Insurance and risk Management - Meaning, Importance, Advantages, benefits, Functions, Insurance organisation in India, Meaning of Risk , elements, types, Methods, Investment plans, Schemes, rider of investment plans
2. Insurance refers to a contractual
arrangement in which one party, i.e.
insurance company or the insurer, agrees to
compensate the loss or damage sustained to
the Insurer, i.e. the insured, by paying a
definite amount, in exchange for an
adequate consideration called as premium.
3. 1. Financially Security - the best way to become financially secure is to
cover yourself, your family, and your assets with insurance. You can buy or
renew insurance online and receive a payout for financial support, in case
there happens to be an unforeseen event
2. Transfer of Risk - The contract of insurance works on the ‘principle of
transfer of financial risk from the insured to the insurer’. As an insured, you
pay premiums to receive compensation from the insurer, in case of
occurrence of an unforeseen event.
3. Complete Protection for You and Your Family - This is why it is important
to make sure that you and your family are completely secure to face any
emergency.
4. No More Stress or Tension During Difficult Times -None of us can see the
future or predetermine the future events. The insurance to take care of the
outcomes of such tragedies such as illness, injury or permanent disability,
even death- it can save our self and our family from tension and stress.
5. Some Types of Insurances are Compulsory - Insurance is necessary
because sometimes it is mandatory as per the law. As per the Motor Vehicle
Act of 1988, it is compulsory to have at least a third-party motor insurance
for every motor vehicle plying on road in India
6. Peace of Mind - Having insurance offers you financial security and also
peace of mind. No amount of money can replace your peace of mind.
4. 1. Providing Security - Insurance provides a cover against any sudden loss.
In case of marine and fire insurance the loss suffered by the insured is fully
compensated and he is restored to his earlier position. In the same way, if a
bread-bringing member of the family dies prematurely, the family is
provided with money to continue with its livelihood. So, insurance gives
security to both individual and business-man.
2. Spreading of Risk - The basic principle of insurance is to spread risk
among a large number of people. A large number of persons get insurance
policies and pay premium to the insurer. Whenever a loss occurs, it is
compensated out of funds of the insurer.
3. Source for Collecting Funds - The premium is received regularly in
instalments. These funds can be gainfully employed in industrial
development of a country.
4. Encourage Savings - The amount of policy is paid to the insured or to his
nominees. In case of fixed time policies, the insured gets a lump-sum
amount after the maturity of the policy.
5. Encourage International Trade - International trade involves many risks
in transporting goods from one country to another. Insurance provides
protection against all types of sea-risks. It has helped the development of
international trade on a large scale.
5. I. Benefits of Individuals
1. Provision of safety and security
2. Protection of mortgaged property
3. offering peace of mind
4. Eliminating dependency
5. encouraging saving habits
6. providing profitable investment
7. Life insurance fulfils the needs of a person
A. family needs
b. old age needs
c. Re-adjustment needs (like disability , unemployment,
death)
D. Special Needs (old age or death, The clean up needs
( marriage, settlement of children,
8. Clean up funds ( tax benefits)
6. II Benefits to business
1. uncertainty of business and loss is reduced - Uncertainty
comes from changes in economic social and political trends.
So the insurance plays an important role in the avoidance of
risk and uncertainty and minimization of losses to the
maximum level.
2. Continuation of business (eg. Partner death business
continue through the policy)
3. Encashment of credit(pledging the policy) - Business man
enjoy better credit standing as the risks are transferred to
the insurance company by pledging as collateral for the
loan.
4. Efficiency of the business is increased – A business man is
free from unnecessary botheration and devotes more care
and energy to maximize the profit and wealth of his
concern.
5. key man indemnification – means particular man whose
capital, expertise, experience, energy , ability to control,
goodwill and dutifulness make him the most valuable asset
in the business and whose absence will reduce the income
of the employer till the time such employee is not
substituted . On that time the insurance will help the
family)
7. III. Benefits to the society
1. protection of society’s wealth - Insurance not only
protect humans and their property resources but also
protects the overall wealth of the society against
damage, destruction, disappearance and degradation.
2. stimulates economic growth of the country – If any
such damage arises due to loss of assets, it can be
replaced without loss of production. Thus, the insurers
accelerate the production cycle thereby, stimulating
the economic growth of the country.
3. Reduction in inflation – Pressure of inflation can be
reduced by insurance in the form of premium the
insurance company generates from the public and by
providing sufficient funds for productive purposes
leading to reduction of inflation.
8. 1. Insurance provides certainty
It provides payment for risk of loss. There are
different types of uncertainty of a risk. The risk
will occur or not, when will occur, how much loss
will be there?. i.e, there are uncertainty and the
assured is given certainty of payment of loss.
2. Insurance provides protection
It provides protection against the probable of
chances of loss. This insurance cannot check the
happening but it can compensate the losses.
9. 3. Insurance shares the risk
the share is obtained from each and every insured
in the shape of premium without which the insurer does
not guarantee protection.
4. Insurance provides capital formation
The insurance provides capital to the society. The
scarcity of capital of the society is minimized to a
greater extent with the help of investment of
insurance.
5. Insurance prevents losses
The insurance companies assist financially to the
health organization, fire brigade , educational
institutions and other organization, which are engaged
in preventing the losses of the masses from death or
damage.
10. 1. Departmental organization
Central govt. – postal insurance and
state govt. – Sickness, maternity, medical, disability
and pension insurance)
2. Corporations -
a. LIC
b. General insurance like National insurance com,
The new India Assurance company, The oriental
fire and general insurance, The united India
insurance company .
c. Employee state insurance
d. Deposit insurance corporations
3. Govt. companies - eg. Export risk insurance
corporation – 1957 and its name is converted into Export
credit and Guarantee corporation in the year 1964.
11. Risk is a condition in which there is a
possibility of an adverse deviation from a
desired outcome that is expected or hoped
for.
12. • There is a probability that
on or other’s may occur.
• Two possible outcomes for
a given situation
Outcome
is
uncertain
• One is unfavourable or not
liked by the individual
Out of
possible
outcome
13. It means a situation where the outcome is
not certain or unknown.
It refers to a state of mind characterised by
doubt, based on lack of knowledge about
what will or what will not happen in the
future.
Eg. Some weights or probabilities can be
assigned into risky situations but uncertainty,
the psychological reaction to the absence of
knowledge lacks this privilege. (Decisions
depends upon the skill, the judgement and of
course luck).
14. Types
of Risk
Financial and Non –
Financial Risks
Individual and Group
Risks
Pure (Car meet with an
accident) and Speculative
(stock market – gain or
loss) Risks
Static
(Inflation & technology
changes) and Dynamic (loss
due to law) Risks
Quantifiable (Financial
risk) and Non –
quantifiable (tension
or loss of peace) Risks
15. 1. Financial and Non-Financial Risk
Financial risk - It involves
three important elements
in risky situation
That some one is adversely
affected by the happening of an
event
The assets or income is likely to
be exposed to a financial loss
from the occurrence of the event
The peril can cause the loss
Non-Financial
Risk
When the possibility
of a financial loss
does not exist the
situation
16. 2. Individual and Group Risks
Individual Risk - Particular risks are confined to
individual identities or small group, theft, robbery,
fire, etc.
Group risk - These risk factors may be social –
economic or political or natural calamities for eg.
Earthquakes, floods, wars, unemployment.
3 . Pure and Speculative (stock market – gain or
loss) Risks
Pure Risk - It is a category of threat that is beyond
human control and has only one possible outcome if it
occur: loss. Pure risk includes such incidents as
natural disasters, fire or untimely death.
Speculative risk – This risk that can be taken on
voluntarily and will either result in a profit or loss.
For eg. Investment in a stock market – we may wither
gain or loss.
17. 4 .Static and Dynamic Risks
Static Risk – This risk are more or less
predictable and are not affected by the
economic conditions, the possibility of loss in a
business or unemployment after undergoing the
professional qualification, loss due to act of
others etc, are static and accordignly suitable for
insurance
Dynamic Risk - The risk of loss resulting from
changes in culture, taste or policy. ... It is
related to political risk, but primarily it denotes
cultural changes.
18. 5. Quantifiable and Non – quantifiable Risks
Quantifiable risk – The risk which can be
measured like financial risk
Non – quantifiable risk – Which may result
in repercussions like tension or loss of
peace.
19. Pure Risks
Personal Risks
(It is directly affect the
individual’s capacity to
earn income)
Premature Death
Old age
Sickness or disability
Unemployment
Property Risks
( The risks to the person in
possession of the property being
damaged or lost)
Immovable (flood,
earthquake, fire)
Liability Risk
(It arising out of the intentional
or unintentional injury to the
persons or damages
Workman’s
compensation
20. Avoidance (patents / copy rights)
Loss Control
• Loss preservation (Smoking)
• Loss reduction (First aid boxes - & fire fighting equipment)
Retention (Fully aware of the risks)
Transfer
• Contractual agreements (insurance )
• Corporatizing (partnership company liability)
21. Investment Plans are financial products that
provide the opportunity to create wealth for
future.
Investment plans offer to help individuals in
disciplined and periodic investment into
different funds overtime so as to achieve
their future financial goals.
22. Savings and Investment plans help you save
regularly and be adequately prepared to
meet family’s financial needs in the future.
These online investment plans offer various
features that help meet your specific
financial needs with investments made
according to your appetite to take risks.
23. Most investors want to make investments in
such a way that they get sky-high returns as
fast as possible without the risk of losing the
principal money. This is the reason why many
investors are always on the lookout for top
investment plans where they can double
their money in few months or years with
little or no risk.
It is a fact that investment products that give
high returns with low risk do not exist.
In reality, risk and returns are inversely
related, i.e., higher the returns, higher is the
risk, and vice versa.
24. 1. Goal Planning - objectives that you want to fulfill through your investment
plans. Eg. Short term objectives may be planning for a world tour or
purchasing a car or a home, while long term ones may be arranging for
your child’s higher education and/or marriage, or building a corpus for
your retired life.
2. Dependents - we need to plan for our self only or future need to secure our
family financially i.e. we , consider the number of our dependents –
spouse, children and aged parents
3. Current Expenses - Decide on the amount that you would be able to
contribute towards your investment plan without compromising on your
existing lifestyle and expenses.
4. Future Expenses - Predicting future expenses is difficult, More so, because
we need to consider the rising expenses and inflationary effects.
Therefore, it is recommended that our plan for a higher amount than what
you need to support your current lifestyle.
5. Major Expenses - expenses like your own marriage plans, child’s education
and marriage, or any other necessities or aspirations that you may have to
decide on the amount that you can invest in other investment plans.
6. Insurance Cover - Your insurance cover should be sufficient to meet all your
and your family’s financial requirements, irrespective of life’s
uncertainties
25. 7. Fund Planning - Debts – Remember to calculate the prevailing debts
like loans and EMIs against your name while deciding on other
investment plans.
8. Provision for Alternate Income - Unforeseen incidents make it
necessary for you to financially safeguard your life and that of
your dependents against all odds. A lack of stable source of
income may arise not just after retirement, but also due to total
or partial disability or even death due to an accident. Opt for a
life cover that will financially support you and your family, in case
such a situation arises.
9. Supplementary source of regular income – to share the premiums
that you pay towards investment plans, or one of you can bear
the current family expenses while the other pays towards the
investment plans.
10. Calculation of the Premium Amount - Know the exact premium that
you have to pay towards your chosen investment plan. This will
enable you to plan our finances well and, most importantly,
decide whether it suits your pocket. Online premium calculator
available on the websites of investment companies offer investors
the convenience of getting free premium quotes.
26. 1. Cover - benefits being offered by each investment plan and
compare between them before purchasing one. Opt for one that
meets your unique investment needs.
2. Add-on Riders - every plan may not be necessary for
every investor. Know about the features and benefits of each
rider and opt for only the ones that are suitable for your
unique needs.
3. Premium - Start with a premium that you can afford and
increase it as and when you can.
4. Option to Increase or Decrease Premium - It is
recommended that you opt for an investment plan that
enables you to customize it as per your requirements even
during its policy years. This allows you the convenience of
starting with a lower cover and gradually increasing it as per
your rising annual income.
27. 5. Returns - The investment plan you should invest in will depend on
the returns you expect to receive and whether you are looking for
a short term or long term investment plan. This, in turn, will be
determined by your risk appetite. The higher your risk appetite,
the higher will be your scope for enjoying higher returns
6. Type of Payouts - There are some investment plans that offer
regular pay outs, others offer a one-time payment, while still
others that offer a mix of both. Choose the option that best suits
your purpose of investment.
7. Alternative Investment and Insurance Options - A single
investment plan may not be sufficient to meet multiple
aspirations for the future and securing the financial needs of your
family. Hence, it would be wise to invest in more than one
investment plan, each meant for a different goal.
28. Accidental Death Riders - If the policyholder dies the
accidental death, the insurance company will pay the sum assured plus
the rider benefit to the nominee.
Accidental & Total Permanent Disability Rider - If the
policyholder suffers total permanent disability due to the accident, the
insurance company gives the rider benefit to the life insured
Critical Illness Rider - On diagnosis of any major critical
illnesses such as heart attack, cancer, stroke, kidney failure,
paralysis, coma, the insurance company pays the rider benefit.
Waiver of Premium - In case of a vanilla term insurance, if
the life insured suffers any disability because of which is unable
to pay any future premiums, the policy terminates
Accelerated Death Benefit Rider - On diagnosis with a
terminal illness, such as Cancer, Leukemia. AIDS, Ebola, the insurance
company pays a part of the sum assured in advance and the rest to the
nominee.
