growth of

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The Assignment of Insurance and Risk Management
Organization in an increasingly competitive
environment through effective utilization of
Information Technology, prompt service to customers,
Effective Human Resource Management and
Maximization of profit

PRODUCT AND SERVICES:

The respective contribution
of portfolios in the total
premium income and in the
underwriting profit / loss of
the company vary from the
year to year . It mainly
depend on the pace of
economic activity in the
country and underwriting
policy of the company. the low interest rates combined with liberal credit facilities by
the banks for auto finance phenomenally increased the number of vehicles on the
road. Resultantantly demand for auto insurance tremendously increased. This
obviously increased the motor premium portfolio by many folds. Similar factors also
influenced various other portfolios resulting in our all premium distribution as under.

FIRE INSURANCE:
A fire insurance policy involves an insurance company agreeing to pay a certain
amount equivalent to the estimated loss caused by fire to the insured, within the time
specified in the contract. The indemnity is subject to change depending upon the
policy. One should confirm with the insurer about the types of risks covered, since
one cannot insure the property against all types of risks of fire.

Fire insurance provides protection for the estimated value of the physical house.
However, there are a number of exclusions to the same, for example medical bills,
loss of human life and pets, loss of personal belongings, structures outside the

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The Assignment of Insurance and Risk Management
property (including garages and gazebos), damage to the landscape and expenses for
accommodation for the time being. These
things can be covered under a package of
extended property insurance.
During the year 2007, the gross premium in
Fire Portfolio has increased to Rs.251.80
million which shows an overall gain of 26%
compared to previous year, whereas the
increase in net premium is 47%. Whereas cession to reinsures has increased by almost
8%. The net claim ratio in Fire portfolio is 24% and hence the overall claim ratio has
decreased.

Marine Insurance:
Marine insurance covers the loss or damage of ships, cargo, terminals, and any
transport or cargo by which property is transferred, acquired, or held between the
points of origin and final destinationDuring the year 2007, the gross premium in

Marine Portfolio has increased from Rs.49.922 million to Rs.89.34 million. This
shows a net gain of Rs.39.4 million. You would also observe that the net premium has
also increased by 208%. The net claim ratio in this portfolio is 58%.

MISCELLANEOUS ACCIDENT INSURANCE

Provides cover against almost anything that is not covered by the specific classes
mentioned earlier. Personal Accident Insurance was first introduced in England in
1845 following the invention of steam engine. this class of Insurance developed

Rapidly following the promulgation of the Act in 1900, and is now widely purchased
all over the world.
The deteriorating law & order situation in the

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The Assignment of Insurance and Risk Management
country in general and in metropolitan cities in particular has resulted in increased
demand for this type of Insurance. As a result, people tend to insure themselves
against variety of risks. This includes Personal Accident, Household Insurance, Travel
Insurance, Burglary, Public liability, Cash in Safe and Transit Insurance & Workmen
Compensation, etc. Some of these are of special interest to the businessmen. In the
year 2007 we have written a premium over Rs.2.39 million in this portfolio.

MOTOR & AUTOMOBILE INSURANCE:

Automobile Insurance is based on two major classes of automobile insurance; namely,
public liability or third party liability and comprehensive insurance. The former
provides indemnification against the
bodily injuries and or property damages
to the third party only. As in most other
countries, in Pakistan, it is a requirement
under law to have this minimum
coverage before plying any motor
vehicle on the road. Comprehensive
insurance provides a broader coverage. In addition to third party liability, it provides
protection to the insured for damage to his own car and may include losses due to
accident as well as theft. Because of the high rate of motor accident as well as theft,
especially in the metropolitan cities, those who can afford it tend to buy
comprehensive insurance in spite of its high premium rates. The motor insurance
generates substantial amount of revenue to the insurance companies. However,
profitability for this portfolio has not been encouraging due to huge losses in the past.
With the improvement in law & order situation and introduction of car tracking
devices, the frequency of claims on account of theft is declining. An improvement in
the profitability of this portfolio is therefore expected. in the year 2007, we have
earned gross premium of Rs. 75.46 million in Motor Portfolio.

BONDS AND CREDITINSURANCE:

Contractors undertaking the Construction of public works building, roads etc are
required to furnish bonds for faithful execution of their obligations. The surety bound
to indemnify the employer if the contractor fails or refuse to complete the job in

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The Assignment of Insurance and Risk Management
accordance with the contractual obligations. The large or medium size contractors
also provide the facility of mobilization advance to the contractors. This advance is
paid on the provision of Mobilization Advance Bond. In addition, the contracts are
normally awarded against the tenders duly secured with bid bonds so that the

contractor does not refuse to commence the work after the award of contract. East
West Insurance Co. Ltd. provides several kinds of Bonds to their clients namely, Bid
Bond, Advance Payment Bond/Mobilization Bond, Performance Bond, Supply Bond,
Fidelity Bond, Maintenance Bond, Custom or Excise Bond.
In the year 2007, premium income under this head was Rs.22.72 million.

CROPS INSURANCE:
In spite of many technological advancements in agriculture sciences including
weather forecasting, Crop farming enterprise still remains vulnerable to the vagaries
of nature including floods, drought, hailstorm,
windstorm, pest and diseases, etc.
Hence, it continues to be a risky business
indeed. Moreover, an overwhelming majority of
our farmers engaged in crop farming are small
farmers with meager financial resources. When
crop losses occur, they are the worst affected. Hence, farmers need financial
protection against total and partial crop losses because of calamities happening due to
these factors. Crop Insurance provides the much needed protection in this case.
Mindful of the role CI has played in the sustained development of Agriculture

Production in many countries, the need and desirability of Crop Insurance Program
for the country's farmers has been felt for a long time. However for one reason or
another, it could not materialize until the bank of Punjab took the initiative and in
collaboration with the East West Insurance officially launched Crop Insurance

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Scheme for its farmers borrowers in July 2004.
Under this scheme, EWI insures crop loans advanced by the Banks to the farmer
borrowers against a wide range of perils namely, floods, heavy rains, hail storm, wind
storm, frost, drought, pests etc. at a minimum cost and indemnifies crop losses of
Insured farmers to the extent of outstanding loans in a Calamity situation. Our Crop
Insurance Scheme is now in the 4th year of operation and is operating successfully to
the full satisfaction of the borrowers of bank of Punjab. Other Banks have also
approached us, expressing their interest in the scheme.
Now that the State Bank of Pakistan (SBP) is also interested in a CI program, and has
been holding meetings with Banks and Insurance Companies in this regard, It is
expected that a uniform CI program will be formulated soon in which all the Banks
and Insurance Companies can participate.
It is worth mentioning here that the Draft CI Proposal which the SBP has circulated as
a working paper for discussion by the representative of Banks and Insurance
Companies contains many of the essential features of EWI Crop Insurance Scheme
which we have been advocating for the past many years.
The year 2004 was the first time, in the history of the Company that we generated a
premium income of Rupees. 2.51 million under the CI portfolio, which has increased
to now more than Rupees 8.57 million in 2007.We are expecting this premium to
grow manifold in the years ahead when other Banks especially the large Banks (HBL,
NBP, MCB, ABL) begin to offer the CI scheme to their Borrowers. Beedless to stay,
there is indeed tremendous potential for generating premium income under this
portfolio.

LIVESTOCK INSURANCE:
Livestock sector has assumed an increasingly critical role in the rural economy of
Pakistan as 30-35 million rural population is engaged in raising livestock for their
livelihood. With the population growing at the rate of force persons per minute,
increasing dietary awareness and rising standard of living, demand for Livestock

Products in the country are rapidly increasing. Consequently, this sector has the
potential of rapid growth and fast economic returns. Hence, it can also serve as an
effective tool for government poverty
reduction program in the rural areas. In fact,

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The Assignment of Insurance and Risk Management
realizing this potential, government is now talking keen interest and giving priority to
the development of this sector However, there are a wide variety of risks associated
with the health and well being of animals and their productivity, which can result in
significant financial losses to the livestock owners. Livestock insurance provides
financial protection to Livestock owners against risks of these losses. Investment in
animal often constitutes a large part of the farmer’s total capital. This investment
therefore needs to be protected. Moreover, procurement of animals is often financed
through credit. Insurance as a security for credit, improves the credit worthiness of
farmers. Lending institutions feel comfortable when credit given to farmers for the
purchase of livestock is insured, as it serves as a supplementary security. East West
Insurance (EWI) has been involved with Livestock insurance right from the beginning
and is one of the leading insurers with good experience in this field. The company
provides comprehensive all risks insurance cover for individual animals as well as
herds against death due to disease of accident including fire, lightening and snakebite
as well as against risks of calving. Thus the insurance cover protects the interest of the
borrowers as well as the Bank advancing loans for the purchase of livestock.
During the year 2004, a gross premium income of Rupees 2.85 million was generated
on this account, which has now increased to rupees 11.94 million during the year
2007. Because of the government interest and emphasis in the expansion of this
industry as reflected in the liberal credit policies and easy loaning to livestock owners
by the banks, we foresee a rapid and substantial increase in volume of business under
this head in the coming years.

RISK THIS COMPANY FACE:

They face many types of risks, known as exposures. Exposures exist for all types of
insurance that is provided by a specific type of insurance company. The most
common types of risks include paying claims for automobile accidents and storm
damage to a dwelling or property. Insurance companies can manage the risks that are
insured by excluding certain types of coverage from a policy.
In the early days of marine insurance, the details of a ship or cargo to be insured
would be described on a slip. This slip would be taken to Lloyd's and the person who
was to carry the risk would read the details and then sign the slip under the details of
the risk. In this way the person carrying the risk became known as the underwriter.
The underwriting process is far more complicated nowadays but the term still applies.

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The Assignment of Insurance and Risk Management
When we looked at the nature of insurance we take it as a common pool. The
contributions of many people were made to the pool and the losses of the few were
met from it. In essence the task of the underwriter is to manage this pool as effectively
and profitably as he can. Thinking of the role of the underwriter in this way we could
say that he has to:
* Assess the risk which people bring to the pool;
* Decide whether or not to accept the risk or how much to accept;
* Determine the terms conditions and scope of cover to be offered;
* Calculate a suitable premium
The first task of the underwriter is to assess the risk which person brings to the
common pool. There are various definitions of risk and a number of different
associated terms. One of the terms we examined was hazard. We differentiated hazard
from peril by saying that peril was the event giving rise to the loss itself, such as
collision, fire, theft. Hazard was the factor which might after the frequency or severity
of the peril.
Underwriter has the task of assessing the hazard which is associated with the various
perils brought to the common pool. There are two aspects of hazard, physical and
moral with which the underwriter is concerned.

Claims
Insurance company primary objective is to pay claims and to earn a profit. This can
be accomplished by accepting only certain types of business that have a low-to-
medium chance of experiencing a loss that will result in a claim. The most common
types of policies property and casualty insurers issue that result in various types of
claims are automobile and homeowners policies. Insurance companies will pay for
valid claims that have not been excluded on the policy.

Peril
Insurance company that provide policy coverage for an individual's automobile,
home, life or health insure against losses that are known as perils. A peril is a
considered an event or action that has the potential to cause loss. Perils exist for all
types of policies. Perils for an automobile policy include theft and vandalism.
Homeowner’s policies provide insurance against perils such as fire, wind or storms

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such as a tornado. Health insurance provides protection from health-related perils
such as a heart attack.

Hazard
Insurance companies are also concerned with hazards that exist which can increase
the chance of a loss occurring or cause more damage than expected. Insurance
companies take hazards into consideration when determining cost and eligibility for a
policy. Hazards can include the type of wiring used in a house when determining risk
of loss due to fire. Smoking is also a hazard when determining losses for a health
insurance or life insurance policy.

Distribution of Loss
Insurance companies that calculate the amount and type of risk to insure also need to
the distribution of losses that occur. The number or amount of losses that occur within
specific period such as one year or three years is known as the frequency of loss. In
addition to loss frequency, insurance companies are also concerned with the severity
of losses. Loss severity is typically the amount that an insurer pays out for a benefit or
a claim.

Age:
In automobile insurance, statistics show that younger people are more likely to have
an accident due to carelessness and inexperience.

Property Risks
In homeowners insurance, companies will want to know about the construction
material of your home. For example, a wood home is more susceptible to fire than a
brick home, so companies will charge a higher premium. Other property risk factors
include the presence of items outside the home such as trampolines and swimming

Pools.

Risk relates to live stock:

If the owner of livestock doesn’t take care of livestock as they think that they are
insured and due to their careless the livestock get affected by any disease like Congo
virus etc and die.

How to Manage Risks

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Insurance company uses a variety of factors to assess risk. In the world of insurance,
the concept of risk is very important. Insurance company employees called actuaries
use statistical risk analysis to determine how much to charge in the way of premiums
for insurance coverage. This Insurance company also attempt to limit their exposure
to risk so that they pay out as little as possible in claims, which makes them more
profitable.
Age is an important risk factor in some types of insurance. . In automobile insurance,
people under the age of 25 generally pay higher insurance rates because statistics
show that younger people are more likely to have an accident due to carelessness and
inexperience.

THE UNDERWRITING PROCESS

The actual process by which risks are underwritten will vary from one class of
business to another and will also depend on an insurer’s general approach.
Underwriting in a general sense in relation to personal insurances, life assurance and
commercial insurances

PERSONAL INSURANCE
The underwriting of personal insurances is relatively straightforward. The main
source of information abut a risk will come from the proposal form and if there is
anything else which an individual underwriter may want, he would write to the
proposer. A large volume of proposal forms for various classes of personal insurance
will be dealt with by branch offices of insures. Much of the work will be mechanical
in nature and the vast bulk will be processed with little difficultly
In many cases the underwriting is delegated to some other person, quite outside the
insurance company. This is the case for example in travel insurance where the policy

is sold by a travel agent or airline. A proposal form is completed by the proposer and
the policy issued almost immediately from a pad of policies. Possibly with an upper
Monetary limit on the sum insured. Underwriting in these cases is almost a matter of
making sure that a completely undesirable proposer is not allowed cover. There will
be little discrimination among those cases which are accepted and he brooked or other
agent will have little or no flexibility in pricing.

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COMMERCIAL INSURANCE
The underwriting of commercial business insurances is a much more complicated and
involved task. Commercial insurance rang reform small shops and factories to large
multinational corporations with operations in many countries throughout the world.
The degree of complexity of the underwriting required will obviously vary with sheer
size of the risk but certain basic principles are still recognizable.
The essence of the task is that the underwriter has to evaluate the hazard associated
with the risk which is being proposed. In small cases he may be able to do this from
reading a proposal form and corresponding with the proposer. It may be that a local
inspector asked to call and see the shop or factory for himself. In large cases this is
simply impossible. For one thing the details of a risk could not be confined to a
proposal from. There is just too much information to condense on to a form no matter
how large the form may be.
This is where the broker may help. As we mentioned earlier, the broker in these large
cases will be in a position to prepare the case for the underwriter. This may mean site
inspections by the broker and the preparation of the plans and reports on the relevant
aspects of the risk. This documentation, which may be extremely extensive, is then
Passed to the underwriter and negotiation can commerce on the
Terms, conditions, cover and price

A RISK SURVEYS
Even where a broker is involved (and certainly when there is no broker). The
underwriter will involve a surveyor. This risk surveyor is the person who acts as
The eyes and ears of the underwriter, many companies employ specialist’s surveyors
in the different areas of risk such as fire, security, liability, business interruption and
so on. The surveyor will eventually prepare a report for the underwriter and in the

case of many property risks will also draw plan. The report will cover a number of
features, including. A full description of the risk. This may include the plan of the
Premises in the case of property risk, the process being carried on at the premises,
details of the insured etc. An assessment of the level of risk. This will take into
account all

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The relevant hazard factors, both moral and physical, and provide the underwriter
with some idea of the degree of risk which he is being asked to accept. The surveyor
will also be able to comment on surrounding property as in the case of fire insurance,
for example, this may have an impact on the level of risk.
A measure of maximum probable loss (MPL)
This MPL, or estimated maximum loss (EML) as is known by some, is the maximum
that the surveyor believes will be the subject of a loss This MPL calculation takes no
account of any good features which may be present. The underwriter must then
consider the impact of good features and may reduce the MPL. In a fire risk the
underwriter may take account of fire lighting apparatus of various kinds such as
automatic sprinklers. One point the surveyor would have to remember is that MPL, he
has just calculated is only for fire damage. The building could, for example, be in the
flight path for a major airport and run the risk of being destroyed by aircraft.
Dividing walls would be little calculating MPLs is to give the underwriter an idea of
the maximum which is likely to be lost.

Recommendations on loss prevention:

The surveyor will also make known to the insured what steps should be taken to
protect the risk. In a few cases these recommendations will be in the form of
requirements which the insured must implement if cover is to be granted.
The surveyor’s view on the adequacy of the insurance being requested. In all of this
the responsibility for ensuring that the cover is adequate, rests with the insured. He
may seek advice from a broker or other expert but at the end of the day he will have to
satisfy himself that the insurance are adequate.
Adequacy, in the case of many classes of insurance will mean the sum insured. This
will be true for many classes of property insurance. In the case of liability insurance
there is of course no sum insured, but a limit of indemnity. Adequacy in thee cases
will mean a limit of indemnity large enough to cater for the expected claims. The

adequacy of cover is an extremely important issue and the underwriter will want to
ensure, as far as is possible. That the insured is not under insuring the risk.
Assuming that the risk is acceptable in all matters relating to the level of hazard, the
decision as to how much of a risk can be accepted is, in part, dependent on the
financial capacity of the insurer. The insurer may have some limit on how much of a

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particular type of risk it wants to accept in any year. Questions relating to the financial
capacity of the insurer, lead us into the area of reinsurance.

PREMIUMS:
Tasks of the underwriter are as:

* Assess a risk which people bring to the pool;

* Decide whether or not to accept the risk or how much to accept;

* Determine the terms; conditions and scope of calculate a suitable premium.

So far we have looked at the role of the underwriter, the underwriter process itself and
the part played by reinsurance. These have examined, in their different ways, the way
in which risks are accepted insurers and the financial steps which insurers take to
protect themselves. Insurance Companies have two final aspects the insurance
transaction to examine. The first, which business of pricing and praying for the
insurance service and the second is the making of claims. The last task of the
underwriter was to calculate a suitable premium. The premium which an insured pays
represents that insured’s contribution to the common pool. This contribution must be
fair and must reflect the degree of hazard which that insured brings to the pool. In
other words the premium must be sufficient to:

Cover Expected claims:

The insurer is in a position to estimate the level of claims which it expects. It is not
possible to say exactly how much is to be paid out in claims but because of the
numbers involved the insurer can make a reasonably accurate assessment of the likely
loss costs. At the very minimum the premium must be sufficient to meet these
expected claims.

Create an estimate for outstanding claims:

Not all claims will be settled during the year for which the premium has been paid and
hence the premium must take into account those claims still to be settled at the end of
the year. This is particularly true in the case of claims involving personal injury. They

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The Assignment of Insurance and Risk Management
can take several years to settle and the insurer must bear them in mind when
calculating the premium.

Provide a reserve:
The insurer must also take into account the fact that there can be contingencies,
beyond their control, which may involve a liability to meet claims at some time in the
future. Insurers do this bymaking reserves.
Meet all expenses:
The insurer has a number of operational expenses to meet in the running of the
business. These include:

* Salaries to staff;

* Office costs of all forms’

* Advertising;

* Commission.

The premium collected from each insured must be sufficient in Aggregate to cover
these costs of operating.

Provide for profit:

Finally, the insurer must ensure that there is provision for a reasonable profit. The
majority of insurers is answerable to shareholders and must provide a reasonable
return on the investment which these shareholders have made in the company. In the
case of mutual companies, the members will still be looking for a reasonable surplus
being made in order to meet the objectives of the mutual. Arriving at the premium,
however, is not simply a matter of calculating the correct premium by a mathematical
formula. A number of important commercial considerations must also be borne in
mind. These will include:

Inflation:
The insurer must be aware of the changing value of money. Claims will be met
tomorrow, out of premium received today. The implication of this is that the cost of

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settling a claim may rise, not due to any increase in the magnitude of the claim itself,
but simply due to the all insurer can not ignore in their premium calculations.

Interest rates:
We have already seen that insurers are major investors of funds. These funds generate
substantial investment income upon which insurers depend. Variability in interest
rates has also to be taken into account in premium calculations..

Required Documents:
Documents required under taking insurance are as follows:
Documents and information for Motor insurance:
1. Original CNIC,
2. Details of vehicle,
3. Sum insured,
4. Registration Book,
5. Driving license,
Documents and information for Marine insurance:
1. Original CNIC,
2. L/C Number
3. Performa invoice
4. Sum Insured
5. Vessel Name
6. Port of shipment and destination
Documents and information for Fire insurance:
1. Original CNIC of Insured,
2. Type of Risk,
3. Construction class,
4. Sum insured,
5. Subject Matter of insurance,
Documents and information for Travel insurance:
1. Original CNIC,
2. Area of visit
3. Sum insured
4. Duration for insurance

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5. No of persons
So this was the Insurance company which we selected to study.We got the knowledge
that how they work, which risk they face and how they mitigate that risk.

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