Principles of InsurancePooja Garg

What is Peril?

Perils are events, unexpected occurrences, cause of a loss

Examples: fire, floods, earthquakes , lightning, hail, windstorm, theft

Perils can cause damage to the asset, as we say asset is exposed to risk

Perils cannot be avoided through insurance

What is Risk?

Indeterminate outcome or uncertainity

Possibility of loss or damage Possible of an adverse deviation

from a desired outcome that is expected or hoped for e.g when we own a house we hope it will not catch fire

Insurance tries to reduce the impact of risk

Degree of risk Probability of the adverse deviation Example: village has 400 housesValue of each house 20,000 and every

year 4 houses are burnt (probability of risk=1%)

Total loss=80,00080000/400=200,distributed by each

person(1% of the value of house)

Hazard

Condition that may create or increase the chance of loss arising from a given peril

Example: in a hair dressing saloon uncovered plugs, improper cleaning

Eg peril =fire ,hazard= dry forest Peril=earthquake. Hazard=earth faults

Types of hazards

Physical hazard Moral hazard Morale hazard-mental attitude of careless n accident prone person

Physical properties that increase the chance of loss from various perilsStem from material charac of objectse.g COPE in fire ins

Intention to seek undue advantage through the insurance policyIntentionally increase prob of loss to gain by cheatine.g fraud , exaggeration of loss

When people have purchased insurance they may have a more careless attitude towards preventing losses or may have an different attitude towards the cost of restoring damage

Group Exercise

Divide class in to groups of six each Case study assigned among groups Hair salon Vs warehouse

Hair Saloon

Peril Risk Hazard SolutionStaff and Customers coming in contact of Chemicals, Bleaches

Eye or Skin irritation

Highly reactive Chemicals, Bleaches

Staff always to check with customers for discomfort.

No chemicals to be stored above eye level

Hand GlovesSlips and Trips Injury Loose wires on the

floor,wet floorTidiness of saloon, no trailing cables

Standing for long peririods

Musculoskeletal problems

Non adjustable client chairs, no breaks

Adjustable chairs,regular breaks

Blades and scissors coming in contact with body

Cuts,wounds Improper handling Proper training of staff, usage of gloves

Warehouse

Peril Risk Hazard SolutionFall of goods from Height

Injury to people, Damage to goods

Improper Storage, Improper retrieval, Improper infrastructure

Training to Staff, Proper Norms for

Storage

Fork Lift truck hitting walls, racks, people, etc.

Injury to people, damage to property

Over-speeding, improper handling, unfit machine

Proper inspection of fork lift trucks before usage, adequately trained staff.

Fire Damage to property, Injury, Death

Inflammable material, uncovered wires

Proper storage precautions, tidy place, Fire extinguisher

Types of Risk

Financial and non financial risks

Static and dynamic risks

Fundamental and particular risks

Pure and speculative risk

Only economic losses can be insured

Static risks - caused by perils which have no consequence on the national economy like theft ,fireMore suitable to insurance treatmentDynamic risks –caused by perils which have a national consequence like inflation, calamities, political upheaval

Fundamental risks –affect larger populations e.g train crash, earthquake ,riot(group risk)

Particular risks affect only specific persons e.g burning of house, robbery ,sickness

Pure risks- involve the possibility of loss or no lossNo gains possibleOnly pure risks are insurable

Speculative risks-possibility of loss or gain

Involve risks which to some extent are under the control of the person concerned gambling, betting, buz ventures

Risk Management as Business Function On of the earliest references to the concept of

Risk management papered in HBR review in 1956

At that time risk manager was suggested by , many large corporations already had staff positions referred as “Insurance manger”

Risk management has its roots in corporate insurance buying , the transition from insurance buying to risk mgt was not an inevitable evolutionary process.

Risk management

Attitude towards insurance changed and it lost its original status as the standard approach for dealing with a corporations risk .

Henry Fayol included “Security activities” in 1916 theory of division of org in to 6 functions.(technical , commercial, financial ,accounting ,managerial)

Considered as a separate and distinct function of the business

Risk Management Vs other disciplines General mgt deals with all risks

facing the organization( both pure and speculative risks) while risk mgt deals only with pure risks.

Insurance mgt only deals with insurable pure risks while risk mgt deals with insurable and non insurable pure risks.

What is Risk Management?

It is a Scientific Approach to deal with Pure

risks By anticipating possible losses and Designing strategies to minimize loss and Implementing procedures and strategies Which minimise the occurrence of loss Or the financial impact of the loss that

occur

Risk Management Process

Determination of objectives

Identification of risks

Evaluation of risks

Considering alternatives and selection of risk treatment

device

Evaluation and review

Implementation of Decision

Determination of objectives Objectives are aligned with the fulfillment of

goals of the organization Mehr and Hedges in their risk management in

the business enterprise These all pursue the goal of wealth

maximization of shareholdersPre-Loss

Economy Reduction in Anxiety Social Responsibilty Meeting externally

imposed obligations

Post-Loss Survival Continuity of operations Stability Continued growth

Identification of Risk

Continual Process Tools: Analysis of Documents,

flowcharts, internal communication systems, questionnaires, checklists, insurance policy checklists

Problem analysis Source analysis

Evaluating Risks

Ranking all the identified risks in terms of priority and significance

Techniques: Critical Analysis

Involves classification of risks in to critical , important and unimportant ones

Budgetary Techniques

Consideration of Alternatives and Selecting a risk treatment device Retention, Transfer and Prevention of

Risk

Implementation of Decision E.g.Transfer of Risk must be followed

by selection of an insurer, negotiations, policy document etc.

Evaluation and Review

New risks arise and old risks disappear

Permit the risk manager to review decisions and discover mistakes

Risk management audit is a tool to review the process

Tools for Risk Management

Risk Control Risk Avoidance Risk Reduction or

Prevention

Risk Financing Risk Retention Risk Transfer

Tools for Risk Management

Risk Avoidance Prevent a risk

from coming into existence

Not performing activity that carries risk

E.g. If liability claim exceeds the profit incurred by manufacturing a dangerous product

Risk Reduction Reduce or

prevent the loss and its severity

E.g. Masks available for preventing Swine Flu, seat-belts and air-bags to prevent injury,outsourcing

Risk Transfer By way of

insurance contracts, hedging

Causing another party to accept the risk

Risk Retention Any

exposures that are not avoided, reduced or transferred, are retained.

Involves accepting the loss when it occurs.

Small n v large risks(war)

Intentional & Unintentional

Definition

Enterprise Risk Management (ERM) refers

to the methods and processes used by

organizations to manage risks and proactively use opportunities to

achieve management’s objectives

Why ERM Is Important ?ERM supports value creation by enabling management to: 

• Deal effectively with potential future events that create uncertainty.

• Respond in a manner that reduces the likelihood of downside outcomes and increases the upside.

Enterprise Risk Management Asa Business Strategy

Benefits of ERM Integration of corporate framework Corporate governance guidelines

Board of directors are mandating transparency Broader view of earnings related to risk New laws Emerging risks Technology Terrorism Global economy Fraudulent corporate practices