WHAT IS INSURANCE ?

Insurance Indemnifies Assets & Income. Every Asset has a value and generates Income to its Owner. There is a normally expected Life-time for the Asset during which time it is expected to perform. If the Asset gets lost earlier, being destroyed or made Non-functional through an Accident or other unfortunate event the Owner is Prejudiced. Insurance helps to reduce CONSEQUENCES of such Adverse Circumstances which are called Risks

Insurance is the SCIENCE OF SPREADING OF THE RISK. It is the system of spreading the losses of an Individual over a group of Individuals Insurance is a Method of sharing of financial losses of a FEW from a COMMON FUND formed out of Contribution of the MANY who are equally exposed to the same loss

 What

is UNCERTAIN for an Individual becomes a CERTAINTY for a Group. This is the basis of All Insurance Operations. Thus INSURANCE CONVERTS UNCERTAINTY TO CERTAINTY

 The

object of Insurance is to provide protection against Financial Losses caused by Fortuitous Events. Thus Insurance is a protection against the Consequences of RISK. RISK is defined for Insurance Purpose as the UNCERTAINTY OF A FINANCIAL LOSS.

Element of RISK is Inherent in Life. Risk Means that there is a possibility of loss or damage. To the common Man, Risk means Exposure to Danger. In Insurance, the word Risk may be used interchangeably with Peril-which means the Event or Occurrence which CAUSES the Loss.

 In

Insurance, the word Risk may also refer to the Property or Subject Matter of Insurance Subject Matter of Insurance can be Life, Limb, Property, Interest & Liability

The

The Problem of Risk in Economic and Commercial Activities can be dealt with in FOUR WAYS. 1. Risk Avoidance 2. Risk Retention 3. Risk Transfer 4. Risk Minimisation Insurance is ONE of the most Import method of Risk Transfer

Insurance spreads the Risk among the Community and the likely Big Impact on ONE is reduced to Smaller Manageable Impacts on ALL. Thus Insurance acts as a SHOCK ABSORBER. A RISK OF TRADE is Insurable but a Trade Risk is not Insurable. In a Risk of Trade there can only be a LOSS whereas in a Trade Risk, there can be LOSS OR GAIN Risks of Trade are called PURE RISKS.

Only Economic or Financial Losses can be compensated by Insurance. The Business of Insurance is the Pooling of RISK and RESOURCES. It is a technique which provides for collection of small amounts of PREMIUM from many Individuals and Firms out of which losses suffered by the FEW are paid. Insurers act as TRUSTEES of the Common Pool.

PURPOSE AND NEED OF INSURANCE

INSURANCE ACTS AS A SOCIAL SECURITY Social Shock Absorber Solarium Fund for Hit & Run Victims of Road Accidents. PASS (Personal Accident & Social Security) scheme launched by the Govt. of India Crop Insurance Schemes and other Rural Insurance covers for the Rural Masses.

PURPOSE AND NEED OF INSURANCE

INSURANCE CONTRIBUTES TO NATIONAL WEALTH It contributes to a vigorous Economy and National Productivity. LIC & GIC funds formed out of the savings of People are channelled into Investments for Economic Growth. HUDCO, IDBI, IFCI, use funds siphoned from Insurance Money for lending to Entrepreneurs.

PURPOSE AND NEED OF INSURANCE

INSURANCE

PROTECTS THE CAPITAL IN INDUSTRY - It helps release the same for further Expansion Insurance is the HAND Commerce and Trade. MADE to

 RATE

OF PREMIUM WILL BE DIRECTLY PROPORTIONAL TO THE DEGREE OF HAZARD TO ASSESS VARIATIONS IN THE DEGREE OF HAZARD,RISKS MUST BE CLASSIFIED INTO HOMOGENEOUS CATEGORIES WITH SIMILARITY OF EXPOSURE IN EACH SUB-CLASS,PAST LOSS EXPERIENCE WILL BE THE CRITERIA APPLIED TO DECIDE THE PREMIUM RATE

 GREATER

THE RISK,HIGHER WILL BE THE PREMIUM RATE THE MORE PROBABLE THE LOSS AND THE MORE SEVERE IT IS LIKELY TO BE,THE HIGHER WILL BE THE PREMIUM RATE Eg.HAZARDOUS GOODS AND HAZARDOUS PROFESSIONS WILL ATTRACT A HIGHER PREMIUM AS COMPARED TO NONHAZARDOUS GOODS OR PROFESSIONS

 RATES

OF PREMIUM SHOULD BE EQUITABLE AND FAIR AS BETWEEN DIFFERENT INDIVIDUAL INSUREDS HENCE,A SYSTEM OF CLASSIFICATION OF RISKS INTO BROAD CATEGORIES IS ADOPTED. THESE MAY BE FURTHER CLASSIFED INTO GROUPS AND SUB-GROUPS DEPENDING UPON THE HAZARDS INVOLVED AND THEIR SIMILARITY Eg.CLASSIFICATION IN MOTOR/FIRE/W.C.

IN EACH SUB-GROUP,THE PAST LOSS EXPERIENCE IS WORKED OUT AND FUTURE FORECASTS ARE MADE ON THIS BASIS FORMULA FOR PURE PREMIUM L X100 L=SUM TOTAL OF LOSSES ---------V V=SUM TOTAL OF VALUES PURE PREMIUM WILL BE JUST SUFFICIENT TO PAY THE LOSSES,HENCE LOADING IS REQUIRED FOR OTHER FACTORS LIKECOMMISSIONS/MANAGEMENT EXPENSES/RESERVES FOR UNEXPIRED RISKS/PROVISION FOR UNEXPECTED HEAVY LOSSES/MARGIN OF PROFITS FINAL RATE=LOADED RATE

LAW OF LARGE NUMBERS IS FUNDAMENTAL TO ALL INSURANCE OPERATIONS THIS IS A MATHEMATICAL PRINCIPAL AND STIPULATES THATThe greater the number of cases studied and longer the duration of study, the more accurate will be the future forecast PROVIDED THE CONDITIONS REMAIN THE SAME AS THE No. OF CASES INCREASES,THE GAP BETWEEN THE ESTIMATED FUTURE LOSSES AND ACTUAL FUTURE LOSSES BECOMES LESS AND LESS
ANTICIPATE FUTURE LOSSES MORE ACCURATELY AND FIX PREMIUM RATES ACCORDINGLY (SUBJECT TO TREND ADJUSTMENTS

APPLYING THIS PRINCIPLE,INSURERS ARE ABLE TO

MERCHANT SHIPPING ACT-1958 COGSA-1925

MARINE INSURANCE ACT-1963

BILL OF LADING ACT-1963

INDIAN CARRIERS ACT-1865

INDIAN RAILWAYS ACT-1890 INDIAN POST OFFICE ACT--1898

W.C.ACT 1923

INSURANCE OPERATIONS ARE DIRECTLY AFFECTED BY IRDA-ACT2000 INSURANCE ACT1938 LIBNA1956---LIFE OPERATIONS GIBNA1972---NON-LIFE OPERATIONS

M.V.ACT1988

C.P.ACT 1986

PLI ACT-1991

SALE OF GOODS ACT-1930

INDIAN STAMP ACT

FERA-1973

The ultimate underwriting objectives are The production of large volume of premium income sufficient to maintain and progressively enlarge the insurers business. The earning of a reasonable profit on the operations The important underwriting factors are - Well spread out and Large Volume of business - Retention limits - Reinsurance of the surplus Reinsurance is insurance of insurance . The ceding company retains a part of the risk / premium and cedes the balance to the reinsurer. There are two main methods of reinsurance a) Facultative b) Treaty

 Facultative

Reinsurance : In facultative reinsurance, the choice / faculty to accept or reject a risk is with the reinsurer. This method involves considerable amount of clerical work and ceding company cannot go on risk unless confirmation is received from the reinsurer about the acceptance of the risk and premium rate / terms conditions of insurance.

Treaty :There are two types of treaty reinsurance Proportional and Non-proportional. Proportional : Proportional treaties are risk based & can be divided into a) Quota Share b) Surplus c) Pools d) Auto Facultative (Facultative obligatory) Non Proportional : Non proportional treaties are not risk based but loss based. The insurer limits the amount of loss as per the underlying limit and the reinsurer agrees to pay the loss over and above the underlying limit. Examples of non proportional treaties are a) Excess of loss for event losses b) Stop loss for portfolio losses

 Retrocession---Reinsurance

of a

Reinsured Risk Purpose of Reinsurance

Creation of additional capacity Achieves Global Spread of risk Best protection against Catastrophic Risks Facilitates acceptance of Mega/Jumbo Risks Works on the Principle of: No Cession without Retention Follow the Fortune of the Ceding Company

 The
Fire

Insurance20% Marine Insurance---15% Motor Insurance---35% Engineering Insurance10% Aviation---5% Miscellaneous Traditional10% Miscellaneous Non-Traditional5%

Major Portfolios are as follows:

Ahmedabad

Kolkata

Mumbai

907/A Uvarshad, Gandhinagar Highway, Ahmedabad 382422.

Infinity Benchmark, 10th Floor, Plot G1, Block EP & GP, Sector V, Salt-Lake, Kolkata 700091.

Goldline Business Centre Linkway Estate, Next to Chincholi Fire Brigade, Malad (West), Mumbai 400 064.