The importance of insurance risk management

Risk management is of vital importance in the day to day business and human

activities. It is essential for not only prevention of risks but also for reduction of risks. It

provides maximum social advantage. It plays significant role in bringing about social,

political and economic development of a country. The importance f risk management is

laid down as follow:

1. To create the right corporate policies and strategy.

2. It is essential for effective managing of people and process.

3. To evaluate the risks of the business.

4. For effective handling of spreading the risk, monitoring and insuring against.

5. To introduce various plans and techniques to minimize the risks.

6. To give advice and make suggestions for handling the risks.

7. To create awareness about risks among the people.

8. To avoid cost, disruption and unhappiness in relating the risks.

9. To decide which risks are worth pursing, and which should be shunned.

10. To fix the sum assured under the policy and to decide on whether to insure or not.

11. To select the appropriate technique or methods to manage the risks.

Insurance ACTS

The insurance sector went through a full circle of phases from being

unregulated to completely regulate and then currently being partly deregulated. It

is the governed by a number of acts, with the first one being the Insurance Act,

1938.

1. The insurance Act, 1938

The Insurance Act, 1938 was the first legislation governing all forms of insurance

to provide strict state control over insurance business.

2. Life Insurance Corporation Act, 1956

Even though the first legislation was enacted in 1938, it was only in 19 January

1956, that life insurance in India was completely nationalized, through a

government ordinance; the Life Insurance Corporation Act, 1956 effective from

1.9.1956 was enacted in the same year to, inter-alia, form LIFE INSURANCE

CORPORATION after nationalization of the 245 companies into one entity. There

were 245 insurance companies of both Indian and foreign origin in 1956.

Nationalization was accomplished by the govt. acquisition of the management of

the companies. The Life Insurance Corporation of India was created on 1st Sept.,

1956, as a result and has grown to be the largest insurance company in India as of

2006.

3. General Insurance Business (Nationalization) Act, 1972

The General Insurance Business (nationalization) Act, 1972 was enacted to

nationalize the 100 odd general insurance companies and subsequently merging

them into four companies. All the companies were amalgamated into National

Insurance, New India Assurance, Oriental Insurance, United India Insurance

which were headquartered in each of the four metropolitan cities.

IRDA: - INSURANCE REGULATORY AND

DEVELOPMENT AUTHORITY (The Authority) was

established by an Act of Parliament-Insurance Regulatory &

Development Authority Act, 1999 (ACT)- and was constituted on April 19, 2000

by a notification issued in the Gazette of India. The Authority was established with

a view to protect the interests of the holders of insurance policies, to regulate,

promote and ensure orderly growth of the insurance industry and for matters

connected therewith or incidental thereto. The Authority, in terms of section 13 of

Insurance Regulatory and Development Authority Act, 1999 [Act], has been

vested with the assets and liabilities of the Interim Insurance Regulatory Authority

as are available on the appointed day i.e. April 19, 2000. In terms of section 16 of

the Act a fund shall be constituted namely ‘The Insurance Regulatory and

Development Authority Fund” [Fund]. The Fund shall constitute of all

Government grants, fees and charges received by the Authority, all sums received

by the Authority from such other source as may be decided upon by the Central

government and the percentage of prescribed premium income received from the

insurer. The Fund shall be applied for meeting the salaries, allowances and other

remuneration of the members, officers and other employees of the Authority and

the other expenses of the Authority in connection with discharge of its functions

and for the purpose of the Act.

Fundamental Legal Principle of Insurance

In all kinds of insurance, the fundamental legal principle is that one man

agrees to take the risk of another man’s life and business in consideration of

certain small payments which are called premiums.

Managing the Business Insurance

Insurance of property

Burglary insurance

For loss of or damage to the property following forcible and violent entry

into or exits form the premises. The business premises policy covers not only loss

of the insured property, but also damages to such property and damage to the

premises caused by burglars.

Cash insurance

For covering loss of cash whilst it is transit or at counters or in the safe. The

policy may be extended to cover infidelity of employees as also riot, strike and

terrorism damages.

Engineering insurance

Insurance protection is available for construction, erection, commissioning,

test run, operation, expansion etc. of plant, machinery or equipment. Providers

coverage for own damage as well as to surrounding property, coverage for bodily

injury to employees, to the third parties etc.

Engineering Boiler Explosion insurance is for stream generating vessels

like boilers, economizers, super heaters etc. contractors’ All risks policy has been

specially designed to protect the civil contractors against the damage to or

destruction of the various civil contractors against the damage to civil construction

works. Contractors’, plant and machinery insurance is for construction Plant and

Machinery which are essentially used at project sites. Deterioration of Stock

Insurance (refrigeration Plant Insurance) is a follow – up –cover to machinery

breakdown insurance and covers deterioration of goods stored in cold storage

which might arise due to a breakdown of refrigerating machinery.

Engineering Electronics Equipments Insurance provides all risks protection

for loss or damage to electronic equipments such as computers, telephone

exchanges and equipments used in hospitals, audio- visual equipments.

Engineering machinery breakdown insurance cover is available to take care

of the loss or damage to plant and machinery due to accidental failure caused by

electrical or mechanical breakdown.

Insurance of pecuniary losses

Fidelity Guarantee

For loss caused to the employer due to infidelity of the employee who are

responsible for dealing with cash or stores or such other valuables.

Loss of profits Insurance

To take care of the loss of profits (net profits) and standing charges incurred

by the insured due to the reduction in turnover. These policies are granted in

conjunction with the material damage policies and are available following Fire,

Machinery Breakdown and Boiler Explosion.

Advance Loss of Profit Insurance

When a major incident of damage to the works during construction phase

(or a number of small instances) is likely to result in delay in the commencement

Of the commercial operation of the plant thereby delaying the ability of earns the

revenue. Advance loss of profit connotes a form of profit insurance which, in

principle, follows the characterized of Consequential Loss Policy but is issued in

advance of the actual commencement of policy but is issued in advance of the

actual commencement of business. The financial consequences of this stoppage or

interruption of any earnings or manufacturing operation normally leads to delay of

commissioning of a project under erection and may effect- liquidity, profitability,

and growth. Advance loss of Profit cover offers protection in respect of fixed cost/

standing charges, estimated net profit, loss and increased cost of working as a

result of an insured peril occurring during the period of insurance, subject to the

initial time exclusion in the policy.

Principles of Risk Insurance Management

Risk insurance is a science though it is one of the most inexact of the social

sciences. Its principles may be defined as a systematic grouping of inter-related

principles, with a view to tying together and providing a framework to significant

knowledge. The principles of risk insurance management have so far been only derived

from the experience of risk insurance managers. The principles are as follow:-

Principles of Risk Identification

Principles of Risk Analysis

Principles of Taking corrective Decision

Principles of Evaluation

Principles of Alternative Course of Action

Principles of risk Control

Principles of Risk Retention

Principles of Risk Transfer

These principles are been discussed below in brief:-

Principles of Risk Identification: Proper identification of risk is essential to achieve

the several objectives of risk management such as preserving the operating

effectiveness of the organization, minimizing the cost of handling risk, etc. without

proper identification of risk; a firm’s operations have no meaning and direction. The

success of the risk insurance management depends on proper risk identification.

Principles of Risk Analysis: The risk manager should select various statistical tools

to analyze the identified risk on the basis of principles of analysis in order to achieve

the objectives of risk management. Analysis of risks is necessary not only to know

the severity of risk but also to determine the accuracy and relevance of risk exposure

at each stage.

Principles of Risk Assessment: necessary steps are to be taken by the executives in

order to make as assessment of cost of risk. This is essential to keep reducing the cost

of risk within the control. The following are important factors worth mentioning

about the risk assessment issues:

a) Frequency of risk

b) Monetary cost or financial severity

c) Human cost in terms of pain and suffering

d) Purpose of the assignment

e) Nature of the risk

f) Description of the project

g) Resources involved or affected

h) Scale of the impact

i) Benefits of the hazard

j) Mitigating factors

k) Contingency plans

l) Limitations of the assessment

m) Conclusions and recommendations

n) Action taken.

The risk manger has to evaluate the occurrence of losses or probability that it is

likely to occur. Certain risks are to be easily identified and evaluated but some

other critical risks are difficult to be exposure. For e.g. Incidents related Bhopal

and Chernobyle etc. disasters. On the basis of the possibility of losses, the

assessment of risk may be described as important risk and unimportant risk. The

importance of risk may vary from individual to individual and firm to firm

.

Principles of taking Corrective Decision: Corrective decision is an integral part of

the risk manager’s job. In risk management, decision making is a process involving

information, choice of alternative actions, implementation, and evaluation that is

directed to the achievement of certain stated goals. The decision for dealing with the

risk highlights three important aspects, they are:

i. To retain risk – this may be achieved with or without a reserve or a fund.

ii. To involve with the risk through loss prevention effective alternative solutions

applied for prevention of loss.

iii. To transfer the risk through insurance and this must be followed by the selection

of an insurer.

Principles of Evaluation: There may be many alternative courses of action for

handling of risk. But not all of them can be said to be equally practicable or suitable.

Each alternative plan has its strong and weak points. A proper evaluation of these points

is necessary for risk management to determine which of the alternatives would be the

bests. Such evaluation has to be from different angles. How would any plan contribute to

the accomplishment of risk management’s desired objectives? To what extent will it be

able to face the effects of various predictable and unpredictable factors? And so on.

Principles of alternative course of action: the final choice from among the several

alternative will be based on how efficiently the risk manager’s chosen alternative will

produce result which come up to the desired level. In some cases, the decision as regards

the final alternative will be objective, but in a majority of cases it is subjective, based on

the value. Majority of cases are subjective based on the value judgment of the risk

manager concerned.

Principles of risk control: effective control provides the yardstick to measure the

effectiveness of performance at various levels of handling risk. To achieve the risk

management objectives, various financial mechanisms can be used to control risk. This is

essential to keep the cost of risk within control. Risk control can be achieved through the

following effectives measures :-

Carrying out a supplier assessment.

Inspecting during manufacture.

Investigating complaints.

Increasing the level of supervision.

Improved detection

Improving financial controls and management systems.

Better working conditions

Improves staff morale and lower staff turnover

Improved standing in the local community

Minimizing the opportunity to steal etc.

Principles of risk retention: This principle provides a valuable framework within

which managers may make their decisions. When the risk has been identified, the risk

manager can look to the principles of risk retention, as to how the effects are to be

financed. For example, loss on account faulty production planning can be improved by

developing newer technologies. High production cost may be minimized by effective

control system.

Principles of risk transfer: Principles of risk transfer help to analyze the transfer of

financial effect of risk to another party. Generally business people are unwilling to bear

such risks or losses to the firm and so want to transfer them,. Many natural risks or losses

can be avoided through insurance. Investment finds loosen their risk by buying the share

of many companies. Companies can also push responsibility on their suppliers by

requiring them to be responsible for product quality and safety. This is a risks transfer

practice which is highly valuable not only to individuals but also to trade and industry.

Scope of the Risk Management and Insurance Planning StudyProviding guidelines on documentation requirements, procedures for claims under

various policies

Identification of all major internal and external pure risks including the

natural risks and analysis of the impact of above risks 

Review of existing risk control measures and offering comments

Scrutiny of all existing major insurance policies in respect of:

Rationalization of basic rate of premium and widening of covers

Applicability / eligibility of discounts in premium

Application of suitable clauses, warranties and conditions

Identification of possible areas for refund of premium and suggestions

regarding procedure for the same

Selection of insurance coverage on the basis of risk analysis

Providing guidelines for fixation of sum insured and illustrate the same on a

selected equipment

Evaluation of business interruption exposure due to identified risks