MF0018 1.5.

1 Pure and speculative risk Pure risks are defined as situation in which there are only two outcomes that is the possibility of loss or no loss to an organisation but no gain the event either happens or does not happen. When this risk happens, the chance of making any profit is very badly low. Few examples of pure risk are earthquake, theft, accident, fire etc. A car may or may not meet with an accident. If an insurance policy is bought for the car, then if accident occurs the insurance company incurs loss but on the contrary if accident does not occur there is no gain to the insured. Speculative risks describe situations in which there is a possibility of gain as well as loss. The element of gain is inherent or structured based on the situation. Few examples are gambling on horses, investing in a stock market, merging with an organisation. Thus most of the speculative risks are business related and some speculative risks are optional and can be avoided if desired. The distinguishing characteristics of pure and speculative risks which is of importance to insurers are the following: The contract of insurance is usually applicable only to pure risks but not to speculative risks. Insurance is meant to assure us against losses that arise as pure risk, but not to outcomes that lead to both loss and gain. Moreover a particular type of risk may appear speculative for the insurance company but a pure risk for the organisation. The law of large numbers is easily applicable to pure risks than to speculative risks. The law is important to insurers since it predicts future loss experience. An exception is the example of gambling, where the casino operators apply the law of large numbers in a most efficient way. Speculative risk may profit the society even if a loss occurs. It carries some inherent advantages to the economy. For example speculative activity in the stock market may lead to more efficient allocation of capital. The same does not apply to pure risk. A fire, flood, earthquake cannot benefit the society. Since pure risk is usually insurable, the discussion on risk is skewed towards pure risks only. Pure risk is broadly classified into the following four categories: - Property risk. - Personal risk. - Liability risk. - Loss of income risk. Property risk This is a risk to a person in possession of the property which faces loss because of some unforeseen events. Property includes both movable and immovable possessions. Movable assets are personal assets like personal computer, any appliance. Immovable assets are land, building which suffers loss due to natural calamities. Property risk is further divided into direct and indirect loss. Direct loss A direct loss is defined as a physical damage due to a given calamity or peril in a direct way. For example, if an office building is damaged by fire, the damage incurred in the direct way is the direct loss. Indirect loss The additional expense incurred due to the destruction of the property is the indirect loss. Thus in addition to the physical damage after a fire, the office would lose profits for several months because of reconstruction. The loss of profits is a consequential loss as a consequence of the damage incurred. Personal risk Personal risks are risks that directly affect the individuals income. This may either be loss of earned income or extra expenditure or depletion of financial assets. There are four major types of personal risks: Risk of premature death. Risk of insufficient income during old age. Risk of poor health. Risk of unemployment.

Risk of premature death Premature death occurs when the bread earner of a family dies with unfulfilled financial

obligations. Therefore this can cause financial problems only if the deceased has dependents to support. There are four

costs which results from this. First, the present value of the familys share of the deceased breadwinners future earnings is lost. Secondly, additional expenses like funeral expenses, uninsured medical bills, inheritance taxes can result. Thirdly, due to insufficient income, the family of the deceased has trouble in making ends meet. Finally, intangible costs due to loss of role model, guidance, and counseling result. Risk of insufficient income during old age The risk arises when retired people do not have sufficient income after their retirement and it leads to social insecurity. Retired people need to have financial assets from which they can draw income or have access to other sources like private pension. Risk of poor health The sudden disability of a person to earn income for living happens to be a disadvantage or sudden risk to that person. The risk of poor health includes payment of medical bills and the loss of earned income. The loss of earned income is a financial insecurity if the disability is severe. Employee benefits may be lost or reduced, savings are depleted and extra care must be taken for the disabled person. Risk of unemployment This risk is due to socio-economic factors resulting in financial insecurity. Unemployment results due to business cycle down swings, technology and structure changes in the economy and imperfections in the labor market. Liability risk This risk arises to a person when there is a possibility of an unintentional damage caused by him to another person because of negligence. Therefore this risk arises when ones activity causes adversity to another person. For example, construction of factories or dams which results in dislocating number of villagers. This risk arises due to government regulations and acts. It is quite different from the other risks as there is no maximum upper limit to the amount of the loss. A lien can be placed on ones income and financial assets to satisfy legal judgment and the cost of legal defense could be huge. Loss of income risk This risk is due to an indirect loss from a certain given risk. For example if a firm is not able to operate due to legal issues or destruction by peril, it takes time to resume its normal operations. Therefore in this period, production stoppage will lead to loss of income.

3.2.1 Voluntary and involuntary coverages Apart from the public and private sector classifications, insurance coverages are classified as voluntary and involuntary. Voluntary insurance is an optional insurance which is taken by an individual or a company by their own wish. Private insurance is usually a voluntary insurance which includes automobile insurance, workers compensation insurance etc. Only 3% of Indias population is covered under voluntary health insurance and there is scope for expansion. Involuntary insurance comes under public sector where the individual is liable to take up insurance by law. It is usually taken for social development, unemployment or for the protection of particular class of people in the society.

10.4 Underwriting Steps The previous section dealt with the objectives and principles in underwriting. This section will describe the steps in underwriting process. The underwriting of life-insurance falls under a category that is different from all other forms of insurances. When the underwriter measures risk at beginning, the company assures a cover for 30 years or throughout life. Life assurance underwriting must consider factors, like, medical history, family details, occupational hazards, and persons lifestyle. The underwriting process for life insurance involves the following steps: 1) Execution of field underwriting. 2) Renewing the application in the office. 3) Gathering additional information, if required. 4) Taking and underwriting decisions.

Additional information is always essential for the underwriter in order to take a decision. This additional information may be in the form of questionnaires, a detail medical report from proposals own doctor (Medical Attendants Report), and an examination by an independent doctor (Medical Examiners report). The general steps followed by Underwriters are: 1) Getting applications -The application for insurance is the main source of insurability information that the underwriter of the life insurance company evaluates first. Applications are generally collected by the field officers, the agents. A typical life insurance consists of: General information The general information consists of general aspects like name, age, address, date of birth, sex, income, marital status and occupation of the applicant. It also includes the details of requested insurance cover like type of policy, amount of insurance, name and relationship of the nominee, other insurance policies that the customer owns and the pending insurance applications as on date. Medical information The medical information consists of consumers health condition and several queries about health history and family history. The medical section of the application is comprehensive and it is mandatory to fill it completely with relevant information. Information is also collected through a medical examination, depending on age and face value of the policy. 2) The medical report An average medical test is compulsory (which is free of cost to the applicant except in case of revivals). Depending on the information filed in the application, an insurance company may ask the physician of the consumer for further information. Gathering information is a standard method used in all domestic insurance companies. Basically, life insurance companies have several sources of medical and financial information to assist them in the underwriting process. These include personal medical records and physicians, the medical information department, inspection reports and credit records. 3) Underwriting review After collecting all the relevant information about the applicant, an underwriter from the insurance company evaluates the information. During this evaluation, the underwriter will organise the risk offered to the company and also determines the premium for the policy depending upon the primary and secondary factors influencing the premium. The premium rates are set by the companys registrars depending upon the applicants risk profile. During each step of the underwriting process, the life insurance agent usually provides details, and is well-informed about the insured status in the process. If the applicant offers more risk than the insurance company standards, then the underwriter rejects the application. 4) Policy writing A special department writes the policy, whose main function is to issue written contracts according to the instructions from the underwriting departments. A register must be maintained as most policies are long-term. Insurance companies generally use computerised systems to maintain the records of the customers, premium payments, and they to verify that all the requirements of underwriting have been met.

11.7 Factors Affecting the Claim Management The previous section explained the general guidelines set by the IRDA to settle claims. This section explains all the factors, which affect claims management, and the importance of time element in claims settlement. 11.7.1 General factors affecting claims The factors that affect claim settlement are: The risk and cause of event covered in the policy. The cause of event is directly related to the loss, a remote cause cannot be placed in the settlement. The policy should be valid on the date of event. If conditions and warranties are not fulfilled according to the cover of the policy, the cover of insurance does not come into effect even though premium is paid. The loss occurred should not be intentional in order to make profit. Without the presence of the insurable interest for the property insured at the time of loss, the benefit or compensation cannot be availed. The assured has to make gains out of the insurance contract, as the contract is indemnity in nature as it makes good the loss suffered. Documentary evidence must support the claim.

The insured has the following alternatives for settling the claims: Pay the claims as reported by the surveyor or the insurer, whichever is less. Take help of agent or some persons who are well-versed in insurance, and come to an agreement, if it is a disputed claim In case of litigation caused by rejection of claim, the cost might be more if the insurer loses the litigation. Arrangements to replace asset, by repairing or by purchasing a similar asset can be made. Repaired assets should continue to provide service as before. 11.7.2 Time element in the claims payment The time value is very important in the settlement of a claim. Insurer should submit the claim details within the specific period mentioned in the policy document. In few cases, either the policyholder or the claimant or the claimant representative, has to intimate the death of a person or the accident of vehicle, either orally or in person, immediately. The reasons for the importance of time element in the claims payment are as: The delay in the claim settlement causes an unfavourable opinion about the insurer. The extension of time increases the cost of claims. The delay may result in the insurer having to pay interest on the due insurance amount, or insurers may have to pay the case costs to the assured, as per the direction of the court, which increases the costs. The delay in payment, may lead to legal action, which is costly. The delay may cause extra burden to the insurer due to the unproductive use of manpower to defend, expenses incurred and waste of time on legal actions. Legal actions will affect on the productive areas of the business mainly in the marketing of the insurance business. The delay may increase the number of cases with consumer protection councils. Thus, the delay in the claims payment influences the present and future insurance business along with the cost burden. Therefore, it is necessary to settle the claim payments faster. The reasons for the delay in claims settlement may include: Late submission of claim form: The reasons for the late submission of claim form may be: - The ignorance or lack of knowledge of the existence of the insurance policies against the lives of the persons, who face the event. - Non-availability of the information to the beneficiary. - The policy may not have any nominee details. Innocence and illiteracy of the claimant: The claimant or assured may not have the knowledge, and may fail to: - File the claim papers. - File the insurance claims within a specified period. - Follow the claims procedure. Incompletely filled claims forms: If the insured do not properly fill the claim forms, then the insurers will: - Fail to provide the necessary information to settle the claims. - Delay the claim settlement asking for the desired information. Insufficient proof: If the assured fails to submit the sufficient proof or the supporting documents along with the claim form, which assists the claim evaluator to know the event date or cause, then it may lead the claim evaluator to delay the settlement of claims. The reasons include: Reasons from insureds or claimants side: Non co-operation with the insurer to settle the claim or attain some compromise.

 Destroyed the evidences, with or without intention, which would otherwise assist the estimation of the loss payable under the claim. Not providing the information about the changes in the constitution of the organisation or the changed address or any other information necessary to settle the claim. Reasons from insurers side: Due to the pressure of work or may be intentional. Lack of motivation. Lack of awareness of importance of the claims settlement. Lack of awareness among the staff of the organisations or imperfect supervision or organisational structure. Insurers can avoid the delay in submitting the claims or settlements, by providing the awareness of the facts and importance of the insurance and the claims procedure, to the claimant or the assured. They can take the help of agent or the local staff to attain certain compromises with the claimants in the complex cases. They must design the organisation in such a way, that it avoids holding of papers. They should have well-trained and motivated staff. They can also use the latest technologies, to assess the losses and recruit suitable staff for using the sa

12.7 Marketing of Insurance Products The previous section dealt with the pricing of insurance products. This section will help in understanding the marketing of insurance products. Marketing of insurance products is an important tool in the insurance business. The marketing of insurance is possible in both the life insurance and the non-life insurance departments. The type of advertisement and marketing suitable for insurance business must be decided. The insurers must consider their budget, and plan their marketing strategy according to their budget. They must also consider their target market. For example, Vendors who want to develop their insurance market need to determine the types and nature of insurance offered. They also need to research the market segment they are targeting. The marketing tools that help in advertising the companys insurance policies are: Online advertisement It is one of the insurance marketing tools. Since, internet plays a very important role nowadays, online advertisement help the insurance marketers to get noticed. Through studies it is found that 75 percent of households have access to computers and internet resources. Thus, online advertisements plays very important role in advertising the companys insurance policy. Block line advertisement It is another marketing tool used in trade journals, industry publications and periodicals. This insurance marketing tool is useful with the perspective of industry professionals who read these publications. Television advertisements and print advertisements These are the other types of insurance marketing tools. These advertisements are the excellent forms of insurance marketing as they have a greater impact and reach. However, the only drawback is that both are very expensive. These may affect the insurance companys advertising budge

Issues in insurance marketing Just like the other business marketing, there are some issues in insurance marketing also. Marketing issues for young growth-oriented insurance companies as well as other insurance companies are as follows: Initial marketing focus issues A potential initiator of an insurance marketing business is needed, because, without support, the insurance company cannot succeed. Thus, if the insurer or the insurance company does not have potential to do marketing may have to face lot of difficulties in insurance marketing. Marketing the company vs. sponsoring products issues A new or young unknown insurance company has to be accepted within the market place before marketing effectively to the end-users (consumers). These companies must be what they are. Every prospect will not value innovation and dexterity; instead the correct ones will value it. Thus, young insurance companies might face issues while finding out the correct prospect of policies. Marketing programs issues Once after a young insurance company is positioned in the market, if its marketing program is not designed specifically to accomplish their current insurance programs objectives, then the whole effort i s almost worthless. Thus, it should re-evaluate its marketing program to acquire good marketing.

 Exit strategy issues It is also one of the marketing issues. Right at the beginning, an insurer or a founder must understand, and be able to explain how they can exit. Even though they had given their expectation about companys growth and prosperity, if they fail to describe which type of customers would ultimately want to purchase into it, they are said to be facing a marketing issue. Thus, they must plan for organising the company, provisioning of funds, and positioning of company in the market for the ultimate exit opportunity. Pricing issues The desired price or premium at which an insurer seeks to sell their policy can impact on the distribution of the same. Since all the insurers wants to make profit for their contributions, their distribution schemes may affect the insurance products pricing. If too many competitors are involved, then ultimate selling price may become barrier to meet sales targets, in such cases an insurer may go for alternative distribution options. Target market issues An insurance marketing is said to be effective, only if customers obtain the policies. The insurers must determine the level of distribution coverage needed th at effectively meet customers requirements to reach their target market.

3.4 The Insurance Regulatory and Development Authority (Investment) (Amendment) Regulations, 2001 The previous section dealt with the regulations related to the investment. This section deals with the Insurance Regulatory and Development Authority (Investment) (Amendment) Regulations formed in 2001. IRDA investment regulations of 2001 were amended by the Insurance Advisory Committee to update the investment regulations for insurance companies in India. To implement the powers granted by sections 27A, 27B, 27D and 114A of the Insurance Act, 1938 (4 of 1938), the Authority, in consultation with the Insurance Advisory Committee, made the following regulations to modify the Insurance Regulatory and Development Authority (Investment) Regulations, 2000. There were totally 14 modifications made to the Insurance Regulatory and Development Authority (Investment) Regulations, 2000. The modifications made for the third and fourth regulations are as given below: The insurers should make an effort to keep a balance between infrastructure sector investments and social sector investments. The bonds provided for these sectors were rated AA and guaranteed by the government and other reputed rating agencies. All investment of funds in assets, which are rated as per market practice will be based on rating of such assets. The rating should be by an independent, reputed and recognised Indian or foreign rating agency. All the assets for investment shall be have an investment grade AA and not less than that. If the investment grade is not up to the mark to meet the investment requirements of the insurance company but the investment committee is fully satisfied about the same, then the investment of the asset is approved for not less than +A rating. All the debt assets issued by all India financial institutions are given an AAA rating and are recognised as such by RBI. If the investment grade is not up to the mark to meet the investment requirements of the insurance company but the investment committee is fully satisfied about the same, then the investment of the asset is approved for not less than AA rating from a reputed Indian or foreign rating agency. If any asset is capable of being rated only on the basis of market practice, then the asset shall not be invested. Investments in equity shares should be made in liquid instruments in a recognised stock exchange. The investment trade volume should not be below ten thousand units in the last 12 months.