INSURANCE AND RISK MANAGEMENT

1. Introduction: Definition and nature of insurance, Role and importance of insurance, Insurance contract, Function of insurance, Principles of insurance, Reinsurance, Double insurance, Insurance marketing , Insurance and society, Philosophy of insurance, Loss, Peril and hazard in insurance.

2. Life insurance: definition, elements, characteristics, life insurance contract, classification of policies, selection of risk, measurement of risk and mortality table, policy conditions profit and bonus, life insurance salesmanship.

3. Marine insurance: nature of marine insurance contract, marine insurance policies, conditions, premium calculations, marine losses, payment of claims, warranties and guaranties.

4. Fire insurance: nature of fire insurance, contract, kinds of policies, policy conditions rate fixation in fire insurance payment of claim.

5. Miscellaneous insurance: export credit guarantee scheme, peoples personal accident insurance, crops insurance, live stock insurance, health insurance, automobile insurance, burglary insurance, group insurance, postal life insurance, education insurance.

6. Insurance business in Bangladesh: jibon bima corporation, sadharan bima corporation, private insurance companies, future of insurance business in Bangladesh.

7. Risk management: definition, function and nature of risk, classification and evaluation of risk, determination of risk, perquisites of an insurable risk. Measures regarding care should be taken in taking the risk for indemnification, elimination and spreading of risk, methods of risk management.

PRINCIPLES OF INSURANCE

# ORIGIN, HISTORY AND DEVELOPMENT OF INSURANCE:

Insurance is nothing but a system of spreading the risk of one on to the shoulders of many. Whist it becomes somewhat impossible for a man to bear by himself 100% loss to his own property.Marine is the oldest form of insurance and came first in the list. This type of insurance probably began in Northern Italy. Gradually the Lombard street of England started becoming the nerve center of marine insurance activities. Fire insurance came second in the list of development. The Great Fire of London in 1666 practically demonstrated the necessity and urgency of fire insurance.The third in the list of development is the life insurance business. Life insurance virtually did not have any scientific basis at that time. In 1663 Halley introduce the mortality table giving a definite value to risk of death.The last in the list of development is the accident insurance business. Accident insurance basically started from personal accident insurance.In 1972 the Govt. of the People’s Republic of Bangladesh nationalized all the insurance companies of the country by Presidential order no. 95.Five insurance corporations were basically established:

1. Jatia Bima Corporation.2. Teesta Bima Corporation.3. Karnaphuli Bima Corporation.4. Rupsa Jiban Bima Corporation.5. Surma Jiban Bima Corporation.

# ESSENTIAL ELEMENTS OF CONTRACT: A). General element of contract.B). Special elements of contract.

A). General element of contract:1. More than one party.2. Offer.3. Acceptance.4. Agreement.5. Obligation.6. Certainty.7. Possibility and reasonability of performance.8. Legal formalities.9. Consideration.10. Capacity of parties.11. Free consent.12. Legality of object & consideration.

B). Special elements of contract:1. Insurable interest.

2. Utmost good faith.3. Indemnity.4. Subrogation.5. Warranties.6. Proximate cause.7. Nomination and assignment.8. Return of premium.

# FUNCTION OF INSURANCE: A). General function. B). Specific function. A). General function: 1.Equitable distribution of loss.

2.Reduction of losses. 3.Assestance to business enterprise. 4.Invisible export. 5.Investment. 6.Inspection services. 7.Resarch and publicity.

B). Specific function: 1.Marine insurance. Protection against financial losses. Loss minimization. Aid to commerce. Aid to internal trade. 2.Fire insurance. Protection against financial losses. Loss minimization. Inspection services. 3.Life insurance: Benefit for dependants.

House purchase schemes. Provision of pension and capital.

Thrift saving. Provision of marriage and educational expenses.

Social welfare. Service to nation. 4.Accident insurance.

Protection against financial losses.

# SIX PRINCIPLES OF INSURANCE: @. Utmost good faith. @. Insurable interest. @. Indemnity. @. Subrogation. @. Contribution. @. Proximate cause.

@. PRINCIPLES OF UTMOST GOOD FAITH:According to this principle, both the parties to the insurance contract must disclose all facts material to the risk voluntarily to each other.Insurance contract is a simple commercial contract.

Factor which are required to be disclosed and which are not:The following facts are required to be disclosed:

1. The facts which would render a risk greater than normal.2. Facts which suggest the abnormality of the proposes himself making frequent

claims.3. Exceptional nature of the risk.

The following facts are required not to be disclosed:1. Facts which lessen the risk.2. Facts of public knowledge.3. Facts possible of discovery through enquiry.4. Facts which should be reasonably inferred by the insurers on the context of the

particulars disclosed.5. Facts to which the insurers do not attach much importance.

@. PRINCIPLES OF INSURABLE INTEREST:Insurable interest may be defined as a financial interest in the subject matter of insurance whereby the insured benefits financially by its safety and suffers financially by its loss or damage.

Essential elements of a valid insurable interest:A). Existence of the subject matter on which insurable interest to be shown.b). Financial relationship.c). Legal relationship with the subject matter.d). Financial gain and loss.Time and form of presence of insurable interest:

1. Owner.2. Part owner and joint owner.3. Mortgagor/ Mortgagee.4. Bailees.5. Carriers.6. Administrators.7. Life.8. Debtor and creditor.9. Insurers.10. Liability.

When insurable interest must exist:Marine: Insurable interest must exist at the time of claim although it need not exist at the time of effecting the policy.

Fire: Insurable interest must exist both of effecting the policy and at the time of claim.Life: Insurable interest must exist at the time of effecting the policy and it may not exist at the time of claim. Accident: Insurable interest must exist both at the time of effecting the policy and the time of claim.

@. PRINCIPLES OF INDEMNITY:The principle of indemnity asserts that on the happening of a loss the insured shall be put back into the same financial position as he used to occupy immediately before the loss.On the other words, the insured shall get neither more or less than the actual amount of loss sustained.Except life and personal accident insurance, all insurance contracts are contract of indemnity. Life and personal accident insurance are not contract of indemnities.There fore marine, fire, motor, car, public liability, crop insurance, livestock insurance etc. are all contracts of indemnity.

Methods of providing indemnity:1. Cash payment.2. Repair.3. Replacement.4. Reinstatement.

@. PRINCIPLE OF SUBROGATION:The principle of subrogation refers to the rights of the insurer to stand in the place of the insured, after settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved.Features of subrogation:

1. This principle is the corollary to the principle of indemnity.2. Subrogation is the substitution.3. Subrogation is only up to the amount of payment.4. The subrogation may be applied before payment.5. Life insurance and personal insurance.

Example: A had been to new market driving his car. After parking the car, he went inside, made some shopping, came back and found that B was damaging the car. In law A has legal right of action against B for damages. A may also have a comprehensive motor insurance which protects him against such losses. The principle of subrogation asserts that if the insurers pay the full loss then they shall take over the right of A for proceeding against B for their own benefit.

@. PRINCIPLE OF CONTRIBUTION:It has been well established through the principle of indemnity that on the happening of a loss, the insured shall be placed back into the same financial position, as if no loss has taken place.

Principle of contribution means that if at the time of loss it is found that there are more than one policy covering the same loss then all policies should pay the loss proportionately to the extent of their respective liabilities so that the insured does not get more than one whole loss from all these sources.

Example:Policy A sum insured tk 1000.Policy B sum insured tk 2000.Policy C sum insured tk 4000.

Total loss- tk 700.Policy A pay =100 tk.Policy A pay =200 tk.Policy A pay =400 tk. Total =700 tk.

@. PRINCIPLE OF PROXIMATE CAUSE:The principle of proximate causes has been established to solve such a cumbersome situation and to enable a claims manager to decide whether a claim is at all payable or not, and if payable, then to what extent.

Example:A man goes to a late night cinema and whilst returning home from the show he is attacked by a group of vandals, stabbed and killed. The proximate cause of his death is stabbing and certainly not going to the cinema. Going to cinema may be simply a remote cause without proximately causing his death.

*See or look to the proximate cause and not to the remote cause.

# CLASSIFICATION OF INSURANCE:

(Business point of view) INSURANCE

PROPERTY LIFE GENERAL INSURANCE INSURANCE INSURANCE

LIABILITY OTHER SOCIALINSURANCE INSURANCE INSURANCE

MARINE FIRE MISCELLANEOUS

INSURANCE INSURANCE INSURANCE

# MAIN FOUR TYPES OF INSURANCE: LIFE INSURANCE MARINE INSURANCE FIRE INSURANCE ACCIDENT INSURANCE LIFE INSURANCELife insurance: Life insurance may be defined as a contract, whereby the insurer in consideration of a premium undertakes to pay a certain sum of money either on the death of the insured or on the expiry of a fixed period.*Insured person and insurance policy holder is not same.

# ESSENTIAL ELEMENTS OF LIFE INSURANCE CONTRACT: A). General element of contract.B). Special elements of contract.

A). General element of contract:1. More than one party.2. Offer.3. Acceptance.4. Agreement.5. Obligation.6. Certainty.7. Possibility and reasonability of performance.9. Legal formalities.10. Consideration.11. Capacity of parties.12. Free consent.13. Legality of object & consideration.

B). Special elements of contract:1. Insurable interest.2. Utmost good faith.3. Warranties.4. Proximate cause.5. Nomination and assignment.6. Return of premium.7.

# INSURABLE INTEREST

Own’s life Other life

Proof is not required Proof is required

Business relation Family relation#. Proof is not required:1. Insurable interest in the life of husband.2. Insurable interest of a husband in the life his wife. #. Proof is required: 1. Insurable interest in other life due to business relationship.

a) Joint owner.b) Mortgagor/ Mortgagee.c) Carriers.d) Administrators.

e) Debtor and creditor. f) Insurers.1. Insurable interest in other life due to family relationship.

a) Sons.b) Father.c) Mother.d) Sister.

# CLASSIFICATION OF LIFE INSURANCE:

Classification on the basis of duration of policy: A). Whole life policies: 1. Single premium whole life policies.2. Continuous premium payment whole life policies.3. Limited payment whole life policies.4. Convertible whole life policies. B). Term policy (2 month-7 year):1. Temporary policy (2 month-2 year).2. Renewable term policy.3. Convertible term policy. C). Endowment policy:1. Pure endowment policy.2. Ordinary endowment policy.3. Joint life endowment policy.4. Double endowment policy.5. Fixed term endowment policy.6. Educational annuity policy.7. Triple benefit policy.8. The multi purpose policy.

Classification in accordance with the premium payment:1. Single premium policy.2. Level premium policy. Continuous level premium policy. Limited level premium policy.

Classification in accordance with participation in profit: 1. With profit or participating life policy.2. Without profit or nonparticipating life policy.

Classification in according to number of persons insured:1. Single life policy.2. Multiple life policy. Joint life policy. Last survivorship policy.

# PROCESSES FOR THE FORMATION & PERFORMANCE OF A LIFE INSURANCE CONTRACT:

1. Primary formalities.2. Making a proposal or an offer: Proposal form of life insurance contract with medical examination. Proposal form of life insurance contract without medical examination.3. Answer to the proposal form: Occupation of insured. Age of insured. Health condition of insured. Description of insurance. 4. Medical examination and its report.5. Certificate of insurance company.6. Certificate of personal doctor.7. Statement of insured friend.8. Offer choice.9. Offer acceptance.10. Proof of age.11. Provide insurance policy.

Condition of life insurance policy:1. Payment of premium.2. Proof of age.3. Travel, Residence & occupation control.4. War-risk.5. Climatic extra.

Payment of claim:1. After expiring the date.2. Before expiring the date or after death.

Document:1. Proof of the death of the insured.2. Succession certificate.

MARINE INSURANCEMarine insurance: A contract of marine insurance is a contract where by the insurer undertakes to indemnity the assured, in manner and to the extent there by agreed, against marine losses, that is to say the losses incident to marine adventure. The British insurance act –1906.# CLASSIFICATION OF MARINE INSURANCE:

1. Hull insurance.2. Cargo insurance.3. Freight insurance.4. Liability insurance.1. Hull insurance: The ship is always at the risk of the perils of the seas and there

fore, the ship owner can insure it against probable losses as such.This refers to the ship, that is to say, hull and machinery of the vessel.

2. Cargo insurance: This refers to goods or merchandise that are being carried from one place to another or are being imported or exported. Such goods or merchandise may be lost damaged or destroyed by perils of the seas. Whilst in course of transit and, there fore, the owner of such goods can always insure against the probable losses.

3. Freight insurance: This is the consideration payable to the ship owner in respect of carriage of goods by the owner’s ship. Some times the freight is pre-paid when it is at the risk of the cargo owner, and some times the freight is after paid when it is at the risk of the ship owner.There fore, depending on circumstances either the cargo-owner or the ship-owner will stand to lose the freight if goods cannot reach destination safe and sound because of the operation of maritime perils.

4. Liability insurance: Liability insurance are usually covered in the protection & indemnity.

KIND OF MARINE LOSSES

Total loss Partial or average loss

Actual total loss Constructive total loss

Particular average loss general average loss Incidental average loss

Loss Expenditure

Particular average on ship Particular average on cargo Particular average on freight.# CLASSIFICATION OF MARINE INSURANCE POLICIES:

1. Time policy.2. Voyage policy.3. Mixed policy.4. Floating policy.5. Double insurance policy.

# Warranties of a valid marine insurance:Expressed warranties:

1. Suitable time of voyage.2. Certain date of voyage.

Implied warranties:1. Seaworthiness of the ship.2. Legality of venture.3. No change in voyage. 4. No delay in voyage.5. No deviation.

# Jettison: Jettisons is a items of a ships cargo that have been thrown over board to lighten the ship in dangerous circumstances. Jettison means to throw cargo from a ship into the sea to make the ship lighter. -Collin.

# Peril: Peril means the actual causes of loss.A). Natural perils: Heavy weather.B). Un-natural perils:

Rover, thieversPiratesEnemies. Man of war.Capture.

Restraints and detainments by the government, king, princes and people of enemy country.

Barratry.Strick, Civil commotion.Jettison.Fire.Explosion.Contract.Collision.

Other peril (I.C.C.)War peril (G.W.C.)

# Hazard: It is condition, environment, weather that increases the degree of activities of perils.A. Physical hazard: 1. Hazard in marine insurance:

The nature of cargo. Quality of packing of the goods.

Voyage itself may be hazardous particularly during monsoon period in our country.

Condition of vessel. 2. Hazard in fire insurance:

Nature and condition of the building. The system of lighting and heating.

If it is a petroleum or kerosene or chemical trade the hazard will be more.3. Hazard in life insurance:

Age and condition of health of the proposer.Family history of cancer, blood pressure.History of any illness of the proposer.The occupation of the proposer.

4. Hazard in accident insurance:Age.Condition.Previous accident.Condition of house, door, window.Physical condition.

B. Moral hazard: Moral hazard indicates those dangers which relate to character, mental attitude of the insured.

1. Carelessness.2. Fraud.3. Over insurance.4. Maintenance/ Bad administration.

FIRE INSURANCE“Fire insurance: Fire insurance may be defined as a contract whereby one party undertakes, in exchange for a premium, to indemnify the other against a loss or damage caused to specified property by fire during a particular period to the extent of a definite sum.” -Ghose and Agarala.

# ESSENTIAL ELEMENT OF FIRE INSURANCE CONTRACT:A). General element of contract.B). Special elements of contract.

A). General element of contract:1. More than one party.2. Offer.3. Acceptance.4. Agreement.

5. Obligation.6. Certainty.7. Possibility and reasonability of performance.

8. Legal formalities.9. Consideration.10.Capacity of parties.11. Free consent.12.Legality of object & consideration.

B). Special elements of contract:1. Insurable interest.2.Utmost good faith.3.Warranties.4.Proximate cause.5.Nomination and assignment.6.Return of premium.

# The subject matter of fire insurance:1. Building. 2. Furniture fixture& fittings.3. Plant & machinery.4. Goods & merchandise.5. Stock of all kinds.

# Special terms and conditions of fire insurance policy: Express condition:

1. Misdescription.2. Alternation.3. Exclusion.4. Claim.5. Fraud.6. Reinstatement.7. Company’s or insurer’s right after fire.8. Contribution and average.9. Subrogation.10. Warranties.11. Arbitration.

Implied condition:1. Existence of property.2. Property insured.3. Insurable interest.4. Utmost good faith.5. Identity.

# Fire waste & loss: Fire is a good servant but a bad master.Fire and people doe in this agree, they both good servants, both ill master be.

Direct cause:

1. Lack of proper plan.2. Negligence & Ignorance.3. Defective lighting & heating arrangement.4. Hazardous process.5. Defective plan layout.6. Carelessness.7. Lack of fire preventive arrangement.8. Fire set by enemy.

Indirect cause:1. Defective construction.2. Nature of the concern.3. Storage of combustible material.4. Intentional destruction of property.5. Collapse of building.

# FIRE INSURANCE POLICY:The policy provide cover in respect of material loss or damage: A). Material loss insurance. B). Consequential loss insurance.

A). Material loss insurance:1. Standard fire policy: This is the basic type of policy form used for almost all

types of fire insurance covers.

The standard fire policy covers:a). Fire:It’s own heating or any process involving the application of heat.Earthquake, war, act of foreign enemy, revolution, military power.b). Lightning:Whether or not there is any fire involved.c). Explosion:Explosion of boiler or of gas used for domestic purposes only even though no fire is involved.

The standard fire policy does not covers:a). Consequential loss.b). Loss or damage caused by radiation, nuclear fuel or waste.c). Loss or damage which is covered by a marine policy.

2. Special perils insurance: The standard fire policy excludes some types of losses and most of these can be covered by payment of additional premium.

The peril for which additional cover can be arranged are:a). Explosion damage.b). Malicious damage.

c). Earth quake.d). Cyclone and Flood.3. Declaration policy: The sum insured is selected at a maximum amount likely to

be at risk during the period of insurance. Only 75% premium is required to declare, normally every month, the estimated value of stock. At the expiry of the policy, all the twelve declaration are totaled and averaged. If this premium is higher than the provisional premium paid before hand then the balance is demanded from the insured and if this actual premium is lower than the provisional premium then the balance is refunded to the insured.

4. Blanket policy: These policies are aimed at simplifying complex fire risks. Under this system, individual sums for each building is only one sum is for all building.

5. Reinstatement policy: New lamp for the old lamp policy. The loss is settled on the basis of cost of replacement of the damaged property, by new property. This means there is no depreciation.

6. House hold policy: These are very comprehensive policies providing covers for

a number of perils.

7. Sprinkler leakage insurance: Even though sprinklers are used for controlling fire losses or minimizing. Some times these sprinklers themselves may pose as a peril and can cause substantial damage to property. Policies can be taken against sprinklers to cover such type of accidental damages.

B). Consequential loss insurance: It is also known as loss of profit insurance. We also know fire policies provide protection only in respect of material loss to the property insured. That is to say, compensation or indemnity is provided only in respect of loss, damage or destruction to building, stock, machinery, etc. The purpose of loss of profit insurance is to provide protection to the insured in respect of such consequential losses arising out of material loss.

Cover provided: Profits insurance provides protection for the following.1. Loss of earnings, which is usually measured by net profit.2. Standing charges, which are still required to be incurred by the insured even though

the business has been interrupted. Such as rent, taxes, electricity bills, telephone bills, interest on loans etc.

3. Extra expenditures incurred by the insured with the sole object of minimizing loss of revenue during the interruption period.

ACCIDENT INSURANCE:The policies are:

1. Burglary insurance policy.2. Motor insurance policy.3. Contractors’ all risk insurance policy.

4. Engineering insurance policy.5. Aviation insurance policy.6. Glass insurance policy.7. Crop insurance policy.8. Live stock insurance policy.9. 16War risk insurance policy.

Motor insurance: Different types or policies may be issued for different types of motor vehicles are usually classified in the following manner.

Private cars.Commercial vehicles.Motor cycles.Agricultural vehicles.Motor traders’ vehicles.

Policies issued are usually of the following types:A). Comprehensive policy:This policy provides protection in respect of:

1. Own damages or loss of the vehicles.2. Liability of the insured in respect of death or bodily injury to third party and

damage caused to the property of third party arising out of the use of the motor vehicles on the road.

3. Act liability only, i.e., legal liability of the insured in respect of death or bodily injury to third party arising out of the use of the motor vehicles use on a public road.

B). Third party only policy: This policy provides protection in respect of: Liability of the insured in respect of death or bodily injury to third party and damage caused to the property of third party arising out of the use of the motor vehicles on the road.C). Act liability only policy: This policy provides protection in respect of: Act liability only, i.e., legal liability of the insured in respect of death or bodily injury to third party arising out of the use of the motor vehicles use on a public road.

PERSONAL ACCIDENT & SICKNESS INSURANCE POLICY:1. Accident only policy:

Death: Sum insured. Loss of two limbs or two eyes: Sum insured.

Loss of one limbs or one eyes: 50% of sum insured.Permanent total disablement: Sum insured.Permanent partial disablement: A percentage of sum insured.Temporary total disablement: Weekly benefit at a rate percent of the sum insured.

Temporary partial disablement: Weekly benefit at a reduce rate percent of the sum insured than in above.

2. Accident & specified Diseases policy.3. Accident and All sickness policy.4. Group schemes.5. Permanent contract.

ANNUITY: A life annuity may be defined as a contract where by the insurance company agrees in consideration of a certain payment or payments, to pay to the beneficiary, a fixed regular income during a given status.

Classification of annuity:1. Immediate annuity.2. Deffered annuity.3. Guaranteed annuity.4. Single life annuity.5. Joint life annuity.6. Temporary annuity.7. Annuity certain.8. Retirement annuity.

RE-INSURANCE:“Re-insurance is an arrangement whereby an original insurer who has insured a risk, insures a part of that risk again with another insurer.”This means insurance of insurance.

Example:A general insurance company may have the capacity to bear up to tk 1000000 for any property insurance. If a risk is placed for tk 3000000 by the insured them the insurer shall have to re-insure tk 2000000.