1. INTRODUCTION TO
INSURANCE

2. WHAT IS INSURANCE ?
• Insurance Indemnifies Assets & Income. Every
Asset has a value and generates Income to its
Owner. There is a normally expected Life-time for
the Asset during which time it is expected to
perform. If the Asset gets lost earlier, being
destroyed or made Non-functional through an
Accident or other unfortunate event the Owner is
Prejudiced. Insurance helps to reduce
CONSEQUENCES of such Adverse Circumstances
which are called Risks

3. WHAT IS INSURANCE (Contd.)
• Insurance is the SCIENCE OF SPREADING OF
THE RISK. It is the system of spreading the
losses of an Individual over a group of
Individuals
• Insurance is a Method of sharing of
financial losses of a FEW from a COMMON
FUND formed out of Contribution of the
MANY who are equally exposed to the
same loss

4. WHAT IS INSURANCE Contd..
• What is UNCERTAIN for an Individual becomes
a CERTAINTY for a Group. This is the basis of
All Insurance Operations. Thus INSURANCE
CONVERTS UNCERTAINTY TO CERTAINTY

5. THE CONCEPT OF RISK
• The object of Insurance is to provide
protection against Financial Losses caused by
Fortuitous Events. Thus Insurance is a
protection against the Consequences of RISK.
• RISK is defined for Insurance Purpose as the
UNCERTAINTY OF A FINANCIAL LOSS.

6. THE CONCEPT OF RISK
• Element of RISK is Inherent in Life. Risk
Means that there is a possibility of loss or
damage.
• To the common Man, Risk means Exposure
to Danger.
• In Insurance, the word Risk may be used
interchangeably with Peril-which means
the Event or Occurrence which CAUSES the
Loss.

7. THE CONCEPT OF RISK
• In Insurance, the word Risk may also refer to
the Property or Subject Matter of Insurance
• The Subject Matter of Insurance can be Life,
Limb, Property, Interest & Liability

8. PURPOSE AND NEED OF INSURANCE
• The Problem of Risk in Economic and
Commercial Activities can be dealt with in
FOUR WAYS.
1. Risk Avoidance
2. Risk Retention
3. Risk Transfer
4. Risk Minimisation
Insurance is ONE of the most Import method
of Risk Transfer

9. PURPOSE AND NEED OF INSURANCE
• Insurance spreads the Risk among the
Community and the likely Big Impact on ONE
is reduced to Smaller Manageable Impacts on
ALL. Thus Insurance acts as a SHOCK
ABSORBER.
• A RISK OF TRADE is Insurable but a Trade Risk
is not Insurable. In a Risk of Trade there can
only be a LOSS whereas in a Trade Risk, there
can be LOSS OR GAIN Risks of Trade are called
PURE RISKS.

10. PURPOSE AND NEED OF INSURANCE
• Only Economic or Financial Losses can be
compensated by Insurance.
• The Business of Insurance is the Pooling of
RISK and RESOURCES. It is a technique
which provides for collection of small
amounts of PREMIUM from many
Individuals and Firms out of which losses
suffered by the FEW are paid. Insurers act
as TRUSTEES of the Common Pool.

11. PURPOSE AND NEED OF INSURANCE
INSURANCE ACTS AS A SOCIAL SECURITY
• Social Shock Absorber
• Solarium Fund for Hit & Run Victims of Road
Accidents.
• PASS (Personal Accident & Social Security)
scheme launched by the Govt. of India
• Crop Insurance Schemes and other Rural
Insurance covers for the Rural Masses.

12. PURPOSE AND NEED OF INSURANCE
INSURANCE CONTRIBUTES TO
NATIONAL WEALTH
• It contributes to a vigorous Economy and
National Productivity. LIC & GIC funds
formed out of the savings of People are
channelled into Investments for Economic
Growth. HUDCO, IDBI, IFCI, use funds
siphoned from Insurance Money for
lending to Entrepreneurs.

13. PURPOSE AND NEED OF INSURANCE
• INSURANCE PROTECTS THE CAPITAL IN
INDUSTRY - It helps release the same for
further Expansion
• Insurance is the HAND MADE to Commerce
and Trade.

14. THEORY AND PRACTICE OF RATING
• RATE OF PREMIUM WILL BE DIRECTLY
PROPORTIONAL TO THE DEGREE OF HAZARD
• TO ASSESS VARIATIONS IN THE DEGREE OF
HAZARD,RISKS MUST BE CLASSIFIED INTO
HOMOGENEOUS CATEGORIES WITH SIMILARITY OF
EXPOSURE
• IN EACH SUB-CLASS,PAST LOSS EXPERIENCE WILL BE
THE CRITERIA APPLIED TO DECIDE THE PREMIUM
RATE

15. DEGREE OF HAZARD
• GREATER THE RISK,HIGHER WILL BE THE PREMIUM
RATE
• THE MORE PROBABLE THE LOSS AND THE MORE
SEVERE IT IS LIKELY TO BE,THE HIGHER WILL BE THE
PREMIUM RATE
• Eg.—HAZARDOUS GOODS AND HAZARDOUS
PROFESSIONS WILL ATTRACT A HIGHER PREMIUM AS
COMPARED TO NON-HAZARDOUS GOODS OR
PROFESSIONS

16. CLASSIFICATION OF RISKS
• RATES OF PREMIUM SHOULD BE EQUITABLE AND
FAIR AS BETWEEN DIFFERENT INDIVIDUAL INSUREDS
• HENCE,A SYSTEM OF CLASSIFICATION OF RISKS INTO
BROAD CATEGORIES IS ADOPTED.
• THESE MAY BE FURTHER CLASSIFED INTO GROUPS
AND SUB-GROUPS DEPENDING UPON THE HAZARDS
INVOLVED AND THEIR SIMILARITY
• Eg.CLASSIFICATION IN MOTOR/FIRE/W.C.

17. PAST LOSS EXPERIENCE
• IN EACH SUB-GROUP,THE PAST LOSS EXPERIENCE IS WORKED
OUT AND FUTURE FORECASTS ARE MADE ON THIS BASIS
• FORMULA FOR PURE PREMIUM
L X100 L=SUM TOTAL OF LOSSES
----------
V V=SUM TOTAL OF VALUES
• PURE PREMIUM WILL BE JUST SUFFICIENT TO PAY THE
LOSSES,HENCE LOADING IS REQUIRED FOR OTHER FACTORS
LIKE-COMMISSIONS/MANAGEMENT EXPENSES/RESERVES
FOR UNEXPIRED RISKS/PROVISION FOR UNEXPECTED HEAVY
LOSSES/MARGIN OF PROFITS
• FINAL RATE=LOADED RATE

18. LAW OF LARGE NUMBERS
• LAW OF LARGE NUMBERS IS FUNDAMENTAL TO ALL
INSURANCE OPERATIONS
• THIS IS A MATHEMATICAL PRINCIPAL AND STIPULATES THAT-
• The greater the number of cases studied and longer the
duration of study, the more accurate will be the future
forecast …
PROVIDED THE CONDITIONS REMAIN THE SAME
• AS THE No. OF CASES INCREASES,THE GAP BETWEEN THE
ESTIMATED FUTURE LOSSES AND ACTUAL FUTURE LOSSES
BECOMES LESS AND LESS
• APPLYING THIS PRINCIPLE,INSURERS ARE ABLE TO ANTICIPATE FUTURE
LOSSES MORE ACCURATELY AND FIX PREMIUM RATES ACCORDINGLY
(SUBJECT TO TREND ADJUSTMENTS

19. LEGISLATIVE AN REGULATORY MATTERS
MERCHANT BILL OF INDIAN
SHIPPING LADING CARRIERS INDIAN
ACT-1958 ACT-1963 ACT-1865 RAILWAYS
ACT-1890
COGSA-1925
INDIAN POST
OFFICE
MARINE
ACT--1898
INSURANCE
ACT-1963 INSURANCE OPERATIONS ARE DIRECTLY
AFFECTED BY
IRDA-ACT—2000
M.V.ACT-19
W.C.ACT INSURANCE ACT—1938
88
LIBNA—1956---LIFE OPERATIONS
1923 GIBNA—1972---NON-LIFE OPERATIONS
C.P.ACT
1986
PLI ACT-1991
SALE OF GOODS INDIAN STAMP
ACT-1930
FERA-1973
ACT

20. REINSURANCE
The ultimate underwriting objectives are
• The production of large volume of premium income
sufficient to maintain and progressively enlarge the insurers
business.
• The earning of a reasonable profit on the operations
• The important underwriting factors are
- Well spread out and Large Volume of business
- Retention limits
- Reinsurance of the surplus
• Reinsurance is insurance of insurance . The ceding
company retains a part of the risk / premium and cedes the
balance to the reinsurer. There are two main methods of
reinsurance
a) Facultative b) Treaty

21. REINSURANCE…contd
• Facultative Reinsurance : In facultative
reinsurance, the choice / faculty to accept or
reject a risk is with the reinsurer. This method
involves considerable amount of clerical work
and ceding company cannot go on risk unless
confirmation is received from the reinsurer
about the acceptance of the risk and premium
rate / terms conditions of insurance.

22. REINSURANCE …. Contd.
• Treaty :There are two types of treaty reinsurance –
Proportional and Non-proportional.
• Proportional : Proportional treaties are risk based & can
be divided into –
• a) Quota Share b) Surplus c) Pools
d) Auto Facultative (Facultative obligatory)
• Non Proportional : Non proportional treaties are not risk
based but loss based. The insurer limits the amount of loss
as per the underlying limit and the reinsurer agrees to
pay the loss over and above the underlying limit.
Examples of non proportional treaties are
a) Excess of loss – for event losses
b) Stop loss – for portfolio losses

23. REINSURANCE…contd
• Retrocession---Reinsurance of a Reinsured
Risk
• Purpose of Reinsurance—
• Creation of additional capacity
• Achieves Global Spread of risk
• Best protection against Catastrophic Risks
• Facilitates acceptance of Mega/Jumbo Risks
• Works on the Principle of:
• No Cession without Retention
• Follow the Fortune of the Ceding Company

24. GENERAL INSURANCE—BUSINESS
PORTFOLIO
• The Major Portfolios are as follows:
• Fire Insurance—20%
• Marine Insurance---15%
• Motor Insurance---35%
• Engineering Insurance—10%
• Aviation---5%
• Miscellaneous Traditional—10%
• Miscellaneous Non-Traditional—5%