KDFEH INSURANCE AND RISK MANAGEMENT Unit : I - V 1
UNIT: I Risk and risk management process Risk identification- evaluation Risk management techniques-selecting and implementing risk management techniques KDFEH Insurance & Risk Management 2
INSURANCE AND RISK MANAGEMENT KDFEH Insurance & Risk Management 3
INSURANCE AND RISK MANAGEMENT MEANING Insurance is a tool by which fatalities of a small number are compensated out of funds(premium payment) collected from plenteous. Insurance companies pay back for financial losses arising out of accordance of insured events, e.g in personal policy death due to accidents, in stick, explosion etc. KDFEH Insurance & Risk Management 4
Who are the parties to an insurance contract? 1. The party agreeing to pay for the losses called the Insurer. 2. The party whose loss causes the insurer to make a claims payment called the insured. 3. The payment that the insurer receives called as a premium. 4. The contract called a policy of insurance. 5. The insured's possibility of loss called the insured's exposure to loss - Risk KDFEH Insurance & Risk Management 5
Who are the parties to an insurance contract? KDFEH Insurance & Risk Management 6
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Types of insurance KDFEH Insurance & Risk Management 8
Meaning of Risk Management o Risk Management is a process that identifies loss exposures faced by an organization and selects the most appropriate techniques for treating such exposures o A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs o E.g., a plant that may be damaged by an earthquake, or an automobile that may be damaged in a collision o New forms of risk management consider KDFEH Insurance & Risk Management 9
Objectives of Risk Management Risk management has objectives before and after a loss occurs Pre-loss objectives: Reduce anxiety Prepare for potential losses in the most economical way Meet any legal obligations Post-loss objectives Ensure survival of the firm Continue operations Stabilize earnings Maintain growth Minimize the effects that a loss will have on other persons and on society. KDFEH Insurance & Risk Management 10
Risk Management Process KDFEH Insurance & Risk Management 11
RISK EVALUATION A proper evaluation of risk is necessary for risk management to determine which of the alternative course of action would be best. Steps in the process of risk evaluation - Estimate severity of losses the probability of losses - Estimate the probability of losses - Ascertain direct and indirect losses - Grouping of monetary and non monetary losses - Analysis of estimated maximum losses and possible maximum losses - Techniques to be used for risk evaluation (Qualitative Assessment, Ranking or Scoring, Past Data and Statistical Distribution Methods). Sub Code - Sub Name 12
Risk management techniques The various techniques of risk management are: Avoidance or Preventing Risk Preventive measures are designed to eliminate risks or the causes of risks. Reduction of business risk Risk are reduced by concentrated efforts of risk management. Some suggestions to overcome loss by reducing the risk are: Loss on account of market changes can be reduced by market research, Loss on account of fashion changes can be reduced by stock clearance. Shifting of Risk or Transferring of Risks Some risks can be shifted to professional agencies such as insurance, hedging etc Acceptance of Risk Risk may be accepted in ignorance, inadvertently or intentionally.provision is made against the consequences of loss by the creation of a reserve fund. Spreading of Risks https://www.youtube.com/watch?v=ghip7kb6wf8 KDFEH Insurance & Risk Management 13
Implementing risk management techniques This will involve: Issuing a risk management statement Training Establishing and documenting procedures Allocating specific responsibilities. KDFEH Insurance & Risk Management 14
UNIT: II Commercial property and liability insurance Workmen s compensation insurance Risk financing KDFEH Insurance & Risk Management 15
Property and liability insurance KDFEH Insurance & Risk Management 16
Commercial Property The term commercial property (also called commercial real estate, investment or income property) refers to building or land intended to generate a profit, either from capital gain or rental income. Commercial property includes office building, industrial property, medical centres, hotels, mall, retail stores, farmland, multifamily buildings, warehouse, and garages. In many states, residential building containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes. KDFEH Insurance & Risk Management 17
Commercial Property KDFEH Insurance & Risk Management 18
Liability Insurance Liability insurance is any insurance policy that protects an individual or business from the risk that they may be sued and held legally liable for something such as malpractice, injury or negligence. KDFEH Insurance & Risk Management 19
Liability Insurance This type of an insurance policy is generally procured by companies or individuals who may be held liable, legally for injuries or other issues. This especially the case for hospitals, doctors or even business owners. An example would be, if a product manufacturer sells products that have been faulty or causes damage to other s products, then he/she may be sued for the damages caused. Procuring a liability insurance will cover the manufacturer from ensuing legal costs. Liability insurance is one part of the general insurance policy itself under the risk transference category. In many countries, liability insurance is mandatory especially for drivers of public transport vehicles. The scope of this form of insurance in India has been defined by the Public Liability Insurance Act of 1991. KDFEH Insurance & Risk Management 20
Types of Liability Insurance Plan: Product Liability Public Liability Insurance Employer Liability Third-Party Liability https://www.youtube.com/watch?v=n9s-krzwrgu KDFEH Insurance & Risk Management 21
Workmen s Compensation Insurance Workers' compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue their employer for the tort of negligence. The trade-off between assured, limited coverage and lack of recourse outside the worker compensation system is known as "the compensation bargain". One of the problems that the compensation bargain solved is the problem of employers becoming insolvent as a result of high damage awards. The system of collective liability was created to prevent that, and thus to ensure security of compensation to the workers. Individual immunity is the necessary corollary to collective liability. https://www.youtube.com/watch?v=enpdn_rptie KDFEH Insurance & Risk Management 22
Risk Financing Methods: RETENTION Retention means that the firm retains part or all of the losses that can result from a given loss Retention is effectively used when: No other method of treatment is available The worst possible loss is not serious Losses are highly predictable A risk manager has several methods for paying retained losses: Current net income: losses are treated as current expenses Unfunded reserve: losses are deducted from a bookkeeping account Funded reserve: losses are deducted from a liquid fund Credit line: funds are borrowed to pay losses as they occur KDFEH Insurance & Risk Management 23
A captive insurer is an insurer owned by a parent firm for the purpose of insuring the parent firm s loss exposures A single-parent captive is owned by only one parent An association or group captive is an insurer owned by several parents Many captives are located in the Caribbean because the regulatory environment is favorable Self-insurance is a special form of planned retention Part or all of a given loss exposure is retained by the firm Another name for self-insurance is self-funding Widely used for workers compensation and group health benefits A risk retention group is a group captive that can write any type of liability coverage except employer liability, workers compensation, and personal lines. KDFEH Insurance & Risk Management 24
Non-insurance Transfers A non-insurance transfer is a method other than insurance by which a pure risk and its potential financial consequences are transferred to another party Examples include: Insurance Contracts, leases, hold-harmless agreements Insurance is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is high The risk manager selects the coverages needed, and policy provisions: A deductible is a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured KDFEH Insurance & Risk Management 25
Insurance An excess insurance policy is one in which the insurer does not participate in the loss until the actual loss exceeds the amount a firm has decided to retain The risk manager selects the insurer, or insurers, to provide the coverages KDFEH Insurance & Risk Management 26
UNIT: III Personal risk management applications property and liability insurance Home owners Auto owners KDFEH Insurance & Risk Management 27
Personal risk management Personal risk management refers to the identification of pure risks faced by an individual or family, and to the selection of the most appropriate technique for treating such risks The same principles applied to corporate risk management apply to personal risk management KDFEH Insurance & Risk Management 28
Personal Risk Management Process KDFEH Insurance & Risk Management 29
House Holders insurance Sec.1 loss or damage to the building and contents (excluding money and valuables) Sec.2 Burglary, house breaking theft., Sec.3 liability or damage to jewelry and valuables caused by accident or misfortune Sec.4 liability or damage to fixed plate glass by accidents Sec.5 Unforeseen physical damages due to breakdown KDFEH Insurance & Risk Management 30
Sec.6 loss or damage to TV/ DVD Sec.7 loss or damage to cycle and legal liability to third parties Sec.8 liability or damage to personal baggage travelling in India Sec.9 Personal accident insurance :insured, spouse children Sec.10 Legal liability: accidental death and workmen s compensation act KDFEH Insurance & Risk Management 31
House Holders insurance Home insurance covers losses to the structure and content of your home due to natural and man-made calamities. KDFEH Insurance & Risk Management 32
Coverages Building Contents Tenant s Liability Money On Premises In Transit Fixed Glass Fidelity Guarantee Mediclaim KDFEH Insurance & Risk Management 33
Coverages KDFEH Insurance & Risk Management 34
https://www.youtube.com/watch?v=equvmsh9ctk KDFEH Insurance & Risk Management 35
Auto insurance is an insurance policy that protects the owner of the vehicle against any financial loss arising out of damage or theft of vehicle. Motor vehicle coverage also includes damage caused to third party or property. Motor Insurance is mandatory in India.Motor Insurance is available for both cars and two wheelers. KDFEH Insurance & Risk Management 36
Auto insurance: coverages Loss or damage by accident Liability for third party Electrical and electronic accessories Persons employed to maintain vehicle https://www.youtube.com/watch?v=cbmtfpmucr0 KDFEH Insurance & Risk Management 37
Unit IV Risk management applications - loss of life - loss of health - retirement planning and annuities - employee benefits - financial and estate planning. KDFEH Insurance & Risk Management 38
HEALTH INSURANCE HISTORY OF HEALTH INSURANCE Medical Insurance was first offered in the United States in 1850 and insured injuries arising from railroad and steamboat accidents. In India the formal health insurance started with the ESIS (Employees State Insurance Scheme) under the ESIS Act 1948 and with the CGHS (Central Govt Health Scheme) 1954. In 1981, a limited cover was devised for individuals and families. This was structured the Mediclaim policy (HDH) both for individuals and Group formally in 1986 when 4 subsidiaries of GIC launched KDFEH Insurance & Risk Management 39
THIRD PARTY ADMINISTARTOR KDFEH Insurance & Risk Management 40
HEALTH INSURANCE CLAIM PROCESS CASHLESS For availing cashless treatment (only at authorized network hospitals), the TPA has to be notified in advance (for planned hospitalization) or within the stipulated time limits (for emergencies) REIMBURESMENT. Reimbursement facility can be availed at both the network and nonnetwork hospitals. Here the insured avails the treatment and settles the hospital bills directly at the hospital SETTLEMENT PROCESS SELF ADMINISTRATED PORTFOLIO Insured may opt to purchase Health Insurance policy without TPA in which case the settlement would be on reimbursement basis by the insuring Office concerned. KDFEH Insurance & Risk Management 41
FINANCIAL PLANNING Financial planning achieved widespread usage during 1970s and1980s Financial is the process of involving establishment of goals, development and implementation of plans and periodic reviews https://www.youtube.com/watch?v=btbfbufkue8 KDFEH Insurance & Risk Management 42
ESTATE PLANNING An executor fund is one of the financial tools often associated with death. Objectives: 1.Minimize the cost of transferring the property as the owner intends. 2.Assured that estates assets will be transferred to the beneficiaries. https://www.youtube.com/watch?v=cxvnhqjq0qm KDFEH Insurance & Risk Management 43
DEBTS At death, existing debts must be paid before remaining assets can be distributed Typical debts include Mortgages, charge accounts, income taxes due, and installment obligations KDFEH Insurance & Risk Management 44
TRUST Involves the transfer of property from a donor to a trustee for the benefit of one or more of beneficiaries. Trustees have legal ownership of the trust property, But they are required by law to manage and distribute in accordance with the instructions specified in the trust agreement. If the trust is set up while the donor is still alive o It is called an inter vivos or living trust If the trust is created at the donor s death through a will o It is known as a testamentary trust KDFEH Insurance & Risk Management 45
LIFE INSURANCE Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policy holder). Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits. Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, and civil commotion. KDFEH Insurance & Risk Management 46
Types of Life Insurance KDFEH Insurance & Risk Management 47
Unit : V Risk management environment Functions and organisation of insurers Government regulation of insurance sector Privatization of insurance business in India Changes in Insurance Act KDFEH Insurance & Risk Management 48
RISK MANAGEMENT ENVIRONMENT KDFEH Insurance & Risk Management 49
OBJECTIVES To take care of the policy holders interest Open market for private sector Ensure financial soundness and solvency Regulate insurance and reinsurance companies Eliminate dishonesty and unhealthy competitions Supervise the activities of intermediaries KDFEH Insurance & Risk Management 50
Functions of Insurers The functions performed by any insurer necessarily depend on -The type of business it writes, the degree to which it has shifted certain duties to others, the financial resources available, the size of the insurer, the type of organization used, etc. These functions, which are normally the responsibility of definite departments or divisions within the firm, are Production Underwriting Rate making Managing claims and losses Investing and financing Accounting and other recordkeeping Providing miscellaneous other services -Such as legal advice, marketing research, engineering, and personnel management https://www.slideshare.net/welingkardlp/functions-and-organisationsof-insurance KDFEH Insurance & Risk Management 51
INSURANCE BUSINESS IN INDIA 1912: The Indian Life Assurance Companies Act enacted. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. 1938: Insurance Act amended earlier legislation for protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized to form LIC by an Act of Parliament, viz. LIC Act,1956, with a capital contribution of Rs.5 core from the Government of India. KDFEH Insurance & Risk Management 52
PRIVATISATION OF INSURANCE Privatisation is the act of reducing the role of Government or increasing the role of private sector in activities. https://www.slideshare.net/iicecollege/privatisation-of-life-insurance-sector-in-india KDFEH Insurance & Risk Management 53
IRDA Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the public & private sector insurance companies. KDFEH Insurance & Risk Management 54
CHANGES IN INSURANCE ACT 1.The latest key changes in the insurance regulatory framework in India are as follows: 2.Registration with IRDAI is compulsory for cross-border reinsurers from April 2012. 3.Permitted to become licensed insurance brokers in 2013 through their introduction of broker s licenses for banks. 4.IRDA (Linked Insurance Products) Regulations 2013 came into effect on February 13, 2013. 5.IRDA (Non-Linked Insurance Products) Regulations 2013 came into effect on February 16, 2013. New regulation for personal accident and health insurance came into effect from February 16, 2013.. KDFEH Insurance & Risk Management 55
LIFE INSURANCE BUSINESS IN INDIA 1912: The Indian Life Assurance Companies Act enacted. 1938: Insurance Act amended earlier legislation for protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized to form LIC by an Act of Parliament, viz. LIC Act,1956, with a capital contribution of Rs.5 crore from the Government of India. KDFEH Insurance & Risk Management 56
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Foreign Direct Investment FDI in the insurance sector has been permitted up to 49% pursuant to the Insurance Laws (Amendment) Act, 2015. With the amendments to the Indian Insurance Companies (Foreign Investment) Rules, 2016 and the FDI Policy in March, 2016, investments up to 49% in the insurance sector are now permitted through the automatic route i.e. prior approval of the Foreign Investment Promotion Board is not required for increase in foreign investment up to 49%. Prior approval of the IRDAI will be required however. Set out below are some of the key points for foreign investment in an Indian insurance company, from an insurance regulatory perspective: 1. All investments, including foreign investments, in an Indian insurance company exceeding 1% of the paid up share capital of the company require prior approval of the IRDAI. While granting the approval, it is customary for the IRDAI to impose a lock-in period on the shares acquired. KDFEH Insurance & Risk Management 59
Foreign Direct Investment 2. All foreign investments must comply with applicable IRDAI regulations which prescribe the manner of computation of foreign shareholding in insurance companies. 3. There are no separate caps on holding of a single foreign investor in an Indian insurance company the 49% limit will apply to all foreign investment. 4. All Indian insurance companies must be "Indian owned and controlled", in the manner prescribed in the IRDAI's Guidelines on Indian Owned and Controlled ("Control Guidelines"). The rights of non-resident investors often need to be negotiated in light of the Control Guidelines, and the IRDAI's norms on corporate governance of insurance companies. From a regulatory perspective, it is imperative that investments are structured keeping in mind the foregoing mandates. 5. A foreign investor that has exited from an Indian insurance company cannot invest in a new insurance joint venture, till the completion of two financial years from the exit date. KDFEH Insurance & Risk Management 60
TOP INSURANCE COMPANIES KDFEH Insurance & Risk Management 60