2. WHAT IS INSURANCE ?
• Insurance Indemnifies Assets & Income. Every
Asset has a value and generates Income to its
Owner. There is a normally expected Life-time
for the Asset during which time it is expected to
perform. If the Asset gets lost earlier, being
destroyed or made Non-functional through an
Accident or other unfortunate event the Owner
is Prejudiced. Insurance helps to reduce
CONSEQUENCES of such Adverse
Circumstances which are called Risks

3. • Insurance is the SCIENCE OF
SPREADING OF THE RISK. It is the
system of spreading the losses of an
Individual over a group of Individuals
• Insurance is a Method of sharing of
financial losses of a FEW from a
COMMON FUND formed out of
Contribution of the MANY who are
equally exposed to the same loss

4.  What is UNCERTAIN for an Individual
becomes a CERTAINTY for a Group. This
is the basis of All Insurance Operations.
Thus INSURANCE CONVERTS
UNCERTAINTY TO CERTAINTY

5.  The object of Insurance is to provide
protection against Financial Losses
caused by Fortuitous Events. Thus
Insurance is a protection against the
Consequences of RISK.
 RISK is defined for Insurance Purpose as
the UNCERTAINTY OF A FINANCIAL
LOSS.

6. • Element of RISK is Inherent in Life. Risk
Means that there is a possibility of loss
or damage.
• To the common Man, Risk means
Exposure to Danger.
• In Insurance, the word Risk may be
used interchangeably with Peril-which
means the Event or Occurrence which
CAUSES the Loss.

7.  In Insurance, the word Risk may also refer
to the Property or Subject Matter of
Insurance
 The Subject Matter of Insurance can be
Life, Limb, Property, Interest & Liability

8. • The Problem of Risk in Economic and
Commercial Activities can be dealt
with in FOUR WAYS.
1. Risk Avoidance
2. Risk Retention
3. Risk Transfer
4. Risk Minimisation
Insurance is ONE of the most Import
method
of Risk Transfer

9. • Insurance spreads the Risk among the
Community and the likely Big Impact on
ONE is reduced to Smaller Manageable
Impacts on ALL. Thus Insurance acts as a
SHOCK ABSORBER.
• A RISK OF TRADE is Insurable but a Trade
Risk is not Insurable. In a Risk of Trade
there can only be a LOSS whereas in a
Trade Risk, there can be LOSS OR GAIN
Risks of Trade are called PURE RISKS.

10. • Only Economic or Financial Losses can
be compensated by Insurance.
• The Business of Insurance is the
Pooling of RISK and RESOURCES. It is a
technique which provides for
collection of small amounts of
PREMIUM from many Individuals and
Firms out of which losses suffered by
the FEW are paid. Insurers act as
TRUSTEES of the Common Pool.

11. INSURANCE ACTS AS A SOCIAL
SECURITY
 Social Shock Absorber
 Solarium Fund for Hit & Run Victims of
Road Accidents.
 PASS (Personal Accident & Social
Security) scheme launched by the Govt.
of India
 Crop Insurance Schemes and other Rural
Insurance covers for the Rural Masses.
PURPOSE AND NEED OF INSURANCE

12. INSURANCE CONTRIBUTES TO
NATIONALWEALTH
 It contributes to a vigorous Economy
and National Productivity. LIC & GIC
funds formed out of the savings of
People are channelled into
Investments for Economic Growth.
HUDCO, IDBI, IFCI, use funds siphoned
from Insurance Money for lending to
Entrepreneurs.
PURPOSE AND NEED OF INSURANCE

13.  INSURANCE PROTECTS THE CAPITAL IN
INDUSTRY - It helps release the same for
further Expansion
 Insurance is the HAND MADE to
Commerce and Trade.
PURPOSE AND NEED OF INSURANCE

14.  RATE OF PREMIUM WILL BE DIRECTLY
PROPORTIONAL TO THE DEGREE OF HAZARD
 TO ASSESS VARIATIONS IN THE DEGREE OF
HAZARD,RISKS MUST BE CLASSIFIED INTO
HOMOGENEOUS CATEGORIES WITH
SIMILARITY OF EXPOSURE
 IN EACH SUB-CLASS,PAST LOSS EXPERIENCE
WILL BE THE CRITERIA APPLIED TO DECIDE
THE PREMIUM RATE

15.  GREATER THE RISK,HIGHER WILL BE THE
PREMIUM RATE
 THE MORE PROBABLE THE LOSS AND THE
MORE SEVERE IT IS LIKELY TO BE,THE HIGHER
WILL BE THE PREMIUM RATE
 Eg.—HAZARDOUS GOODS AND HAZARDOUS
PROFESSIONS WILL ATTRACT A HIGHER
PREMIUM AS COMPARED TO NON-
HAZARDOUS GOODS OR PROFESSIONS

16.  RATES OF PREMIUM SHOULD BE EQUITABLE
AND FAIR AS BETWEEN DIFFERENT
INDIVIDUAL INSUREDS
 HENCE,A SYSTEM OF CLASSIFICATION OF
RISKS INTO BROAD CATEGORIES IS ADOPTED.
 THESE MAY BE FURTHER CLASSIFED INTO
GROUPS AND SUB-GROUPS DEPENDING
UPON THE HAZARDS INVOLVED AND THEIR
SIMILARITY
 Eg.CLASSIFICATION IN MOTOR/FIRE/W.C.

17.  IN EACH SUB-GROUP,THE PAST LOSS EXPERIENCE IS
WORKED OUT AND FUTURE FORECASTS ARE MADE
ON THIS BASIS
 FORMULA FOR PURE PREMIUM
L X100 L=SUM TOTAL OF LOSSES
----------
V V=SUM TOTAL OF VALUES
 PURE PREMIUM WILL BE JUST SUFFICIENT TO PAY
THE LOSSES,HENCE LOADING IS REQUIRED FOR
OTHER FACTORS LIKE-COMMISSIONS/MANAGEMENT
EXPENSES/RESERVES FOR UNEXPIRED
RISKS/PROVISION FOR UNEXPECTED HEAVY
LOSSES/MARGIN OF PROFITS
 FINAL RATE=LOADED RATE

18.  LAW OF LARGE NUMBERS IS FUNDAMENTAL TO ALL
INSURANCE OPERATIONS
 THIS IS A MATHEMATICAL PRINCIPAL AND
STIPULATES THAT-
 The greater the number of cases studied and longer
the duration of study, the more accurate will be the
future forecast …
PROVIDED THE CONDITIONS REMAIN THE SAME
 AS THE No. OF CASES INCREASES,THE GAP BETWEEN
THE ESTIMATED FUTURE LOSSES AND ACTUAL
FUTURE LOSSES BECOMES LESS AND LESS
 APPLYING THIS PRINCIPLE,INSURERS ARE ABLE TO ANTICIPATE
FUTURE LOSSES MORE ACCURATELY AND FIX PREMIUM RATES
ACCORDINGLY (SUBJECT TO TREND ADJUSTMENTS

19. INSURANCE OPERATIONS ARE DIRECTLY
AFFECTED BY
IRDA-ACT—2000
INSURANCE ACT—1938
LIBNA—1956---LIFE OPERATIONS
GIBNA—1972---NON-LIFE OPERATIONS
BILL OF
LADING
ACT-1963
INDIAN
CARRIERS
ACT-1865
MERCHANT
SHIPPING
ACT-1958
MARINE
INSURANCE
ACT-1963
W.C.ACT
1923
PLI ACT-1991
SALE OF GOODS
ACT-1930
INDIAN STAMP
ACT
INDIAN
RAILWAYS
ACT-1890
INDIAN POST
OFFICE
ACT--1898
C.P.ACT
1986
FERA-1973
COGSA-1925
M.V.ACT-
1988

20. The ultimate underwriting objectives are
 The production of large volume of premium income
sufficient to maintain and progressively enlarge the
insurers business.
 The earning of a reasonable profit on the operations
 The important underwriting factors are
- Well spread out and Large Volume of business
- Retention limits
- Reinsurance of the surplus
 Reinsurance is insurance of insurance . The ceding
company retains a part of the risk / premium and
cedes the balance to the reinsurer. There are two
main methods of reinsurance
a) Facultative b) Treaty

21.  Facultative Reinsurance : In facultative
reinsurance, the choice / faculty to
accept or reject a risk is with the
reinsurer. This method involves
considerable amount of clerical work and
ceding company cannot go on risk unless
confirmation is received from the
reinsurer about the acceptance of the
risk and premium rate / terms conditions
of insurance.

22.  Treaty :There are two types of treaty reinsurance –
Proportional and Non-proportional.
 Proportional : Proportional treaties are risk based
& can be divided into –
 a) Quota Share b) Surplus c) Pools
d) Auto Facultative (Facultative obligatory)
 Non Proportional : Non proportional treaties are
not risk based but loss based. The insurer limits the
amount of loss as per the underlying limit and the
reinsurer agrees to pay the loss over and above the
underlying limit. Examples of non proportional
treaties are
a) Excess of loss – for event losses
b) Stop loss – for portfolio losses

23.  Retrocession---Reinsurance of a
Reinsured Risk
 Purpose of Reinsurance—
 Creation of additional capacity
 Achieves Global Spread of risk
 Best protection against Catastrophic Risks
 Facilitates acceptance of Mega/Jumbo Risks
 Works on the Principle of:
 No Cession without Retention
 Follow the Fortune of the Ceding Company

24.  The Major Portfolios are as follows:
 Fire Insurance—20%
 Marine Insurance---15%
 Motor Insurance---35%
 Engineering Insurance—10%
 Aviation---5%
 Miscellaneous Traditional—10%
 Miscellaneous Non-Traditional—5%