Risk management and insurance
Risk management is process of identification of reason of loss of assets and
selecting the measures to minimize threatening of such losses. The term risk is
ambiguous and has different meaning for different managers on the basis of
situation and event.
According to George R Raija “risk management is the process that
identifies loss exposures faced by an organization and selects the most
appropriate techniques for treating such exposures”
In same way according to Holyoake and welpers “Risk management can be
defined as the identification, analysis, and economic control of those risks that
can be threatened the assets or earning”
From the above definitions it may be concluded that risk management is the
process of identifying loss of assets, analyze the reasons of such losses, select the
appropriate techniques for treating such reason of loss and implement the risk
management process.
Concept of insurance
The life of human beings always surrounded by various kinds of risk. Human
beings cannot stop or eliminate such type of accidental events or risks. However,
it is possible to reduce financial loss with the help of insurance.
The concept of insurance is developed in the principle of mutual help
through mutual cooperation. The insurance can be defined under two
approaches.
1. Functional basis or approaches:According to this basis insurance is a cooperative device through
which risk of financial loss, due to accident or other calamities,
distributed among the large number of people.
According to John H Magee “ insurance has been define as a
plan by which large number of people associate themselves to the
shoulder of all, risk that attached to individual.”
It make clear that under this basis, it is a social cooperative device
where large number of individual come together by contributing
equitable amount to minimize financial loss.
2. Contractual basis:According to this concept insurance is a contract between
insurer and insured where insured undertakes the responsibility of
compensation of financial loss on the occurrence of unexpected
event to the insured or his nominee.
According to Edwin W Patterson” insurance is a contract by
one party, for compensation called premium assumes particular risk
of the other party and promises to pay to him or his nominee a
certain sum of money on a specified contingency.”
In conclusion, insurance is a contract between insured and
insurer where insurer undertakes the risk of compensation of
financial loss due to accident or specified contingency to the insured
or nominee.
Importance of insurance
Insurance is an important auxiliary of business. It minimize risk of financial
loss in business, individual and social activities. The importance of insurance may
be studies under the following headings:
For individual and family
The following are the importance of insurance for the individual and family.
1. Economic safeguard: insurance provides economic safeguard to individual
and family. It provides protection against risk of loss of property, assets and
loss arises to the family due to death of insured.
Figure 1
2. Provide scope for employment: insurance is the better scope for
employment. Individual can get employment opportunities in insurance
company according to their skill and knowledge.
3. Incentive to economy: Insurance facilitates to save money, specially, in the
insurance policy, insured is to be paid a fixed lump sum after certain fixed
period of time. This encourages the individual to save their surplus
revenue.
4. Profitable investment: insurance directly or indirectly a profitable business.
Life insurance is directly profitable investment because it creates capital by
returning whole deposited premium amount along with certain rate of
bonus.
5. Maintain living standard: In the first, insurance indemnifies the loss of
property and assets on the basis of policy. Similarly, in the second, life
insurance return deposited amount to the insured along with certain rate
of premium at the maturity of the period or to the nominee when the
insured expired before the date of maturity.
For business organization
The following are the important of insurance to the business organization.
1. Safeguard against risk of loss: Business organizations enter into insurance
policy by depositing certain amount of premium. It provides protection
against the unexpected business losses in future.
2. Stability in business: Insurance Company takes all responsibility against the
risk of loss of business. Business man can perform their work without fear
of losses.
3. Increase efficiency: When all the resources of the organization like human
resources, materials and machines are insured, it helps to develop working
efficiency. Employee can perform their work without fear of risk of loss or
accident.
4. Loan facilities: In case of life insurance, a businessman can get loan from
bank or financial institution by submitting life insurance policy as security.
In case of properties and assets, bank and financial institution grant loan
only on the submission of document of insured property.
5. Promotion of commerce and trade: Trade is more risky, therefore, there is
more probability of loss of properties through many factor. Insurance
provides protection against any unexpected loss in trade on the basis of
contract.
For society and nation
The following are the importance of insurance for the society and nation:
1. Maintain living standard: It takes guaranty of the loss of property and
assets by natural calamities and of other disasters. Life insurance return
sum of money to the period of maturity of the policy period or to the
nominee at the death of insured. This helps to maintain living standard of
the society and nation.
2. Reduce social evils: It compensates to the insured whenever any losses due
to calamities. Peoples can involve in any profession with the help of
compensated money. This helps to beneficiaries to provide education,
training and other facilities to their children. Hence it helps to reduce social
evils.
3. Employment opportunity: As a commercial concern, insurance needs
various types of skilled and efficient employees. Peoples can get
employment according to their ability and knowledge. Therefore, increasing
trade of insurance business helps to solve unemployment problem of the
society.
4. Formation of capital: insurance accumulates small saving of the people in
terms of premium and invest in productive purpose. Ultimately, it
contributes for the economic development of nation.
5. Economic development: Firstly, insurance protects from unexpected losses
and secondly, helps to gather small amount of money as premium from the
insured, which helps to enhance economic development of nation.
Essential of insurance
From insurer point of view, there are normally six essential requirement of
insurable risk. They are as follows.
1. Large number of exposure units: There should be large group of similar
exposure units that are subject to same peril or group of perils. However,
all exposure groups not to be identical. The main objective of this
requirement is to enable the insurer to predict loss based on the large
numbers.
2. Accidental and unintentional loss: According to this requirement, the loss
of insured property should be accidental, unexpected, unintentional and
beyond the control of insured.
3. Determinable and measurable loss: Another requirement of insurance
policy is that the loss should be determinable and measurable. It means the
loss should be defined regarding reason, place, time and amount.
4. No catastrophic loss: One of the essential requirements of insurance policy
is that the loss should not be catastrophic. It means that a large proportion
of exposure units should not incur losses at the same time.
5. Calculable chance of loss: Another essential requirement of insurance is
that the chance of loss should be calculable. The insurer must be able to
calculate both the average severity of future loss with some accuracy.
6. Economic feasible premium: The most important requirement of insurance
policy is that the premium should be economically feasible. It should be
determined in such a way that the insured must be able to pay the
premium.
Principle of insurance
Insurance business is based on some basic principles. They are
Figure 2
1. Insurable interest: In valid contract of insurance there must be insurable
interest in the subject matter of insurance i.e. property or life insured.
Insurable interest is essential is all types of insurance contract. Therefore,
2.
3.
4.
5.
6.
7.
insurable interest again means pecuniary interest in the subject matter of
insurance.
Utmost good faith: According to this principle, there must be good faith
between insured and insurer while entering into insurance contract. It
means both the parties should provide true and actual subject matter of
insurance.
Contract of indemnity: insurance is a contract of indemnity i.e. a contract
to pay the stipulated sum of the happening of a certain accident. This
principle classifies that insurance is only for compensation of loss and not
to any financial benefit or gain.
Principle of subrogation: This principle focus that after compensation of
loss of any property to insured, insurer can acquire the ownership of
damaged property.
Proximate cause: The words cause proximity means main or nearest
cause. This principle is based on the concept that the compensation will
be paid only if the cause of event is insured.
Principle of contribution: This principle of contribution is the part of
indemnity. Here contribution means sharing of loss of insurer among co
reasons. This principle emphasizes that a person cannot get insurance
policy from more than one insurance company for a single property.
Mitigation of loss: Another essential principle is the mitigation of loss.
This means to minimize the loss with the best effort on the occurrence of
event. This principle concentrates that as far as possible insured should
take proper measures to protect subject matter of insurance of
unexpected event.
Type
Types of Insurance
1. Life Insurance policy
2. Fire Insurance policy
3. Marin Insurance policy
1. Concept of life Insurance Policy:
Life insurance is a contact between insurer and insured where insurer
undertakes the risk of compensation of financial loss at the termination of policy
Period or at the death of insurer.
Life insurance is contract where by the insurance company agrees to pay a
specified Sum of money to the insured either On the termination ofa certain time
or on the death of the Person whose life is insured.
Type of life insurance policy
Life insurance contract provides protection against the risk of financial loss. The
insured feel a sense of protection because he can get a definite Sum of money at
the maturity of the definite time Period or his nominee on his death before
expiration of the period. Life insurance is divided into various types on different
basis. They are as follows.
a) Whole life policy
b) Endowment policy
c) Term Policy
A. whole life policy: In case of whole life policy' the assured amount is Payable
only on the death of the insured and the premium for it is payable during the
entire life time of the insured or for a fixed Period of time. The whole life policy
again may be classified into following three types.
1. Ordinery whole life policy: Ordinary whole life policy is issued for the whole
life of the insured.
2. Limited payment whole life policy: In this policy, the payment of premium is
limited to fix period.
3. Convertible Whole life policy: Under this whole life policy, the policy holders
are given option to convert their whole life policy into endowment policy after
terminate of a fixed period of time.
b. Endowment policy:In case of endowment policy ' the assured sum is payable after termination of a
fixed period or on the death of the insured whichever is earlier. Premium amount
is payable only for a fixed period of time according to contract. The endowment
policy May be of following types.
1. Ordinary Endowment policy: This policy is combination of both the family
protection and investment. In this policy ' assured sum is to be paid either to the
insured at the maturity of the period or to the nominee at the expiry of are
insurance policy whichever is earlier.
2. Pure Endowment policy: Pure endowment policy is for the benefit of the policy
holder. In this policy, the insured amount is to be paid to the insured only at the
termination of a fixed period. This type of policy is accepted only by the insured,
who has no nominee.
3. Double Endowment Policy: In this policy, insurance company pays double of the
assured Sum to the insured at the maturity of fixed period . But if insured died
before the maturity period, the basic sum assured is payable to nominee.
4. Joint life Endowment policy: This policy covers More than one life under a
single policy. In this policy, the sum assured is payable either at the end of the
policy term or on the death of one of insured to the living insured during
endowment period.
5. Anticipated Endowment Policy: In this policy, a part of sum assured is paid to
the insured before maturity period and balance amount to be paid at lee maturity
period.
6. DEFERRED ENDOWMENT POLICY: In this policy, the assured Sam is to be paid to
the insured or to his nominee only after termination of policy period. Even it
insured died before maturity of fixed period, insurance company will pay the sum
assured to his nominee only after the termination of policy period.
c. Term Policy:-
This is specific and short Period life insurance policy ranging from three month to
7 years. Assured amount is payable only in the event of his death. The following
are the some of the term policy.
1. Straight term policy: In this policy, a single premium is required to be paid. The
assured Sum will be payable only in the event of the death of the insured.
2. Renewal term policy: This term policy can be renewed at the expiry of a fixed
Period Of earlier insurance policy. For renewal of the term policy, medical
examination often insured is not regained.
3. Convertible term policy: This policy gives option to convert term policy into
whole life policy or endowment policy. However, this policy is issued only to first
class lives.
4. Decreasing term policy: this policy is also known as mortgage redemption
policy. In this type of policy, insurance premium Payable will be consecutively
decreased.
Procedures of life insurance policy
It is essential to complete some of the procedures for getting life insurance
pointy.
1. Submission of proposal form
It is the first step of life insurance policy. A person willing to get insurance policy
of his life has to fill up the proposal form. Generally, it's essential to submit the
proposal form by mentioning detail information required according to the rule of
the insurance. A Person willing to get life insurance policy has to complete the
following details.
• Name, address and Occupation
• Family background, health, date of birth
•Detail about income, life and habit
• Mode of payment of premium, etc
2. Submission q Medical examination reports
It is the report regarding health of the proposer. This report is also submitted
along with the proposal form. Medical examination report is essential for
valuation of insurance premium
3. Submission g agent's reports
This is one of the important documents of life insurance contract comes into
account only through agent. Agent's reports should also attach with the proposal
form. Insurance policy contract, basically, depends upon the agent's report.
4. Submission of age certificate
This is another important evidential document g life insurance policy. A proposer
has to Submit The certificate of his actual age.
5. Acceptance of proposal
In case, information is in accordance of the requirement of the insurance
company it accept the proposal and demand for fish premium. A letter of regret is
to be sent to the proposer if proposal is rejected
6. Payment of first premium
On the demand of insurance company, proposer should pay the first premium
amount. After receiving premium amount, company issues receipts as an
evidence of premium amount received.
7. Issue of insurance policy
After and payment of first allotment of the premium insurance company issues
insurance policy certificate to the insured .fire insurance is a contract between
insurer and ensured to identify loss of property due to the fire and other defined
reason for this purpose insured charges certain rate of premium .
According to bhushan and professor R S sharma
”fire insurance is an agreement for a Consideration, undertakes to indemnity the
other Party against financial loss which the latter may sustain by reason of Certain
defined Subject-matter being damage or destroyed by fire or other defined perils
up to an agreement amount.”
In simple word we may say fine insurance is contract between insurer and insured
where insurer undertakes responsibility of Compensation of loss of property or
assets due to fine and other defined Reason under the consideration of certain
amount of premium.
Types of fire insurance policy
Depending upon agreement and Situation fire insurance may be classified into the
following types
A- On the basis of risk cover
The following are the four types of policy on the basis of risk covered:
1. Comprehensive policy
This policy also known as all policy. In this policy Insurer takes responsibility of
compensation not only loss of goods by fire but also due to other reasons like,
theft' accident, explosion, etc.
2. Blanket Policy: This policy covers various types of assets of different location
along with building. If the insured building is caught by fire, insurance company
will indemnify the value of all the damaged properties along with building.
3. Consequential policy: The Settlement of a loss covering material damage only is
not sufficient. The consequential loss is also to be provided. Therefore, this policy
provides compensation not only for the value of loss but also value of anticipated
loss due to accident and increase in cost of working capital.
4. Sprinkle Leakage Policy: This policy provides protection against loss of property
caused by the accidental leakage of water, gas or other materials.
On the basis of indemnity
The following are the four types of insurance policy on the basis of indemnity
1. Valued policy
In this policy, the sum amount assured payable is predetermined. The amount
claim about the loss of property or assets fire is predetermined.
2. Average policy
In this policy that amount of sum is determined with reference to actual value of
property assured. The amount is calculated as the average amount of actual loss
and insured amount by dividing the value of property of the insured.
3 specific policies
In specific policy the assured can claim only assured sum when property loss by
fire. Assured cannot claim more than the assured sum even if loss of property is
more than that assured sum.
4. Reinstatement policy
In this policy the insurer only replace the damaged property to insured. The
insurance company compensate the loss of property to the insured .this policy is
also known as new for old policy where old property is replaced by new property.
C. On the basis of stock goods
The following are the five types of insurance on the basis of stock of goods
1. Floating policy
This policy is applicable to store located in different places. it covers one or more
kind of goods under one sum assured for one premium which is of one owner.
2 declaration policy
Under the declaration policy the ensured takes out an insurance policy for the
maximum amount of stock that he considers would be at risk during the period of
policy. In simple word in this policy ensure undertakes insurance policy for the
maximum amount of stock that may remain during policy period.
3. Adjustable policy
This policy is just an ordinary policy for business stock. in this policy premium
amount payable to insurance on according to the variation of the stock. The
insured has to deliver monthly stock valuation report to the insurer..Insurance
premium is determined on the basis of monthly changing value of a stock
4. Access policy
Access policy covers the stock of different nature of items. This policy has been
introduced to minimize the sum of premium and also to minimize the amount of
loss on the occurrence of fire.
5. Maximum value with discount policy
In this policy premium paid to insurer on the basis of maximum value of a stock in
any month during policy period policy. Therefore no declaration and adjustment
of policy is needed. At the end of the police period if there is no loss of property
one third of the premium paid will be returned to the insured.
Procedures of effective fire insurance policy
for completion of fire insurance policy it is essential to complete some formal
documents and formalities. they are as follows
1. Selection of insurance company
The first step of the policyholder is to select the insurance company generally
such company should be preferred which can provide promote service and
promote indemnification of loss. The financial position of the company is taken
into account while selecting an insurance company.
2 Submission of proposal form
After selection of appropriate insurance company another step of the
policyholder is the submission of proposal form. Proposal form can be obtained
either from agent or directly from office of insurance company. In proposal form
it is essential to mention detail about property for insurance.
3. Evidence of status or respectability.
Respectability is concerned with status and morality there is the possibility of
more hazards in fire insurance policy because sometimes the insured may himself
destroy the property by fire. Therefore in some cases insured has to submit
certificate of responsibility.
4. Survey of property. In some special cases when the value of insurance is high,
insurer make survey of property and assets of the policyholder before accepting
proposal. For such survey insurance takes support of technical employees. On the
basis of technical report from the employee the company will determine the
nature of risk and amount of premium.
5. Acceptance of proposal
The insurer accepts the proposal after getting evidential documents in accordance
of requirement. The rate of premium is also mentioned in the acceptance letter.
Through acceptance letter the insurer may ask for the payment of premium to the
policyholder.
6. Issue of cover notes
After accepting proposal form and first premium amount insurance company
issues ok, notes as an initial evidence of insurance contract .discover note act as
an evidence of insurance policy.
7. Issue of fire insurance policy
The insurance company after completion of documents and procedures issues a
stamped policy certificate. This certificate contains detailed information about
subject matter of insurance.
Marine insurance
Concept of marine insurance
Marine insurance is the insurance sea journey.
According to Mr. Arnold "Marine insurance is a contract whereby one party for an
agreement consideration undertakes to indemnify the other against loss arising
from certain perils and sea risk to which a shipment and other interest in marine
adventure may be exposed during a certain voyage or certain time."
in fact we may say marine insurance is a contract between insurer and insured
where insured undertakes the responsibility of indemnification of loss of
shipment and other properties in sea transportation in return of certain amount
of premium.
Subject matter of marine insurance
On the basis of contract marine insurance covers all the property and goods
navigating root like hull cargo freight insurance etc
1. Hull insurance.
It is concerned with insurance of shipment against the risk of journey. In hull
insurance only value of ship is covered and value of goods in ship is not taken into
consideration.
2. Cargo insurance
Here cargo means value of goods and services carried in the ship to a definite
destination. The owner of the goods has interest in the value of goods carried.
Generally businessman and trading organization make cargo insurance to carry
goods and services from a particular point to the destination.
3. Freight insurance
Freight is concern with carrying charges of ship. The transportation company
takes the responsibility of delivering goods to the destination. For delivery of
goods it charges certain amount of fright. It may be unable to receive freight if
ship does not reach to the destination by carrying goods safely. In such situation
freight insurance protects the transportation company by paying value of freight.
3. Liability insurance
Transportation company or ship owner has responsibility to carry goods
safely to the destination. Therefore marine insurance policy may include
liability hazards such as collision, running down, or other accidents.