Innovation in Banking & Insurance 1- SYBBI
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Transcript of Innovation in Banking & Insurance 1- SYBBI
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Definition
Insurance is a contract between the
insurer and insured under which theinsurer undertakes to compensate the
insured for the loss arising from the risk
insured.
In consideration, the insured agrees to
pay the premium regularly.
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Characteristics
Cooperative Device Sharing Risk
Evaluation of Risk
Payment at contingency
Amount of Payment Large number of insured persons
Is not Gambling
Not a charity
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Importance
*Compensation is received.
*Position becomes as it was prior to the loss.
*Financial Protection to dependents.*Security, Safety & Peace of Mind.
*Security Against Loans.
*Emergency Loan.
Transfer of Risk- Risk of Loss.
Protection to Business men &Public
Minimum Guarantee Profit
Raising Credit.
Easy settlement & Protection
against creditors.
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*Lump sum amount in case of accident resulting
permanent disability.
Mediclaim Support
Source of Employment
Confidence
Tax concessions.(sec 80 C
Income Tax)
Promotes Employee welfare.
Promotion of International Trade.
Growth of Business Competition.
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*Business risk free.
*Safeguards capital Invested.
*Amount maintained for meeting unexpected losses.
*Collect small national savings in form of premium.
*Invest these funds in shares & Debentures.
*Covers injuries, road accidents, disability, death etc.*Employers- Employees.
Stimulates Business Enterprise.
Increases Efficiency.
Capital Formation
Savings
Solving Social Problems
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Essentials Offer & Acceptance.
Free consent.
Agreement must be in writing.
Competent Persons.
Premium as consideration. Object must be lawful.
Element of uncertainty.
Subject matter should be risk.
Risk must be capable to be calculated.
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Principles of Insurance
*Clear & complete & correct info- else void.*Disclose.
*Applicable to all types.
*Interest in the subject matter of insurance.*Physical existence gives-Gain.
*No existence-Direct Financial Loss.
*Property- Ownership.
*Applicable to all types.
Principal of Utmost Faith
Principle of Insurable Interest.
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*Guarantee/Compensation to pay for the loss occurred.
*Amount of Insurance.
*For Protection & not for Profit-making.*Same financial position as prior to the loss.
*Applicable to fire, marine & general.
*More than one policy.*Claim from any one or in proportionate basis from all.
*Applicable to all except Life.
*Corollary of the principle of indemnity.
*All necessary steps to minimize loss.
Principle of Contribution.
Principle of Indemnity.
Principle of Loss minimization
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*Replacing of one person to another.
*Right of ownership will pass to the insurer.
*Prevents the insured to make profit or loss suffered by him.*Insurer steps in the shoes of the insured.
*Corollary of the principle of indemnity.
*Loss caused by series or chain of causes.*Nearer cause needs to be insured.
*Subject Matter should be at risk of loss.
*Insurer gets premium in a contract of insurance for running,
certain risk.
Principle of Subrogation.
Principle of Causa Proxima.
Risk must attach
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* Insurance contract clearly mentions the term or period of
time it covers.
*Life Insurance is a continuing contract with the condition the
premium is to be paid at regular periods. If the premium is
is not paid regularly, the contract becomes invalid and can
be started back after fulfilling certain conditions as given in
the contract.The insurer is legally responsible to pay the compensation for
the loss insured only till the term or period of time of the
policy and not alter that.
Period Of Insurance
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Forms of Insurance Organisations
SELF-INSURANCE (Private Fund)
INDIVIDUAL INSURER
PARTNERSHIP
JOINT STOCK COMPANIES
MUTUAL COMPANIES
CO-OPERATIVE INSURANCE ORGANISATION
LLOYDS ASSOCIATION
STATE INSURANCE
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Types of Insurance
Life Insurance Non-Life
Endowment.
Term
Whole-Life.
Limited Payment whole life
policy.
Convertible-whole life
policy.
Joint Life Policy.
Annuity Policy.Childrens Endowment
Policy.
Unit Linked Policies
Health Insurance
LIC Policies etc.
Marine.
Fire.
Vehicle .
Medical.
Crop.
Fidelity.Burglary.
Cattle
Cash In Transit etc.
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Life Insurance
Life Insurance is a contract between the assurerand the assured, under which the assurer on the
payment of premium, agrees to pay a certain sum
of money on the expiry of the certain period, or on
death, whichever is earlier.
Needs for Life insurance:-Family
Children
Old Age
Special medical reasons.
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Features of Life Insurance in India
Elements of Valid Contract Insurable Interest
Utmost Good Faith
Warranties
Assignment & Nomination Premium
Certainty of event
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Advantages of Life Insurance in India
Encourages & aids thrift
Protection Accidental death benefits
Tax Benefit
Provides Liquidity.
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Types ENDOWMENT POLICY
*Popular Form of life insurance.
*Sum Assured is payable only after expiry of the
period of
the policy or on death.
*Premium needs to be paid till the maturity.
*Regular savings.
*Self & Family members.
*Types (i) Pure(survival) (ii) Ordinary (iii)Joint Life(iv)Double Endowment (v) Triple Benefit.
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WHOLE LIFE POLICY
*Cheapest form of policy.
*Insurance cover against death irrespective of when it
happens.*Premium is paid throughout the lifetime of the assured.
*Policy if kept current, covers over entire life as compared to
term insurance which covers only for a certain term of yeatrs.
*Sum assured is paid only on the death to family members.
LIMITED PAYMENT WHOLE LIFE POLICY.
*Term is fixed.
*Premium is payable for selected period or until death if itoccurs within this period.
* Assured knows how much amount he will be required to pay
no matter how long he lives.
* Sum Assured is paid only on the death of the assured.
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SINGLE PREMIUM WHOLE LIFE POLICY
*Premium is paid at the start of the policy.
*It is available with or without profits
*With Profit, these policies continue to share in the periodicalbonus contribution until the death of the life assured.
*(Do not stop participating in the profits after completion of
the period for which the premium has been paid)
CONVERTIBLE-WHOLE LIFE POLICY
*For Young persons.
*Whole life policy is taken first with low premium.
*During the tenure, policy can be converted to endowmentwith increase in the premium.
*Else continues as Whole Life with premiums reducing every
stage.
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JOINT LIFE POLICY
*Policy covering two or more lives.
*Sum Assured is paid at the end of a fixed term or onfirst
death of any lives assured whichever is earlier.
*Popular with Partnership firms.
GROUP LIFE INSURANCE
*Provides insurance coverage to a group of people
under one contract.
*These schemes are provided for employees,association societies etc.
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ANNUITY PLAN
*Reverse of Life Insurance.(Starts where Life Insurance
ends)
*Premium is payable either monthly, quarterly, half yearly,yearly.
* form of Pension in which insurance company makes a
series of periodic payments to a person or his/her
dependents over a number of years, in return for the money
paid to the insurance company either in a lump sum or in
installments.
*Useful for those who would wish for a regular income for
themselves & their dependents after the expiry of certain
number of years.
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CHILDRENS ENDOWMENT POLICY.
*Policy for childrens marriage, education.
*Premium is payable not at once but on monthly, quarterly,
half-yearly or yearly installments.
TERM INSURANCE
*Pure Risk cover for a specified time period.
*Pays death benefit to the legal heirs of insured dies duringthe term of the policy.
*Temporary & inexpensive Insurance.
*Convertible, Level, Decreasing(constant Premium but the
benefits are reduced over a period of time), Increasing(Premium as well as the benefits increases), Renewable.
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UNIT LINK POLICIES
*Benefits depend upon the performance of a portfolio of
shares.
*The Allocated premiums will be applied to purchaseunits as per the fund type chosen.
*The investment is denoted as units and is represented
by the value that it has attained called Net Asset Value.
*Premium by the insured is spilt (a)Life insurance cover
(b)units of Mutual fund after deduction of costs,
expenses.
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HEALTH INSURANCE
Covers 4 major diseases cancer, kidney transplantation,
heart problems needing by-pass surgery or paralysis.
Under this plan , money is provided at a lump sumandthereafter in regular intervals in case of a major disease
for meeting the expenses of hospitalization or operation.
If the policyholder gets affected with any of the health
problems within one year of policy, he will not get anybenefit, however policy continues as an endowment
policy.
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JEEVAN SATHI POLICY
*For married couple.
*If both Lives survive, Sum assured + Bonus declared
fromtime to time is paid.
*Maturity is twice:
-if one dies before the due date of the policy, the sum
assured is payable to the survivor.-policy continues even after that date till the date of
maturity.
-Same amount is payable to the survivor or nominee.
OTHER LIC POLICIES*Jeevan Akshay *Jeevan Dhara *Jeevan Kishor
*Jeevan Chaya *Jeevan Mitra etc
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PROCEDURE TO TAKE LIFE
INSURANCE POLICY
Submission of proposal form. Submission of agents report.
Doctors Report.
Certificate of Age.
Scrutiny of Documents.
Acceptance of Proposal.
Payment of First Premium.
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NOMINATION
Is the right given to the life insurance
policyholder to appoint a person or
persons to receive the benefit underthe policy in case it becomes a death
claim
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The act of naming a person by the policy holder to
whom the policy money will be paid in the event of the
death of the policy holder.
Nominee- person in whose favour the nomination iseffected
Above 18 years
Nominee details as full name , age , relationship.
Multiple persons are allowed as nominees , share needs
to be specified under S/39 insurance act 1938.
Can change/ cancel the nomination.
In Absence of nomination, payments of the claims may
be delayed due to involvement of legal proceeding. The
claimant will have to present (i) succession certificate or
(ii)letter of administration from the court of law.
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ASSIGNMENT
Transfer of Rights , Title & Interest of
the Life Insurance Policy to a person orpersons.
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Assignor(policyholder who transfer the title) &Assignee(person who derives the title from the assignor)
Two Types- Absolute and Conditional
Cannot be cancelled and Changed The Third Parties may be creditor, bank, the assured
himself or any other person.
AS per Section 38, of the Insurance Act 1938,
Assignment can be effected:-Either by Endorsement upon the policy document OR
By Endorsement upon a separate document
Should be signed by the assignor or his duly authorizedagent.
Attestation by at least one witness.
It is compulsory for the assured to give notice ofassignment to the assurer for making the assignmenteffective.
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SURRENDER VALUE & PAID UP
VALUE OF POLICY
Surrender means giving up of an insurance policy
before the date of maturity.
Surrender value means the amount of money which the
insurer agrees to pay in case the assured decides to
surrender his policy before its due date.
The Amount of Surrender value is calculated on the
basis of actual premium paid and number of years the
policy has been active.
Minimum 3 years premiums need to be paid so that the
policy can acquire a surrender value.
Surrender value is paid at the time of discontinuation of
the policy.
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PAID UP VALUE Paid Up Value= Original Sum assured * No of Premiums
paid
Total no of premiums that wererequired to be paid.
Paid up value is the amount at which your sum assured
would be reduced if you discontinue paying the premiums.
Policy continues with a reduced sum assured and premiumsneed not be paid.
3 Years minimum premiums need to be paid.
Paid up value is paid only on maturity or death of the
policyholder which ever is earlier.
In case of with profit or participating policy, the bonus or
profits are added to the paid up value but future gains or
profits are not added to such policy.
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CLAIM SETTLEMENT UNDER
LIFE INSURANCE POLICY
(A) Procedure to be following in case of
claims by MATURITY.
Obtain a copy of maturity intimation. (If not received
within 2 months then the policy holder needs to contactthe concerned Divisional Office & obtain a copy of the
maturity intimation
Submit the Policy Document
Submit the Age Proof Submit the Discharge Form no 3825.(duly stamped
and signed attested by witness)
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Assignment/Re-assignment Deed, if any
If policy or Any deed of assignment/ re-assignment is
lost by the policy holder, he has to submit an indemnity
bond (in a particular format)along with a reliable suretyof sound financial standing.
Existing certificates in case of Childrens Deferred
Assurance & Pure endowment policies.
Insurance co will send a cheque to the policyholder forthe money due to him as per the terms of the policy.
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(B)Procedure to be following in case of
claims by MATURITY.
Intimation of Death-To be sent by the person who is entitled to get the
proceeds of the policy
Letter of information of Death should contain:-
Name of Life Assured, Statement that life assured isdead, date of death, cause of death, place of death,
policy number/s, claimants relationship with the
assure or his status (Nominee/ Assignee)
Submission of Death Proof Submission of Age Proof
Certificate of Ownership
Payment and Discharge
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General Insurance FIRE INSURANCE
*Protection to the property against fire,lightning/explosion.
*Covers damage caused due to perils like storm,earthquake
aircraft, riot etc.*Types:-
(a)Specific covers the loss of the assured upto a
certain amount which is less than the real value of the
property. Insurers liability arises only when when thelosses reaches to the extent of certain specified sum.
(b)Comprehensive risk of fire, burglary, riot,theftpest, damage, lightning etc- All in policies
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(c)Valued Property is valued by experts at the time of
affecting the policy.
Amount can be either less or more than the actual loss.
Fixed amount is payable irrespective of the actual
amount of loss.
(d)Floating can be issued for stocks to take care of
frequent changes in sum assured at various locations
Goods kept at different places, a floating fire insurance
policy can be obtained by such a trader to cover the risk
of goods lying at different places under one policy.
(e)Average Policy- contains the average clause.
Insurance company needs to pay only that portion of
the loss which is borne by the insured amount to the
actual value of the subject matter of the insurance.
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(f) Stock Declaration Policy- Covering the stock where
great fluctuations in the value can happen throughout
the contract period.
75% of the premium has to be deposited in advance.
At the end of year, the average stock & final premium is
calculated.
(g) Loss of profit policy- covers the loss of profit which
sustains as a result of fire.
Consequential loss policy.
(h)Standard fire policy- compensation of all the direct
loss or damage caused by lightning & burning.
It also covers damages by earthquake, hair flood,
explosion, cyclone & riot.
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(i)Reinstatement policy- Insurance company pays more than
the actual value of the property destroyed by fire in order to
cover the cost of replacement of the said property.
(j) Schedule Policy- insures many properties under collectiveterms & conditions.
(k) Sprinkler Leakage policy- covers the loss of building as a
result of the damage by the leakage of liquid or water.
(l) Excess policy- Stock of merchandise whose value isconstantly fluctuating.
Insured takes an ordinary policy for minimum value of the
stock & excess policy for excess value of the stock.
The actual value of the stock will be reported periodically.
(m) Maximum value with discount policy
CLAIM SETTLEMENT UNDER FIRE
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CLAIM SETTLEMENT UNDER FIRE
INSURANCE POLICYInforming the insurance co. about the loss(correct
and true information, details of policy number, place of
fire, time and cause of fire if known)
Assessment of Loss by the insured
Should not throw away the damaged goods or assets
but he must keep them till the time the surveyor arrives
at the place where fore took place
Appointment of Surveyorby the Insurance company
once it receives the information.
Duty of the surveyor to find the exact cause of the fire
and to assess the exact amount of loss.
Investigation- He asks the insured to provide the
necessary details about the loss by producing some
proof such as purchase vouchers, & other records.
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He may visit once or couple of times
Preparation of detailed report
Reporting of all the details to the insurance company
Verifying the claim proposal by the claims sanctioning
department
Appeal- means to make a request an authority to
change the decision made by it.
Insurance co. settles the claim at a lower value than
expected by the insured then the insured can make an
appeal to the insurance co to consider again the amount
or claim sanctioned by it.
The insured may also enter into negotiations with the
insurance co.
After agreement, insurance company issues the
cheque
MARINE INSURANCE
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MARINE INSURANCE
*Oldest type of insurance.
*To indemnify the assured against losses due to marine
adventure/ sea voyage.
*Types:-
(a)Voyage- Journey by sea- AT & FROM.
(b)Time Tenure is fixed, (one year on the vessel).
(c) Mixed Time & Voyage both included.- Issued for ships
& steamers.
(d)Valued Fixed value is paid whether loss suffered istotal
or partial.
(e)Unvalued- Loss is examined & compensation is paidacc.
to amount of loss.
(f)Floating/ Declaration/Open/Unnamed Covers ships of a
policy holder carrying goods from one part to another.
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CLAIM SETTLEMENT UNDER MARINE INSURANCE
(From Text Book)
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MOTOR INSURANCE
Motor Vehicle insurance covers claims against the driver
& also in respect of damage to the insureds vehicle.
Provides safety to the motor by damage due to thefts oraccidents.
Insures the policy holder against any loss and harm
caused to his motor & its accessories due to natural
mishaps or accidentsMay cover both legal liability claims against the driver &
damage to the insured vehicle.
CLASSIFICATION OF VEHICLES- FOUR WHEELERS,
2 WHEELERS, COMERCIAL, MISCELLANEOUS.TYPES OF MOTOR INSURANCE POLICIES
Act/Liability policy
Package/Comprehensive policy
C I
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Car Insurance
Two Wheeler Insurance
Commercial Vehicle Insurance
INSURANCE CLAIMS:-VOLUNTARY EXCESS
NCB
DAMAGE CAUSED
HEALTH /MEDICAL INSURANCECovers medical insurance for themselves or their familymembers.
Renewed every year.
Medical claims relating to sickness & hospitalization arecovered in this scheme.
The claim amount depends on the amount of medicalexpenses & type of sickness.
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INDIVIDUAL MEDICLAIM POLICY
GROUP MEDICLAIM POLICY.
OVERSEAS MEDICLAIM POLICY
MEDICAL INSURANCE
CRITICAL ILLNESS
HEALTH INSURANCE CLAIM
Planned HospitalizationUnplanned
RIDERS
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CROP INSURANCE
Contract of crop insurance is a contract which provides
financial help to farmers if the crop fails due to drought
or flood, irregular rainfall, temperature.National Agricultural Insurance(NAIS) for crops has
been specially introduced since 2000 to provide
insurance cover to small & marginal farmers.
Insurance cover if provided if any crops fails due tonatural calamities such as floods, droughts, cyclones
etc, pests & crop diseases.
Fid lit G t I
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Fidelity Guarantee Insurance
Guarantees the employer for any damages or loss
happening due to employees dishonesty.
Guarantees to pay if the employer suffers any loss due toemployees dishonesty.
The insurer pays the loss to the employer as per the agreed
terms in the contract.
Burglary Insurance
Loss or damage of household goods & properties due to
theft, burglary, house breaking & similar kinds of acts are
covered
Actual Loss is compensated.
Cattle Insurance
Covers the death of animals like bulls, buffaloes, cows
Cause of death may be accident, disease etc.
It helps the farmers as they buy cattle from their savings.
C h I T i
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Cash In Transist-
Covers any loss in the event of money or cash being stolenfrom the business premised of the insured or while it is beingcarried from or/to the bank.
PERSONAL ACCIDENT INSURANCE
Covers loss due to accident
To protect against risk to life or disability arising directly from
accident.The amount of compensation depends on the amountinsured with the insurance company
LIVESTOCK INSURANCE
PEDAL CYCLE INSURANCE
AVIATION INSURANCE
RURAL INSURANCE
MICRO INSURANCE
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RISK & INSURANCE
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RISK & INSURANCE
CLASSIFICATION
Financial & Non-Financial Risk
Static & Dynamic Risk
Fundamental & Particular Risk
Pure & Speculative Risk
FACTORS AFFECTING RISK OF INSURANCEBUSINESS
Age
Physique or Body
Physical Condition
Personal & Family History
Occupation
Residence
Present Habits
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Present Habits
Gender
Economic Status
Defense ServicesRace & Nationality
Plan of Insurance
Morals
SOURCES OF INFORMATION
Proposal Form
Agents report
Medical Examiners reportInspection report
Medical Information Bureau
Family Physician
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Definitions
Risk- A measure of likelihood to achieve objectives
- Two components (probability and consequences)
Risk Management
- Act or practice of controlling risk
+ Identifying and tracking risk drivers+ Defining risk mitigation plans
+ Performing periodic risk assessments
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PROCESS
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Determination of objectives
Risk Identification
Risk EvaluationSelection of Risk Management Techniques
Implementation of Decision
Evaluation & Review
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Determination of objectives
Identifying the objectives of risk management
functions.
The objective may be classified into two broad
categories i.e
pre loss or post loss.
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Risk Identification
Process of specifying, describing and documenting program
risks and their sensitivities to other risks
Internal External
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Risk Analysis/Evaluation
Process of evaluating program risks for their impacts to
performance, cost, and schedule objectives
Process includes assessing each risks:
Probability of occurrence, and Consequences of failure to mitigate the risk
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SELECTION OF RISK MANAGEMENT TECHNIQUES
Risk Control
Either through avoiding the risk or reducing the risk.
Risk Financing
Risk Retention(Funded or unfunded retention) or
transfer
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Implementation of the Decision
Identification and Grouping of risk categories.
Organization Prepares itself for Administration &Financial resources
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Risk Monitoring, Review
Process that systematically tracks and evaluates the
performance of risk mitigation actions
- against established metrics throughout the acquisition*
process, and
- develops further risk handling options as appropriate
* Acquisition includes any procurement from government or contractor
sources within all phases from early research through logistics,
operations, support, and disposal
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Reinsurrance and Double Insurance
What Reinsurance Does Not
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What Reinsurance Does Not
Do!
IT IS NOT A MAGIC POTION
What Reinsurance Does Not Do!
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What Reinsurance Does Not Do!
Convert an uninsurable risk into aninsurable one.
Make loss either more or less likely to
happen Make loss either greater or lesser in
magnitude
Convert bad business into goodbusiness
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REINSURANCE
Reinsurance is a contract of insurance whereby oneinsurer (called the reinsurer or assuming company)
agrees, for a portion of the premium, to indemnify
another insurer (called the reinsured or ceding
company) for losses paid by the latter underinsurance policies issued to its policyholders.
Is an arrangement whereby an original insurer who
has insured a risk insures a part of that risk again
with another insurer, that is to say, reinsures a partof the risk in order to diminish his own liability.
ELEMENTS OF REINSURANCE
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ELEMENTS OF REINSURANCE
Reinsurance is a form of Insurance.
There are only two parties to the reinsurance contract -
the Reinsurer and the Reinsured - both of whom areempowered to insure.
The subject matter of a reinsurance contract is the
insurance liabilitythe Reinsured has assumed under
insurance policies issued to its own policyholders. A reinsurance contract is an indemnity contract even in
life and personal accident insurance, caused by
insurance policy obligations.
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CHARACTERISTICS OF REINSURANCE
Spreading of loss Principles of insurance applicable to Reinsurance
Terminated when original Insurance lapses for any
reason
All types of insurance Original Insurer cannot do reinsurance more than his
insured sum.
Reinsurer is not liable to original insured in event of loss.
NEED FOR REINSURANCE
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NEED FOR REINSURANCE
An Insurance Company would therefore buy Reinsurance :
To protect its Capital and its Shareholders
To Stabilise its results from year to year by leveling claims
fluctuations
To increase its Capacity to handle larger and more
complex risks of various classes
To maintain any statutory minimum Solvency
requirements and provide Security
To Spread risks throughout world markets, not just
locally, to lessen financial impact on any single
economy
Limit concentration of risk
Take advantage of risk expertise of reinsurers who have
grater experience of business (territory class)
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NEED FOR REINSURANCE
Most risks, both natural and man-made, are insured and yet thelikely losses are often beyond the capacity of any single
insurance company or even insurance market.
Reinsurance is therefore the means by which Insurance
Companies obtain the necessary protection.
Types of Reinsurance
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Types of Reinsurance
SHOPPING / STREET INSURANCE
NO STANDING AGREEMENT REGARDING REMAININGOF RISK OF ONE COMPANY BY THE OTHER.
EACH POLICY IS TREATED AS INDIVIDUAL BASIS.
Reinsurer is sought only when the need of reinsurance on
a policy arises.Each case is scrutinized on merits & may or may not be
accepted.
Ceding company not sure for reinsurance , hence it
exercises a greater care in selecting the risk.
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Facultative Reinsurance
Primary insurer and reinsurer negotiate a specificagreement for a particular risk/exposure.
Best suited for unique, large exposures.
High transaction costs.
Facultative Obligatory Treaty (Facultative +Treaty) The insurer cede risks of any agreed class which
Reinsurer must accept if ceded
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Treaty Reinsurance/Automatic
Reinsurer is obligated to accept all business that falls
within the terms of the treaty.
Lower transactions costs but greater potential for
adverse selection.
Best suited for numerous, smaller exposures that are
more similar.
1. Quota Share Treaty
2. Surplus Treaty
3. Excess of Loss Treaty
1. Quota Share Treaty
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1. Quota Share Treaty
Primary insurer cedes a fixed, predetermined % ofpremium & losses on every risk it insurers within
class(es) subject to treaty.
75%
$50,000 Policy
25%
75%25%
$100,000 Policy
75%25%
$150,000 Policy
Simple to rate & administer.
Does not stabilize underwriting results.
Can help reduce reported expenses.
Can cede profitable business.
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Every risk or policy is shared in the percentage
agreed in terms of sum insured subject to a
maximum limit and also the premium
Profitable to reinsurer as he participate in every risk
or policy
It is costly to ceding insurer and so a short term
arrangement or for new class of business
Good for new Insurer with less capital in relation to
underwriting of insurance business
2. Surplus Treaty
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p y
Minimum limit ofretention stated in $ or
INR; % of premiums &losses ceded varies bypolicy.
Avoids cessions on
small policies.
Better at providing
large-line capacity.
More costly toadminister.
Used on property risks,
rarely liability.
75%25%
$100,000 Policy
83%17%
$150,000 Policy
Example:
$25,000 retention
3 Excess of Loss Treaty
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3.Excess of Loss Treaty
Provides against Catastrophic Losses.
If the total net loss exceeds the maximum limit providedin the treaty the excess amount is paid by the insurer.
The premium depends upon the nature and extent of
reinsurance.
A number of insurer agrees to pool together all their
business to a leading office & the payment is made by
this leading office. Profit of this association is distributed amongst the
insurers according to their shares to the business.
4. Pool or Syndicate Method
DOUBLE INSURANCE
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DOUBLE INSURANCE
Subject matter of insurance is insured with two or more
insurers and the total sum insured exceeds the actualvalue of the subject matter.
In life insurance, double insurance is allowed as nobody
can place a value of human life.
In case of non-life insurance, a property can always bevalued & it cannot be insured at a higher sum whether
with one insurer or more.
If total sum assured with all the insurers is less than the
value of property it does not amount to doubleinsurance.
Assured can not demand more than the actual loss.
UNDERWRITING
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UNDERWRITING
Underwriting refers to the process of selecting,classifying, and pricing applicants for insurance
A statement of underwriting policy establishes policiesthat are consistent with the companys objectives, suchas
Acceptable classes of business
Amounts of insurance that can be written A line underwriter makes daily decisions concerning the
acceptance or rejection of business
UNDERWRITING PROCESS
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UNDERWRITING PROCESS
The process of determining the level or risk presented by
the applicant, and deciding whether to accept the policy,and if so, at what terms and at what price.
Collect the information
Classify and analyse the information
Premium is decided.
Acceptance or Rejection of the proposal.
First Premium receipt is issued on the payment of the first
premium by the proposer.
Top 3 Challenges
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Disclos
ures Impact
Increase in
cost Asymmetricalportfolio
ClaimsRepudiation
Extremecustomer
discomfort
p g
79
UWS
kills?? Impact
Inappropriate,inconsistent
decisions Loss of
credibility
Increasedmedicalevidence
Higherdeclinaturerate
Loss ofbusiness
ProcessingHurdles Impact
Delay inissuance
Customercools off
Dissatisfiedcustomer,agent
Reduced
businessvolumes
Objectives of Underwriting
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Objectives of Underwriting Access the risk
Fix the premium
Carry Inspection of various factors
Assist in the activities in calculation of pricing of the
product
To be more Financially feasible
Minimise the effects of adverse selection
Attain underwriting profit
Select prospective insureds according to the companys
underwriting standardsAdverse selection is the tendency of people with a higher-than-average
chance of loss to seek insurance at standard rates. If not controlled by
underwriting, this will result in higher-than-expected loss levels.
Adverse selection
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Adverse selectionApplicant A Applicant B
35 year old
Goes to gym everyday
Yearly routine health check ups
No ailments
Healthy and fit
35 year oldNo physical activity
Back pain on and off
Diagnosed with hypertension a month back
Recommended blood test for sugar
Premium Rs 1000 Premium Rs 1000
No adverse disclosure
Adverseselection
No adverse disclosure
INSURANCE LEGISLATION IN INDIA
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INSURANCE LEGISLATION IN INDIA
insurance in its current form has its history dating back
until 1818, when Oriental Life Insurance Company was
started by Anita Bhavsar in Kolkata to cater to the needsof European community. The pre-independence era in
India saw discrimination between the lives of foreigners
(English) and Indians with higher premiums being
charged for the latter. In 1870, Bombay Mutual LifeAssurance Society became the first Indian insurer.
At the dawn of the twentieth century, many insurance
companies were founded. In the year 1912, the Life
Insurance Companies Act and the Provident Fund Act
were passed to regulate the insurance businessin 1906.
It is in business.
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. The Life Insurance Companies Act, 1912 made it
necessary that the premium-rate tables and periodical
valuations of companies should be certified by anactuary. However, the disparity still existed as
discrimination between Indian and foreign companies.
The oldest existing insurance company in India is the
National Insurance Company Ltd., which was founded
INSURANCE ACT 1938
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The insurance sector went through a full circle of
phases from being unregulated to completely regulated
and then currently being partly deregulated. It isgoverned by a number of acts.
The Insurance Act of 1938[1] was the first legislation
governing all forms of insurance to provide strict state
control over insurance business. Agents- Chief Agent and Special Agent
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LIFE INSURANCE ACT 1956
GENERAL INSURANCE ACT 1972
IRDA ACT 1999
(From TB- Structure, Objectives, Duties, Power &
Functions, Initiatives)
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IMPACT OF PRIVATISATION &
LIBERALIZATION
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CORPORATE GOVERNANCE
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Refers to the processes, structures &
information used for directing &
overseeing the management of aninstitution.
Is about promoting corporate fairness,
transparency& accountability
Is a system by which the businesses are
directed & controlled
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Is the system by which the companies
are directed & controlled by themanagement in the best interest of the
stakeholders & others, ensuring greater
transparency & better & timely financial
reporting
Is holding the balance between economic& social goals & between individual &
community goals
Clear Cut distinction between the owners &
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stakeholders(Ownership & Professional Management)
Establishes the mechanisms for achieving accountability
between the Board, Senior Management &shareholders, while protecting the interests of relevant
stakeholders.
Sets out the structure through which the division of
power is determined. Includes the relationships among the many stakeholders
involved & the goals for which the corporation is
governed.
Internal & External Stakeholders Aims at maximum welfare of the maximum number.
To Generate accurate & reliable information.
CORPORATE GOVERNANCE MODELS AROUND THE
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WORLD
There are many different models of corporate governance
around the world. These differ according to the variety ofcapitalism in which they are embedded.
India's SEBI Committee on Corporate Governance
defines corporate governance as the "acceptance by
management of the inalienable rights of shareholders asthe true owners of the corporation and of their own role
as trustees on behalf of the shareholders. It is about
commitment to values, about ethical business conduct
and about making a distinction between personal &
corporate funds in the management of a company
It has been suggested that the Indian approach is drawn
from the Gandhian principle of trusteeship and the
Directive Principles of the Indian Constitution
In the United States, corporations are directly governed
b t t l hil th h ( ff i d t di )
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by state laws, while the exchange (offering and trading)
of securities in corporations (including shares) is
governed by federal legislation
The "Anglo-American model" of corporate governance
emphasizes the interests of shareholders. It relies on a
single-tiered Board of Directors that is normally
dominated by non-executive directors elected by
shareholders. Because of this, it is also known as "theunitary system. Policies are framed by the BOD and
implemented by the management.
German Model- Shareholders own the co. , they do not
entirely dictate the governance. Shareholders elect 50%members of the supervisory board & the other half is
appointed by labour unions.
Some continental European countries including
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Some continental European countries, including
Germany and the Netherlands, require a two-tiered
Board of Directors as a means of improving corporate
governanceIn the two-tiered board, the Executive Board, made up of
company executives, generally runs day-to-day
operations while the supervisory board, made up entirely
of non-executive directors who represent shareholdersand employees, hires and fires the members of the
executive board, determines their compensation, and
reviews major business decisions
IMPORTANCE
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Improves economic efficiency
Increases market confidence
Protects welfare & interests of a wide range ofconstituencies & communities nearby
Prepares a small enterprise for growth & helps to secure
new business opportunities when they rise
Attracts long capital- foreign as well as domestic Ensures Purity & quality or product after the product
leaves the factory
Provides the structure through which the objectives of
the company are set Enhances the long term value of the company for its
shareholders.
Integrates all the participants involved in a process which
i i t th i l
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is economic , at the same social.
Helps to achieve its outcomes & obligations through
sound planning & risk management. Provides stability & growth to the companies
Goodwill
Protects interest of the investors of all categories
PRINCIPLES
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RIGHTS & EQUITABLE TREATMENT OF
SHAREHOLDERS
Freedom to exercise their rights by openly & effectivelycommunicating information
Encouraging shareholders to participate in general
meetings.
INTERESTS OF OTHER STAKEHOLDERS(Employees,Creditors, Suppliers, Local Communities, Customers,
Policy Makers etc)
ROLE & RESPONSIBILITIES OF THE BOARD
Adequate level of independence & Commitment
Sufficient Relevant skills & Understanding to review &
challenge management performance
INTEGRITY & ETHICAL BEHAVIOR(Code of Conduct)
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In choosing corporate officers & board members
Ethical Decision-Making
DISCLOSURE & TRANSPARENCY
Publicly Know the responsibilities of Board &
Management
INTERNAL CORPORATE GOVERNANCE
CONTROLS
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CONTROLSMONITOR ACTIVITIES & THEN TAKE CORRECTIVE
ACTION TO ACCOMPLISH ORGANISATIONAL GOALS
MONITORING BY THE BOARD OF DIRECTORS
Hire, Fire & Compensate the top Management
Safeguard the invested Capital
INTERNAL CONTROL PROCEDURES & INTERNAL
AUDITORS
BALANCE OF POWER
President be a different person from the TreasurerSeparation of Power
Separate divisions check and balance each others
actions
REMUNERATION
P f B d R ti
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Performance Based Remuneration
Cash or Non-Cash Payments such as shares,
superannuation etc MONITORING BY LARGE SHAREHOLDERS &/OR
MONITORING BY BANKS & OTHER LARGE
CREDITORS
Given their large investment in the firm, thesestakeholders have the incentives, combined with the right
degree of control and power, to monitor the management
EXTERNAL CORPORATE GOVERNANCE
CONTROLS
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CONTROLSEncompass the controls external stakeholders exercise
over the organization
Competition
Debt Covenants
Demand for & Assessment of performance information
Government Regulations
Managerial Labour Market
Media Pressure
Takeovers
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CORPORATE GOVERNANCE & INSURANCE
SECTOR
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SECTOR CG is mainly concerned with how ownership influence,
promoting corporate fairness, transparency &
accountability. CG in insurance companies makes corporate entities,
institutional investment & business opportunity.
Insurance Companies are important constituent of
Corporate Governance. Keeping an open mind, listening, learning from others,
ready to share ideas & thoughts recognizing &
rewarding co-operation & franchise development skill of
employees. Insurers should develop transparency of financial
resources.
Board of Directors consists of 1Chairman, 2 Executive
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Directors, 3 Nominee Directors, 4 Independent
Directors.
BOD has set up Audit Committees, InvestmentCommittees, IT Committees & Personnel &
Administration Committees apart from Policyholders
Council at Divisional level & Zonal Advisory Board at
Zonal Office. Management is accountable to BOD which oversees
whether management is effective & satisfying the
consumers policyholders & employees interests.
CEO is the main functioning body His decisions should not invite conflicts.
Most Important ascepts of CG are Supervision of
M t th h di h f it t t t
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Management through proper discharge of its statutory
responsibility, enforcement of effective internal control
system censuring operation & monitoring of adequate &proper risk management & handling consumers
grievances.
Marketing systems have been self regulatory to monitor
the activities of insurance companies apart from the
IRDA regulations, SEBI guidelines & Insurance Acts.
Insurers should fairly deal with the employees, insured
people & others avoiding manipulation, concealment,
abuse of privileged information, misrepresentation odf
material facts & unfair dealings
NEED OF CG IN INSURANCE INDUSTRY
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Long term performances
Honesty & Integrity of insurers CONFIDENCE
CHANGE MANAGEMENT
Insurance industry is growing faster than GDP
Specialized Insurance cos are enteringManage between safety & solvency
INVESTMENT
Safety Solvency Risk Management & protection of
policyholders interest.
Live up with the securities market & governing rules
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VIABILITY
Operate in a safe & sound manner in accordance with
the applicable rules and regulations
Prove their viability
CORPORATE GOVERNANCE & BANKING
SECTOR
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SECTOR RBI has taken various steps furthering corporate
governance in the Indian Banking System-
TRANSPARENCY & accounting standards in India havebeen enhanced to align with international best practices.
However there are many gaps in disclosures in India
vis--vis the international standards in the area of Risk
Management strategies & risk parameters, performancemeasures.
OFF-SITE SURVEILLANCE mechanism is also active in
monitoring the movement of assets, its impact on capital
adequacy & overall efficiency & adequacy of managerialpractices in banks.
PROMPT CORRECTIVE ACTION has been adopted by
RBI as a part of core principles for effective Banking
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RBI as a part of core principles for effective Banking
supervision.
RBI in keeping with Indian conditions have set 2 tiggerpoints namely NPA and Return on Asset
In future, Banking sector is not only going to grow in size
but also in complexity as the forces of competition gain
further momentum & financial markets acquire greaterdepth.
Real success of the financial sector reforms depend
primarily on the organizational effectiveness of the
banks
CG is important for :-
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Bank have a dominant position in developing economy
financial systems & are extremely important engines of
economic growth.Banks are important source of finance for the majority of
firms
Banks are the main depository for the economys
savings.Many developing countries have liberalized their
banking systems thru privatization/disinvestments &
reducing the role of economic regulation.
Managers have obtained greater freedom in how theyrun their banks.
Bank undertakes periodic inspections of a licensees
t ti
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corporate governance practices.
Inspections include a review:-
The minutes of meetings of the Board,, its committees,& senior management.
All policies & procedures on risk management practices.
Level of reporting to the Board & to the Parent Board
where relevant
Compliance with Statutory & regulatory rules & internal
policies.