The document discusses various concepts related to risk and risk management in insurance. It defines risk as the possibility of a loss occurring and explains that risk management involves processes to reduce risks to a minimum level. It also discusses how insurance companies pool risks from many policyholders to spread costs and how life insurance specifically provides a tool for risk management by allowing people to share unexpected losses. The document also covers topics like how insurance underwriters evaluate risks, classify policyholders, and determine appropriate premiums based on risk factors like age, health, occupation, and family history.

1. Dr. Amitabh Mishra

2.  “Risk is the possibility that a loss or injury will
occur”.
 “Risk is danger, peril, hazard, chance of loss,
amount covered by insurance, person or object
insured”.
 “The risk is an event or happening which is not
planned but eventually happens with financial
consequences resulting in loss”.
Dr. Amitabh Mishra

3.  People generally seek security and avoid
uncertainty.
 The risk of death is unavoidable, and is especially
an economic threat if premature.
 Insurance provides a means for reducing the
adverse impact of unexpected losses.
Dr. Amitabh Mishra

4.  Life insurance provides a tool for risk management,
“a process for dealing with the risk of loss of life”.
 The risk management is nothing but
“a method to prejudge the risk that may come up
sometime in future”.
 It is not prediction but a process of reducing the risk to
a minimum level.
Dr. Amitabh Mishra

5.  Risk is a fear of happening something
adverse and in order to restrict such
adverse happenings a plan is envisaged to
overcome such adverse happenings. Which
is called as risk management.
Dr. Amitabh Mishra

6.  Insurance companies are in the business of
taking risks. Therefore, insurance companies
should be good at managing their own risks.
 Shriram Gokte: “Today it is well recognized
that sound management of an insurer, as for
other financial sector entities, is dependent
on how well the various risks are managed
across the organization.”
Dr. Amitabh Mishra

7.  Life insurance is based on a mechanism called risk pooling, or a group
sharing of losses.
 People exposed to a risk agree to share losses on an equitable basis. They
transfer the economic risk of loss to an insurance company. Insurance
collects and pools the premiums of thousands of people, spreading the risk
of losses across the entire pool. By carefully calculating the probability of
losses that will be sustained by the members of the pool, insurance
companies can equitably (fairly) spread the cost of the losses to all the
members. The risk of loss is transferred from one to many and shared by all
insureds in the pool. Each person pays a premium that is measured to be fair
to them and to all based on the risk they impose.
Dr. Amitabh Mishra

8.  In insurance, the risk manager evaluate risks which
endangers’ the company’s funds or capacity to pay claims.
Their work is done together with underwriters by given the
degree of risk the company can cover and profit realization
on an insurance application.
 Risk manager is said to be one who manages risk by:
◦ Assessing and quantifying business risk
◦ Taking into accounts control or measures to reduce them.
◦ Advice on investment strategies and pricing on policies.
Dr. Amitabh Mishra

9. underwriting the risk
Dr. Amitabh Mishra

10.  The selection of risk is:
◦ “process of accepting or rejecting risk”
◦ “a process whereby inferior lives are
“weeded out”
◦ “a life insurer decides whether a proposal
can be accepted at standard rates of premium
or on different terms or be rejected”.
Dr. Amitabh Mishra

11. Applicant
Standard
(A normal risk; offered
the basic rate)
Substandard
(A higher than usual
risk; offered a more
expensive premium)
Preferred
(A low risk; offered a
premium discount
accordingly)
Dr. Amitabh Mishra
Applicants can be grouped in

12.  To determine whether the proposal should
be accepted or not.
 To determine the rate of premium to be
charged from the assured.
◦ The premium depends upon the amount of risk.
◦ Higher is the risk the more will be amount of premium.
Dr. Amitabh Mishra

13.  To classify the insurance risk into
standard/sub-standard/or preferred on the
basis of selection.
◦ Since, there are various degrees of risk to a person and so theoretically at
least, all the persons should be charged different premiums, but it is not
practicable to charge so many premiums as many applicants are.
Therefore, for practical purpose the risks are classified and premiums are
determined accordingly.
 To avoid any discrimination on the part of
the lives assured.
◦ Since the degree of risk is not the same to all the persons, different
premiums should be charged from different groups. For instance, it
would be wrong to charge the same premium from the persons who are
engaged in the hazardous occupation and from the persons who are
enjoying robust health and conducive occupation.
Dr. Amitabh Mishra

14.  To avoid adverse-selection
◦ Adverse-selection/Anti-selection means selection of the persons
for insurance who are not insurable and charging of lesser
premium for those who are to be charged higher premium.
Dr. Amitabh Mishra

15. Dr. Amitabh Mishra

16.  In life insurance, the factors which may affect the
risk are usually those factors which are affecting
the mortality; they are also called factors affecting
longevity of a person.
 Major factors are:
Dr. Amitabh Mishra

17. Factors affecting
Selection &
Classification of
Risk
Age
Build
Physical Condition
Personal History
Family History
Residence
Morals
Race and Nationality
Gender
Dr. Amitabh Mishra

18. ◦ Age
 The age of the life to be assured is the most important factor to
affect mortality. Except for a few years of the childhood, the
premium is determined at every year of the completion of age.
◦ Build (physique of the proposed life) includes
 Height, weight
 Distribution of weight and chest expansion
 There are standards of weight according to maximum weight
reveal the indication of certain hidden diseases.
 The relationship between height, weight, girth and
expansion of chest are the basic determinants of mortality
expectations.
Dr. Amitabh Mishra

19. ◦ Physical Condition :
 The conditions of an applicants’
 Sight, hearing,
 Heart, arteries, lungs, tonsils,
 Teeth, kidneys, nervous system, etc.
 The physical condition of the age life proposed
has a direct bearing on the mortality of the life.
Dr. Amitabh Mishra

20.  Personal History :
◦ The personal history reveals the possibility of death.
Dr. Amitabh Mishra
Personal
History
Health record
Past surgery,
Recent injuries
and
illness
Past habit
Drugs
or
Alcohol
Previous
occupation
Past hazardous
or
unhealthy
occupation
Insurance
history
Previous amount of
insurance
Previous refusal for
insurance

21.  Health Report
◦ The past health record is the most important factor under personal history because it
affects the longevity or mortality of a person to a greater extent.
◦ It has been the practice not to accept the proposal form of the applicants who are
suffering from illness. If the applicant has suffered from certain serious disease or
operation during the past 5 years, he may be under the possibility of getting it again.
 Past Habits
◦ The insurers want to know the past habit the life proposed, for drugs or alcohol
because the cure may be only temporary. The past history is usually expected to be
repeated. Therefore, past history is very cautiously examined.
 History of Occupation:
◦ If the proponent was employed in hazardous or unhealthy occupation, there is a
possibility that he may still retain ill-effects there from or may revert to such
occupation.
◦ An intimate association within a person suffering from a contagious disease may
influence the health of the life proposed. The past hazardous occupations generally
affects, health slowly occupational diseases are contacted. Inorganic dust may create
silicosis.
 Insurance History:
◦ The previous amount of insurance may disclose the degree of risk of the applicant. If
he was refused insurance, it might be a suspicious factor of his insurability. If it was
found that the applicant was already insured for adequate amount this request for
more insurance is regarded with suspicions.
Dr. Amitabh Mishra

22.  Family History :
◦ Family history requires information of habit, health,
occupation and insurance of other family
members.
◦ Particularly of
 Parents, brother and sisters.
 The children’s history of health is also required.
◦ The certain diseases, (tuberculosis and insanity, etc.),
and longevity of the parents will be relevant factors
for determining the degree of risk of the proponents.
Dr. Amitabh Mishra

23.  Residence :
◦ The residence affects the risk. Important
residence related factor which may affect the
risk:
 The geographical location,
 Atmosphere and climate,
 Political stability,
 Construction of house, travel, etc.,
◦ The risk will be lesser in a good climate area and
more in a bad climate.
Dr. Amitabh Mishra

24.  Morals :
◦ It has been observed that the departure from the
commonly accepted standards of ethical and
moral conduct involve extra mortality.
◦ Infidelity seriously may affect the health.
◦ Unethical conduct is considered to be another
form of moral hazard.
◦ Insurance is not generally given to bankrupt and
reputed dishonest persons.
Dr. Amitabh Mishra

25.  Race and Nationality :
◦ The mortality rate differs from race to race and nation to nation.
◦ Similarly, countries near to equator have more mortality. The climate and
way of life of a country affect the health conditions of the people.
◦ In India, persons of high, race or caste are expected to live longer than the
scheduled castes or tribes.
 Gender
◦ Mortality among female is, generally, higher than that of male because the
physical hazard of maternity is present in the former case.
◦ Moreover, the ladies are physically more handicapped.
Dr. Amitabh Mishra