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MF0018 - Insurance and Risk Management

Roll no. 571119918

Q1. Explain the risk management process.


Answer: Risk management is defined as, It is a process which identifies loss exposures faced by an organization and selects the most appropriate technique to treat the exposures. It involves identification, analysis and assigns economic value of these exposures, which holds the earning capacity of an organization. Risk management helps an individual or an organization in achieving a planned objective. There are six risk management processes are there they are, 1. Determination of objectives: The prime objective is to ensure the effective continuous operation of an organization. If the objectives are specified clearly then the risk management process can be a holistic one instead of having isolated problems. The various objectives of risk management can be classified broadly as, Post-loss Objectives: Survival of the organization. Perpetuity of the organizations operations. Steady flow of income/earnings. Social obligation. Pre-loss objectives: Economy. Fulfillment of external obligations. Reduction in anxiety. Social obligations. 2. Identification of risks: Risk identification is a process of identifying property, liability and personnel exposures to loss on a systematic and continuous basis. There is no ideal method to identify risk, but a combination of methods is used. The following are the general methods for risk identification, Risk analysis questionnaire - The questionnaire has to be a simple listing of points and phrases. The questionnaire is to be distributed among the employees. Checklist of exposures - This is a list for checking factors which may be risky to the organization. Flowcharts - They can describe any form of flow within the company but they are system specific concentrating on specific events which are potentially risky.

Analysis of financial statement - This method involves studying each account in detail and determining the potential losses created. 3. Evaluation of risk exposure: Before evaluating, the risk needs to be measured in two dimensions of loss frequency and loss severity. While evaluating risks, risk managers need to consider the following: The importance or the severity of a risk. All types of losses due to a given event and their financial losses. The specification of the exposure as to how many would be affected and the timing of the exposure. The importance or the severity of a risk is more important than the frequency of occurrence. 4. Consideration and selection of risk management techniques: This should be done by selecting the most appropriate technique or a combination of techniques for treating the loss exposures. These techniques are applied based on the following two broad methods: Controlling the risk - Here the frequency and severity of the loss is reduced hence the risk is controlled. This is done by avoiding the risk and through reduction of exposure. Financing the risk - This method provides the financing needed for the losses either by retaining the risk or transferring the risk. 5. Implementation of decisions: The next step is to identify the insurance company and negotiate and start the policy statements. The statement must outline the risk management objectives and the company policy with regard to treatment of loss exposures. 6. Evaluation and review: Evaluation and review is to be done periodically to check if the set objectives are attained. The review process is a continuous and ongoing activity. This step not only analyses the extent to which the objectives are achieved but lays foundation for future course of actions.

Q2. Write about IRDA. Explain the functions and powers of IRDA
Answer: Insurance Regulatory and Development Authority (IRDA) was shaped in the year 1999 when the Indian parliament passed the IRDA bill. This organization was developed to control and enhance the insurance industry standards. IRDA is a team of ten appointed by the Government of India, it includes the Chairman, 5 full time associates & 4 part time associates. Functions and powers of IRDA: It gives a certificate of registration, renewal, withdrawal, modification, suspension or cancellation of registrations to the applicants in insurance industry.

It safeguards the interests of policyholders of all insurance companies regarding the assignment and nomination of policy, resolution of insurance claim, insurable interest and submission value of policy and other terms in the contract. It states the mandatory credentials, code of conduct and practical instructions for mediator, as well as the insurance company. IRDA supports competence in the insurance industry. It promotes and regulates professional organizations in insurance. It has the responsibility of inspecting and examining the audits of the insurers, agents, actuaries, insurance intermediaries and other organizations. It is also assigned the task of controlling and regulating the rates and profits and conditions given by the insurers with respect to the general insurance business which was not controlled or regulated by the Tariff Advisory Committee. It is permitted to oversee the performance of the Tariff Advisory Committee. It states the way in which the books of accounts should be maintained and insurers and other insurance mediators shall provide the statement of accounts. It controls the investment of funds by insurance companies as well as the upholding of the margin of solvency. It has to state the share of premium income of the insurer to finance policies. It also states the percentage of share of life and general insurance business to be received by the insurer in the rural or social sector. The formation of IRDA had a major impact on the Indian insurance industry. When IRDA started to function, it had to deal with only two players in the industry - LIC and GIC. Now IRDA deals with more than 20 players of the industry.

Q3. Write down about the objectives, purpose, functions and advantages of life insurance.
Answer: Life insurance is a policy that provides the basis of protection and financial stability after ones death in a family. Its function is to support the other family members with financial stability. Objectives of life insurance: The primary objectives of life insurance are: Protection - The main objective of life insurance is to give protection. Life insurance decreases the financial loss arising due to the death. Investment - The insured person invests small amounts, in the form of premiums, with an insurance company. Purpose of life insurance: The purpose of life insurance is to provide financial protection against the losses that may be incurred due to uncertain difficulties caused by ill-health, death of an earning family member or financial losses.

Families need life insurance to: Provide financial security to their family members at the times of financial crisis. Protect the home mortgage. Plan their future financial requirements. Avail the benefit of retirement savings and other investments. Advantages of life insurance: Life insurance reduces stress due to the financial security it offers. Life insurance contracts provide double benefits of both protection and investment, as the event assured against is sure to happen. Businessmen would enjoy a better credit standing as they transfer the risks to the insurance company. Insurance companies are offering employment opportunities for many people. The premiums paid for certain life insurance are eligible for tax rebate under section 80C of the income tax act. As the premium paid is a form of compulsory savings, it promotes thrift and builds savings. Functions of life insurance: Protection to stockholder - Companies with stockholders have life insurance contracts in place so any unpredicted transition goes easily. Both large and small companies insure the life of important employees, whose loss would distress business operations. Small business actions - People having sole ownership businesses need life insurance to enable the business operations to continue even after their death, at least until there is time to arrange for forthcoming management. Retirement complement - Some life insurance policies can be converted into an annuity that will pay bonuses to the policyholder after retirement. Support to the family - Life insurance provides security to a familys needy survivors with a financial help in their grief. Final expenditures - Many persons carry enough life insurance to cover funeral costs and other end-of-life expenses of the insured, and to repay unsettled dues. Gifts and special endowments - Another function of life insurance is to enable special endowments such as a major gift to a charity.

Q4. Explain the product development process, classification of new products, stages in new product development, pricing strategy for new products.
Answer: Product Development Process: Any business organization faces problem due to the threats from the environments like political and economical conditions, social, technology and supply conditions, changes in client requirements, and so on. In addition to this, competition is another threat-causing factor. In order

to overcome these threats and fulfill the customer requirements, business organizations have to develop new products. The new products provide new opportunities for the growth and security of the organization. The new products are also needed to ensure profits to the company. Thus, the new products become a part of the growth requirements of the organization, and yields profits to the organization. Classification of new products: The new products introduced in any sector are classified into two groups: New products that arise from technological innovations: These are the products that have new functional value. New products that arise from marketing oriented modifications: These are the new versions of the existing products. The products may look new because of some changes in the existing product design, adding a new feature to the existing product, presenting the existing product with a new sales strategy to a new market segment. Stages in new product development: Stages of product development differ from one company to another. Generally, product development is carried out at the top-level management. The different stages of product development are: 1. Generating Ideas - Before developing the product, the company should conduct a formal market research. This can help get some ideas on the customer needs. 2. Screening Ideas - While screening the products, it is better to determine the following: Is the new product an improvement over the existing product? Is there any need for the new product? Is it in the same line of business or different from the business? 3. Concept testing - In this stage, the product concept is tested. It tests whether the customers have understood the product idea, whether they have interest in the idea, whether they need the product, and so on. 4. Business analysis - This stage of the product development life-cycle helps in designing the product based on the market analysis. 5. New product development - In this stage, the elements of the products are identified and highlighted. At this stage of product development the organization is generally committed to the new product. 6. Commercialization - In this stage, the organization releases the product to the market. Insurance companies distribute their products through various channels including banks. Pricing strategy for new products: After the new product is developed, it is essential to price the product before releasing in the market. Pricing new insurance products is an important phase in product development process. Pricing a new product of insurance is quite difficult, as there are no previous versions of these products. Thus, there is no data on the possible market reaction for this product and the probable demand rate of the product it is difficult to assign the cost for a particular product. Pricing of the new insurance products includes four steps:

Drafting a pricing strategy. Actuaries testing. Rate setting and testing. Managing of pricing outcomes.

Q5. 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. Explain the tools that help in advertising the companys insurance policies. Write down the issues in insurance marketing.
Answer: 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. Issues in insurance marketing: 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. These companies must be what they are. 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 - Right at the beginning, an insurer or a founder must understand, and be able to explain how they can exit. 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 organizing 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. 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. Reinsurance is a kind of insurance. It is an important operation of insurance. Give an overview of reinsurance and explain the reasons for reinsurance.
Answer: Reinsurance is the transaction in which one insurer agrees to pay a premium of another insurer either a part of the policy or the whole policy. Reinsurance involves protecting the insurance company against a certain portion of potential losses. Overview of Reinsurance: Reinsurance is the transaction in which one insurer agrees to pay a premium of another insurer either a part of the policy or the whole policy. The insurance company that purchases reinsurance is called as the ceding insurer and the company selling the reinsurance is called as reinsurers or the assuming insurer. It can also be known as the insurance of insurance. The amount of insurance the ceding company retains for its own account is called the retention limit or the net retention. The amount of the insurance policy that is ceded to the reinsurer is called as the cession. The reinsurance of the risk involved either a part of it or the whole risk is called retrocession. In such cases the second reinsurer is called as the retrocessionaire. The purpose of reinsurance is to decrease the financial cost of the insurance companies that arise from the possible occurrence of the particular insurance claims. Reinsurance gives the reimbursement to the ceding insurer for the losses covered by the reinsurance agreement. It improves the basic objectives of the insurance for spreading the risk so that no single unit finds itself loaded with a financial burden beyond its ability to pay. Reinsurance can either be acquired directly from a reinsurer or through a broker or reinsurance intermediary.

Reasons for Reinsurance: The insurance business is basically risky because this is a business that is very sensitive to losses and when these losses occur they occur with an unreliable frequency. In such cases some amount of their insurance risk cover should be reinsured so as ensure that the risks are spread. Some of the important reasons are, Increase underwriting capacity - The underwriting capacity is the highest amount of exposure that an insurance company can underwrite. The companys retained earnings, paid in capital or other forms of capital support generally determine the limit. Reinsurance helps in increasing the companys underwriting capacity. This is done by decreasing the companys exposure to a particular risk Stabilize profit - The fluctuations due to the exclusive nature of the insurance, this involves pricing of a product whose real cost will not be known until sometime in the future. Reinsurance can be used to stabilize profits. Reinsurance can be used to cover a large exposure. Reduce the unearned premium reserve - When any insurance company sells a policy, the whole amount of the premium is transferred to the unearned premium reserve as specified by the law. Reinsurance reduces the unearned premium reserve that an insurance company needs according to the law and it increases the surplus position of the insurer. Accordingly the ratio of the policyholders surplus to that of the net premium is enhanced and this allows the insurer to grow. The unearned premium reserve is a liability item on the balance sheet of any insurance company. Provide protection against a catastrophic loss - Insurers often experience catastrophic losses due to industrial explosion, natural calamities, and similar events. Reinsurance can provide some amount of protection to the ceding company that undergoes catastrophic losses. To protect against the catastrophic loss, insurers use reinsurance in the following two ways: The first is to protect against catastrophic loss that are resulting from a single event, like the loss that a large manufacturing plant suffers due to fire accident. On the other hand, insurers also request reinsurance for the protection against the collection of many smaller claims that results from a single event and affects many policyholders at the same time like a major hurricane, volcano or an earthquake. Other reasons for reinsurance - Any insurer can make use of reinsurance when they want to retire either from the business or from some insurance policies. Reinsurance allows the insurers to transfer their liabilities to another carrier so that the policyholders coverage remains the same. It can allow an insurer to provide the underwriting advice and assistance of the reinsurer. The reinsurer can often provide valuable assistance with respect to rating, retention limits, policy coverages and other underwriting details.