INTRODUCTION

Risk is a pervasive condition of human existence.

People express risk in different ways. It has a simple meaning in
every day usage but sometimes it has a specialized
connotation, when used in a particular field. A car accident, fire,
theft, natural calamities like earthquake, flood etc. Cause harm
to some people which we call a risk. Losses like these happen
to some people, while others go along happily free from
misfortune. Therefore, such losses are uncertain. The term risk
is used by people in the business of insurance to mean either a
peril insured against a person or property protected by
insurance.
 MEANING & DEFINITION OF RISK

The entire business process has to face numerous risks and

uncertainties. Uncertainty comes from changes in economic,
social and political trends, the arrival of new technologies, or
shifts in consumer demands. The risk arises due to uncertainty
in regards to cost, loss, or damage. The loss or damage may be
related to financial loss or non- financial loss. In a dynamic and
free economy and in life such risks are inevitable. Business
risks include changing demand and fashions, prices falls,
change in desire and taste of consumers, high competitions,
new inventions and there development, fire, flood, accident etc.
The risk may mean that there is a possibility of loss or damage.
It may or may not happen.
 According to the Dictionary, risk refers to its possibility
that something unpleasant or damage might happen.

RISK MANAGEMENT

Meaning:-

Risk management is a scientific approach to the

problem of pure risk in the business of insurance. The objective
of risk management is to reduce or eliminate the pure risk
faced by the insurance business. Although, risk management is
a recent phenomenon the actual practice of risk management
is very old. It is a process of protecting the person and the
assets. It is a managerial function which uses scientific
approach in dealing with risks.

Definition:-
 Risk management is a scientific approach to dealing
with pure risks by anticipating possible accidental losses and
designing and implementing procedure that minimize the
occurrence of loss or the financial impact of the losses that do
occur .

WHAT IS INSURANCE

Insurance is a means of protection from financial

loss. It is a form of risk management primarily used to hedge
against the risk of a contingent, uncertain loss. An insurer, or
insurance carrier, is selling the insurance; the insured, or
policyholder, is the person or entity buying the insurance
policy. The insurance act 1938.

Need for Insurance:-

 Tax benefit + Tax free cash on maturity
Help during retirement act as a pensions
Saving Instrument
Improve credit rating- considered as a financial asset
Contribution towards sustaining a standard of living when
one contributing

INSURANCE INDUSTRY IN INDIA

LIFE GENERAL
INSURANCE (Non
INSURANCE life insurance)

Motor Fire Health Marine

Insuranc insurance Insurance Insurance

WHAT IS LIFE INSURANCE?

Life insurance or life assurance, especially in the

Commonwealth, is a contract between insurance policy holder
and insurer or assurer, where the insurer promise to pay a
designated beneficiary a sum of money (the benefit) in
exchange for a premier, upon the death of an insured person
(often the policy holder ). Depending on the contract, other
events such as terminal illness can also trigger payment. The
policy holder typically pays a premium, either regularly or as
one lump sum.
 Life policies are legal contract and the term of the contract
describes the limitation of the insured events .Specific
exclusion are often written into the contract to limit the liability
of the insurer: Common examples are Fraud, war, riot civil
commotion.

WHAT IS GENERAL INSURANCE?

Life is full of risks. Thats what makes it so interesting and

exciting. But some unexpected events can really set you back.

General insurance helps us protect ourselves and the

things we value, such as our homes, our cars and our
valuables, from the financial impact of risks, big and small
from fire, flood, storm and earthquake, to theft, car accidents,
travel mishaps and even from the costs of legal action against
us. And we can choose the types of risks we wish to cover by
choosing the right kind of policy with the features we need.
 In general, insurance works by spreading the cost of
unexpected risks among a large number of people in the same
region who share similar risks.

When you take out an insurance policy, you pay a monthly

or annual premium. That money joins the premiums of many
thousands of other policyholders and goes into a big pool of
funds. For more information on how premiums work click here.

With any luck, you will never need to draw on that pool. But
if you happen to be one of the unlucky ones affected by an
unexpected calamity, perhaps through severe weather or
accident, that pool of funds can be used to help you up to the
limit you have selected in your policy.

If things go wrong, your insurer may either repair or replace

the items that have been lost or damaged, depending on the
terms of your policy. You may also have the choice of receiving
a cash settlement for the amount of money agreed in your
policy.
 TYPES OF RISK

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1. PURE RISK:-
 Pure risk is a situation that holds out only the possibility of
loss or no loss or no loss. For example, if you buy a new
textbook, you face the prospect of the book being stolen or not
being stolen. The possible outcomes are loss or no loss. Also,
if you leave your house in the morning and ride to school on
your motorcycle you cannot be sure whether or not you will be
involved in an accident, that is, you are running a risk. There is
the uncertainty of loss. Your motorcycle may be damaged or
you may damage another persons property or injured another
person. If you are involved in any one of these situations, you
will suffer loss. But if you come back home safely without any
incident, then you will suffer no loss. So in pure risk, there is
only the prospect of loss or no loss. There is no prospect of
gain or profit under pure risk. You derive no gain from the fact
that your house is not burnt down. If there is no fire incident,
the status quo would be maintained, no gain no loss, or a
break-even situation. Therefore, it is only the pure risks that
are insurable.

Different Types of Pure Risk

Both the individual and business firms face different types of

pure risks that pose great threat to their financial securities.
The different types of pure risks that we face can be classified
under any one of the followings:

Personal risks
Property risks
Liability risks
 2. PRESONAL RISK:-
Personal risks are those risks that directly affect an
individual.
Personal risks detrimentally affect the income earning power of
an individual. They involve the likelihood of sudden and
complete loss of income, or financial assets sharp increase in
expenses or gradual reduction of income or financial assets and
steady rise in expenses. Personal risks can be classified into
four main types:

Risk of premature death

Risk of old age
Risk of sickness
Risk of unemployment
Risk of Premature Death

It is generally believed that the average life span of a human

being is 70 years. Therefore, anybody who dies before
attaining age 70 years could be regarded as having died
prematurely. Premature deaths usually bring great financial
and economic insecurity to dependants. In most cases, a
family breadwinner who dies prematurely has children to
educate, dependants to support, mortgage loan to pay. In
addition, if the family bread-winner dies after a protracted
illness, then the medical cost may still be there to settle and of
course the burial expenses must have to be met. By the time
all these costs are settled, the savings and financial assets of
the family head may have been seriously depleted or possibly
completely spent or sold off and still leaving a balance of debt
to be settled.

The death of family head could render some families destitute

and sometimes protracted illness could so much drain the
financial resources of some families and impoverish them even
before the death of the family breadwinner.

When a family breadwinner dies, the human-life value of the

breadwinner would be lost forever. This loss is usually very
considerable and creates grate financial and economic
insecurity. What is a human life value? A human life value is
the present value of the share of the family in the earnings of
the family head.

Risk of Old Age

The main risk of old age is the likelihood of not getting

sufficient income to meet ones financial needs in old age after
retirement. In retirement, one would not be able to earn as
much as before and because of this, retired people could be
faced with serious financial and economic insecurity unless
they have build up sufficient savings or acquired sufficient
financial assets during their active working lives from which
they could start to draw in old age.
Even some of the workers who make sufficient savings for old
age would still have to contend with corrosive effect of inflation
on such savings. High rate of inflation can cause great financial
and economic distress to retired people as it may reduce their
real incomes.

Risk of Poor Health

Everybody is facing the risk of poor health. It is only when

people are healthy, that they can meaningfully engage
themselves in any productive activity an earn full economic
income. Poor health can bring serious financial and economic
distress to an individual. For example, without good health,
nobody can gainfully engage himself in any serious economic
undertaking an maximized his economic income.

A sudden and unexpected illness or accident can result in

high medical bills. Therefore, poor health will result in loss of
earned income and high medical expenses. And unless the
person has adequate personal accident and health insurance
cover or has made adequate financial arrangements for income
from other sources to meet these expenses, the person will be
financially unsecured.

Risk of Unemployment
The risk of unemployment is a great threat to all those who are
working for other people or organizations in return for wages or
salaries. The risk equally poses a great threat to all those who
are still in school or undergoing courses of vocational training
with the notion of taking up salaried job after the training
period. Self-employed persons, whose services or products are
no longer in demand, could also be faced with the problem of
unemployment.

Unemployment is a situation where a person who is willing to

work and is looking for work to do cannot find work to do.
Unemployment always brings financial insecurity to people.
This financial insecurity could come in many ways, among
which are:

(i) The person would lose his or her earned income.

When this happens, he will suffer some financial hardship
unless he has previously built up adequate savings on which he
can now start to draw.
(ii) If the person fails to secure another employment
within reasonable period of time, he may fully deplete his
savings and expose himself to financial insecurity.
(iii) If he secures a part-time job, the pay would
obviously be smaller than the full-time pay and this entails a
reduction of earned income. This would also bring financial
insecurity.

3. SPECULATIVE RISK:-
 Speculative risk is a situation that holds out the prospects of
loss, gain, or no loss no gain (break-even situation).
Speculative risks are very common in business undertakings.
For example, if you establish a new business, you would make a
profit if the business is successful and sustain loss if the
business fails.

If you buy shares in a company you would make a gain if the

price of the shares rises in the stock market, and you would
sustain a loss if the price of the shares falls in the market. If
the price of the shares remains unchanged, then, you would not
make a profit or sustain a loss. Your break-even. Gambling is a
good example of speculative risk. Gambling involves deliberate
creation of risk in the expectation of making a gain. There is
also the possibility of sustaining a loss. A person betting $500
on the outcome of the next weekend English Premier League
Match faces both the possibility of loss and of gain and of no
loss, no gain. Most speculative risks one dynamic risk with the
exception of gambling situations.

Other examples of speculative risk include taking parts in a

football pool, exporting to a new market, betting on horse race
or motor race.

Speculative risks are no subject of insurance, and then are

therefore not normally insurable. They are voluntarily accepted
because of their two-dimensional nature of gain or loss.
 Liability Risks:-

Most people in the society face liability risk. The law imposes
on us a duty of care to our neighbour and to ensure that we do
not inflict bodily injury on them. If anyone breaches this duty of
care, the law would punish him accordingly. For example, if you
injure your neighbour or damage his property, the law would
impose fines on you and you may have to pay heavy damages.
Unfortunately, one can be found liable for breach of duty of
care in different ways and the best security seems to be the
purchase of liability insurance cover.

Liability Risks have two peculiarities:

(i) Under liability risk, the amount of loss that can be

involved has no maximum upper limit.
The wrong doer can be sued for any amount. For example,
while riding on your bicycle valued $500, you negligently cause
serious bodily injury to another person, that person can sue you
for any amount of money, say $5000, N10,000 or even more
depending on the nature of the injury.

In contrast, if the bicycle value at $500 is completely damaged

by another person, the maximum amount of compensation
(indemnity) that would be paid to you for the loss of the bicycle
is jus $500, that is, the actual value of the bicycle.

ii. Under liability risks your future income and assets may
be attached to settle a high court fines if your present income
and assets are inadequate to pay the judgment debt. When
this happens, your financial and economic security would be
greatly endangered.

Property Risks:-

Property owners face the risk of having their property stolen,

damaged or destroyed by various causes. A property may
suffer direct loss, indirect loss, losses arising from extra
expenses of maintaining the property or losses brought about
by natural disasters.

Natural disasters such as flood, earthquake, storm, fire etc can

bring about enormous property losses as well as taking several
human lives. The occurrence of any of these disasters can
seriously undermine the financial security of the affected
individual, particularly if such properties are not unsecured.

- Direct Loss:-

Direct loss is that loss which flows directly from the unsecured
peril. For example, if you insure your house against fire, and
the house is eventually destroyed by fire, then the physical
damage to the property is known as direct loss.

- Indirect Loss or Consequential Loss:-

Indirect or consequential loss is a loss that arises because of a

prior occurrence of another loss. Indirect loss flows directly
from an earlier loss suffered. The loss is the consequence of
some other loss. It arises as an additional loss to the initial loss
suffered. For example, if a factory that has a fire policy suffers
a fire damage, some physical properties like building,
machinery maybe destroyed. The loss of these properties flows
directly from the insured peril (fire). The physical damage to
the properties is known as direct fire loss.

But in addition to the physical damage to the properties, the

firm may stop production for several months to allow for the
rebuilding of the damaged of the premises and replacement of
damaged equipment, during which no profit would be earned.

This loss of profit is a consequential loss. It Is not directly

brought about by fire but flows directly from the physical
damage brought about by fire and hence indirectly from the fire
incident. Other examples of consequential loss are the loss of
the use of the building and the loss of a market.

- Extra Expenses:-
Alternative arrangement may have to be made to rend a
temporary premises, pending the repairs or reinstatement of
the damaged building, and it may also be necessary to rent,
hire or lease a machine in order to keep production going so as
not to disappoint customers and in the process lose market to
competitors. The expenses incurred in securing the alternative
premises, an renting, hiring or leasing a machine are referred to
as extra expenses. These expenses may not have been insured
if there has been no fire damage.

4. FUNDAMENTAL RISK:-

A fundamental risk is a risk which is non-discriminatory in its

attack and effect. It is impersonal both in origin and
consequence. It is essentially, a group risk caused by such
phenomena like bad economy, inflation unemployment, war,
political instability, changing customs, flood, draught,
earthquake, weather (e.g. harmattan) typhoon, tidal waves
etc. They affect large proportion of the population and in some
cases they can affect the whole population e.g. weather
(harmattan for example). The losses that flow from
fundamental risks are usually not caused by a particular
individual and the impact of their effects falls generally on a
wide range of people or on everybody. Fundamental risk arise
from the nature of the society we live in or from some natural
occurrences which are beyond the control of man.
The striking peculiarity of fundamental risk is that is incidence
is non-discriminatory and falls on everybody or most of the
people. The responsibility of dealing with fundamental risk lies
with the society rather than the individual. This is so because,
fundamental risks are caused by conditions which are largely
beyond humans control and are not the fault of anyone in
particular. The best means of handling fundamental risk is the
social insurance, as private insurance is very inappropriate.
Although, it is on record that some fundamental risk, like
earthquake, flood are being handle by private insurance.

5. PARTICULARS RISKS:-

A particular risk is a risk that affects only an individual and

not everybody in the community. The incidence of a particular
risk falls on the particular individual affected. Particular risk
has its origin in individual events and its impact is localized (felt
locally). For example, if your textbook is stolen, the full impact
of the loss of the book is felt by you alone and not by the entire
members of the class. You bear the full incidence of the loss.
The theft of the book therefore is a particular risk.
If your shoes are stolen, the incidence of the loss falls on you
and not on any other person. Particular risks are the
individuals own responsibility, and not that of that society or
community as a whole. The best way to handle particular risk
by the individual is the purchase of insurance cover.

6. STATIC RISK:-

Static risks are risks that involve losses brought about by

irregular action of nature or by dishonest misdeeds and
mistakes of man. Static losses are present in an economy that
is not changing (static economy) and as such, static risks are
associated with losses that would occur in an unchanging
economy. For example, if all economic variables remain
constant, some people with fraudulent tendencies would still go
out steal, embezzle funds and abuse their positions. So some
people would still suffer financial losses. These losses are
brought about by causes other than changes in the economy.
Such as perils of nature, and the dishonesty of other people.

Static losses involve destruction of assets or change in their

possession as a result of dishonesty. Static losses seem to
appear periodically and as a result of these they are generally
predictable. Because of their relative predictability, static risks
are more easily taken care of, by insurance cover then are
dynamic risks. Example of static risk include theft, arson
assassination and bad weather. Static risks are pure risks.

7. DYNAMIC RISK:-
 Dynamic risk is risks brought about by changes in the
economy. Changes in price level, income, tastes of consumers,
technology etc (which is examples of dynamic risk) can bring
about financial losses to members of the economy. Generally
dynamic risks are the result of adjustments to misallocation of
resources. In the long run, dynamic risks are beneficial to the
society. For example, technological change, which brings about
a more efficient way of mass producing a higher quality of
article at a cheaper price to consumers than was previously the
case, has obviously benefited the society.
Dynamic risk normally affects a large number of individuals, but
because they do not occur regularly, they are more difficult to
predict than static risk.

DIFFERENCE BETWEEN

DYNAMIC RISK AND STATIC RISK :-

Static Risk Dynamic Risk

1. Most static risks are1. They are mainly
pure risks speculative risks.
2. They are easily 2. They are not easily
predictable predictable
3. The society derives no 3. The society derives
benefit or gain from static some benefits from dynamic
risk. Static risks are always risk.
harmful.
4. Static risks are present 4. Dynamic risks are only
in an unchanging economy. present in changing
economy
5. Static risks affect only 5. Dynamic risk affect
individuals or very few large number Of Individuals.
individuals.

PURE RISK & SPECULATIVE RISK:-

Pure Risk Speculative Risk

1. Pure risk is a risk where1. Speculative risk is a risk
there is only the possibility of a where both profit and loss are
loss or you maintain a status possible. Speculative risks are
quo. Only pure risks are not normally insurable.
insurable.
 The few exceptions of
speculative risks are insurable
firms that insure their
institutional portfolio of
investments against loss.
2. Although there are some
2. Speculative risks are not
exceptions of pure risks which generally easily predictable.
are not insurable. So, the law of large numbers
cannot be easily applied to
speculative risk.

However, gambling is one

exception of speculative risks to
which the law of large numbers
can easily be efficiently applied.

Society may benefit from a

speculative risk if a loss occurs.
For example, a firm may
develop a new invention for
producing a commodity more
cheaply. As a result of this, a
competitor may be forced out of
the market into bankruptcy. In
this situation, the society will
benefit since the products are
produced more efficiently and at
lower cost to consumers, even
though competitor has been
 forced into bankruptcy.

Speculative risks are more

voluntarily accepted because of
its two-dimensional nature of
gain or loss.
3. Pure risk are generally
easily predictable than
speculative risks. So the
application of the law of large
numbers can be more easily
applied to pure risk.
4. Society will not benefit from
a pure risk if a loss occurs. For
example, if a flood or
earthquake devastates a
region, society will not benefit
from such devastation.
5. Pure risk is not voluntarily
accepted.

FACTORS AFFECTING RISK

In life insurance, the factors which may affect the risk are
usually those factors which are affecting the mortality; they are
also called factors affecting longevity of a person. The mortality
is not the only risk but the capacity and willingness of a person
also influence the insurance decision. These factors are
discussed in following paragraphs:

1. Age:-

The age of the life to be assured is the most important

factor to affect mortality. Except for a few years of the
childhood, the premium is determined at every year of the
completion of age. The corporation asks for the age nearer to
birthdays.

The person below six months and the person above six months
older of the age will be treated of the same age. For instance, a
person of 22 years 7 months and another person of 23 years 5
months will be treated the age of 23 years.

The age proof is very essential for calculating premium rate. So,
unless age is proved payment of claim is not made if the age
was not admitted at the time of proposal. Now it has been the
common practice that the age should be admitted at the time
of proposal to avoid dispute.

On the basis of age, in future, if a misstatement is discovered

after the policy has become a claim; the amount of the claim is
adjusted in accordance with the rectification of age.

Age proof is essential at the proposal if the policy is term

insurance, non-medical policies and immediate annuity or the
insurance is taken at advance age or for a child because they
are maximum and minimum limits of age.
Minimum and Maximum limit of age:

The maximum age limit is fixed to avoid adverse selection. At

advance age, the need for insurance is a doubtful proposition,
i.e., the chances of moral hazard are higher.

The third reason for fixing maximum limit is the medical

examination will disapprove most of the proposal at that stage.
Mortality is certainly increased at that age. The minimum age
limit is meant to avoid risk of infant mortality.

2. Build :-

Build refers to physique of the proposed life and includes

height, weight, the distribution of weight and chest expansion.
There are standards of weight according to maximum weight
reveal the indication of certain hidden diseases.

Therefore this sign is not favourable. The relationship between

height, weight, girth and expansion of chest are the basic
determinants of mortality expectations.

Overweight is dangerous in advanced age and underweight is

similarly not desirable at younger age, say, below 35 years. The
corporation, for example, has fixed the minimum weight, and
maximum weight at a specified height.

If the assured life is not within the standard the proposal may
not be accepted at the time of proposal and it may be
postponed or may be accepted at extra-premium or may be
rejected at all.

3. Physical Condition:-
The physical condition of the age life proposed has a direct
bearing on the mortality of the life. Insurers are, therefore, very
particular about the conditions of an applicants' sight, hearing,
heart, arteries, lungs, tonsils, teeth, kidneys, nervous system,
etc. The experts in the field can assess the longevity or
mortality of a person due to impairment of certain organs.

The questions are also designed to elicit information on the

physical status of the applicant in the proposal form. The
information is confirmed and supplemented by a medical
examination. The primary purpose of the medical examination
is to detect any malfunctioning of the vital organs of the body.

4. Personal History:-

The personal history of the life proposed would reveal the

possibility of death to him. The history may be connected with
the (i) health record, (ii) past habit, (iii) previous occupation,
(iv) insurance history.

(i) Health Record:

The past health record is the most important factor under

personal history because it affects the longevity or mortality of
a person to a greater extent. It includes any operations of the
life proposed. The medical examination may reveal these facts.

This information is also given by the applicant. Particular

emphasis is placed on the recent injuries and illness. It is
customary to consult attending physicians.
It has been the practice not to accept the proposal form of the
applicants who are suffering from illness. If the applicant has
suffered from certain serious disease or operation during the
past 5 years, he may be under the possibility of getting it
again.

(ii) Past Habits:

The insurers want to know the past habit the life proposed, for
drugs or alcohol because the cure may be only temporary. The
past history is usually expected to be repeated. Therefore, past
history is very cautiously examined.

(iii) History of Occupation:

If the proponent was employed in hazardous or unhealthy

occupation, there is a possibility that he may still retain ill-
effects there from or may revert to such occupation.

An intimate association within a person suffering from a

contagious disease may influence the health of the life
proposed. The past hazardous occupations generally affects,
health slowly occupational diseases are contacted. Inorganic
dust may create silicosis.

(iv) Insurance History:

The previous amount of insurance may disclose the degree of

risk of the applicant. If he was refused insurance, it might be a
suspicious factor of his insurability. If it was found that the
applicant was already insured for adequate amount this request
for more insurance is regarded with suspicions.

5. Family History:-
Like the personal history, family history also requires
information of habit, health, occupation and insurance of other
family members, particularly of the parents, brother and
sisters. The children's history of health is also required.

The certain diseases, like tuberculosis and insanity, etc., and

longevity of the parents will be relevant factors for determining
the degree of risk of the proponents. The favorable family
history, however, is not considered for offsetting the adverse
effect of the personal history.

The family history is considered significant to know the

transmission of certain, characteristics by heredity. Hearts,
lungs, build, etc., follow family.

6. Occupation:-

Occupation is an important factor to affect the risk. It affects

the occupation in various ways. Firstly, the nature of work may
be hazardous because he may suffer an accident at any time
while at work.

Secondly, the morale of the workers may go down. They may

be tempted to indulge in intoxicating or liquor or other forms of
immoral living.

Thirdly, the chemical effect may be poisonous. For instance, the

workers may contact poison while engaged in match or
chemical factories.

Fourthly, the dusty or unventilated house, unhealthy or

insanitary environments may deteriorate the health of the
workers.
Fifthly, in certain occupation, the occupational diseases are
common.

Sixthly, excessive mental and nervous strain may cause

financial worries, and lastly, the lesser income may affect the
health of the worker.

7. Residence:-

The residence also affects the risk. The risk will be lesser in a
good climate area and more in a bad climate although the
difference is narrowed down because of better medical and
sanitary facilities! Information about the previous residence is
equally important.

The geographical location, atmosphere, political stability,

climate, construction of house, travel, etc., are important factor
which may affect the risk.

8. Present Habits:-

The general mode of living of the proposer affects the risk.

Drunkards and non-temperate persons cause increase in
mortality. Similarly, temperate habits tend to increase longevity
of a person.

Excessive and careless smoking tends to shorten the life due to

development of nicotine poisoning. The past habits are also
considered important. The intoxication affects the health of a
person and consequently his mortality. The general mode of
living is also considered in habits.

9. Morals:-
It has been observed that the departure from the commonly
accepted standards of ethical and moral conduct involve extra
mortality. Infidelity and departure from the code of sex
behaviour are seriously regarded because these may affect the
health. Unethical conduct is considered to be another form of
moral hazard. Insurance is not generally given to bankrupt and
reputed dishonest persons.

Consideration, of morals is essential to determine the moral

hazard. There are two types of hazards Moral and Physical
hazards we have discussed factors affecting physical hazards in
the other sections. Moral hazard will be discussed only under
this heading.

The moral hazard occurs due to intention of the insured

whereas the physical hazard is beyond his approach. The
former is present where the policy is taken not with a view to
protect one-self against losses but to obtain gain through
crooked means.

The moral hazard is judged by the reputation and fairness in

dealings. The moral hazard is expected to present where
insurance is taken at advanced age, where person is suffering
from serious disease, proposal is on other's life and the
proponent is engaged in hazardous occupation.

10. Race and Nationality:-

The mortality rate differs from race to race and nation to

nation. In India, persons of high, race or caste are expected to
live longer than the scheduled castes or tribes. Similarly,
countries near to equator have more mortality. The climate and
way of life of a country affect the health conditions of the
people.

11. Sex:-

Mortality among female sex is, generally, higher than that of

male sex because the physical hazard of maternity is present in
the former case. Moreover, the ladies are physically more
handicapped. The lesser education, conservatism and non-
employment of the ladies also affect the mortality.

The absences of proper examination of the ladies also count

more hazards. The chances of moral hazard are also present in
the female insurance. So, unless woman has good financial
reasons for insurance, her proposal is not generally conceded.

12. Economic Status:-

It is essential to examine that the family and business

circumstances of the proponents are such as to justify the
amount of insurance applied for. This investigation also reveals
whether the income of the applicants bears a reasonable
relationship to the amount of insurance which he proposes to
carry.

The higher economic status generally provides a better field for

insurance due to various reasons. Educational, financial and
professional consciousness makes the proponent insurance
minded. The chance of death is also lower in higher strata of
the society.

13. Defence Services:-

Though there has been much improvement in defence
technology, yet flying or gliding, etc., is still considered
hazardous one. Sometimes, certain restrictive clauses are
imposed for insuring persons engaged in such services.

In some other works, extra premiums are required. In

commercial flying, no occupational extra is required. The war
clause is added to avoid the occupation risk in defence, say,
navy, air force and military.

14. Plan of Insurance:-

Certain plans involve more responsibility to the insurer at death

and so these plans are restricted to only first class lives,
Similarly, some plans have lesser risk and. therefore, can be
issued without any extra investigations. For example, the multi-
purpose policy is issued only to first class lives and the pure
endowment policy can be issued to any one irrespective of
health.
 FEATURES OF RISK MANAGEMENT

Following are the features of risk management:-

1. Risk management is a scientific approach to the problems

of dealing with only pure risks and not only other risks
faced by the individual and business.

2. Risk management gives important to insurable and

uninsurable risks and to use suitable techniques for
problems dealing with all pure risks.

3. It helps to evaluate the risks faced by business

enterprises.
 4. It helps to create the right business policies and strategy.

5. Create risk awareness to policyholders & other people

also.

6. Select the suitable technique or method to handle the

risks.

7. Decide which risk is worth taking / pursuing and which are

not.

8. It helps to manage and control men & machine

(Processes) effectively.

IMPORTANCE OF RISK MANAGEMENT

Risk management is of vital in the day to day

business and human activities. It provides maximum social
advantage. The importance of risk management is laid down as
follows.

1. To evaluate the risk of the business.

2. For effective handling of spreading the risk, monitoring
and insuring against.

3. To introduce various plans and techniques to minimize the

risks.

4. To give advice and make suggestion for handling the risks.

5. To avoid cost, disruption and unhappiness in relating to

risks.

6. To fix the sum assured under the policy and decide on

whether to insure or not .

7. To select the appropriate technique or methods to manage

the risks.

8. To create awareness about risks among the people.

DEGREE OF RISK

Degree of risk related to the likelihood of occurrence. It is

measured by the probability of the adverse deviation. In
case of an individual, we measure the risk in terms of the
probability of an adverse deviation from what is hoped for.
 In the case of a large number of exposure units, estimates
can be made, about the likelihood that a given number of
losses will occur, predications can be made on the basis of
these estimates.

Insurance companies make predictions about losses that

are expected to occur and charge a premium based on
this predication.

ELEMENT OF INSURANCE RISK

 Insurance companies do not accept all the risks
that others may wish to transfer them. Certain characteristics
should be present in order to be considered a proper subject for
insurance. The following pre-requisites are the ideal elements
of an insurable risk:

1. There must be a sufficiently large number of

homogeneous exposure units to make the losses
reasonably predictable.

2. The loss produced by the risk must be definite and

measurable.

3. The loss must be accidental.

4. The loss should not be catastrophic which means that the

loss should not be incurred from attack by the enemies.
 METHODS OF HANDLING RISK

A businessman finds out means to eliminate the risk

or at least minimize the effect of such risks. Burden of risk is
the greatest problem in connection with risk management. This
is because, it relates to risk of some financial loss. The risk
occurs due to multiple causes. The following methods are
usually adopted for handling risk:

A. Prevention of risk / Avoiding of risks.

B. Reduction of risks.

C. Shifting of risks / Transferring of risks

D. Acceptance of risks and

E. Spreading of risk

A. Prevention of risk / Avoiding of risks :-

Prevention is better than cure. Prevention measure
are designed to elimate risks or the causes of risks.

E.g.
Losses from theft, shop- lifting etc. Can be minimized by
giving effective training to the employee of the firm. Apart
from this, Burglar alarms, watchman, safety vaults etc.
Help to a extent preventing or avoiding the risks.

B. Reduction of risks: - Many risks are neither

transferable nor avoidable. But business risks are
reduced by concentrated nor avoidable.

E.g.

Loss on sale on account of fashion changes, can be

overcome by stock clearance sale at a discount .

Loss on account of market change may be minimized by

market research .

C. Shifting / transferring of risk:- Generally

business people are not willing to bear such risks which
bring losses to the firm and so want to transfer them.
Many natural risks or losses can be avoided through
insurance. Insurance companies covers many risks for
the payment of a sum, known as premium, for
instance, Marine insurance , Fire insurance, Credit
insurance etc . A businessman can easily transfer the
risk to the insurer
D. Acceptance of Risk:- Because the element of risk is
incidental to life and cannot usually be avoided. It may be
accepted in the following ways:

Some risks are accepted ignorance.

Some risks are accepted inadvertently.

E. Spreading of risk: - Spreading of risk is termed as

Averaging of risks. This involves the combination of the
risk of risks of many individuals who band together.

E.g

By entering business indifferent geographical status within

a country or different countries.
 RISK FOR INDIVIDUAL

The risks faced by individual and families can be

classified in a variety of ways. The personal risks can be in the
natural of earnings, medical expenses, liability, physical asset
and financial asset etc.

1. Earning risk:-

It refers to the potential fluctuation in the families earning.

The earning may decline due to death, disability, old age or
change in technology. The families expenses can also be
uncertain.
 2. Medical expenses risk:-

Health care costs and liability suits can causes large

unexpected expenses.

3. Physical asset risk :-

A family also faces the risk of a loss in the value of the

physical asset such as vehicle, houses etc.

4. Financial asset risk :-

The value of financial asset is also subject to fluctuation due

to changes in inflation and changes in the real value of share,
debentures and bonds .

THE BURDEN OF RISK

The risk is the loss incurred by a person. When a house is

destroyed by fire, or money is stolen, there is financial loss. The
negligence of someone results in injury to a person or damage
to the property, there is also a financial loss. These losses are
the primary burden of risk.
 There is other detrimental aspect of risk. The uncertainty as
to whether the loss will occur requires the prudent individual to
prepare for its possible occurrence. The individual attempt to
avoid the risk or alleviate its impact with the help of insurance.

Furthermore, the uncertainty connected with risk usually

produces a feeling of frustration and mental unrest, particularly
in case of pure risk. People may worry about possible mishap.
This worry induces a feeling of diminished well-being which is
an additional burden of risk.

SOURCES OF RISK INFORMATION

Information on the factors affecting risk is collected before it

can be evaluated to determine the degree of risk. It is collected
from various sources because it is not possible to get all
information from one source. Moreover, information from
various sources on a particular item will provide an effective
check.

1. The Proposal Form:-

The first and the important source of risk information is

application form. The proposer is required to disclose all the
material facts truly and fully.

If any information is not asked by the insurer, the proponent

should reveal the information if he thinks it to be material.
Usually, the agent asks all the questions which are written in
the proposal form.

The proposal form is divided into two parts:

1. Application form; and

2. Personal Statement.

The application includes questions pertaining to home, address,

term of insurance, sum to be assured, mode of premium
payment, date of birth, object of insurance, name of the
nominee, previous insurance history, acceptance or rejection of
the proposal, engagement in navy, air force and military
services or the intention to be engaged in these services.
Double accident benefit is sought or not. There are some
additional questions to be answered by formal proposers, which
are about education, their income, income occupation and
insurance of husband. There is declaration in the end of the
form which forms the basis of contracts between the insured
and the insurer.

Part II of the proposal form is called personal statement which

is filled by (i) either the life to be assured, or (ii) the agent or
the development officer, writing at the dictation of the life to be
assured.

This statement mentions name of the life to be assured, family

history of father, mother, brothers and sisters in connection
with their health and illness and cause of death. Questions
about the bodily impairments, serious disease, habits,
operation, accident or injury.

There are special questions for such as observing of predate

conceptions, miscarriages and abortion for female proposers.
Declaration of the proposer is also essential.

In non-medical proposals some detail information is also

required. Name and address of family physicians, absent on
ground of ill-health, height, weight, name and address of
present and previous employers and declaration.

The proposal form gives all the required information of risk.

Different types of proposal forms are used for different policies.
2. Medical Examiner's Report:-

The medical examiner has to identify the applicant to avoid the

case of impersonation. The knowledge of medical examiner to
the assured is also required.

General appearance is an important question where proposal's

apparent age, general health, habit, vaccination, deformity is
asked. Measurement of height, weight, conditions of teeth,
gums, ears, chest, heart, digestive tract, genitor-urinary
system, nervous system operations and other details, etc. are
inquired by physical test of the life to be assured.

There are special questions for female proposers. Opinions of

the medical examiner for the longevity, suspected health, first
class lives, etc., are required. He has to declare that the
findings are true and correct.

The information given by medical examiner is deemed to be

correct and it is expected that the medical examiners would
give true and fair picture; but certain cases in India have
revealed that the reports of medical examiner are not hundred
per cent reliable.

Therefore, the underwriting officers at divisional or zonal office

are required to go into details of suspected cases because once
proposal has been accepted it cannot be repudiated on the
ground of wrong medical reports.
3. Agent's Report:-

Although agents has to pursue or canvass a lot for getting

proposal, yet he is required to state whether the life to be
assured, is insurable or not.

He has to furnish information of sum assured, name,

acquaintances with the proposer, time and place of first
introduction, identity of the life, medical examiners, name and
address, monthly income and occupation of the proposer,
general state of health, relationship with the agent, etc.

The agent has also to disclose the financial and social position
of the proposer. The agent is required to disclose all the
unfavorable information of the life proposed. The agent's report
can be of great value to the underwriting department because
he has personal acquaintances with the life proposed and can
give full and correct information of all the factors affecting the
risk.

Insurers do not place too much reliance on the agent's

certificate because, he, in his zeal to increase his commission,
might tend to color his judgment. The comparison of agent's
reports with information of other sources may reveal the fair or
unfair reports of the agent. In case of wrong information of
material facts, his license may be cancelled.
4. The Inspection Report:-

The insurers generally verify the information obtained by an

independent agency. Sometimes this investigation is conducted
without the knowledge of the applicant. Today, the insurers
have their own inspection staffs that are generally known as
inspectors or field officers or development officers.

When the amount of insurance is not large, the inspectors

make a general inquiry but when the amount is substantial, a
deep and thorough inquiry of habits, character, social condition,
occupation and health is required.

In this case, the inspector interviews the applicant's neighbors,

employers , bankers, business associates and other who have
had special information pertaining to business, personal ethics,
temperate habit, social behavior and health.

The main advantage of this source is that the inspectors

provide fair and frank information because they have no
interest in the outcome of the case.

5. Private Friends Reports:-

The information from private friends is not generally required.

But for some checking purposes, confidential reports of the
friends of the proposer are considered. They are requested to
reply those questions which are generally asked in agents
report.
Since friends are fully aware of the personal and private life of
the proposer, they can give better information than the agents.
But naturally the real friend does not want to harm his friend.
So friends report may not always be correct.

6. Attending Physicians:-

The attending or family physicians can give better records of

health, history of the proposed life and his family. It has been
revealed that the family physicians have given true and fair
reports of the required information by the insurers. The family
physicians give the information only after charging a certain
amount of fees.

7. Medical Information Bureau:-

The organization commonly known as 'MIB' is an effective

bureau for furnishing confidential medical reports. This bureau
is common in U.S.A, but in India such bureau has not started.
The insurers are members of this bureau and pay a certain fees
annually.

Sometimes they are required to pay commission for furnishing

information. The MIB has recorded sufficient information of
reputed and distinguished persons so the bureau is competent
enough to report adequate and fair information.
8. Neighbors and Business Associates:-

Confidential reports about the applicant can be easily obtained

from the neighbors and business associates although it may be
prejudice to the extent of friendship or enmity with the
proposer. The obtained information can be tallied with other
information.

9. Commercial Credit Investigation Bureau:-

The bureau assembles financial and social information of

businessmen. The credit worthiness is decided by the Bureau.
The information given by the Bureau is treated confidential.
These reports are expected to be correct and fair to a greater
extent.
 CLASSIFICATION OF RISK

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 Underwriting Risks:-

The purpose of underwriting is to accept the greatest amount

of insurance business that will allow the insurance company to
remain profitable. With this in mind, an insurance company
places each case into one of four risk classes. The risk class
determines the premiums paid to the insurance company. If a
person is in a higher risk class then he will pay a higher
premium.

Standard:-

A person whose risk of dying is considered the same as that of

an average person will be in the standard risk class. The
premiums for the standard class are the base premiums, and
premiums for the other classes are determined in relation to
the premiums for a person who is in the standard risk class.

Substandard:-

A person who presents a greater risk of dying than the average

person will be placed in the substandard category. A person
may be in this category due to a medical impairment that
decreases life expectancy. A person who in this category will
pay a higher premium than a person who is classified as a
standard risk because it costs more for an insurance company
to insure a substandard risk.
 Preferred:-

If a person has a lower risk of dying than the average person,

he will be in the preferred risk class because of a lifestyle
choice that increases life expectancy. Premiums for this
category are less than the premiums a person pays if he is
considered a standard risk because it costs less for an
insurance company to insure a lower risk.

Declined:-

Some people represent too great a risk for the insurance

company to insure. A risk that an insurance company could
consider too great is a person who is on an active tour of duty
in Iraq or Afghanistan. In this case, the insurance company will
place the person in the declined class.
 RISK MANAGEMENT TOOLS

Two broad techniques that are used in risk management for

dealing with risks are:

a) Risk Control

b) Risk Financing.

a) Risk Control:-

Risk control focuses on minimizing the risk of loss to

which the firm is exposed and includes the techniques of
 risk avoidance and risk reduction. Risks are avoided when
the insurance company refuses to accept the risk. It is a
negative approach. If it is used extensively, the company
cannot achieve its primary objectives. Risk reduction is a
technique of reducing the likelihood of loss or the occur.
Risk reduction is also possible by the timing of its
application which may be prior to the loss event or at the
event or after the loss event.

b) Risk Financing:-

Risk financing involves arrangement of funds to meet

losses arising from the risk. It is a technique designed to
guarantee the availability of funds to meet the losses. Risk
financing takes the form of risk retention or transfer. Risk
retention is an exposure which is not avoided, reduced or
transferred. In other words when nothing is done about the
risk, risk is retained by the company.

Risk retention is accompanied by specific budgetary

allocation to meet the losses and may involve the accumulation
of funds to meet to deviations from the expected losses. Risk
transfer is to purchase insurance which is a primary approach.
In consideration of a specific payment (Premium) by one party,
the other party contracts to indemnify the first party, upon a
certain limit for the specified loss that may or may not occur.

RISK MANAGEMENT INFORMATION SYSTEM

(RMIS)
 Risk management information system is software
tools designed to assist risk managers in there functions.
Traditional RMIS software emphasizes claim management,
safety monitoring, and financing losses. Other tools available in
an RMIS are management of insurance policies, exposure date
and insurance certificates.
 An enterprise wide RMIS system can help managers
with a wide array of function. At the outset , once connected to
an organization existing information system , the RMIS gathers
information from all these various system into one database.
The date can be analyzed from various angles to get different
perspectives on the risks the organizations faces.

EHS SOFTWARE

Improve safety and boost productivity by preventing

adverse events with risk and compliance software:- Over
EHS risk management and compliance software for operations
can help reduce incidents, save money, and decrease the
likelihood of regulatory sanctions and production interruptions.
Whether you are a small business or a global giant you move
beyond compliance and natural a proactive safety culture
throughout your operations.
 Minimize cost associated with managing operational risks.

Automate key risk management process and controls in all

business function.

Enhance corporate performance by aligning your strategy

with risk management processes.

Heighten strategic effectiveness though automated risk

monitoring and analysis.

RISK MANAGEMENT PROCESS

The Risk management process can be divided into the

following steps. Before that, it is explained with following
charts.

Risk Management Process:

vaERismeDukAywpICongdfihrcbfljt
Determination of objectives: - The first step in the
process of risk management is the determination of
objective of the risk management program. It is the
process of deciding precisely about the risk management
program of the management. The objectives can be pre-
loss and post-loss objective.

Identification of risk: - It is difficult to generalized about

the risk that a given organization is likely to face because
difference in operations and conditions given raise to
 differing risk. The following are important tools used for
identification of risk:

Check list method

Interaction with other

Management information system

Evaluating Risk: - Risk evaluation means using certain

ranking according to the importance of risks. In this case
programs like critical analysis, probability theory and the
loss unit concept can be used.

Considering Alternatives: - once the risk is identified

and evaluating the next step is to consider the best
alternative. It is a problem of decision making. It is
deciding which of the techniques available should be used
in dealing with risk.

Implementation of the Decision: - The decision is

made to retain the risk in one business. If the fund is
accumulated proper administrative procedure should be
set up to implement the decision.
 Evaluation and Review: - Evaluation and review of risk
management program permits the manager to review
decisions and discover mistakes, ideally before they
become costly.

Know your Rights and Duties

As a smart consumer, you should be aware of your duties and

rights about your policy coverage and claims.

Duties:

When you buy a policy:-

Fill the proposal form yourself correctly and truthfully, it is

the basis of the insurance contract
 Do not leave any column blank, do not sign a blank
proposal form

You will be responsible for any information in this

document as it bears your signature. Disclose all material
information about the risk you want to cover

Select the term of the policy as per your needs

Select the amount of premium you can afford to pay

Choose between Single Premium or Regular Premium

Choose your premium paying frequency such as annual,

half-yearly, quarterly or monthly

Opt for electronic payment of your premium (ECS) for your

convenience, safety and records

Ensure to register nomination under your policy. Fill the

nominees name correctly

After you buy the policy:-

Once the proposal is submitted, you should hear from the

insurance company in 15 days

If not, take up the matter in writing

 If any additional documents are asked for, comply
immediately

Once the proposal is accepted by the insurance company,

the policy bond should reach you within a reasonable
amount of time

If not contact the insurance company about it

When policy bond is received, check it and be sure that

the policy is the one that you wanted.

Go through all the policy conditions and be sure that these

are the same that were explained to you by the
intermediary/ insurance company official at the time of
sale

In case of doubts, contact the intermediary/ insurance

company official immediately for clarification.

If necessary contact the insurance company directly.

Maintaining the policy:-

Pay your premium regularly on the due dates/ within the

grace period
 Do not wait for a premium notice. It is only a courtesy. It is
your duty to pay the premium to avoid lapsation or other
penalties

Do not wait for your intermediary or anyone to pick your

cheque up. Make your own arrangement for paying the
premium on time

If there is a change of address, please intimate the

insurance company immediately.

Nomination:

After the policy is issued, you can change the nomination

by:

Filling a notice of change of nomination and

Sending them to the insurance company for them to

register it in their records

If the nominee is a minor, appoint an appointee to receive

any claim paid while the nominee is still a minor

Get the appointee to sign in the endorsement showing

consent to act as an appointee

If your policy lapses:

 If you fail to pay the premium in time, your policy may
lapse. Contact the insurance company for reviving it.

If you lose your policy:

If you lose your policy bond, report it to the insurance

company immediately

Get a duplicate policy by complying with the formalities

The duplicate policy confers the same rights as the

original policy bond

At the time of a claim:

Comply with all the requirements of the insurance

company

Whenever required, you should help the insurer in a

prosecution or for recovery of claims which the insurer has
against third parties
Rights:

You have the right to

Cancel a life insurance policy within 15 days from the date

of receipt of the policy document. If you disagree to any of
the terms or conditions in the policy

You can

o Return the policy stating the reasons for objection

o You will be entitled to a refund of the premium paid

o A proportionate risk premium for the period on cover

and the expenses incurred by the insurer on medical
examination and stamp duty charges will be
deducted

o If it is a unit linked insurance policy (ULIP) in addition,

the insurer can repurchase the units at the price on
the cancellation date.
ULIPs

You have the right to partial withdrawal

You have the right to switch funds

You can surrender the policy after the lock-in period from
the date of commencement of the policy

The nominee/assignee under a life insurance policy has

the right to the death claim amount

You can ask for alterations in the policy such as:

o Mode of payment of premium

o Term of the policy

o Increase in sum assured and

o Premium redirection

INFORMATION COLLECTION ABOUT

INSURANCE COMPANY COVERING RISK OR
NOT

Nam Ag Do you Which Why do What do you

e e have compan you take think about the
insurance ys the policy cover risk
policy? insuran insuranc or not?
ce e policy?
 policy
do you
take?

Ajay 24 No No ____ In only insurance

Arde you get guarantee
return but for
other insurance
not sure, Some
time there is
hidden term &
conditions.
Kunda 26 Yes LIC Its secure Yes its reduce risk
n your
salaw family
ade tension in
term of
money.
Balvin 34 Yes LIC To ensure Some has risk
der the life of some doest cover
Singh mine and because the fake
family company.

Seven 45 Yes LIC, Max If I Its cover the risk

Rodri life, survive I but Cannot trust
gues will get any company
HDFC
the
 benefit or
family
Sujee 24 Yes LIC, Met For Its cover the risk.
t life protect
Gupta my family
though
insurance
.
Conn 40 Yes GIC For my Yes Its cover the
oly business risk & its reduce
justin purpose, the tension.
for goods
& risk is
uncertain
thats
why I
taken
 CONCLUSION

Insurance sector in India is growing at a very high rate and it

is expected to grow more in future. The study had made an
attempt to understand the various risk involves in investing in
insurance and how to manage those risk. I observed that most
of the people buy an insurance policy under someones
influence and not according to there requirement also there is
very low awareness about need analysis calculation. Many
people do not pay their premium as they did not purchase their
policies. According to there requirements.

Customer satisfaction plays a very important role in

increasing the market. Share of the company and it is very hard
to get. So insurance companies should sell there insurance
policies according to needs of customers in this way they can
easily acquire customers loyalty.

Risk management is an ongoing process, not a one time

event. If economy is a chain and every sector is its ring strong.
Over the long term , the only alternatives to risk management
is a crisis management.

At present transport companies managers are facing with a

bewildering array of uncertainties, as the environment within
which they operate changes at an increasing rate.
 Risk management is dealing with uncertainty in order to
reduce threats and maximize opportunities. It can be seen as a
way that enables to create sustainable competitive advantage,
but no risk management process can create a risk free
environment.
 BIBILIOGRAPHY

BOOKS AND EADITION PUBLISHER

AUTHOR
Insurance 2010 S Chand
principles and
practice

M.N.Mishra
Insurance industry 2008 General
Trends and
Regulations

U Jawaharlal
Principles & 2012 Vipul Prakashan
practices of
banking &
insurance

P.K.Bandgar
Environment 2012 Vipul Prakashan
Management of
financial services

Lakshmi
Chandrasekaran
WEBSITES:-

www.google.com
www.riskmanagment.com
www.wikipidia.com
www.redifbooks.com
www.economictimes.com
www.irdaindia.org
www.indiatoday.com