Introduction to insurance

1. PRESENTED BY
SIMRAN KAUR
MBA 2ND YEAR

2. › Financial device or contract to mitigate or eliminate risk of
loss to life and property
› Form of risk management primarily used to hedge against
the risk of a contingent or uncertain loss
› Involves avoiding, mitigating and transferring of risk, which
creates greater predictability for individuals and
organizations

3. › Originated from Italy with motto “Yogakshemam
Vahamyaham” which means “Your welfare is my
responsibility”
› Marine insurance is oldest form of insurance related to
Mediterranean voyage in 1347
› In India, first marine insurance company, Sun Insurance
Office Ltd., was setup in Calcutta in 1710
› The first recorded life policy was issued on 18th June 1653
on the life of Mr. William Gybbons for 12 months

4. › The first Indian company named as Bombay Mutual Life
Assurance Society Ltd.was formed in Bombay in December
1870, was the first to cover Indian lives at normal rates
› The origin of the fire insurance can be traced in 16th
century in Germany
› In India, the fire insurance started with establishment of
Triton Insurance Company in Calcutta in 1850
› Miscellaneous insurance took present shape at later part of
19th century with industrial revolution in England

5. › In 20th century, many types of social insurance started
operating , viz. unemployment insurance, crop insurance,
cattle insurance, etc.

6. › Insurance is a device by which the loss likely to be caused
by an uncertain event is spread over a number of persons
who are exposed to it and who propose to insure
themselves against such an event
› Instrument containing contract of insurance is called policy
› The person whose risk is insured is called insured or
assured, and the person or the company, which insures is
known as insurer, assurer or underwriter

7. › The consideration in return for which the insurer agrees to
make good the loss is known as premium
› The thing or property, which forms the basis of insurance, is
called Subject Matter of insurance
› The interest of the assured in the subject matter is called
insurable interest

8. › Risk sharing
› Cooperation
› Risk assessment
› Payment at the time of contingency
› Quantum of compensation
› Larger the number, better the care
› Insurance by choice not by chance
› Insurance a charity

9. › If the worker of a factory falls sick, he losses his income and
he also needs more money for medical treatment. In such a
case, Employee state insurance provides compensation and
meets medical expense
› Insurance sector has opened up for private insurance
companies with enactment of IRDA Act, 1999
› FDI equity in this sector is 26% and proposals have to be
cleared by IRDA established to protect the interest of
holder of insurance policy and act as a regulator and
facilitator in the industry

10. › Some of major players in this sector are LIC, Max New York
Life Insurance, Bajaj Allianz, ICICI Prudential, HDFC
Standard Life, Metlife Insurance, Birla Sun Life Insurance,
etc

11. › Protection against risk of loss
› Distribution of risk
› Capability of facing cut-throat competition
› Specialization of labor
› Optimum utilization of capital
› Formation of capital
› Social security
› Advancement of loans
› Mobilization of small savings

12. › Contract where the insurance company agrees to pay a
particular sum of money to the insured on expiry of certain time
or on the death of the person whose life is insured
› Examples:
a) Term insurance
b) Whole life insurance
c) Endowment policy
d) Money back policy
e) Annuity
f) Unit Linked Insurance Policy (ULIP)

13. › Contract of indemnity whereby the insurer undertakes to
pay compensation to the insured for the actual loss only
› Types: Fire, Marine, Motor, Accident, Credit, Public liability,
Property/Casualty, Fidelity, Burglary, Workmen
Compensation, Unemployment, National health, Cash
transit, Employment liability

14. › Promotes financial stability
› Substitutes for and complements government security
programs
› Facilitates trade and commerce
› Helps in mobilize savings
› Enables risk to be managed more efficiently
› Encourage loss mitigation
› Foster efficient capital allocation

15. › In a perfect capital market, insurance will be priced so that
it has an NPV of zero for both the insurer and the insured
› Although insurance allows the firm to divide its risk in a
new way, the firm’s total risk – and, therefore its value
remains unchanged
› Just like a firm’s capital structure, the value of insurance
must come from reducing the cost of market imperfections
on the firm

16. › A convenient way of summarizing events and probabilities
is through a probability distribution
› While evaluating the performance of a portfolio, the return
earned on the portfolio has to be evaluated in the context
of the risk associated with that portfolio
› One approach would be to group portfolios into equivalent
risk classes and then compare returns of portfolios within
each risk category
› An alternative approach would be to specifically adjust the
return for the riskiness of the portfolio.

17. › Values at Risk(VaR) is defined as a threshold value such that
the probability that the mark-to-mark loss on the portfolio
over the given time horizon exceeds this value is the given
probability level
› Monte Carlo Simulation method is used to compute the
VaR
› Stress testing seeks to determine possible changes in the
market value of a portfolio that could arise due to non-
normal movement in one or more market parameters

18. › Central tendency includes methods like Mean, Median and
Mode
› Measure of Dispersion helps to assert risk in receiving a
return on investment
› Probability distribution represents likelihood of its
occurrence
› Continuous probability distributions is in which probabilities
are not assigned to individual points
› Normal distribution is the most commonly used probability
distribution having bell shaped curve

19. › Mutuality is the normal form of commercial insurance,
whether or not it is run by a mutual insurance company or
one owned by shareholders
› Solidarity is the basis of what goes under a variety of
names, such as social security, social insurance or national
insurance
› The mutuality concept comes into play after retirement, but
before then only in so far as the member may invest in a
pooled investment vehicle

20. › Mutuality and solidarity involve sharing of losses, but only
mutuality involves assessment of risks
› Solidarity requires comprehensiveness or compulsion; a
private commercial insurance market requires mutuality

21. 1. ELEMENTS OF GENERAL CONTRACT
› Offers and acceptance
› Free consent
› Competent to make contact
› Lawful object
› Legal consideration
› Legal relationship
› Agreement not declared void
› Certainty and possibility of performance
› Legal formalities

22. 2. ELEMENTS OF SPECIAL CONTRACT RELATED TO INSURANCE
› Principle of insurable interest
› Doctrine of utmost good faith
› Principle of indemnity
› Principle of subrogation
› Principle of contribution
› Warranty
› Mitigation of loss
› Attachment of risk
› Cause of loss – doctrine of proximate cause

23. › Contract between two or more insurance companies by
which a portion of risk or loss is transferred to another
insurance company
› In a contract of reinsurance, insurer who has accepted an
insurance much bigger than he can conveniently bears lay-
off whole or part of the risk with another insurer and thus
reduces his own ultimate liability

24. › Spread or share out loss
› Contract made on the same terms and conditions that
govern the original contract of insurance
› If the original insurance lapses for any reason, reinsurance
may be terminated
› An original insurer has insurable interest upon the amount
of risk undertaken by him
› On the occurrence of loss, the original insurer has to pay
the assured amount to the insured and only then he will be
entitled to claim his share of liability from the re-insurer

25. › Re-insurer is not liable to the original insured in the event
of loss as there is no agreement between the two
› In the absence of a legally accepted contract between the
original party who has insured his subject matter and
original insurer, the re-insurers are obviously discharged

26. › PROPORTIONAL REINSURANCE
1. Quota method
2. Share surplus method
› NON-PROPORTIONAL REINSURANCE
1. Excess of loss method
2. Excess of loss ratio method
3. Treaty method
4. Facultative reinsurance
5. Pools method

27. › Security for insurers
› Reduces situations of uncertainty by distribution of risks
among other insurers
› Increases capacity of insurer to undertake insurance of
large sums without any hesitations
› Re-insurer can provide important underwriting training and
skill development
› Re-insurer can contribute to designing the product, pricing
and marketing new products

28. › Every insurer should retain risk proportionate to its financial
strength and business volumes
› Certain percentage of the sum assured on each policy by an
insurance company is to be reinsured with National Re-insurer
› Reinsurance program will begin at the start of each financial
year and has to be submitted to IRDA, 45 days before the start
of the financial year
› Insurers must place their reinsurance business, in excess of
limits defined, outside India with only those reinsurers who have
a rating of atleast BBB for the preceding 5 years

29. › Private life insurance companies can’t enter into
reinsurance with their promoter company or its associates,
though LIC can continue to reinsure its policies with GIC
› Objective of these regulations is to expand retention within
India, ensure the best protection for the reinsurance costs
incurred and simplify administration