INTRODUCTION TO INSURANCE , RISK AND IRDA

INTRODUCTION TO INSURANCE , TYPES OF RISK AND IRDA

1. INTRODUCTION TO INSURANCE SANJANA R ASSISTANT PROFESSOR DEPARTMENT OF COMMERCE WITH RETAIL MARKETING SRI RAMAKRISHNA COLLEGE OF ARTS AND SCIENCE

2. RISK (vs) UNCERTAINITY Risk involves known and measurable probabilities, while uncertainty involves unknown probabilities and unpredictable outcomes. Risk can be quantified and assessed objectively, while uncertainty is difficult to quantify or assess due to a lack of information. Risk arises from identifiable events or situations, while uncertainty arises from ambiguity and a lack of information. Risk involves known potential outcomes and their likelihoods, while uncertainty involves unknown potential outcomes and their probabilities. Risk allows for the calculation of expected values and probabilities, while uncertainty does not allow for precise calculations or predictions.

3. Risk can be managed and mitigated through risk management strategies, while uncertainty cannot be fully managed or eliminated. Risk provides a basis for decision-making and planning, while uncertainty requires adaptive and flexible approaches. Risk involves both positive and negative consequences, while uncertainty can lead to both opportunities and threats. Risk is frequently encountered in structured and well-defined environments, while uncertainty is common in dynamic and complex environments. Risk is associated with potential losses or gains, while uncertainty is associated with ambiguity and limited information.

4. TYPES OF RISK Financial and Non Financial risk Financial risk includes those risks whose outcomes can be measured in monetary terms. In this type of risk, loss of a person/thing is compensated by paying money to the person after proper assessment of loss. Eg: Damage or stealing of a property like a motorcycle, car, machinery, cash etc. On the other hand, non-financial loses are those that cannot be measured in monetary terms.  Pure risk and speculative risk Pure risk is an accidental risk that results in the physical loss of the insured. The probability of the occurrence of physical risk is very high. These risks can be the result of human negligence, natural disaster, communal riots, strikes at the workplace, sudden breakdown in a manufacturing unit, fall of the country, etc.  In pure risk, the outcome will be either be a loss or no loss, there is no gain in pure risk. The outcome is never favorable for the insured. Eg: loss in business due to damage to resources. Speculative risk works on speculations. The cause of these risks is mere speculation. The goal of these risks is to make a profit. In speculative risk, there is a possibility for the insured to get profit however loss can also occur. These types of risks involve investing in a share market, setting up a new business, etc

5.   Fundamental risk and Particular risk Fundamental risks are the risks that are dependent on nature. These are the risk arises from natural calamities and can’t be controlled by any individual or group. The loss caused by such factors is unpredictable; it can be either a huge loss of money and lives or it can cause small loss. Eg: Flood, earthquake, etc. Particular risks are the risks that are caused by a group of people and are not natural. It includes causes like communal riots, terror attacks, etc which are not created and controlled by nature.   Static Risk and Dynamic risk Static risks are inherent to a situation and don't change over time. They are predictable and often involve events with a relatively constant level of occurrence. Eg: Fire damage to property, theft of belongings, accidental injuries during routine activities. Dynamic risks are changeable and influenced by external factors. They are often unpredictable and can arise suddenly. Eg: Earthquakes, explosions, active shooter situations, or unexpected changes in the market.

6. LOSS MINIMIZATION MEANING: Loss minimization technique in risk management and insurance refers to the strategies and measures taken to reduce or mitigate the potential losses that an individual or organization may face due to various risks. It involves identifying and assessing the risks, implementing preventive measures, and having insurance coverage in place to minimize the financial impact of losses. Loss minimization techniques Risk assessment: Evaluating and identifying potential risks that may impact an individual or organization and determining their likelihood and potential impact. Risk avoidance: Taking actions to completely avoid or eliminate certain risks by not engaging in activities that pose a high risk. Risk reduction: Implementing measures to reduce the likelihood or impact of risks, such as installing safety equipment or implementing security protocols.

7. Risk transfer: Transferring the financial burden of potential losses to an insurance company through purchasing insurance policies. Risk retention: Accepting the potential losses and handling them internally without transferring to an insurance company, often used for small or manageable risks. ROLE OF INSURANCE IN LOSS MINIMIZATION: Insurance plays a crucial role in loss minimization by providing financial protection against potential losses. By purchasing insurance policies, individuals and organizations can transfer the financial burden of losses to the insurance company. In the event of a covered loss, the insurance company compensates the policyholder according to the terms of the policy. This helps in minimizing the financial impact of losses and provides a sense of security and stability. Insurance also encourages individuals and organizations to take preventive measures, as insurers often provide guidance and incentives for risk reduction.

8. INSURANCE MEANING: A contract between a person and an insurance company is known as insurance. In return for regular premium payments, the insurer promises to offer financial protection against specific risks. Insurance serves as a safety net that shields the policyholder or beneficiary from unforeseen dangers by providing resources occasionally in addition to financial compensation. NATURE OF INSURANCE Contract: Insurance is a contract between the insurance company and the policyholder wherein the policyholder (insured) makes an offer and the insurance company (insurer) accepts his offer. The contract of insurance is always made in writing. Consideration: Like other contracts, there must be lawful consideration in insurance also. The consideration is in the form of premium which the insured agrees to pay to the insurer.

9. 3. Co-operative Device : All for one and one for all is the basis for cooperation. The insurance is a system wherein large number of persons, exposed to a similar risk, are covered and the risk is spread over among the larger insurable public. Therefore, insurance is a social or cooperative method wherein losses of one is borne by the society. 4. Protection of financial risks: An insurer is protected from financial risks which can be measured in terms of money. As such insurance compensates only financial or monetary loss or risks. 5. Risk sharing and risk transfer: Insurance is a social device for division of financial losses which may fall on an individual or his family on the happening of some unforeseen events. When insured, the loss arising out of the events are shared by all the insured in the form of premium. Therefore the risk is transferred from one individual to a group. 6. Based upon certain principles: The insurance is based upon certain principles like insurable interest, utmost good faith, indemnity, subrogation, causa- proxima , contribution, etc.

10. 7. Regulated by Law : Insurance companies are regulated by statutory laws in almost all the countries. In India, life insurance and general insurance are regulated by Life Insurance Corporation of India Act 1956, and General Insurance Business (Nationalization) Act 1972, and IRDA Regulations etc. 8. Value of Risk : Before insuring the subject matter of the insurance contract, the risk is evaluated in order to determine the amount of premium to be charged on the insured. Several methods are being adopted to evaluate the risks involved in the subject matter. If there is an expectation of heavy loss, higher premiums will be charged. Hence, the probability of occurrence of loss is calculated at the time of insurance. 9. Payment at contingency : An insurer is liable to pay compensation to the insured’s only when certain contingencies arise. In life insurance, the contingency — the death or the expiry of the term will certainly occur. In such cases, the life insurer has to pay the assured sum. In other insurance contracts, the contingency — a fire accident or the marine perils, may or may not occur. So, if the contingency occurs, payment is made, otherwise no payment need to be made to the policyholders.

11. 10. Insurance is not gambling : An insurance contract cannot be considered as gambling as the person insured is assured of his loss indemnified only on the happening of such uncertain event as stipulated in the contract of insurance, whereas the game of gambling may either result into profit or loss. 11. Insurance is not a charity: Premium collected from the policyholders under an insurance is the cost of risk so covered. Hence, it cannot be taken as charity. Charity lacks the element of contract of indemnity and compensation of loss to the person whosoever makes it.

12. PRINCIPLES OF INSURANCE Principle of Utmost Good Faith ( Uberrimae Fidei): This principle implies that both the insured and the insurer must disclose all material facts truthfully at the time of entering into the insurance contract. Material facts are those that influence the decision of the insurer in accepting the risk. Any non-disclosure or misrepresentation may lead to denial of claims or cancellation of the policy. Example : If a person applying for life insurance has a serious medical condition like diabetes or a heart problem, they must disclose this to the insurance company. Failure to do so may result in the rejection of the claim in case of death. Principle of Insurable Interest: Insurable interest means that the insured must have a legal or financial relationship with the subject matter of the insurance. In other words, the insured must stand to suffer a financial loss if the insured event occurs. This principle prevents moral hazard and ensures that people do not take insurance for speculative purposes. Example: A person can take insurance on their own house or car because they have a financial interest in it. However, they cannot take insurance on their friend’s property as they do not suffer a direct loss.

13. Principle of Indemnity: This principle states that the insured shall be compensated only to the extent of the actual loss suffered. The purpose is to restore the insured to the same financial position as before the loss, and not to make a profit. This applies mainly to general insurance such as fire, marine, and motor insurance. Example: If a factory suffers damage worth ₹10 lakh due to fire and it is insured for ₹15 lakh, the insurer will pay only ₹10 lakh as compensation. Principle of Contribution: This principle applies when the insured has taken more than one insurance policy for the same subject matter. In the event of a loss, the insured cannot claim the full amount from each insurer. Instead, each insurer will contribute proportionately to the claim based on their share of the sum insured. Example: A person insures their goods worth ₹5 lakh with two insurance companies, one for ₹3 lakh and another for ₹2 lakh. If the goods are lost in a fire, both insurers will share the loss in the ratio 3:2. Principle of Subrogation: Subrogation means that after the insurer pays the claim to the insured, the insurer obtains the legal right to recover the amount of loss from the third party responsible. This prevents the insured from recovering compensation twice (once from the insurer and again from the third party). Example: If a car is damaged due to a third-party’s negligence and the insurer pays for the repairs, the insurer can sue the third party to recover the amount paid.

14. Principle of Proximate Cause: This principle states that the actual cause of loss must be closely related to the insured risk. If the loss is caused by an insured peril, then the insurer is liable. If the loss is caused by an excluded or non-insured peril, then the insurer is not liable. Example: If a building insured against fire is damaged due to an electrical short circuit leading to fire, the insurer will pay the claim. But if the damage is due to an earthquake and earthquake is not covered, the claim will be rejected. Principle of Loss Minimization: According to this principle, it is the duty of the insured to take all reasonable steps to minimize the loss or damage after the occurrence of the insured event. The insured should act as if they are uninsured and try to reduce the loss to the minimum possible extent. Example: If a fire breaks out in a warehouse, the owner must try to extinguish it using fire extinguishers or call the fire brigade immediately. They cannot sit idle just because the property is insured.

15. IRDA Insurance Regulatory and Development Authority of India, commonly known as IRDA, is the supreme authority that authorizes the insurance business in India. It was established by the Insurance Regulatory and Development Authority of India Act, 1999 after the declaration made by the former President of India, Pranab Mukherjee, on Insurance Laws (Amendment) Ordinance of 2014. Objectives of IRDA To carry forward the interests of the policyholders. To uphold the development of the Insurance industry. To ensure speedy resolution of claims. To prevent frauds and malpractices. To ensure fair conduct on the part of the financial market and transparency when dealing with insurance

16. Composition of IRDA: According to Section 4 of the Insurance Regulatory and Development of Authority Act, 1999, the members of the Authority will consist of the following: A chairman Not more than five full-time members Not more than four part-time members Role of IRDA To ensure interests and fair treatment to the insurance policy holders. To ensure the development of the insurance industry or sector and to impart benefits to people and long-term funds to increase the growth of the economy. To promote and apply high standards of integrity, fair dealing, the ability of all those companies that it administers. To ensure clarity and accuracy while contracting with the insurance policyholders. To provide speedy trials in case of disputes and to prevent fraud or any other misconduct. To initiate new standards where they are needed or where there is lack of such standards. To promote self-regulation in daily activities with the necessary regulations .