Insurance and Risk Management Chapter -11

Insurance_Basics Ppt-2.pptx
Insurance_Basics Ppt-2.pptx

1. Insurance Chapter 1 Origin was in 4 th century when Bottomry Bonds and Respodentia Bonds were used in maritime trade What Is Bottomry? Bottomry, referring to the ship's bottom or keel, is a maritime transaction, where the owner of a vessel borrows money and uses the ship itself as  collateral . However, if an accident should happen during the voyage, the  creditor  will lose out on the loan because the guaranteed security no longer exists, or exists in a damaged fashion. Should the vessel survive the journey intact and whole, then the lender will receive the return of the loaned  principal  plus interest. Bottomry transactions are mostly obsolete in modern-day maritime activity. The interest received by the lender on a bottomry loan is known as maritime interest and may be more than the legal rate of interest.

2. Respondentia Bonds It is a loan where a ship's cargo is the security, on similar terms to bottomry. General Average Still in existence The law of  general average  is a principle of  maritime law  whereby all  stakeholders  in a sea venture proportionately share any losses resulting from a voluntary sacrifice of part of the ship or  cargo  to save the whole in an emergency. For instance, should the crew jettison some cargo overboard to lighten the ship in a storm, the loss would be shared  pro rata  by both the carrier and the cargo-owners. In the exigencies of hazards faced at sea, crew members may have little time in which to determine precisely whose cargo they are jettisoning. Thus, to avoid quarreling that could waste valuable time, there arose the equitable practice whereby all the merchants whose cargo landed safely would be called on to contribute a portion, based upon a share or percentage, to the merchant or merchants whose goods had been tossed overboard to avert imminent peril. General average traces its origins in ancient maritime law, and the principle remains within the admiralty law of most countries.

3. History and development Marine is the oldest, began in Italy during 12 th century Fire came second Life Accident Industrial revolution of the 19 th century is reposible for rapid growth

4. Development in Bangladesh From British rule Insurance, particularly life insurance was introduced Since 1947 to 1971 there were 49 companies in East Pakistan Following the independence of  Bangladesh  in 1971, both life and general insurance business in the country was nationalised under the Bangladesh Insurance (Nationalisation) Order 1972 except foreign insurance companies. Five corporations were established to absorb, own and control the businesses of existing insurance companies and these new corporations were Bangladesh Jatiya Bima Corporation, Karnafuli Bima Corporation, Tista Bima Corporation, Surma Jiban Bima Corporation and Rupsa Jiban Bima Corporation. Jatiya Bima Corporation supervised and controlled the remaning four These four corporations were in business from 1 January 1973 to 14 May 1973

5. On May 14 th , 1973 the five companies were abolished and instead two corporations were established: Sadharan Bima Corporation Jiban Bima Corporation According to the latest data from the Insurance Development and Regulatory Authority (IDRA), the country hosts  81 insurance companies , comprising 35 life insurance firms and 46 non-life insurance entities. Development in Bangladesh

6. The  Bangladesh Insurance Academy  ( BIA ), established in 1973, is the only public training institute imparting  insurance  training and education for the insurance professionals of the country. The management of the academy is vested in a board formed by the government. The academy also provides tailor-made insurance training for the insurance operators in Bangladesh. Additionally it organizes customized training sessions, seminars, symposiums and conferences on issues relating to the insurance sector of Bangladesh. Development in Bangladesh Ch#1

7. Risk Management Chapter 2 Risk is a fundamental concept in insurance, encompassing potential threats and opportunities. Understanding risk types and their implications is crucial for effective risk management strategies. This knowledge informs decision-making, allowing insurers to develop appropriate coverage options and pricing models.

8. Chance Probable advantageous, desirable or profitable outcome of a fortuitous event Risk Probable disadvantageous, undesirable or unprofitable outcome of a fortuitous event Probability Neutral mathematical quantitative expression of a fortuitous event

9. Methods of Risk management Risk avoidance ( e.g., invest in projects with minimun risk) Risk prevention (e.g., eliminating causes of risks) Risk Assumption (e.g., self-insurance) Risk distribution (e.g., partnership; company formation) Hedging and neutralization ( e.g.,diversification of business) Risk Elimination (e.g., improve equipments ) Risk Transfer( e.g., insurance)

10. Self-Insurance Insurance of  oneself  or one's interests by maintaining a fund to cover possible losses rather than by purchasing an insurance policy. Law of Large number In the insurance industry, the law of large numbers produces its axiom. As the number of exposure units (policyholders) increases, the probability that the actual loss per exposure unit will equal the expected loss per exposure unit is higher. To put it in economic language, there are returns to scale in insurance production.

11. Nature of Risk Chapter 3 Uncertainty vs risk Risk involves known probabilities of potential outcomes, while uncertainty lacks measurable probabilities Quantifiable nature of risk allows for statistical analysis and modeling (actuarial science) Uncertainty presents challenges in risk assessment and requires qualitative approaches Risk can be managed and mitigated, whereas uncertainty often requires adaptability and flexibility

12. Classification of Risk Financial risk:  This risk type is the main base of insurance. Such risks are for events that are bound to make a financial loss. The insurance companies evaluate and cover such losses. For example, a company may lose their goods in a warehouse fire. This event risk is thus a financial loss. The company can take insurance to cover the fire losses. Non-financial risk:  This risk type is related to events where the risk loss is not measurable. Insurance companies cannot quantify the amount. Thus, they don't offer insurance policies for the same. For example, a person cannot avail of any loss if they select a bad phone brand. This risk is usually not insurable.

13. Pure risk : This risk type is when the affected party can only incur a loss or remain in the same position. The individual cannot gain anything from a pure-risk event. The companies, for example, may make a loss or cover the costs. It cannot lead to a profit for the firm. An example can be a natural calamity. A person may lose their house in such an event. However, their house may remain the same and not be affected by the calamity. They cannot gain anything in that event. Speculative risk:  This risk type relies on speculation. It means the individual can also profit or gain from such a risk. The loss or no-affect factors are still present. The classification of risk in insurance in this type is that the individual may gain, remain in the same position, or incur a loss. An example can be an investment in a company's shares. These shares can appreciate or lose value. They may also trade at the same levels. This case results in speculation.

14. Particular risk:  This risk type is for a particular event that comes up with the actions of an individual or group. It affects only a few people or that group. For example, a car accident is usually localized to the involved parties. They get the damages. Insurance policies are available for such risks. Fundamental risk:  The classification of risk in insurance of this type impacts the population or a big group. Such events are not under anyone's control. They lead to losses for several people. For example, an earthquake usually impacts a big area. Many people face the loss, and this event isn't under their control. Such events can also have insurance policies.

15. Functions of Insurance Chapter 4 Specific Functions Marine protection against financial loss Loss minimization aid to international trade Aid to commerce Fire protection against financial loss Inspection service Loss minimization

16. Life Benefits for dependants Pension and capital Thrift savings Marriage and educational expenses House purchase scheme Social welfare Service to nation Accident protection against financial loss Inspection service Loss minimization

17. General functions Equitable distribution of loss Equitable distribution of loss of one onto the shoulders of many Each insured contributes to the fund an amount or premium commensurating the risk he introduces. Reduction of losses through rating principle Insurer by the method of rating encourages care which reduces loss Excess premium is charged for bad feature and reduced premium is charged for good features Assist to businesses Investment Inspection service Research and publicity Invisible export Invisible export is  the part of international trade that does not involve the transfer of goods or tangible objects , which mostly include service sectors like banking, advertising, copyrights, insurance, consultancy etc. Providing insurance services abroad either by direct insurance or by accepting reinsurance from abroad

18. Reinsurance Reinsurance, often referred to as insurance for insurance companies, is a contract between a reinsurer and an insurer. In this contract, the insurance company—known as the ceding party or cedent—transfers some of its insured risk to the reinsurance company. The reinsurance company then assumes all or part of one or more insurance policies issued by the ceding party.

19. Contract of insurance Chapter 5 An insurance contract shall bind an insurer to undertake certain risks in return for the payment of premium, and upon occurrence of an insured event to pay the insured or a third beneficiary party an insurance indemnity or an amount in cash. Subject matter of insurance The subject matter in insurance refers to  the object or property that is the focus of the insurance policy . It can encompass a wide range of items, including tangible assets like cars, homes, or businesses, as well as intangible interests such as liability or life. Subject matter of insurance contracts The subject matter in insurance contract refers to  the legal financial interest of a man on the property, life, limb, or liability which is being insured

20. Insurance Vs. Wagering In everyday language, a wager means bet.  An agreement wherein two parties in which one of the parties agrees to pay money if some unknown event occurs , with the understanding that if the event does not happen, the other party must pay the same amount back, is called an agreement of Wager. Contract of insurance are based on scientific and actuarial calculation of risks, whereas wagering agreements are a gamble without any scientific calculation of risk . Wager agreements are speculative and often unenforceable, lacking any insurable interest.

21. Assignment Transfer of all rights and obligations under a contract to a third party Assignment of policy proceeds only The parties to the contract remain unaltered and only rights are transfered Assignment of policy Original insured is replaced and both the rights and obligations are transfered

22. Life and marine ( assignment possible) Fire and Accident ( Not assignable. Novation is required) What is Novation? Novation is  the replacement of one of the parties in an agreement between two parties, with the consent of all three parties involved . To novate is to replace an old obligation with a new one. ( i.e., seeking consent of insurer)

23. Scope of Insurance Chapter 6 Classification of Insurance Branch Wise: Marine Hull Cargo Freight Fire Loss to material property Loss of profit/ consequential loss Life Ordinary life assurance Industrial life assurance Group life assurance Accident Personal accident Burglary Motor Employers liability Fidelity guarantee

24. Classification of Insurance (contd.) Subjectmatter Wise: Insurance of person Life and personal accident insurances Insurance of Property Fire, marine, motor, burglary etc. Insurance of liability Employers liability, hull insurance, aviation insurance Insurance of interest Fidelity guarantee, credit insurance

25. Marine Insurance Marine Insurance provides protection against loss during sea voyage. The businessmen can get his ship insured by paying the premium fixed by the insurance company. The functional principles of marine insurance are the same as the general principles of Insurance. subjectmatter : Hull Cargo Freight Types of policies Time policy Typically for one year Policy comes to an end when the period is over even though the voyage is on mid-ocean hull is normally isured on this basis

26. Types of policies Voyage policy To validate a claim the loss must occur within the specified voyage Cargo is insured on th is basis Mixed policy It covers a voyage and also an additional time after completion of voyage Floating policy Typically for cargo A round sum covering the numbers of anticipated shipments Each time a shipment takes place, the insured declares the shipment and obtains a certificate of insurance The sum insured gradually reduced by the value of each shipment Open cover A cover for 12 months is given to the insured indicating that the insures shall insure each and every shipment to be declared by the insured as per terms and conditions of the cover note Building risk policy For ships being built in the dockyards

27. Fire insurance It provides safety against loss from fire. If property of insured gets damaged due to property as compensation from insurance company. If no such event happens, then no claim shall be given. Scope of fire insurance Material loss insurance Standard fire policy Fire, lightning, explosion Special peril insurance Riots, explosion, earthquake, storm, cyclone, flood Declaration policy A declaration clause is attached to a standard fire policy 75% of the premium is required at the inception Each month the insured declares the value of the stock. At expiry the 12 declarations are summed up and averaged to find out the actual premium

28. Scope of fire insurance Blanket policy provides broad protection for multiple properties, activities, or items under a single policy . It may refer to any type of insurance, including property, liability, and health, but it is most commonly used in the context of property insurance. Reinstatement policy The loss is settled on the basis of cost of replacement of the damaged property by new property Building in course of erection Usually used by contractors and builders Households policy Comprehensive policy that covers fire, burglary, special perils and limited liabilities of the insured Sprinkler leakage insurance Consequential loss insurance/ loss of profit insurance Loss of earning/net profit Standing charges like, taxes, electricity bills, salaries to staffs etc. Extra expenditures borne by the insured ( e.g., additional rental expense for hiring a new premise to continue production)

29. Accident Insurance Burglary insurance Motor insurance Crop insurance Live-stock insurance

30. Liability insurance Marine Fire Accident Employer’s liability insurance Public liability insurance Product liability insurance Professional indemnity insurance Motor insurance Aviation insurance

31. The scope of insurance-2 Chapter 7 Personal accident and sickness insurance Accident only policy Ordinary life assurance Under life insurance the amount of Insurance is paid on the maturity of policy or the death of policy holder whichever is earlier. If the policy holder survives till maturity he enjoys the amount of insurance. If he dies before maturity then the insurance claim helps in maintenance of his family. The insurance company insures the life of a person in exchange for a premium which may be paid in one lump sum or periodically say yearly, half yearly quarterly or monthly. Term or temporary assurance claim is provided only if the insured dies within the period/term mentioned in the policy Whole life assurance Under this policy the sum insured is not payable earlier than death of the insured. The sum becomes payable to the heir of the deceased. Pure endowment assurance claim is provided only if the insured survives within the period/term mentioned in the policy Group life assurance Juvenile policy

32. Aspects of life assurance Premium A life insurance premium is a payment made to the insurance company that keeps the policy active. Without this payment, the policy will lapse, and the coverage will come to an end. Paying life insurance premiums helps allow insured’s beneficiary to receive the death benefit later. Without these payments, the death benefit is not guaranteed, and insured may have to surrender the policy. Life insurance premium costs vary, so it is important to understand the frequency and cost of these payments. In some cases, premiums are required monthly, semi-annually, or annually. Usually, premium payments will stay constant throughout the life of your policy, but this depends on insured’s specific plan. Level-premium payments, or premiums that stay consistent, are more common in term life insurance plans

33. Aspects of life assurance Bonus In the context of life insurance, a "bonus" refers to an extra sum of money, or a portion of the insurance company's profits, that may be added to a participating policy, typically distributed annually.  Life insurance policies can offer various types of bonuses, including simple reversionary, compound reversionary simple reversionary This is the simplest type of bonus in life Insurance.  It is accrued yearly and is paid when a death or surrender claim is raised by the policyholder or at policy maturity . The simple reversionary bonus is declared in the form of a percentage i.e. per thousand of the sum insured. compound reversionary Unlike the simple reversionary bonus, the compound reversionary bonus is  added to the sum assured and any previously declared bonuses . This means that each year's bonus is calculated on a progressively increasing base, leading to potentially higher payouts .

34. Aspects of life assurance Paid-up policy/ free policy Surrender value The surrender value of a life insurance policy is the amount the insurance company pays to the policyholder if they decide to terminate the policy before its maturity, after a certain period (usually 3-5 years), minus any surrender charges.  Loan

35. Annuities Annuities and life insurance both offer financial security, but serve different purposes: life insurance protects beneficiaries upon your death, while annuities provide a stream of income, often for life, to the policyholder.  Types: (Reading assignment for students) Annuity for life Annuity certain Guaranteed annuity Reversionary annuity Joint and survivor annuity Deffered annuity

36. Insurance of interest Fidelity guarantee insurance Fidelity Guarantee Insurance (FGI), also known as first-party fraud or employee dishonesty cover, protects organizations from financial losses caused by the fraudulent or dishonest acts of employees, partners, contractors, or volunteers.  Credit insurance This insurance policy  pays all or a portion (i.e. monthly payment) of the outstanding debt if an event that is named in the policy occurs  (i.e. death, disability or involuntary unemployment of the insured). The insurance company usually pays the money directly to the creditor or lender. Performance bond A performance bond, also known as a contract bond, is  a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor .

37. Lmitations on the scope of insurance Limitation of pecuniary value Thing of pecuniary value means  any thing having a monetary value including gifts, loans, services, securities, tangible objects, and business and professional opportunities . Sentimental value is not considered Limitation by law Losses arising out of deliberate misdeeds or fraud cannot be insured Limitation by insurable interest No insurable interest, no insurance contract Limitation by insufficiency of knowledge E.g., loss of profit due to fluctuation in the market; loss due to delayed arrival of the vessel etc. Limitation by public policy Insurance of smuggling ventures; breach of foreign law etc.

38. Chapter 8 Six principles of insurance are: Principle of Utmost Good Faith ( Uberrima fides) Insurance contracts are based upon mutual trust and confidence between the insurer and the insured. It is a condition of every insurance contract that both the parties i.e.insurer and the insured must disclose every material fact and information related to insurance contract to each other. Insurable Interest:  It means some pecuniary interest in the subject matter of insurance contract. The insured must have insurable interest in the subject matter of insurance i.e., life or property insured the insured will have to incur loss due to this damage and insured will be benefitted if full security is being provided. A businessman has insurable interest in his house, stock, his own life and that of his wife, children etc. Indemnity: Principle of indemnity applies to all contracts except the contract of life insurance because estimation regarding loss of life cannot be made. The objective of contract of insurance is to compensate to the insured for the actual loss he has incurred. These contracts ‘provide security from loss and no profit can be made out of these contracts.

39. Proximate Cause:  The insurance company will compensate for the loss incurred by the insured due to reasons mentioned in insurance policy. But if losses are incurred due to reasons not mentioned in insurance policy than principle of proximate cause or the nearest cause is followed. Subrogation:  This principle applies to all insurance contracts which are contracts of indemnity. As per this principle, when any insurance company compensates the insured for loss of any of his property, then all rights related to that property automatically gets transferred to insurance company. Contribution:  According to this principle if a person has taken more than one insurance policy for the same risk then all the insurers will contribute the amount of loss in proportion to the amount assured by each of them and compensate for the actual amount of loss because he has no right to recover more than the full amount of his actual loss.