INSURANCE PRINCIPLES

Ø The following are the essential features of a valid contract:

·        Offer and acceptance-one party makes an offer accepted unconditionally by the other

·        Consideration-a contract must be supported by a consideration in order to be valid. Premium is the insured’s consideration.

·        Capacity to contract – individuals are said to be competent to enter into a contract if the are:

§  Of the age of majority (age 18 );

§  Of sound mind; and

§  Not disqualified, buy law, from entering into contracts

·        Any contracts entered into by people not competent to contract will be null and void.

·        Consensus ad idem- in simple terms: both parties to the contract must understand and agree upon the same thing, in the same sense.

·        Legality of object or purpose- the objective of both the parties to the contract should be to create a legal relationship.

·        Capability of performance- the contract must be capable of being performed by both the parties.

Law of large numbers

Ø Insurance companies apply the law of large numbers to determine the cost of total annual claim.

Ø Determine the probability that a certain amount of claim will have to be paid by insurer if a large number of people re insured for a similar risk.

Ø Set the rates of premiums according to the number of claims expected over the term of the policy.

Pooling of risk

Ø Pooling of risk is one of the fundamental principles of insurance there the company pools the premium collected from several individuals to insure them against similar risk.

Ø Separate pools are maintained by insurance company for different risks.

Ø The pool account for one risk can be used to settle the claim of  another type of risk

Ø The premium collected from the individuals is deposited in the pool accounts and claims are paid out of this pool.

Ø Premium charged should be sufficient be sufficient to meet the claim payments & administrative and other expenses for maintaining the pool.

Risk transfer

In case of transfer of risk from an individual to insurance company, the company is called insurer and individual is called insured.

          1.The insured pays a certain amount (consideration) to insurer,  called as premium.

          2.Insurance company provides cover for only a specified number of risks as listed in policy document.

          3.Insurer will not provide for claims arising out of risks other than the specified risks.

Insurable risk

             1.   Risks that can be insured are financial risk, pure risk &particular risk.

             2.   Financial risk: the outcome of risk that can be measured in monetary terms are known as financial risk. Some of the financial risks include loss of life, disease or disability, savings accumulation, retirement.

             3.   Pure risk: risks where there is no possibility of making a profit are called pure risk.  
4.   In pure risk, there is no possibility of benefit as a result of the insured event happening, the only possibility is loss or break even. Pure risk is associated with event which are totally out of control of individuals.

           5.   Particular risk: particular risk are personal or local in their effect and the consequences effect  and the consequences effect specific individual or local community.

Peril and Hazzard

   RISK AND INSURANCE

Ø Perils: peril refers to specific events which might cause a loss.

·        Perils are risk being insured against.

·        Loss arising out of peril can be loss of life or loss of property

Ø Hazard: hazard is a condition that either increases the chance that a peril will happen or may cause its effects to be worse, if it does.

Ø Hazards can be categorized as physical hazard and moral hazard

·        Physical hazard refers to dimensions  and physical characteristics of the risk.

·        Moral hazard refers to habits and activities of the individual that increases the risk 

Ø Some hazards that would cause an individual to be categorized as high risk are

·        Risky job profile

·        Existing medical condition

·        Life style of individual

·        Imposing restrictions on the sum assured

·        Term or a lien etc

COMPONENTS OF RISK

Components of Risk

·        As a general principle, insurance is only available for risks that are uncertain

·        It is the uncertainly about the timing of death that makes death insurable

·        Level of risk is determined by 2 criteria:

v The probability of certain event happening

v The extent of the event (severity), if it happens

·        The probability of certain event happening: the probability that a certain person will die within one  year is calculated by actuary from the past data collected and is made available as mortality table.

·        The mortality rate is a chance of dying at a specified age based on the proportion of deaths among a specific number of a sample population.

·        The probability of risk to life for individuals will differ on the basis their age, medical well being, family medical history, life style, job profile etc.

·        Life insurance companies determine the level of risk based on past data (claims experience).

·        If the past data indicates that the individual with certain age group are more prone to risk will be considered to be higher for the age group

Recent developments in the insurance industry

Recent developments in the insurance industry

Ø Growing importance of IT: today customers can pay their premium and check their policy status online.

Ø Bancassurance: bancassurance is when banks partner with insurance companies to sell insurance products to bank’s customers.

Ø Micro insurance: micro insurance products provide insurance  as low as Rs. 15to low income groups.

Ø Grievance redressal: insurance companies have set up internal customer grievance cells also, an insurance ombudsman has been established .

CONCEPT OF RISK

Concept of Risk

Ø In insurance, risk is applied to certain assets to certain assets that can be insured, such as a human life, a house, a car, etc.

Ø Here are some of the definitions of risk:

·        Risk is the chance of damage or loss.

·        Risk is doubt concerning the outcome of a situation.

·        Risk is something or someone considered to be a potential hazard

·        Risk to human life

·        Life insurance mainly deals with 2 risks – premature death and living too long

·        Life insurance companies offer additional benefits of riders along with life insurance plans to cover the risk of death of death or due to accident and illness

Role and functions of an agent

Role and functions of an agent

Ø To become an agent a person has to submit the necessary form and fees, have the required qualification, undergo practical training pass the required examination.

Ø An agent should recommend to clients the best products that address their needs and make sure there is no adverse selection for the insure.

Ø An agent should continuously strive to improve their knowledge of their own insurer’s products, competing insurers’ products and other competing investment products on the market.

Ø All licensed agents have to comply with the code of conduct at all times.

Ø Agents should assist their clients in completing the paper work involved and policy is serviced properly till a arises.

Insurance organizations and roles

 Types of insurance organizations

actuaries	Calculates standard price of products, takes into account statistical data and past claims experience. Does overall financial assessment of the insurance company from time to time. Ensures the company has sufficient reserves to pay for future liabilities.
Third party administrators (TPAs)	Build hospital networks, helps in –approvals for cashless admission to a hospital –setting the bill with the insurer on discharge
Loss adjusters/surveyors	Assess and certify a loss when a claim is made on the insurance company. Play a major role in non-life insurance business.
The regulator(the insurance regulatory and development authority-IRDA)	Smooth running of the insurance sector. Grants licenses. Ensures compliance with the regulations at all times. Responsibility to protect the interests of the small policyholders against the mighty insurance companies.
Training institutes	Supply trained manpower. Premier training institutes -the insurance institute of India (III) -insurance institute of risk management (IIRM) -national insurance academy (NIA)
Non-governmental Organisations (NGOs)-	Protect customers’ rights. spread awareness about   insurance products work with self help groups (SHGs) and insurance companies in rural areas for penetration of micro-insurance products

Benefits of a professional insurance market

v Need based Selling

Ø Ensures that customer gets what he is looking for rather than what the company wants to sell.

v Disclosure

Ø All the relevant information about the product needs to be disclosed to the customer.

v Benefits to customer of a professional insurance market:

Ø Higher confidence among policy holder Increase in insurance penetration.

Ø Social benefits.

Ø  Employment generation.

Ø Increase in profit for insurance company.