Master of Business Administration- MBA Semester 4 MF0018 Insurance and Risk Management- 4 Credits

Q1. Explain the different types of pure risk and the difference between pure and speculative risk ? Ans. 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.

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.

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.

Q2. What are voluntary and involuntary insurances? Ans.: 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. Q3. Explain the steps in underwriting process? Ans. Underwriting: Underwriting is defined as a process of analysing risks of insurance applicants, and deciding whether the insurance company should accept or reject the application. Underwriting is a challenging task where the underwriter has to consider the applicants side and also the risks that the company will have to face if it accepts the new policy. Though the task of choosing polices is the responsibility of underwriters, the power to accept or reject the policy lies with the insurer. For example, if an applicant asks for a health insurance, the provider has to thoroughly scrutinise the present and past health of the applicant, within applicable terms. Sometimes the underwriter may have some reservation due to past medical records, but decide to insure the applicant, with some conditions not included in the coverage for a period of time. At some other times, the medical records may indicate a level of risk that the company cannot accept, and the provider will decide to not underwrite the health coverage. If the underwriter discards the applications where the applicant is expected to take long time medial coverages then the insurance company can maintain a steady monetary base and serve other clients. Underwriting differs for life and property insurances. For life insurance, either a numerical method or a judgmental method is used. In judgmental method, an underwriter judges the application, by studying the applicants medical history records and present health conditions. In numerical method, the underwriter (insurer) numerically rates every type physical disability. These rates are added up and used to find the risks involved in the particular policy. In some cases, the underwriters do not consider policy proposals wherein the applicant has very bad health conditions. Underwriting is carried out in accordance with an underwriting policy and principles. Statement of underwriting policy The underwriting policy is the first step in underwriting. This policy clearly obeys the companys policies and is written to ensure that the company gains more profit and business. This policy establishes certain rules and conditions which the underwriters follow thoroughly. This policy defines the statements of insurance policies that will be written, prohibited exposures, the coverage to be given for each exposure and similar terms and limitations.

The underwriting officers write the underwriting policy and the desk underwriter applies these terms and conditions to the applications and chooses the best policies. Basic underwriting principles The basic principles of underwriting, which the underwriter has to follow, to achieve profit in insurance business, are: To select the applicants according to the companys underwriting principles - The underwriters should consider only those applicants whose actual loss rating is less than the expected loss rating. For example, a company may consider insuring buildings which are highly protected against fire hazards as the actual loss rate will be less than the expected loss rate. Assume that the loss percentage is expected as 20%. Then the underwriters should make sure that the applicants meet the underwriting requirements strictly so that the actual loss percentage does not exceed 20%. To balance the rate classification effectively - The underwriters should ensure that there is a balance in rates between the below-average applicants and above average applicants. The applicants are grouped according to the percentage of expected loss rate. Then the underwriters have to use their skills wisely and choose the applications to keep the rate balanced. To charge equitable rates to the policy owners - Apart from the rate balancing, the underwriter should make sure that one set of policy holders should not subsidise some other set. For example, a 25-year old person and an 84-year old person should not be charged the same premium for a life insurance policy. Here the rate is inequitable, as the 25-year old person will be charged more premium compare to the 84year old. This equity balance should be maintained while underwriting. Other underwriting factors: The underwriter should consider some more factors while underwriting. They are rate adequacy, reinsurance, renewal underwriting. The underwriter should ensure that the business has adequate profit rate available. They have to check if reinsurance is available for the application, if so the underwriting can be made liberal. Insurance policies cannot be renewed if the loss due to an insured-insurer partnership is not favorable. Rate making: Rate making is yet another important operation of insurers. Rate is defined as the price per each unit of protection or exposure of insurance. The rate is the cost of production and its value is known only when the policy period is over. The premium paid at first should be sufficient for the claims and other expenses. If it is inadequate, then the insurer will be in loss. Insurance rates are subjected to government regulations. Government allows rates which are not too high and which are not biased. The rate and premium determination is the function of insurance actuaries. To determine the rates for life insurance, an actuary has to study the statistical data of births, deaths, marriages, employment, retirement, illnesses, and so on. The basic goal of an actuary is to determine the best premium for policies, such that there is a profit for the company, and the company can effectively compete with other insurance companies. Insurance premium: Insurance premium is the product of rate and the number of units of protection purchased. It involves the cost of the policy, requirements, benefits and the cost of writing the insurance. The insurance premium

depends upon two factors, loss expected (Pure premium), and cost required for the business (Loading). The insurer calculates the pure premium by dividing the total expected loss by the total number of exposures. Loading is calculated as the sum of the agents fee, insurance expenses, tax and other fees. The gross premium is the sum of pure premium and the loading amount. The first year insurance premium of some life insurers for the period of September 2010 is given below in the table. Q4. Describe factors affecting claim management, and the importance of time element in claims payment? Ans. 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. 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.

 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 same.

Q5. What do you understand by marketing of insurance products? Write down the issues in insurance marketing? Ans. 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 budget. 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 is 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 that effectively meet customers requirements to reach their target market.

Q6. List the changes made in the third and fourth regulations in the Insurance Regulatory and Development Authority (Investment) (Amendment) Regulations, 2001? Ans : 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.