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UNIT IV
RISK MANAGEMENT IN INSURANCE
CHAPTER 1: INSURANCE INDUSTRY
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA):
INTRODUCTION:
In order to provide better insurance coverage to citizens and also to augment the flow of long-
term resources for financing infrastructure, the Government of India opened the insurance
sector to foreign and Indian companies. IRDA - Insurance Regulatory Development and
Authority is the statutory, independent and apex body that governs and supervise the
Insurance Industry in India.
IRDA is a national agency of the Government of India based in Hydrabad. It was formed by
an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to
incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect
the interests of the policyholders, to regulate, promote and ensure orderly growth of the
insurance industry and for matters connected therewith or incidental thereto."
IRDA provides a certificate of registration to both life and general insurance company. IRDA
is responsible for the renewal, modification, withdrawal, suspension or cancellation of this
certificate of registration.
OBJECTIVES OF IRDA:
1. To promote the interest and rights of policy holders.
2. To promote and ensure the growth of Insurance Industry.
3. To ensure speedy settlement of genuine claims and to prevent frauds and malpractices
4. To bring transparency and orderly conduct of in financial markets dealing with
insurance.
5. To promote orderly growth of insurance industry in the country, including registration
of the insurance companies.
6. To administer the provisions of the insurance act.
7. To device control activities needed for smooth functioning of the insurance
companies including investment of funds and the solvency requirements to be
maintained by insurance companies.
8. To lay down the accounting methodology to be adopted.
9. To adjudicate on disputes.
POWERS OF IRDA
The following are the powers of IRDA
1. All insurance companies have to register with IRDA compulsorily.
2. Companies can undertake only insurance business.
3. The capital structure of the companies will be determined by IRDA.

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4. Companies have to deposit with RBI the amount stipulated by IRDA.
5. Accounts and balance sheets of companies have to be submitted to IRDA.
6. Insurance companies have to appoint actuaries and they will value the liabilities of the
insurance companies and report the same to IRDA.
7. Investment of assets will be prescribed by IRDA in the form of approved securities.
8. The nature of general insurance business will be prescribed by IRDA.
9. Statements of investment assets to be submitted to IRDA every financial year.
10. All insurance companies have to devote certain percentage of their business including
insurance for crops. This should cover unorganized sector including the economically weaker
sections.
11. The appointment of chief executive officer requires prior permission of the IRDA.
12. All insurance agents must obtain license from IRDA.
13. IRDA has powers for levying penalty on companies which fail to comply with the rules
and regulations.
DUTIES OF IRDA
1. Regulates insurance companies
The working of insurance companies will be regulated in the following aspects
 the persons to be employed,
 the nature of business,
 covering of risks,
 terms and agreements for covering risks etc., will be prescribed by IRDA.
2. Promotes insurance companies
Corporate set-up is a must for establishing an insurance company and they have to submit
periodical reports to IRDA. Different kinds of policies and different types of insurance are
also suggested by IRDA to these insurance companies.
3. Ensures growth of insurance and reinsurance companies
Here, the promotion of new companies is encouraged. Even banks are also permitted to
promote insurance companies as a subsidiary.
Other duties are as follows:
1. To promote the interest and rights of policy holders.
2. To promote and ensure the growth of Insurance Industry.
3. To ensure speedy settlement of genuine claims and to prevent frauds and malpractices
4. To bring transparency and orderly conduct of in financial markets dealing with
insurance.

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5. To promote orderly growth of insurance industry in the country, including registration
of the insurance companies.
6. To administer the provisions of the insurance act.
7. To device control activities needed for smooth functioning of the insurance
companies including investment of funds and the solvency requirements to be
maintained by insurance companies.
8. To lay down the accounting methodology to be adopted.
9. To adjudicate on disputes.
FUNCTIONS OF IRDA
1. Issuing certificate of registration.
2. Protecting the interest of policy holders.
3. Issuing license to agents.
4. Specifying code of conduct for surveyors and loss assessors.
5. Promoting efficiency in the insurance business.
6. Undertaking inspection, conducting enquiries etc., on insurance companies.
7. Control and regulations of rates, terms and conditions by insurance company to policy
holders.
IRDA REFORM:
The Insurance Regulatory and Development Authority (Irda) has published in the gazette of
India five key reforms related to the sector, including new guidelines for insurers and
reinsurers.
The reforms are:
1. Investment regulations for insurers,
2. Irda (life insurance-reinsurance) regulations;
3. places of business regulations;
4. Irda appointed actuary amendment regulations and
5. regulations for the standard proposal form.
According to the actuary amendment regulations, non-life insurers will also have appointed
actuaries as full time employees.
General insurers have been given two years‘ time to appoint those actuaries as ―employees‖.
According to the gazette notification, an appointed actuary should have a minimum
experience of 10 years, out of which two years must be post-fellowship qualification and at
least two years‘ experience must be in life, non-life or health insurance.

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The new standard proposal form norm called for a common proposal form for all
life insurance proposals.
According to the investment regulations, insurers could invest from 10 to 15 per cent in
equity, based on their investment assets. The limit is 10 per cent for investment assets less
than Rs 50,000 crore, 12 per cent for investment assets for Rs 50,000 crore to less than Rs 2.5
lakh crore.
For companies with investment assets of more than Rs 2.5 lakh crore, the limit is set at 15 per
cent.
ACTUARY:
Meaning:
An actuary is a statistician who is in charge of evaluating various types of risks. Most
actuaries are employed by insurance companies, which use their expertise to set the terms,
conditions and premium rates for their insurance policies. They are also hired by pension
funds and various private companies to detect risks and help design procedures that can help
mitigate risk. And while the actuaries' responsibilities vary depending on who hired them,
and what kind of data they are working with, the basics tend to remain the same.
Actuaries and the Importance of Risk Evaluation:
When an insurance company sells off an insurance policy, it operates under the assumption
that the person who bought will not require the coverage. There are only so many times
insurance companies can pay claims before those payments start costing them more money.
In order to avoid pay-outs, insurance companies need someone to analyse what kind of risks
their potential beneficiaries will be facing and calculate whether or not selling insurance to
them is worth the risk. This is where the actuaries come in.
The actuary will use their extensive knowledge of statistics, finance and economics to analyse
the data. They serve similar purpose when they work for pension funds. Private companies
used them to evaluate risks involved in implementing their business strategies in hopes that
they will be to avoid putting their money in something that will ultimately backfire and cost
them far more than it's worth. The responsibilities include the compiling and reviewing
statistical data, using that data to suggest policy guidelines for their employers, providing
expert testimony at trials and legislative hearings and coming up with new and improved
ways to consider risk.
1. Compiling and Reviewing Statistical Data
This is the first and the most important responsibility of the actuary. Actuaries gather data on
mortality, sickness, accidents, disability and retirement within their community, as well as
any other data that may be relevant to their employer. They plug those variables into
advanced statistical models to calculate how those variables would affect the insurance
beneficiaries in the future. The data that is produced is fairly reliable.
2. Advising on Company Policies
Another responsibility is contract review. An actuary will review contracts, insurance plans,
annuity plans, pension plans and policies. They look to see if those policies take the risks they

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calculated into account and craft guidelines that would allow their employers to better adapt
to those risks.
3. Providing Expert Testimony
The actuaries are sometimes asked to provide testimony in lawsuits that revolve around
insurance or risk in general. Sometimes, they are asked to testify on the behalf of their
employees, but they are also asked to act as expert witnesses. They may also be asked to
testify in similar capacity when state and federal legislatures are trying to create laws that
have anything to do with insurance companies.
4. Devising New Methods of Risk Analysis
While actuaries often rely on statistical models devised by other actuaries or mathematicians
in general, they are sometimes asked to come up with new statistical models in order to
evaluate risks for new insurance policies, or modify existing models to account for
circumstances that did not previously exist. They may also be asked to make existing models
more exact and more efficient.

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CHAPTER 2: PLAYERS OF INSURANCE BUSINESS
LIFE INSURANCE:
Introduction:
Life insurance (or life assurance, especially in the Commonwealth of Nations) 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).
Types of life insurance policies:
There are various types of life insurance policies .The basic types of life insurance policies
are:
(1) Term insurance: Term plans are the most basic form of life insurance. They provide life
cover with no savings profits component. They are the most affordable form of life
insurance as premiums are cheaper compared to other life insurance plans.
Online term insurance plans provide pure risk cover, which explains the lower
premiums. A fixed sum of money - the sum assured – is paid to the beneficiaries if the
policyholder expires over the policy term. If the policyholder survives, there is no pay
out.
(2) Endowment plans: Endowment plans differ from term plans in one critical aspect i.e.
maturity benefit. Unlike term plans which pay out the sum assured, along with profits,
only in case of an eventuality over the policy term, endowment plans pay out the sum
assured under both scenarios – death and survival. However, endowment plans charge
higher fees / expenses – reflected in premiums – for paying out sum assured, along with
profits, in either scenario – death or maturity. The profits are an outcome of premiums
being invested in asset markets – equities and debt.
(3) Unit linked insurance plans (ULIP): ULIPs are a variant of the traditional endowment
plan. They pay out the sum assured (or the investment portfolio if it‘s higher) on
death/maturity. ULIPs differ from traditional endowment plans in certain areas. As the
name suggests, performance of ULIP is linked to markets. Individuals can choose the
allocation for investments in stock/debt markets. The value of the investment portfolio is
captured by the NAV (net asset value). To that end, there are many similarities between
ULIPs and mutual funds. ULIPs differ in one area, they are a combination of investment
and insurance, while mutual funds are a pure investment avenue.
(4) Whole life policy: A whole life insurance policy covers a policyholder over his life. The
main feature of a whole life policy is that the validity of the policy is not defined so the
individual enjoys the life cover throughout his life. The policyholder pays regular
premiums until his death, upon which the corpus is paid out to the family. The policy
expires only in case of an eventuality as there is no pre-defined policy tenure. There are
two types of whole life insurance
(i) Limited Payment Life Insurance
(ii) Single premium whole life policy

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(5) Money back policy: A money back policy is a variant of the endowment plan. It gives
periodic payments over the policy term. To that end, a portion of the sum assured is paid
out at regular intervals. If the policy holder survives the term, he gets the balance sum
assured. In case of death over the policy term, the beneficiary gets the full sum assured.
GENERAL INSURANCE POLICIES:
Introduction:
General insurance covers insurance of property against fire, burglary, theft; personal
insurance covering health, travel and accidents; and liability insurance covering legal
liabilities. This category of insurance virtually covers all forms of insurance except life. Other
covers may include insurance against errors and omissions for professionals, credit insurance
etc. Common forms of general insurance are motor, fire, home, marine, health, travel,
accident and other miscellaneous forms of non-life insurance.
Types of general insurance policies:
There are various types of general insurance policies. The basic types of general insurance
policies are:
(1) Motor Insurance: Motor insurance covers all damages and liability to a vehicle against
various on-road and off-road emergencies. A comprehensive policy even secures against
damage caused by natural and man-made calamities, including acts of terrorism.
Motor insurance is mandatory in India as per the Motor Vehicles Act, 1988 and needs
to be renewed every year. Driving a motor vehicle without insurance in a public place is
a punishable offence.
Common motor insurance categories include:
Car Insurance, Two Wheeler Insurance, Commercial Vehicle Insurance.
(2) Health Insurance: Health insurance covers the medical and surgical expenses of the
insured individual due to hospitalisation from an illness. Additional riders enhance the
benefits and scope of the cover. Health insurance often includes cashless facility at
empanelled hospitals, pre and post hospitalisation expenses, ambulance charges, daily
cash allowance etc.
Common types of health insurance policies include: Individual Policy, Family Floater
Policy, and Surgery Cover Comprehensive Health Insurance.
(3) Marine/Cargo Insurance: Marine cargo insurance covers goods, freight, cargo and
other interests against loss or damage during transit by rail, road, sea and/or air.
Shipments are protected from the time the goods leave the seller‘s warehouse till they
reach the buyer‘s warehouse. Marine cargo insurance offers complete financial
protection during transit of goods and compensates in the event of any loss suffered.
Common types of policies:
Open Cover, Open Policy, Specific Voyage Policy and Annual Policy etc.
(4) Fire Insurance: Fire insurance means insurance against any loss caused by fire. Fire
insurance is a contract under which the insurer indemnifies the insured, in return for

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payment of a premium, losses suffered due to damage to the property caused by fire. Fire
insurance is a contract of indemnity.
(5) Miscellaneous Insurance:
(i) Personal Accident Insurance: Personal Accident is an insurance cover wherein, in
the event of the person sustaining bodily injuries resulting solely and directly from
an accident caused by external , violent, and visible means , resulting into death or
disablement. An accident may include events like: Rail / Road / Air Accident, Injury
due to any collision/fall, Injury due to Bursting of gas cylinder, Snake-bite, Frost
bite/Dog bite , Burn Injury, Drowning, Poisoning etc.
(ii) Fidelity Insurance: Fidelity insurance protects organizations from loss of money,
securities, or inventory resulting from crime. Common Fidelity claims allege
employee dishonesty, embezzlement, forgery, robbery, safe burglary, computer
fraud, wire transfer fraud, counterfeiting, and other criminal acts.
(iii) Burglary Insurance: Such a policy provides protection against loss or damage
caused by housebreaking, robbery or theft. It is also known as ‗robbery, theft or
larceny insurance‘.
(iv) Credit Insurance: Credit insurance policy is taken to cover the loss which may
arise due to bad debts or non-payment of dues by the debtors. This insurance is very
useful to businessmen who sell goods on credit. It protects them from loss arising
out of insolvency of their debtors. In India, Export Credit and Guarantee
Corporation (ECGC) provide credit insurance to exporters.
(v) Workmen’s Compensation Insurance: In India, Workmen‘s Compensation Act
was passed in 1934 and 1946. According to this act, an employer is required to pay
compensation to his workers who receive injuries or contract occupational diseases
during the course of their work. An employer may obtain an insurance policy to
cover such liability. The premiums are payable usually on the basis of wages. It is
also known as ‗Employers Liability Insurance‘.
(vi) Personal Liability Insurance: Personal liability insurance provides protection
against the legal liability, which arises due to insured‘s personal acts. The insurance
company will pay for legal defence to third party damages or injuries up to policy
limit. Except legal liability, which arises due to automobile accidents and
professional liability, most other personal acts are covered under personal liability
insurance.
(vii)Crop Insurance: Crop insurance refers to an insurance which insures farmers and
crop producers against the loss of crops due to natural disasters, such as hail
drought, and floods. There are two types of crop insurance:
(1) Crop-yield insurance. (2) Crop-revenue insurance.
(viii) Cattle Insurance: Cattle Insurance is suitable for the farmer who owns the cattle
and the banks/financial institutions who have financed for the purchase of cattle
under IDP/ District Rural Development Scheme / Drought Prone Areas Programmed
Schemes. In a Cattle Insurance, the word cattle refer to Cows & Buffaloes, Stud
Bulls, Bullocks, He Buffaloes, Calves and Heifers.

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(ix) Travel Insurance: Travel insurance, also referred to as visitor insurance, and covers
one against unseen medical and non-medical emergencies during overseas travel,
ensuring a worry-free travel experience. It protects the insured against misfortunes
while travelling. Backed up by travel insurance, the whole experience is like no
other.
Different types of travel insurance policies include:
Individual Travel Policy, Family Travel Policy, Student Travel Insurance, Senior
Citizens Travel Policy.
(x) Home Insurance: Home insurance secures the home against natural calamities and
man-made disasters and threats. Home insurance provides protection against risks
and damages from fire, burglary, theft, flood, earthquakes etc. covering the physical
asset and valuables in it.
REINSURANCE:
Meaning:
Reinsurance is basically a form of coverage intended for insurance providers. Generally
speaking, this type of policy reduces the losses sustained by insurance companies by allowing
them to recover all, or part, of the amounts they pay to claimants. Reinsurers help insurance
providers avoid financial ruin in case a huge number of policyholders turn out to make their
claims during catastrophic events. Below are some of the major types of reinsurance policies.
Types of Reinsurance:
1. Facultative Coverage
This type of policy protects an insurance provider only for an individual, or a specified risk,
or contract. If there are several risks or contracts that needed to be reinsured, each one must
be negotiated separately. The reinsurer has all the right to accept or deny a facultative
reinsurance proposal.
2. Reinsurance Treaty
Unlike a facultative policy, a treaty type of coverage is in effect for a specified period of
time, rather than on a per risk, or contract basis. For the duration of the contract, the reinsurer
agrees to cover all or a portion of the risks that may be incurred by the insurance company
being covered.
3. Proportional Reinsurance
Under this type of coverage, the reinsurer will receive a prorated share of the premiums of all
the policies sold by the insurance company being covered. Consequently, when claims are
made, the reinsurer will also bear a portion of the losses. The proportion of the premiums and
losses that will be shared by the reinsurer will be based on an agreed percentage. In a
proportional coverage, the reinsurance company will also reimburse the insurance company

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for all processing, business acquisition and writing costs. Also known as ceding commission,
such costs may be paid to the insurance company upfront.
4. Non-proportional Reinsurance
In a non-proportional type of coverage, the reinsurer will only get involved if the insurance
company‘s losses exceed a specified amount, which is referred to as priority or retention
limit. Hence, the reinsurer does not have a proportional share in the premiums and losses of
the insurance provider. The priority or retention limit may be based on a single type of risk or
an entire business category.
5. Excess-of-Loss Reinsurance
This is actually a form of non-proportional coverage. The reinsurer will only cover the losses
that exceed the insurance company‘s retained limit. However, what makes this type of
contract unique is that it is typically applied to catastrophic events. It can cover the insurance
company either on a per occurrence basis or for all the cumulative losses within a specified
period.
6. Risk-Attaching Reinsurance
Under this type of contract, all policy claims that are established during the effective period
of the reinsurance coverage will be covered, regardless of whether the losses occurred outside
the coverage period. Conversely, no coverage will be given on claims that originate outside
the coverage period, even if the losses occurred while the reinsurance contract is in effect.
7. Loss-occurring Coverage:
This is a type of treaty coverage where the insurance company can claim all losses that occur
during the reinsurance contract period. The important factor to consider is when the losses
have occurred and not when the claims have been made.
BANCASSURANCE:
Bancassurance is used to describe the partnership or relationship between a bank and an
insurance company whereby the insurance company uses the bank sales channel in order to
sell insurance products. Bancassurance simply means selling of insurance products by banks.
In this arrangement, insurance companies and banks undergo a tie-up, thereby allowing banks
to sell the insurance products to its customers. By selling insurance policies bank earns a
revenue stream apart from interest. It is called as fee-based income. This income is purely
risk free for the bank since the bank simply plays the role of an intermediary for sourcing
business to the insurance company.
Insurers see it as a tool to increase penetration and market share and bankers use it to
augment their fee income and to smoothen the volatility of interest income. Bancassurance is
a package of banking and insurance service at one roof. The introduction of Bancassurance
has broadened the scope of retail banking.

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Bancassurance companies in India
a) SBI life insurance Company
b) LIC is tied up with Vijaya bank, Oriental bank of commerce, Corporation bank
c) ICICI Lombard
d) Barclays – MetLife India
e) Axis bank – MetLife India
f) Aviva Life
g) Kotak Mahindra
h) ICICI Pru - ICICI Pru Life Insurance has tied up with 18 banks
i) HDFC Standard Life - HDFC Bank, Indian Bank and Bank of Baroda and many co-
operative banks
j) Birla Sun Life - The first bancassurance policy in India was sold by Birla Sun.
Advantages of Bancassurance:
I. Advantage for the banks
1. Revenue diversification
2. Satisfaction of more financial needs under the same roof.
3. Customer retention-Increase in customer loyalty
4. More profitable resources utilization
5. Enriched customer environment
6. Establish sales oriented culture
7. Advantage for the insurance companies
8. Revenue and channel diversification
9. Quality customer access
10. Increase in volume and profit
11. Improved brand equity
12. The insurance company can establish itself more quickly in a new market ,using a
local existing bank channel.
II. Advantage for the consumers
1. Enhanced convenience
2. One stop shop for all financial needs
3. Innovative and better products range
4. More credible solutions
Disadvantages of Bancassurance:
1. Data management of an individual customer‘s identity and contact details may result
in the insurance company utilizing the details to market their products, thus
compromising on data security.
2. There is a possibility of the conflict of interest between the other products of bank and
insurance policies (like money back policy). This could confuse the customer
regarding where he has to invest.
3. Better approach and services provided by banks to the customer is a hope rather than
a fact. This is because many banks in India are known for their bad customer service
and this fact turns worse when they are responsible to sell insurance products. Work
nature to market insurance products requires submissive attitude, which is a point that
has to be worked on by many banks in India.

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ALTERNATIVE RISK TRANSFER (ART):
1. Alternative Risk Transfer (ART) is the use of techniques other than traditional insurance
and reinsurance to provide risk-bearing entities with insurance-like coverage/protection.
Alternative Risk Transfer (ART) Market' is the portion of the insurance market that allows
companies to purchase coverage and transfer risk without having to use traditional
commercial insurance. The Alternative Risk Transfer, or ART, market includes risk retention
groups (RRGs) as well as insurance pools and captive insurers.
2. The alternative risk transfer market is broken into two primary segments:
a) Risk transfer through alternative products- Transferring risks through alternative
products entails the purchase of insurance policies or other financial products such
as securities.
b) Risk transfer through alternative carriers-Transferring risk to alternative carriers
entails finding organizations, such as captive insurers or pools, which are willing to take on
some of the insurer‘s risk for a fee.
3. Characteristics unique to alternative risk transfer often include:
a) Multi-year, multi-line coverage
b) Coverage tailored to a special or unique need of an insured
c) Coverage not generally available in the marketplace
d) Insured retains some risk
4. Benefit of Alternative risk transfer:
a) Does not subsidize others whose premiums are inadequate to pay their claims.
b) Gains access to profits generated from current insurance premiums.
c) Has more control of who shares your risk.
d) Is not subject to market swings—gain stability and predictability in premiums
5. Common Alternative risk transfer strategy includes:
a) Loss-sensitive insurance plans, in which your premiums are based on your losses.
b) Risk-purchasing groups of individuals purchasing liability insurance.
c) Self-insured retention plans
d) Protected cell captives, which allow you to rent a captive while ensuring complete
separation of assets, capital and surplus between you and other participants.
e) Self-insured groups and pools
f) Captives, which are owned and controlled by their insured parties
g) Group captives, which are owned and controlled by multiple insureds. Often firms of
a similar size pool risks in an industry captive with customized insurance plans.
h) Agency captives, which are typically structured like rent-a-captives.

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INSURANCE SECURITIZATION:
Meaning:
Insurance securitization is a financial technique which consists in transferring insurance risks
to investors operating on the international financial markets. This transfer is carried out by
gathering these risks and turning them into notes on the capital markets.
The general concept of insurance securitization, therefore, includes two elements:
a) The transformation of liquidity generated by the underwriting into notes on the
financial market.
b) The transfer of the risks underwritten toward financial markets through notes trade.
Most common structure of insurance securitization:
The advantages of insurance securitization
Securitization has numerous benefits in both life and non-life insurance.
I. Securitization in the life insurance
1. In the life business, securitization stands as capital management tool. Indeed, by
transferring part of their risks to investors, life insurers improve their return on equity.
2. Securitization consolidates capital efficiency as it lowers the need in equity. Bonds are one
of the tools of securitization which allow monetizing intangible assets such as deferred
acquisition costs and the present value of expected profits. Monetizing these assets represents
a new source of funding for the insurer. The increase of the cash flow which results may:
a) either reinforce the capacity of underwriting new policies
b) comply at minimal level in terms of capital
c) or, fund any operation for the company
3. Securitization enables insurers to transfer catastrophe risks (extreme mortality due to a
pandemic for instance) towards financial markets, which is notably the case of life bonds.
4. Securitizations yield tax advantages to the insurer.

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II. Securitization in the non-life insurance
In non-life insurance due to the market's volatility, insurers have a wide range of tools
allowing them not only to manage their capital but also to carry out risk transfer.