Risk Management and Insurance

Concept of risk management:

A risk is something that may or may not happen. The term risk can be defined as uncertainty concerning the accurence of loss. It refers to a situation where there is a possibility of loss. The loss is uncertain. It occurs by chance and happens to anybody. The process of managing risk or loss exposure is called risk management. Risk management is process of identification and analysis of risk and implementing effective plans to prevent loss or reduce the impact of loss. It is concerned with identifying the risk faced by an organization. Their evaluation and implementing programs for treating such risks.

According to Julio and Bills, “Risk management is the identification analysis and economic control of these risk that can threaten the assets or earning capacity of enterprises.

Concept of insurance:

Insurance is a co-operative mechanism or method of spreading the loss of an individual over the heads of large number of people who are the member of the particular insurance company by paying premium on regular basis. Insurance can be effected for life or properties of both general people and business organization by which the financial losses caused due to the destruction by fire, accidents, sinking and death are compensated under the term and condition between the insurer and insured.

According to J.H. Magee, “insurance has been defined as a plan by which a large number of people are associated themselves and transfer to the shoulders of all risks to attach to individuals.” 

Importance of insurance:

1. Financial security: Insurance provides financial security to an incurred person. It guarantees protection against large and uncertain loss in return of small premium. There are different types of insurance are there to give different kinds of protection. Insurance provides financial security to the family members if they fall in financial crisis due to the death of the head member of the family. It provides protection for old age when they become unable to work.
2. Risk reduced: Men are exposed to various kinds of risk and uncertainty completely. It is impossible to eliminate risk and uncertainty completely. Insurance is a co-operative effort of sharing risk. Thus, the impact of risk can be reduced through the distribution of risk.
3. Mental Peace: Insurance provides mental peace to insured person. It removes the tensions and fears associated with the future uncertainty. By means of insurance, most of the uncertainty that center round the modern life can be eliminated.
4. Encourage saving: The insured has to pay a premium regularly. Thus, it encourages the habit of saving specially in the insurance. It is a good measure to make provision for old age.
5.  National Development: Insurance companies take premium in consideration to compensate loss. They keep a part in a fund for these purpose and rest of the money is invested in different industries and government banks for development of nation.
6. Basis of credit: insured can get a loan by pledging insurance policy as a security. Moreover, financial institutions grant credit facilities on the place of property only if they are insured.
7. Promotes foreign trade: foreign trade is riskier. Chances of fire and marine perils are mood in this field. Insurance takes away this risk and promotes foreign trade. Thus, it helps to earn foreign exchange.
8. Cheats inflation: premium collected by insurance companies produces many supplies and the checks inflation. Moreover, the premium collected is invested in productive purposes and this increases production. This also reduces the impact of inflation.
   Employment opportunity: countries of people are engaged in insurance business. Insurance companies need various types of employees both in management and technical activities. Thus, insurance provides employment opportunities in the country.

Essentials of insurance contracts:

1. Offer and acceptance: there must be two parties in a contract. The first step in the formation of a valid contract is arriving at an arrangement between two parties by means of offer and acceptance filing of the proposal form by the insured constitute of offer and the notice of acceptance of the proposal by the insurer is a valid acceptance.
2. Legal consideration: in every contract there should be a legal consideration. In insurance payment, premium is taken as a valid consideration. Without payment of premium, the insurance contract cannot be initiated.
3. Competent parties: like in other contracts, there must be competent parties in insurance contracts too to be competent to insurance contract the person. Must be of majority age according to the existing law. Must be of some mine and must be qualified to contract. Thus, minor, unsound mind person and criminal person and not competent to contract.
4. Free consent: Parties entering into contracts enter into IIT by their free consent. The constant will be free when it is not caused by undue insurance fraud or misrepresentation.
5. Legal object: the object of the contract should be lawful. It should not be illegal, immoral and opposed to public policy. Thus, legality of an object is an essential requisite to offer a valid contract.
6. Certainty: are contracts not be uncertain. The terms and condition of the contract should be clearly understood by both parties. In insurance, the insurance company gives a printed policy document which contains all the terms and conditions of the policy.
7. Writing and registration: the contract must be written properly, signed, stamped and registered. This condition is fulfilled as the proposal signs in a printed proposal form. The insurance company issues the policy document properly signed and stamped.

Principle of insurance:

1. Utmost good faith: an insurance contract based on the principle of utmost good faith that is higher degree of honesty is imposed on both parties to an insurance contract. Parties of the insurance contract must follow the principle of utmost good faith.

There should not be fraud; Misrepresentation or non-disclosure concerning the material facts. In case of life insurance, health condition, age, occupation, income, residence, habit, etc. are material facts. Both parties of the insurance contract must disclose all the material facts fully and truly. This principle focuses on avoiding cheating.

2. Insurable interest: the insurance contract will be valid only if the insurer has insurable interest in the subject matter of insurance. Interest means a relationship between the insured and the subject matter of insurance. This relationship involves monetary gain from the existence of the subject matter or loss from its destruction. If the insured does not suffer a loss out of the destruction of the subject matters has no interest. In the absence of these provisions, anybody can get a property, the insured may claim the indemnity of loss from the insurance company by destroying the property. Thus, it is essential that the insurance should have insurable interest in the subject of insurance.

3. Indemnity: if insurance companies provide compensation equivalent to the amount of loss, it is known as principal of Indemnity. Under this principle, insured gates exactly the same amount as he/she has lost his/her property or things. These principles are not applicable to Life insurance because the loss of life of a person cannot be measured in terms of money. the following conditions should be fulfilled for the principle of indemnity.

i. Loss of property should be measured in terms of money.

ii. Loss should not be accidental or intentional.

iii. Compensation should be equivalent to the amount of loss.

4. Proximate cause: it means that the nearest cause insurance company compensates to the insured person according to the contract paper. There is more than one cause for a loss. At that time, the insurance company finds out the nearest cause, if the real cause of loss is insured, the insurer is liable to compensate the loss. Otherwise, the insurer may not be responsible for loss.

5. Principle of subrogation:  Subrogation refers to the right of the insurance company or insurer to stand in the place of the insured after indeminited the claim. In other words, subrogation means substitution of the insurance in place of the insured for the purpose of claiming Indemnity from a third party for a loss covered by insurance. According to this principle, the insurer becomes entitled to all the rights of the insured subject matter after payment because he has paid an actual loss of the property. According to subrogation principle, “The insured entitled to the benefit to the extent of the amount he has paid is compensation to the insured.”

6. Principle of contribution: contribution refers to sharing of loss between co-insurer. It applies to the contract of Indemnity. A person can get the subject matter insured with several insurers. But the insured will be entitled to recover only the actual amount of loss costing by him or nothing more. Thus, in the event of loss he cannot recover claims from all the insurers. In such cases, the total loss suffered by the insured is contributed by different insurers in the value of policies issued by them for the same subject matter. If one insurance company pays off the amount of compensation fully, then it can recover the portion of the contribution from other insurance who are liable from the same loss.

7. Principle of loss mitigation: mitigation of loss is the duty of insured to make every effort and to take every step to minimise the loss in the event of some mishap. Issue not be the mere and on looker of the loss. He must do his best to minimise the damage, save the property from damage. He must act as a rational uninsured person. If he does not do so, the insured can avoid the payment of claims. Which principle of mitigation of those provides only or check on the behaviour in the want of loss.

Types of insurance:

1. Life insurance: It is a contract by which the insurance assures the insured to make payment of insured amount either to the insured after the expiry of the period of the contract or to the nominee of the insured after his death whichever occurs earlier. It is a legal contract between the insurer and insured. The insurer being the insurance company and the insured being the person who seats financial security of his life. The insurance company takes all the risk of the insured through this contract. It has to pay a certain amount to the insured either after the expiry of the contract period or after the death of the insured before the expiry period. In the latter case the insurer has to pay the amount to the nominee of the insured person. Thus, the contract in which the insurer assures the insured or his nominee to define at insured amount on a given incident is known as life insurance. The life insurances are further divided into following categories:

A. Whole life policy: In this type of policy, the insured have to pay premium throughout his lifetime or up to the limited year. The sum insured amount is paid to the nominee or dependence of the insured or his death. This is done only to protect his family. The rate of premium in this policy is low as compared to other policies because the premium is payable in the whole life. This type of policy has no financial gain to insured. Thus this type policy is not popular. The whole police it can be further classified as:

a. Ordinary whole life policy: under the ordinary whole life policy the insured have to pay insurance premium throughout his whole life and the sum insured is payable to dependent only after the death of the insured. If the insured person leaves for a longer period, the amount of premium may be even more than the sum insured under his policy.

b. Limited premium whole life policy: this policy is the premium paid for a limited period usually up to the retirement age of the insured. However, the sum insured is payable to the dependent any after the date of the insured.

c. Single premium whole life policy: under this policy, the insured is required to pay the amount of premium only one time. Highway the sum insured is payable to the dependent only after the death of the insured. Thus the policy has elements of investment than securities.

B. Endowment policy: This type of policy is issued for a fixed specific period. Thus, the insured have to pay premium only up to that period. the sum insured is payable to the policy holder on the maturity of policy ought to the dependent or is death whichever is earlier. This policy is very popular because it makes provision for security of the family or livelihood in the world. Thus the elements of safety are wellbeing investment is present in this type of policy. The endowment can be folded classified under as:

a. Ordinary endowment policy: this policy is for a fixed term. The sum insured is payable to policyholders on the maturity of the policy or to the dependent or death whichever is earlier.

b. Pure endowment policy: In this policy, the sum insured is payable to policyholder only if he survives till the maturity of the policy. if the insured dies before the term of the policy the sum of insured is not paid by the insurance company.

c. Double endowment policy: under this policy, if the insured survives till the maturity of the policy he will get double the amount of the sum insured. But only the sum insured is payable to the defendant on his death within the maturity period.

d. Different endowment policy: under this policy, the sum insured is payable only at the end of the specific period even if the insured died prior to the selected period. This policy is for making provision for education, marriage etc. to the children. When the children attend a particular age, the sum insured is payable by insurance company.

C. Term Life policy: This is a very old type of life policy. This policy is for a fixed term such as one, two, five or ten years. In this policy, the sum insured is payable to the nominee by the company only on the death of the insured of a policy holder. But if the service till the maturity, the company will not be liable to pay the sum insured. Thus, it is neither saving nor investment. However, this policy is generally taken on the life of difference because the amount of gift can be realised from insurance company on death of debtors before its maturity following its special kinds.

a. Straight term policy: The straight term policy is issued for a very short period of year. A single premium is paid on one instalment at the outset. The sum insured will be payable only if the death occurs within the term.

b. Convertible term policy: under this policy, option is given to the insured to convert it into whole life or endowment life policy without going in for a fresh medical examination. If the option of conversion is exercised or new policy under the limited period life plan or endowment insurance plan will be issued age is the case may be subjected to rates of premium, terms and condition free village on the death of conversion.

c. Decreasing term policy: this is an insurance policy mainly taken from loan transactions. The policy money goes on diminishing year after year as the payment of premium is continued which will be clear to the outstanding loan. The insurance company required to pay a policy money to a creditor, if the insured died before the end of the term.

d. Renewal term policy: The renewal term policy is renewal at the expiration of the tomb for an additional period without medical examination. The premium rate will increase according to the advancement of age. With the help of this policy insured can enjoy the benefit without going on the face medical examination.

Procedures of electing life policies:

1. Submission of proposal form: the person who once to get an insurance policy makes a proposal to the agent of the insurance company. This proposal is the basis of an insurance contract. The insurance agent provides a proposal form to be filled in by the proposal. The proposal phone is actually a printed questionnaire which contains a number of questions regarding the following information:

i. Name, address and health of proposer or insured.

ii. Family history and health of proposed

iii. Facts about the income, life and habit of the proposer.

iv. Date of birth and age of proposer

v. Mode of payment of premium
The proposal must provide true and correct information because the insurance contract is based mostly on good faith. So, the proposal should not conceal only factual information.

2. Certificate of age: the proposal must submit the certificate of his actual age with proposal form. The risk of life insurance depends upon the age of the proposer because the mortality rate is high in the people of higher age. Thus, the people of fire age are required to pay a higher rate of premium.

3. Medical examination: after submitting the proposal form with a certificate of age in the insurance company the proposal is required to get himself medical examined from the doctor approved by the insurance company. The proposal form is sent to the approved doctor for a medical report of the proposer. The doctor has to report about the general health of the proposer. He prepares the medical report and forwards it to the company. The medical report is very important life insurance because the company evaluates risk of life on the basis of this report.

4. Submission of agent report: Insurance contract materializes through an agent. This helps the proposer in explaining the technical terms. He tells the rate of premium chargeable in views of the period of insurance, types of policy, mode of payment and the sum insured etc. Thus the agent is required to furnish confidential reports about the proposer in a prescribed form. This report contains the facts about the proposer particularly his death character financial position and other personal information relevant to the contract of insurance.

5. Tense of proposal: on the basis of the information given in the proposal from agent’s report and medical report, the insurance company decides to insure or not to insure the life of the proposer. If the life proposed is found insurable, then the insurer accepts it and sends an acceptance letter along with the premium notice stating the amount of the premium and the due dates.

6. Payment of first premium: on the receipt of acceptance letter and demand for the first premium, the proposals should remit the premium amount to the company. After the payment of the first premium, the position comes into operation and the risk is covered onward. The company issues a receipt for the amount of payment. a receipt act is a contract paper between the insurance company and the insured person.

7. Issue of policy: on the payment of first premium, the contract of life insurance comes into existence. Insurance policy is not issued immediately. It takes some weats to prepare in proper form and duly stamped. The life insurance policy contains all details terms and conditions of life insurance contract. It also contains details of discovered and other rules governing the validity of the policy.

Fire insurance
The agreement which is made to provide financial security against the risk of fire is fire insurance. Why insurance is the combination of two words that is fire and insurance. fire means condition of burning and insurance means of contract against loss. Hence, fire insurance means a contract against loss by fire. It is an agreement between the insured and the insurer under which the insurer agrees to compensate for the loss by fire to the insured. It is a return contract between insured and insurer. Necessity of fire insurance was feat for the first time in 1666 when one third of London was destroyed by fire. It is a contract in which the insurance company promotes a sum of money for loss due to fire during the affected time in consideration for the premium paid by the insured.

Types of fire insurance policy:

A. Valued policy: In this type of policy, the value of a subject matter is a grid of at the time of taking up the policy. This fixed sum is payable irrespective of the amount of loss or damage of the market value of the property loss. This type of policy is generally issued for those goods or property which value cannot be determined after the loss or damage of goods, jewelleries, books, paintings, etc.

B. Specific policy: it is a fire policy without an average clause. English policy the insurance company is liable to Indemnity to specific amount. Insurance company pay the full amount if the loss is within the specific amount of insurance. If the loss is more than the specific amount of insurance, then specific amount is paid but not anything more than the amount of policy.

C. Floating policy: the policy which covers the property lying at different places organs loss by fire is known is floating policy. For example; good produced in godowns to different places. The insured person does not make separate policies for different properties at different places. The average clause is always there in floating policy.

D. Average policy: in the average policy, the insurance inserts average clause in the policy. It is the policy for insurance of the part value of the thing or property. The actual loss is not identified in this policy. The insurer is the proportion of actual loss as the insured beers of rateable proportion of loss to the value of the property.

E. Declaration policy: this policy provides an estimated sum insured. It depends upon the maximum stock which was held during the year by the insured. Initially, the insured pays 75% of the premium amount. The actual amount of trees during the year is submitted on monthly basis. When the policy matures, the amount of premium is determined on the basis of monthly stock valuation. The excess premium amount if any is refunded to the insured.

F. Adjustable policy: which policy is issued for a definite sum of money. But the insured has the right to adjust the rate of premium with the changing value of stocks. The insured will have to give information every month to the company about his/her stock position.

G. Comprehensive policy: this policy covers not only reached by fire but also reached due to theft lightning, flood, storm, volcanic eruption, etc. Which policy is called “all in one policy”. Comprehensive policy does not mean all types of risk are covered. There can be a number of exclusion and limitations. the insurer may get higher premium while the insured is protected from specific perils under this policy.

H. Consequential loss policy: This policy is issued to cover the losses suffered by the insured during the period. After the Fire, the business is interrupted. Thus, an indemnity is insured against the actual loss as well as against anticipated financial loss due to interruption of business by fire. It is also known as loss of profit policy.

Produce of selecting fire policies:

A. Selection of insurance company: first of all, the person who wants to effect fire insurance should select the company which is financially strong and efficient. The company that provides better terms of insurance for taking policy is always preferred.

B. Submission of proposal form: the proposal form should be obtained from the company or agents and filled up carefully. It requests details such as name, address, occupation of the proposer, value and nature of prosperity to be insured, type of policy is required, etc. This information given should be true and correct because fire insurance is the contract of utmost good faith. The proposal form should be signed properly and sent to the company for acceptance.

C. Evidence of responsibility: there is much more process to the fire insurance because sometimes the insured himself destroys the property by fire. Thus the insurance company asks for the evidence honestly and financial position from the third parties. It is not necessary to collect the fresh evidence if the insurer already knows the insured.

D. Survey of property: insurance companies usually have safe and easy policy on the basis of proposal form. If the risk is high and the sum insured is large the company sends its servers for a proper survey and to assess the real nature of risk involved. In the right of the proposal form and surveyors report the company who either accept or reject a proposal.

E. Acceptance of proposal: if the proposal is accepted the company informs the same to the proposer and asks him/her to pay the premium. On payment of premium, the fire insurance contract is said to have entered upon and the risk commences.

F. Payment of premium: after the proposal form is accepted, the company informs the proposal about the rate of premium and asks him/her to pay the premium wheat in a time period. When the proposer receives the acceptance letter and rate of premium, he/she is obligated to pay the first premium to the insurer. On payment of premium, the fire insurance contract is said to have entered.

G. Issue of insurance policy: finally, the insurance company issues a duly e-stamp policy containing all the terms and conditions. It is, indeed, a statutory and formal document of insurance contract. The policy usually contains the name and address of the insured, the subject matter of insured, the sum insured, the amount of premium, etc.

Marine Insurance
Marine insurance is believed to be the oldest form of insurance. it is an attempt to minimise the loss due to perils of the sea in the course of the sea voyage. Mohan insurance is an agreement whereby the insurer undertakes to indemnify the insured in the manner and to the extent they agreed against marine losses that is to stay losses incidental to marine adventure. Marine insurance policy maintains the situation for which the loss may be compensated.
In conclusion, marine insurance is a form of insurance related to perils of the sea or ship, cargoes, freight and so on. Good faith, implied warranties, seaworthiness of a ship. Reality of the venture and no deviation are the essential of marine insurance.

Types of marine insurance

I. Voyage policy: the voyage policy covers the risk particular voyage from one part to the other and from one place to another place. This policy maintains the path of departure and the path of destination. The voyage is suitable for cargo insurance because it does not operate over a particular route only, say from Kolkata to London.

II. Time policy: this policy which is based on period only is known as time policy. For example, the policy insuring the ship from 1.8(1999) to 31.7(2002) i.e. for one year. This policy is more suitable for hull insurance.

III. Mixed policy: when both the conditions for voyage and time policies are considered in a single policy, it is known as mixed policy. Insurance coverage is taken for a particular voyage and within a period of time. For example: from Bombay to Singapore for six months.

IV. Blanket policy: in a blanket policy, the maximum value of the subject matter and policy theorem required is estimated and premium is paid accordingly. If the area or period or cost are increasing, additional premium is to be paid. In case of loss, the company pays the full amount. If shipment is less or more, the premium is adjusted accordingly.

V. Block policy: this is a marine policy for all the properties of the insured against all perils and transportation. The risk is covered from the time of collection of goods, fuel and oral and sent to the port for transporting to the part of the destination by sea. This policy was popular in South Africa to carry gold from mines to a place of destination.

VI. Floating policy: insurance policy for a large prepaid amount without specifying the ship but may be applicable to the cargo listed by the insured is called floating policy. It is the insured who declares the values of each shipment which must be covered. It is also called declaration policy.

VII. Named policy: Name policy is on a specific policy of marine insurance. This policy contents the name of the seat and the amount of insurance to cargo.
Currency policy: policy of marine insurance is currency policy. The policy which is issued on foreign currency is called currency policy. This policy minimises the effects of fluctuating foreign currency. This policy promotes international trade.

Subject matter of marine insurance

I. Hull: Hull means the full body and machinery of the ship or vessel. Hull insurance refers to insurance of ships. The subject matter of insurance in the ship or vessel, which is subject to an adventure and other dangers of navigation. Therefore, the ship owner takes hull insurance to cover the loss on the happening of destruction or damage to the vessel.

II. Cargo insurance: goods sent by ship are known as cargo. Insurance of such goods is called cargo insurance. The subject matter of insurance is and the owner of cargo takes a cargo insurance to cover the loss of marine perils which affect the cargo in the ship. Different types of cargo insurance policies are available to suit one’s extent and requirement.

III. Freight insurance: right insurance refers to the insurance of freight. If the freight is payable on the arrival of the ship at the part of destination, the shipping may hack to lose the freight on the non-arrival of goods safely at the path of destination. The shipping company takes off right insurance to cover shops loss and the subject matter of insurance is freight receivable cargo.

IV. Liability insurance: The marine insurance policy may also include liability hazards such as collision or running down. Insurance can also be taken for the expenses involved in non- compliance of rules and regulations without any intention to deceive.

Important Questions:

1. What it is risk management? Explain the importance insurance. 
2. Explain the essential insurance contract.
3. What is insurance? Explain the principle of insurance
4. What is life insurance? Explain the types of fire insurance policy. 
5. Explain briefly the procedure of affecting life policy. 
6. What is fire insurance? Describe the procedure affecting fire insurance policy.
7. Define fire insurance and explain the types of fire insurance.
8. What is marine insurance. Explain the types of marine insurance.
9. What is marine insurance. Explain the subject matter of marine insurance.