1. MF0009 INSURANCE AND RISK MANAGEMENT
1. Explain the essentials of doctrinal of subrogation. (5 Marks)
Answer:
The principle of subrogation refers to the right of the insurer to stand in the place of
the insured, after settlement of a claim, as far as the insured’s right of recovery from an
alternative source is involved.
The following aspects elucidate the essentials of Doctrine of Subrogation:
i. Corollary to the Principal of Indemnity: the doctrine of subrogation is the
supplementary principle of indemnity. The latter doctrine says that only the actual
value of the loss of the property is compensated, so the former follows that if the
damaged property has any value left, or any right against a third party, the insurer can
subrogate the left property or right of the property because if the insured is allowed to
retain, he shall have realized more than the actual loss, which is contrary to principal
of indemnity.
ii. Subrogation is the Substitution: The insurer, according to this principle, becomes
entitled to all the rights of insured subject matter after payment because he has paid
the actual loss of the property. He is substituted in place of other persons who act on
the right and claim of the property insured. It must be noted here that the right if
subrogation is exercisable at common law after the insurer has paid the claims made
against it.
iii. Subrogation only up to the Amount of Payment: The insurer has subrogated all the
rights, claims, remedies and securities of the damages insured property after
indemnification, but he is entitled to get these benefits only to the extent of his
payment. The insurer is, thus, subrogated to the alternative rights and remedies of the
insured, only up to the amount of his payment to the insured. In the same way, if the
insured is compensated for his loss from another party after he has been indemnified
by his insurer, he is liable to part with the compensation up to the extent that the
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2. MF0009 INSURANCE AND RISK MANAGEMENT
insurer is entitled to. In a leading case, it was made clear, “If the insurer, having paid
the claim to the insured, recovers from the defaulting third party in excess of the
amount paid under the policy, he has to pay this excess to the insured through he may
charge the insured his share of reasonable expenses incurred in collecting.”
iv. The Subrogation may be Applied before Payment: If the assured got certain
compensation from third party before being fully indemnified by the insurer, the
insurer can pay only the balance of the loss.
v. Personal Insurance: The doctrine of subrogation does not apply to personal
insurance because the doctrine of indemnity is not applicable to such insurance. The
insurance have no right to action against the third party in respect of the damages.
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3. MF0009 INSURANCE AND RISK MANAGEMENT
2. Define indemnity and explain contract of indemnity. (5 Marks)
Answer:
In Insurance the word indemnity is defined as “financial compensation sufficient to
place the insured in the same financial position after a loss as he enjoyed immediately before
the loss occurred.” Indemnity thus prevents the insured from recovering more than the
amount of his pecuniary loss. It is undesirable that an insured should make a profit out of an
event like a fire or a motor accident because if he makes a profit there may be more fires and
more vehicle accidents.
Uses of Contract of Indemnity:
i. To discover over-insurance: the principle of indemnity is an essential feature of an
insurance contract, in the absence whereof this industry would have the touch of
gambling and the insured would tend to effect over-insurance and then intentionally
cause a loss to occur so that a financial gain could be achieved. So, to avoid this
intentional loss, only the actual loss becomes payable and not the assured sum. If the
property is under-insured, the insured is generally regarded his own insurer for the
amount of under-insurance and in case of loss he shall share the loss himself.
ii. To avoid Anti-social Act: if the assured is allowed to gain more than the actual loss,
which is against the principle of indemnity, he will be tempted to gain by destruction
of his own property after getting it insured against a risk. He will be under constant
temptation to destroy the property. Thus, the whole society will be inclined towards
doing some anti-social act. So, the principle of indemnity has been applied where only
the cash-value of the loss and nothing more than this, though one might have insured
for a greater amount, will be compensated.
iii. To maintain the Premium at Low-level: if the principle of indemnity is not applied,
larger amount will be paid for a smaller loss and this increases the cost of insurance
and the premium of insurance will have to be raised. If premium is raised two things
may happen- first, persons may not be inclined to insure and second, unscrupulous
persons would get insurance to destroy the property to gain from such act. Both things
would defeat the very purpose of insurance. So, principle of indemnity is there to help
them because such temptation is eliminated when only actual loss and not more than
the actual financial loss is compensated provided there is insurance up to that amount.
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4. MF0009 INSURANCE AND RISK MANAGEMENT
3. Write short notes on: (10 Marks)
a. Static & Dynamic Risk
b. Anti – Insurance Bias
c. Contractual Definition
d. Motor Vehicle Act 1988
e. Sub – Bailment
Answer:
a. Static & Dynamic Risk
Dynamic risks are those resulting from changes in the economy. Changes in the price
level, consumer tastes, income and output, and technology may cause financial loss to
members of the economy. These dynamic risks normally benefit society over the long run,
since they are the result of adjustments to misallocation of resources. Although these dynamic
risks may affect a large number of individuals, they are generally considered less predictable
than static risks, since they do not occur with any precise degree of regularity.
Static risks involve those losses that would occur even if there were no changes in the
economy. If we could hold consumer tastes, output and income, and the level of technology
constant, some individuals would still suffer financial loss. These losses arise from causes
other than the changes in the economy, such as the perils of nature and the dishonesty of
other individuals.
b. Anti – Insurance Bias
In standard models of contracts, efficient incentives require the promisor to pay
damages for non-performance and the promisee to receive no damages. To give efficient
incentives to both parties, we propose a novel contract requiring the promisor to pay damages
for nonperformance to a third party, not to the promisee. In exchange for the right to
damages, the third party pays the promisor and promisee in advance before performance or
nonperformance occurs. We call this novel contract “anti-insurance” because it strengthens
incentives by magnifying risk, whereas insurance erodes incentives by spreading risk. Anti-
insurance is based on the general principle that efficient incentives typically require each
party to bear the full risk that they jointly create. By improving incentives, anti-insurance
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5. MF0009 INSURANCE AND RISK MANAGEMENT
contracts can create value and benefit everyone. Anti-insurance could be especially useful in
contracts for goods susceptible to consumer misuse (e.g. automobile transmissions) and
goods or service contracts requiring buyer’s cooperation (e.g. building construction). In some
circumstances we recommend allowing sellers to substitute anti-insurance for implied
warranties or liability to consumers of defective products.
c. Contractual Definition
Insurance has been defined to be that in which a sum of money as a premium is paid
in consideration of the insurer’s incurring the risk of paying a large sum upon a given
contingency. The insurance, thus, is a contract whereby: (a) certain sum, called premium, is
charged in consideration, (b) against the said consideration, a large sum is guaranteed to be
paid by the insurer who received the premium, (c) the payment will be made in a certain
definite sum, i.e., the loss or the policy amount whichever may be defined as consisting of
one party (the insurer) who agrees to pay to the other party (the risk) against which insurance
is sought.
d. Motor Vehicle Act 1988
The Motor Vehicle Act was amended in 1988 to make Third Party Liability Insurance
compulsory. Thus no uninsured vehicle is allowed to ply the roads in any public place in
India. The need of this enactment was felt due to the growing number of vehicles and the
increasing number of accidents causing injury and death of the people involved in accidents
and not being able to get relief from the owner/driver of the vehicle because of long
protracted legal battle involved, which many victims could not afford. The Act now provides
that irrespective of the fact that the fault was of the driver/owner or not the victim of an
accident will be entitled to a payment of Rs. 50,000/- in case of death and Rs. 25,000/- in the
case of grievous bodily injury. Motor Accident Claim Tribunal (MACT) has been set up by
the State Govt. to provide speedy redressal of Third Party claims. Damage to property of
third party is also covered and the limit is Rs. 6,000/-. Motor Vehicle Act also provides for
the creation of a “Solatium Fund” to cater to the victims of Hit and Run cases. The fund is
created by the contribution from Insurance companies, State and Central Govt. and the
victims of Hit and Run cases are entitled to receive Rs.25,000/- in case of death and
Rs.12,500/- in the case of grievous bodily injury.
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6. MF0009 INSURANCE AND RISK MANAGEMENT
e. Sub – Bailment
A bailment is effected by a transfer of possession (but not of ownership) from one
party, the bailor, to another, the bailee. A party is not a bailee unless he takes actual
possession of the goods. Where a bailee receives the goods, but subsequently passes the
possession of goods to a subcontract, he will generally make a sub-bailment, so that he as the
original bailee and the sub-contractor as a sub-bailee, both remain answerable to the bailor
throughout the duration of the bailment. However, where the bailee delivers possession to
another under or at the direction of the bailor in fulfillment and termination of his contract, he
will generally be held to have thereby terminated his obligations as bailee entirely, so that, in
delivering possession to the new party, he does so on behalf of his bailor and so as to make a
co-called substitutional bailment.
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7. MF0009 INSURANCE AND RISK MANAGEMENT
Case Study (10 Marks)
4. Select any two banks of your choice preferably one nationalized and another private bank
that has banc assurance tie up. Discuss the insurance products offered by them.
Answer:
Banc assurance in its simplest form is the distribution of insurance products through a
bank distribution channel. In concrete term, banc assurance which is also known as ‘Allianz’-
distributes a package of financial services that can fulfill both banking and insurance needs at
the same time. It takes various forms in various countries depend upon the demography,
economic and legislative climate of that country. Profile of a country decides the kinds of
products banc assurance shall be dealing with. Economic situation will determines the trends
in terms of turnover, market share etc. Whereas legislative climate will decide the periphery
within which the Banc assurance has to operate. The motive behind banc assurance varies:
For banks- product diversification, source of additional fee income. For Insurance company-
a tool of increasing their market penetration, premium turnover, For Customers- Reduced
Price, High Quality Product, Delivery at doorsteps. Actually everybody is a winner.
SBI-New India Banc assurance Tie Up
State Bank of India, the country's largest Bank and New India Assurance Co. Ltd,
India's largest non- life insurance company have tied up for distributing general insurance
policies of New India through SBI's branch network.
A Memorandum of Understanding was signed yesterday between SBI and New India
for the Banc assurance tie up. As per the memorandum of Understanding, SBI will become
the corporate Agent of New India after completing the formalities prescribed by IRDA.
SBI, has of late, been laying emphasis on cross selling various products to its
customers. It has already become Corporate Agent of SBI Life Insurance Co. Ltd for life
insurance business. SBI Life's products are now being sold by around 1000 SBI branches.
Mutual Fund products of SBI Mutual Fund are also now being sold through select branches
of SBI. Similarly, SBI Credit Cards are also sold through SBI's branch network. While all
these products are from SBI's own stable, the tie up with New India will be a first for SBI in
vending a third party's product.
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8. MF0009 INSURANCE AND RISK MANAGEMENT
New India as the largest non-life insurer in the country is the first general insurance
company to cross Rs.4000 crores premium mark last year having booked overall premium of
Rs.4812.79 crores. The Company has been reaffirmed 'A' Excellent rating for the 4th
consecutive year by A.M. Best (Europe). For New India a tie up with SBI, the country's
largest bank with a 9000 strong branch network is a major boost. Banc assurance as a
distribution channel is assuming increasing important for both life and non- life insurers.
The tie up between the two largest players in their respective fields will enable SBI to
leverage its unmatched branch network and customer base to cross sell a range general
insurance products and thus open up a new revenue stream. For New India, the tie up with
SBI will enable it to tap into SBI's huge network and customer base.
ICICI Prudential
ICICI Bank, Federal Bank, Bank of India, South Indian Bank, Lord Krishna Bank,
Goa State Co-operative Bank, Indoor Paraspar Sahakari Bank, Manipal State Co-operative
Bank, Jalgaon People's Co-operative Bank, Shamrao Vithal Co-operative Bank, Punjab &
Maharashtra Co-operative Bank.
ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a
premier financial powerhouse, and Prudential plc, a leading international financial services
group headquartered in the United Kingdom. ICICI Prudential was amongst the first private
sector insurance companies to begin operations in December 2000 after receiving approval
from Insurance Regulatory Development Authority (IRDA). ICICI Prudential’s equity base
stands at Rs. 925 Crore with ICICI Bank and Prudential plc holding 74% and 26% stake
respectively. In the financial year that ended March 31, 2005, the company garnered Rs. 1584
Crore of new business premium for a total sum assured of Rs. 13,780 Crore and wrote nearly
615,000 policies. For the past four years, ICICI Prudential has retained its position as the No.
1 private life insurer in the country, with a wide range of flexible products that meet the needs
of the Indian customer at every step in life.
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