PowerPoint Presentation

Risk in insurance terms:

Risk is the chance something harmful or unexpected could happen.

Life is full of risks:

loss

theft

damage of valuable property and belongings,

or it may involve someone being injured.

Premature death

What's important to know about risk is the type of risk, the effect of that risk, the cost of the risk and what you can do to mitigate the risk.

Example: Let's take the example of driving a car:

1. Type of risk: Accident

Bodily injury,

total loss of vehicle,

having to fix your car

2. The effect:

Spending time in the hospital,

having to rent a car

and having to make car payments for a car that no longer exists

3. The costs:

Can range from small to very large

4. Mitigating risk:

Not driving at all (risk avoidance),

becoming a safe driver (you still have to contend with other drivers), or

transferring the risk to someone else (insurance).

History of Insurance

ancient Romans ( 100 BC )

Believed to avoid being a tortured ghost the dead need proper Burial ceremonies.

Burial Clubs pay for funeral expenses and to families of deceased.

1706 (London)

First company to offer life insurance

Amicable Society for a Perpetual Assurance Office

Chinese traders 3rd millennia BC.

These merchants travelling through seas distribute their wares across many ships to spread the loss

History of Insurance

The Greeks and Romans - origins of health and life insurance - 600 AD

organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death.

Great Fire of London, which in 1666 devoured 13,200 houses. (88% of population)

In the aftermath of this disaster in 1680

established first fire insurance company, "The Fire Office," to insure homes.

Vehicles 20th Century

car insurance is of more recent origin

Insurance policy

The insurance policy is a contract in which an individual receives financial protection against losses caused by perils covered under the policy from an insurance company In exchange for a payment, known as the premium .

Transfer of economic risk of loss to an insurance company.

A peril is something that can cause a loss. Examples

Theft

crashing your car

fire

Wind

Lightning

choking.

insurance

Insurance is based on the law of large numbers. By combining a large number of homogeneous units, the insurer is able to make predictions of possible loss.

Pooling of loses, or a group sharing of losses.

The company pools clients' risks to make payments more affordable for the insured.

How Insurance Works?

Each policyholder pays a premium

Insurance company collects and pools the premiums of thousands of people spreading the risk of losses across the entire pool.

At occurrence of unexpected loss the policyholder is paid from the pool to return him partially or completely to his position prior to loss.( Indemnification )

Claim paid on loss

Premiums

How Insurance Works?

Example 1:

1. Suppose:

a. Houses in a colony = 1000

b. Value of 1 House = Rs. 40,000/-

c. Houses burning in a year = 5

d. Total annual loss due to fire = Rs. 200,000/-

e. Contribution of each house owner = Rs. 300/-

2. Underlying assumption:

All 1000 house owners are exposed to a common risk, i.e. fire

3. Procedure:

All owners contribute Rs. 300/- each as premium to the pool of funds

Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses x Rs. 300)

5 houses get burnt during the year

Insurance company pays Rs. 40,000/- per head out of the pool to all 5 house owners whose house got burnt

4. Effect of insurance:

Risk of 5 house owners is spread over 1000 house owners in the village, thus reducing the burden on any one of the owners

Underwriting : refers to the process of evaluating the risk to be insured.

To generate a profit

By calculating risk insurance companies decide:

How much premiums to charge and which policy to offer

premium collected-( claims + expenses ) = profit (Underwriting income)

Due to poor underwriting in 1960 EFU almost bankrupted itself.

How insurance company works?

Premiums

Profit

Cost of the company

Claim for losses

Reinsurance

The transfer of risk by insurance company to a reinsurer.

Reinsurance companies of EFU:

Munich Re group

Swiss reinsurance

Retention Limit: The amount insurance company can cover on its own

EFU health retention limit 50%

Reinsurer

Insurance company

50% Premiums

50% Claims

Sources of income Premiums [Underwriting income premium collected-( claims + expenses ) = profit ]Investment:stocks bonds , real estate and high quality assets.EFU life invests 40% of funds in securities.EFU General Insurance invests Mostly in high quality assets.

premium

Claim settlement

Real estate

Stocks and bonds

Mostly fixed interest bearing securities

High quality assets

Policy holder

investment

Sources of income

Premiums

Investment

risk

profit