Insurance_midsem terms only

Insurance

Process of transferring the risk of loss by the owner of an asset (who cannot bear a risk) to the other party (insurance company) in return for a consideration (premium)

Pooling of risk

People exposed to similar risks are bought together.

Compensation of insurance is expected to

put the person in the same position financially before suffering the loss.

Risk

Refers to the uncertainty in outcome/possibility of loss

Peril

Cause of the loss

Hazard

situation that increases the chances of loss

Physical hazard

physical attributes that increase chance of loss - smoking. loose wiring

Moral hazard

attitude of person that increases chances of risk - carelessness after taking insurance

Personal risk

potential loss to people - bankruptcy, unemployment, arrest, identity theft

property

loss to property - damage due to fire, burglary, flooding

liability

potential liability to individual/institution

example of liability risk

people fall sick after eating at a restaurant customer slips and falls on the wet floor of a store your delivery staff knocks over an expensive item at customer's house pizza delivery person hits someone while out for delivery

example of professional liability

mistake of the engineering team causing building to be structurally unsound

Professional Liability

Insurance designed to protect professionals from claims due to errors or omissions, also known as malpractice insurance.

Automobile liability

Covers damages to a third party Includes bodily injury and property damage

physical risks

due to physical effect of climate change, and environmental degradation - storm, hurricane, flood

Social risks

activities that affect communities around business - riot, strike, theft - labour, human rights, public health and political unceratinty

market risks

the risk of losses on financial investments caused by adverse price movements.

Examples of market risk are

: changes in equity prices or commodity prices, interest rate moves or foreign exchange fluctuations.

Pure risks

complete loss/no loss - no opportunities for profit - can't be controlled by people - natural disaster, fire, death

Speculative risks

Involve the possibility of loss and gain. (Not Insurable) - risks due to conscious choices - sports betting, stock investment, buying junk bonds

Static risks

risks that are unchanging through time - due to irregular actions caused by forces of nature/ misdeeds of humans

Dynamic risks

due to changes in human wants, improvements in machinery, technology - change over time - The result of changes in the economy, such as changes in the business cycle or inflation. Insurance does not typically cover dynamic risks.

Fundamental risks

risks that effect everyone / a larger portion of the population at the same time - natural disaster, war, inflation

Particular risk

risks that effect individuals / a small group of people at a given time - fire destroying a house, theft, car robbery

Risk management

process of identifying, measuring, controlling and financing risk

Methods of managing risk

Avoiding, reducing, retaining and transferring risk

avoiding risk

Elimination of the risk cause before the project begins - not owning a car to avoid own car accident

retaining risk

Simply accepting the risk and not taking any pre-emptive action to mitigate the risk - bearing the cost of repairs post accident and not claiming insurance

Reducing risk

Reduce the likelihood or impact of risk by implementing an effective system of internal controls - wearing seatbelts and helmets

Transfering Risk

taking insurance

Risk appetitle

Amount of risk the organization or function is willing to pursue or accept to attain its goals.

Risk seekers

describes people who like risk and want risk - usually young population - make risky investments

Risk averse

Having a low tolerance for risk - reluctant to take risk/ avoid risk - older population - invest in govt. bonds

Insurance Regulatory Authorities

IRDAI, PFRDA

IRDAI (full form)

Insurance Regulatory and Development Authority of India - Life, Non-life and Health

IRDAI is the

sole regulating authority for both life and non-life

PFRDA is the

sole regulating authority

•Composite insurance cos (both life & non-life) not allowed because

To operate in both life and non-life insurance, a company needs separate licenses for each sector. Meeting capital requirements for both sectors simultaneously can be challenging Life insurance typically involves long-term commitments and investment components, while non-life insurance is often more focused on short-term risk coverage. Managing risk in both can be complex and may require specialized expertise in each sector.

Insurance cover commences only on

payment of premium

Agents to be appointed by insurers in

•conformity with IRDAI regulations.

Agents to be trained by

IRDAI accredited institutes only.

Surveyors(Loss Adjusters) to be licensed by IRDAI on the basis of

professional qualification, training and experience.

Insurance Ombudsman structure created in 1998 as a

• public grievance redressal measure.

PFRDA (full form)

Pension Fund Regulatory and Development Authority-Pension

General insurance/ Non-life Insurance (definition)

Insurance designed to protect policyholders from the financial consequences of adverse life events - Fire, Marine, Miscellaneous

Miscellaneous Insurance (types)

Motor, Liability, Health, Engineering, Burglary

Fire Insurance (definition)

Coverage for losses to insured property resulting from fire or lighting, as well as any resulting smoke or water damage

Marine (cargo) insurance (definition)

A form of insurance covering the total loss of cargo of the vessel, or while loading or unloading standing, sinking or burning of the vessel, or from fire, explosion, or collision.

Companies in insurance (4)

life, non-life, health, reinsurance

Intermediaries in insurance (4)

Individual agents Corporate agents Banks Brokers

Bank's role in insurance

sells the insurance product of the concerned insurance company to its customers.

Tariff Advisory Committee (definition)

to regulate and control the rates, benefits, terms and conditions offered by life insurance companies in India.

Insurance Councils (Life and Non-life) (definition)

a forum that connects the various stakeholders of the Life Insurance sector. It develops and coordinates all discussions between the Government, Regulatory Board and the Public.

Ombudsman (definition)

an alternate Grievance Redressal platform which has been setup with an aim to resolve grievances of aggrieved policyholders of all insurance

risk factors - fire

nature of construction of house, location, goods stored, electrical wiring, inflammable materials

risk factors - life

age, gender, profession, habits, dangerous pass times, health conditions

to be insurable - a loss should be

likely to occur by chance, identifiable in time, quantifiable in time, significant value, predictable

transfer of insurance policy

insurance policy follows the person, not the property - exception: marine cargo

Fidelity Insurance

This insurance protects against employee dishonesty which may lead to the theft of money, securities, or property

proposal form

An application form filled out by the person applying for insurance - age, gender, address, location, sum assured

insurance questionnaire

contains specific info - type of insurance, machinery, plant and equipment

Proposal form and Questionnaire form

part of insurance policy

policy

Describes the type of coverage in an insurance agreement - legal contract b/w insured and insurer

endorsement

issued when terms of insurance contract are varied - addition of perils, alteration of risks

A person has "insurable interest" if

they stand to gain or benefit from the continued existence and well-being of the person or property insured

Principle of Insurable Interest

states that the insured must be in a position to lose financially if a covered loss occurs

insurance is meant to indemnify which means:

insurance is meant to compensate for the losses

•Principle of Indemnity does not apply to Life Insurance contracts

as no fixed value can be attached for human life

Ways of indemnifying in non-life insurance

•Cash payment •Reinstatement •Repair Replacement

In case of damage to car, equipments at factories, etc the claim amount will be paid after

deducting depreciation

Principle of Indemnity

insurance should place the insured in the same financial position after the loss as before ie the Insured does not profit from the insurance

•Indemnity principle ensures that

no profit is made by making the same claim with multiple insurance companies

For special types of property (eg: art works, paintings, vintage cars etc)

a Fair Value is agreed upon and policy is issued (Agreed Value policies)

•Other factors underlying indemnity:

•Deduction for under-insurance •Applying deductible or excess •Max amount recoverable under any policy will be lesser of (Sum Insured, Loss Value)

subrogation

the right for an insurer to pursue a third party that caused an insurance loss to the insured insurance company bears the financial expenses of the insured by seeking a repayment from the defaulter.

subrogation in auto insurance

suppose you have suffered injuries due to an accident caused by a third party. Your insurance company the legal right to step into your shoes and seek compensation for the damages caused to your car from the third party

Principle of Subrogation

substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance

Subrogation ensures

that the insurance co. does not suffer from the mistake caused by some third party •Having paid the claim, the insurer can make good the damages from the party who caused the loss •Having been indemnified by the insurer, the Insured does not retain the right to get compensated by the party who caused the loss and hence make a profit from the insurance

Principle of Contribution

•If there is more than one insurance policy drawn up on the same subject matter, the Insured cannot recover the loss from all the insurers and make a profit

Contribution ensures

•The insured does not make a profit from the claim Each insurer pays only a proportionate share of the loss

The principles of Subrogation and Contribution do not apply to

life insurance and personal accident policies

The principles of Subrogation and Contribution do not apply to life insurance and personal accident policies because

because these policies are independent of indemnity

Principle of Utmost Good Faith

•This principle imposes a Duty of Disclosure on both the Insurer and the Insured to disclose all material facts relevant to the insurance contract

•Correct disclosure will enable the insurer to decide:

•Whether to accept the proposal •What is the Appropriate Premium to be charged

under principle of utmost good faith, the insurer has to disclose

•all benefits and information accurately to the proposer (eg: rebate on safety procedures under Fire Insurance)

under principle of utmost good faith, the insured has to disclose

material information (eg: property) at every renewal, accurate health information, etc.

principle of Proximate Cause

referred to as the cause that is active and is efficient in causing or setting in chain a motion of events that ultimately brings forward a result. It needs to be the first cause or the last, but it is defined as the cause that is most active in bringing forth a result.

When the liability of the insurer is determined, the proximate cause is considered first. Therefore, if the proximate cause of a loss is a known insured risk

the insurer has to pay the insured

prove insurable interest at start

life insurance

prove insurable interest at start and time of claim

property insurance

prove insurable interest at time of claim

marine cargo insurance

contingent event

loss event based on which claim is payable

premium payment term

how long one has to pay premiums for

Exclusions

events excluded from the scope of insurance cover

Premiums

Fees that insured parties pay insurers for coverage against losses

sum assured

The amount that will be paid out under the terms of the policy

policy term

Period during which the policy or contract is effective.

condition precedent

A condition in a contract that must be met before a party's promise becomes absolute.

an insurance contract may require the insurer to pay to rebuild the customer's home if it is destroyed by fire during the policy period. identify condition precedent

fire is a condition precedent.