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Chapter 7: Risk FinancingInsurance

Basic concept and principle Insurance contract

Insurance industry Classification of insurer Selection of insurer Underwriting cycle Demand for insurance

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Learning Objective Understand the basic concepts of insurance Identify the main components of an insurance

contract Describe the different types of insurance company

ownership Describe the factors that affect the selection of

insurer Summarize the evidence and explanations for the

insurance underwriting cycle Understand the demand for insurance for a

corporation

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Risk Financing

Risk Retention

Risk Transfer Via insurance Via contract

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Definition of Insurance

Insurance is pooling of fortuitous loss bytransferring of such risk to insurers, whoagree to :-

a) indemnify the policy holders such losses;

b) provide other pecuniary benefits on theoccurrence;

c) render services connected with the risk

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BasicConcepts

Pool

fortuitous

transfer

indemnification

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Basic Principles of Insurance

1 Indemnity

2 Insurable interest

3 Subrogation

4

Contribution

5. Utmost good faith

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Basic Parts of Insurance Contracts

Declaration

Definition

Insuring agreement

Condition

Exclusion

Miscellaneous provisions

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Insurance Companies

Life General Composite

Type

Capital Stock Mutualwnership

Agency Branch office Direct

Marketing

system General Agent Brokergency

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Others

Insurer capital Insurance premium

Underwriting cycle

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Selection of insurers

Financial stability

Product availability

Service quality

Ethical behavior

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Insurer capital Insolvency Risk

Inadequatepremiumcollection

Underwriting>

capital

Highinvestment

risk

ManagementFraud

TO AVOID:

Diversification reinsurance

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Why transfer the risk to insurer?

Services Claims processing Advise

External funds Avoid

Financialdistress Avoid

Tax Deductible

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Insurance Premium

Gross premium

Purepremium Loadings

Investmentincome

Lossadjustmentexpenses

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