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Master of Business Administration - MBA Semester 4

MF0018 Insurance and Risk Management

Assignment Set- 1

Q.1 Explain chance of loss and degree of risk with examples.

Ans:- Chance of loss

Loss is the injury or damage borne by the insured in consequence of the happening ofone or more of the accidents or misfortunes against which the insurer, in considerationof the premium, has undertaken to assure the insured. Chance of loss is defined as theprobability that an event that causes a loss will occur. The chance of loss is a result oftwo factors, namely peril and hazard. Hazards are further classified into the followingfour types:

Physical hazard This is a danger likely to happen due to the physicalcharacteristics of an object, which increases the chance of loss. For exampledefective wiring in a building which enhances the chance of fire.

Moral hazard It is an increase in the probability of loss due to dishonesty orcharacter defects of an insured person. For example, Burning of unsold goodsthat are insured in order to increase the amount of claim is a moral hazard.

Morale hazard It is an attitude of carelessness or indifference to losses,

because the losses were insured. For example, careless acts like leaving a doorunlocked which makes it easy for a burglar to enter, or leaving car keys in anunlocked car increase the chance of loss.

Legal hazard It is the severity of loss which is increased because of theregulatory framework or the legal system. For example actions by governmentdepartments restricting the ability of insurers to withdraw due to poorunderwriting results or a new environment law that alters the risk liability of anorganization.

Degree of risk

Degree of risk refers to the intensity of objective risk, which is the amount of uncertaintyin a given situation. It can be assessed by finding the difference between expected lossand actual loss. The formula used is

Degree of risk =

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Degree of risk is measured by the probability of adverse deviation. If the probability ofthe occurrence of an event is high, then greater is the likelihood of deviation from theoutcome that is hoped for and greater the risk, as long as the probability of loss is lessthan one. In the case of exposures in large numbers, estimates are made based on thelikelihood of the number of losses that will occur. With regard to aggregate exposuresthe degree of risk is not the probability of a single occurrence but it is the probability ofan outcome which is different from that expected or predicted. Therefore insurancecompanies make predictions about the losses that are expected to occur and formulatea premium based on that.

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Q.2 Explain in detail Malhotra Committee recommendations

Ans:- Recommendations of Malhotra committee

The major reforms in Indian industry started when the Malhotra committee was formedin 1993 headed by R. N. Malhotra (former Finance Secretary and RBI Governor). Thiswas formed to analyze the Indian insurance industry and propose the future course ofthe industry. It modified the financial sector to design a system appropriate for thechanging economical structures in India. The committee recognized the importance ofinsurance in financial systems and designed suitable insurance programs. The reportsubmitted by the committee in 1994 is given below:

Structure

Government risk in the insurance Companies to be decreased to 50%.

GIC must be taken under the government so that the GIC subsidiaries can workindependently.

Better freedom of operation for insurance companies.

Competition

Private companies who have initial capital of Rs 1 billion must be permitted towork in the insurance industry.

Companies should not use a single entity to deal with life and general Insurance.

Foreign companies may be permitted to work in the Indian insurance industryonly as partners of some domestic company.

Postal life insurance must be permitted to work in the rural market.

Every state must have only one state level life insurance company.

Regulatory body

The Insurance Act must be changed.

An Insurance Regulatory body must be formed.

Insurance controller, which was a part of finance ministry, should be allowed towork independently.

Investments

The mandatory investments given to government securities from the LIC Life

Fund must be reduced from 75% to 50%. GIC and its subsidiaries should not be allowed to hold more than 5% in any

company.

Customer service

LIC must pay interest if it delays any payments beyond 30 days.

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All insurance companies should be encouraged to create unit linked pensionplans.

The insurance industry should be computerised and the technologies must beupdated. The insurance companies should promote and fulfil customer services.They should also extend the insurance coverage areas to various sectors.

The committee allowed only a limited competition in this sector as any failure on the partof new players could ruin the confidence of the public to associate with this industry.Every insurance company with an initial capital of Rs.100 crores can act as anindependent company with economic motives.

Since then there is a competition between the private and public sectors of insurance,the Insurance Regulatory and Development Authority Act, 1999 (IRDA Act) was formedto control, support and ensure a structured growth of the insurance industry. The privatesector insurance companies were allowed to work along with the public sector, but hadto follow the conditions given below:

The company must be registered under the Companies Act, 1956. The total capital share by a foreign company held by itself or by through sub

sectors of the company should not exceed 26% of the capital paid to the Indianinsurance industry.

The company should only provide life, general insurance or reinsurance.

The company should have an initial paid capital of at least Rs.100 crores toprovide life insurance.

The company should have an initial paid capital of at least Rs.200 crores toprovide reinsurance.

Later in 2008, further reforms were made by introducing the plan for Insurance (Laws)

Amendment Bill - 2008 and The LIC (Amendment) Bill - 2009. These amendmentsinfluenced the Indian insurance industry in a huge way.

The Insurance (Laws) Amendment Bill - 2008 amended three other acts namely,Insurance Act 1938, General Insurance Business (Nationalisation) Act 1972 (GIBNA)and Insurance Regulatory and Development Authority Act 1999.

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Q.3 What is the procedure to determine the value of various investments?

Ans:-

Procedure to determine the value of investments

According to this sub clause of the Regulations, a detailed procedure has beenprescribed for determining value of various investments like real estate, debt securitiesand equity securities.

Real estate

Investment property The investment property can be valued at a historical cost afterdeducting the accumulated depreciation and impairment loss. Residual value isconsidered zero and no re-evaluation is allowed. The change in the carrying amount ofthe investment property shall be taken to Revaluation Reserve. The insurers can assesat every balance sheet date to check whether an impairment of the investment propertyhas occurred. All impairment losses are recognized as expense in the Revenue/Profitand Loss account.

Debt securities

Debt securities that include the government securities and the redeemable preferenceshare must be considered as held to maturity securities and can be measured at anhistorical cost that is subjected to amortization.

Equity securities and derivative instruments that are traded in active markets

Limited equity securities and derivative instruments that are traded in active marketsmust be measured at a fair value according to the balance sheet date. The lowest of thelast estimated closing price of the stock exchanges where securities are listed can beconsidered for estimating the air value. The insurer can assess the balance sheet dateto check whether an impairment of the listed equity security instruments has occurred.

An active market means the market where the securities that are traded arehomogenous, it has normal willing buyers and sellers and the prices are availablepublicly. Unrealized gains or losses that arise due to the change in the fair value oflisted equity shares and derivative instruments can be considered under the headingFair Value Change Account and reported in Profit or Loss account. The profit or losson sale of such investments can include the accumulated changes of the fair value thatwas previously recognized under the heading Fair Value Change Account with respect

to a particular security and recycled to Profit and Loss Account on actual sale of thatlisted security.

The balance in Fair Value Change Account or any part thereof cannot be distributed asdividends. In addition to this, while declaring dividends, any debit balance in the FairValue Change Account can be reduced from the profits or free reserves.

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Loans

Loans can be calculated at a historical cost that is subjected to impairment provisions.

Catastrophe reserve

Catastrophe reserve can be created according to the norms, if any prescribed by theauthority. Fund investment out of catastrophe reserve can be made according to theinstruction given by the authority. Further it is clarified that this reserve is created tomeet the losses that may arise because of some unexpected set of event and not anydefinite known reason. The following need to be disclosed as notes to the BalanceSheet: Contingent liabilities:- Partly paid-up investments.- Outstanding underwritingcommitments.- Claims not judged as debts.- Guarantees provided by or on behalf of thecompany.- Statutory demands.- Reinsurance commitments.- Others (to be specified).Encumbrances to company assets (inside and outside India) Obligations made forloans, investments and fixed assets.

Ageing of claims

Premiums, less reinsurance.

Recognition of premium income extent based on different risk patterns. Contract valueswith respect to investments. Procurements where deliveries are delayed and pending.Sales where payments are not settled. Operational expenditures of the insurancebusiness. Historical costs of valued investments on a fair value basis. Calculation ofremuneration of managers. Amortization basis of debt securities.

Unrealized gains or losses due to fair value changes of equity shares and derivativeinstruments. The credit balance in Fair Value Change account is not available fordistribution when realizations pending. Fair value of investment property and its basis.Claims settled and outstanding claims for a period of more than six months on thebalance sheet date. The following accounting policies form an integral part of financialstatements: All important accounting policies with respect to accounting standardsissued by ICAI, important policies mentioned in Part I of Accounting Principles. Otheraccounting principles of an insurer are stated according to Accounting Standard AS 1 byICAI. Any departure from the accounting policies as abovementioned need to beseparately revealed with reasons. The following information also needs to be disclosed:Investments made according to statutory requirements need to be disclosed separatelytogether with its amount, security and special rights inside and outside India.Segregation of performing and non performing investments for income purpose as per

the directions issued by authorities. Percentage of business sector-wise. Summarizedfinancial statements of last five years prescribed by authorities. Accounting ratiosprovided by authorities. Allocation of interests, dividends and rents among revenues,profits and losses.

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Q.4 Discuss the guidelines for settlement of claims by Insurance Company .

Ans:- General guidelines for claims settlement

There are some guidelines that must be followed while settling the claims. Theseguidelines are general in nature, and are not compiled to be the same always.Therefore, the claim settling authority uses discretion and records reasons.

Appointment of surveyor

The Insurance Act states that surveyor should survey claims above Rs. 20,000. Thesurveyors appointment should be based on the following points:

The surveyor should have a valid license.

The surveyor selected should consider the type of loss and nature of the claims.

Depending on the situation, if technical expertise is required, a consultant havingtechnical expertise assists the surveyor.

One surveyor can be used for various jobs, if the surveyors competence is goodfor both.

Appointment of investigator

Depending on circumstances, it is necessary to appoint an investigator for verifying theclaim version of loss. The appointing letter of the investigator o mentions all thereference terms to perform.

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Q.5 What is facultative reinsurance and treaty reinsurance?

Ans:- The two different types of reinsurances are:

Facultative reinsurance.

Treaty reinsurance.

Facultative reinsurance

It is a type of reinsurance that is optional; it is a case-by-case method that is used whenthe ceding company receives an application for insurance that exceeds its retentionlimit. It is based on the individual agreements that help to cover specific losses. Whenany primary insurer wants reinsurance for a specific coverage, it enters the market, andbargains with different reinsurance companies for the amount of coverage andpremium, looking out for a better value. According to most of the contracts, the reinsurerpays a ceding commission to the insurer to pay for purchase expenses.

Before issuing the insurance policy the insurer looks for reinsurance and speaks tomany reinsurers. The insurance company does not have any commitments to cedeinsurance and also the reinsurer has no commitments to accept the insurance. Howeverif the insurance company find a reinsurer who is willing to take the insurance policy thenthey can enter into a contract.

Facultative reinsurance is used when a huge amount of insurance is preferred and whileconsidering a specific risk involved in an individual contract. Facultative reinsurance isthe reinsurance of a part of a single policy or the entire policy after negotiating the termsand conditions. It reduces the risk exposure of the ceding company against a particularpolicy. Facultative reinsurance is not mandatory.

One advantage of facultative reinsurance is it is flexible as a reinsurance contract isarranged to fit any kind of cases. It helps the insurance companies in writing largeamount of insurance policies. Reinsurance moves the huge losses of the insurers to thereinsurer and thus helps the insurer.

One main disadvantage of facultative reinsurance is that it is not reliable. The cedinginsurer will not know in advance whether a reinsurer will agree to pay any part of theinsurance. The other disadvantage of this kind of reinsurance is the delay in issuing thepolicy as it cannot be issued until the reinsurance is got for that policy.

Treaty reinsurance

Treaty reinsurance is one in which the primary insurer agrees to cede the insurancepolicy to the reinsurer and the reinsurer has to accept it. It includes a standingagreement with a specific reinsurer. The amount of insurance that the primary insurersells and those policies where both the parties provide the service is specified in thecontract. All the business that comes under the contract is automatically reinsuredaccording to the conditions of the treaty.

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Treaty reinsurance needs the reinsurer to assume the entire responsibility of the cedingcompany or a part of it for some particular sections of the business with respect to theterms of the policy. The contract is a compulsory contract because according to thetreaty the ceding company has to cede the business and the reinsurer is compelled toassume the business. It is a type of reinsurance that is preferred while considering thegroups of homogenous risks.

The treaty reinsurance provides many advantages to the primary insurance company. Itis automatic, more reliable, and there is no delay in issuing the policy. It is also morecost effective as there is no need to shop around for reinsurers before writing the policy.

The treaty reinsurance is not advantageous to the reinsurer. Usually the reinsure doesnot know about the individual applicant of the policy and has to depend on theunderwriting judgment that the primary insurer gives. It may be so that the primaryinsurer can show bad business like more losses and get reinsured for it as the reinsurerdoes not know the real fact. The primary insurer may pay insufficient premium to thereinsurer. Therefore the reinsurer undergoes a loss if the risk selection of the primaryinsurer is not good and they charge insufficient rates.

There are different types of treaty reinsurance arrangements which may differ accordingto the liability of the reinsurer. They are:

Quotashare treaty.

Surplusshare treaty.

Excessofloss treaty.

Reinsurance pool.

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Q.6 What is the role of information technology in promoting insurance products

Ans:-The rapid developments in information technology are posing serious challengesfor insurance organizations. The use of information technology in insurance industry hasan impact on the efficiency of the organization as it reduces the operational costs. Aftermany private players entered the insurance industry, the competition in the insurancesector has become immense. Information technology has helped in enhancing theinsurance business. Insurance industry uses information technology for internaladministration, accounting, financial management, reports, and so on.

Indian insurance organizations are rapidly growing as technology-driven organizations,by replacing billions of files with folders of information. Insurers are heading towards thetechnological enhancements, in order to focus on the key areas of insurance business.

The role of IT in different fields of insurance like:

Actuarial investigation - Insurers depend on the rates of actuarial models todecide the quantity of risks which create loss. Insurance organizations are usingnew technologies, to analyze the claims and policyholders data for providingconnection between risk characteristics and claims. Developments in technologyallow actuaries to examine risks more precisely.

Policy management - Most of the insurance policies are printed and conveyedto policy owners through mail every year. The method of creating documents isaccomplished by technicians and typists. In most of the cases, this task isgenerally completed by using new technology. Customer data is accessed bycomputer systems, and maintained in huge folders, in order to renew each policy.To assemble the policies, complex software packages are used, and to print thepolicies high speed printers are utilized.

Underwriting Underwriters can use knowledge based expert systems to makeunderwriting decisions. By using automated systems, underwriters can comparean individuals risk profile with their data and customise policies according to theindividuals risk profile.

Front end operations: CRM (Customer Relationship Management) packagesare used to integrate the different functional processes of the insurance companyand provide information to the personnel dealing with the front end operations.CRM facilitates easy retrieval of customer data. LIC is using CRM packages tohandle its front end operations.

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Master of Business Administration - MBA Semester 4

MF0018 Insurance and Risk Management

Assignment Set- 2

Q.1 Explain risk avoidance, risk reduction and risk retention

Ans:- Risk avoidance

Risk avoidance is where a certain loss exposure is never acquired or the existing one istotally removed. This is one of the strongest methods to deal with risks. The majoradvantage of this method is that it reduces the chance of loss to zero. The two ways bywhich risk can be avoided are proactive avoidance and abandonment avoidance. In thefirst case, the person does not assume any risk and therefore any project which bringsin risk is not taken up. For example a company which has chances of nuclear radiationwill not set up the company, due to the perils which it can bring up.

In the case of abandonment avoidance, the existing loss exposure is abandoned. Allactivities with a certain degree of risk are abandoned. The case of abandonmentavoidance is very few. If a firm abandons risky activities, then it faces difficulties inremaining in the market. The firm in the process of abandoning might take up newactivities which exposes to another type of risk.

Risk reduction

This strategy aims to decrease the number of losses by reducing the occurrence of loss,which can be done in two ways namely loss prevention and loss control.

Loss prevention is a desirable way of dealing with risks. It eliminates the possibility ofloss and hence risk is also removed. The examples of this are safety programs likemedical care, security guards, and burglar alarms.

Loss control refers to measures that reduce the severity of a loss after it occurs. Forexample segregation of exposure units by having warehouses with inventories atdifferent locations. Insurance companies provide guidance and incentives to thecompany which has taken the policy to avoid the occurrence of loss.

Risk retention

Retention simply means that the firm retains part or all the losses incurred from a givenloss. Risks may be knowingly or unknowingly retained by the organization. They arehence classified as active and passive based on this. Active risk retention is when thefirm knows of the loss exposure and plans to retain it without making any attempt to

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transfer it or reduce it. Passive retention is the failure to identify the loss exposure andretaining it unknowingly.

Retention can be used only under the following circumstances:

When insurers are unwilling to write coverage or if the coverage is too expensive.

If the exposure cannot be insured or transferred. If the worst possible loss is not serious.

When losses are highly predictable.

Based on past experience if most losses fall within the probable range of frequency,they can be budgeted out of the companys income.

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Q.2 What are the challenges faced by Indian Insurance Industry and whatmeasures are taken to overcome them?

Ans:-

Issues and Challenges of Insurance industry in India

The increased growth in the Indian middle income group has posed incrementalgrowthin the insurance sector in India.

October 2008 The Indian insurance sector is on a bull run. The average Indian nowspends 5.4 times as much on life insurance as what s/he did seven years ago when theindustry was yet to be opened up for private participation.

With the largest number of life insurance policies in force in the world, India's insurancesector accounted for 4.1 per cent of GDP in 2006-07, up from 1.2 per cent in 1999-2000, far ahead of China where insurance accounts for just 1.7 per cent of the GDP andeven the US where insurance penetration stands at 4 per cent of the GDP.

Indians are now setting aside a larger chunk of their income on life insurance whenmeasured as a percentage of GDP. They are allocating a small amount of their take-home to buy insurance products given their rising equated monthly installment (EMI)payments for home mortgage and other loans.

The growth in insurance premium collections has spelt an opportunity for the equitymarket too. The industry's investment in the equity market stood at US$ 38.1 billion andthe assets under management were at US$ 152.6 billion as on March 31, 2007.

Indian insurance companies recorded a 19.9 per cent growth in premium in dollar terms(adjusted for inflation) in 2006-07, compared to the world market growth rate of 2.9

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percent. This rate of growth of the industry looks particularly impressive when seenagainst the fact that the combined penetration of both life and non-life is less than 2 percent of the GDP compared to world average of 7.52 per cent. Clearly, the scope forgrowth is enormous.

Nonetheless, the minimal foreign investment allowed within the country increase theneed for partnerships to operate in the Indian environment. This poses challenges ofgovernance, risk and compliance mechanisms that will allow the partnerships to act inthe best interest of the policyholder. As India is in the cusp of grasping potentialopportunities in the insurance industry, one needs to understand that investing for thelong term is key. The sector wise growth and potential is underscored below to enhancethe understanding of the Indian insurance segment. Life Insurance Led by the LifeInsurance Corporation (LIC), the life insurance industry registered a growth of 110 percent in fiscal 2006-07, taking the total business to US$ 19.2 billion from the previousyear's US$ 9.1 billion. The life insurance market has grown rapidly over the past sixyears, with new business premiums growing at over 40 per cent per year owing to theentry of a host of new players with significant growth aspirations and capitalcommitments.

Life insurance penetration in India - which was less than 1 per cent till 1990-91 -increased to 2.53 per cent in 2005, and to 3 per cent in 2006-07. The impetus for growthhas come from both public and private insurers. Also, the number of players in thissegment has also increased to 17 (16 in private sector), with Life Insurance Corporation(LIC) being the dominant player (market share of about 74 per cent). GeneralInsurance The general insurance industry grew 12.63 per cent during 2007-08 drivena robust performances by private players. The 13 non-life insurers collected US$ 2.63billion in premium during 2007-08, against US$ 2.04 billion in 2006-07. Consequently,total non-life premium collections totaled US$ 6.59 billion in 2007-08, against US$ 5.85billion collected in 2006-07.

While the public sector could increase its premiums by just 3.94 per cent, 13 privatesector players clocked premium growth of 28.85 per cent. Private sector players' marketshare has grown to about 40 per cent in FY 2008 as compared to the public sector's 60per cent. Government Initiatives The Government has taken many proactive stepsto give a boost to this sector:

Foreign direct investment up to 26 per cent is permitted under the automaticroute subject to obtaining a license from the IRDA.

IRDA has removed administered pricing mechanism, i.e. de-tariffing in respect offire and engineering along with motor insurance of general insurance forpremium, effective from 1 January, 2007.

The control rates on fire, engineering and workmens compensation insuranceclasses have been removed from 1 September, 2007.

Some state governments have also taken a dynamic role in this sector. TheGovernment of Andhra Pradesh after piloting the 'Arogya Sri' health insurance

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scheme in three districts plans to issue health cards to 18 million BPL (below thepoverty line) families. As a result, about 60 million of the State's 80 million peoplewill have insurance cover. The Karnataka Government has partnered with theprivate sector to provide coverage at a low cost in the Yeshaswini Insurancescheme. Launched in 2002, the scheme provides coverage for major surgicaloperations, including those pertaining to pre-existing conditions, to Indian farmerswho previously had no access to insurance.

Innovative Trends Insurance in India has been spurred by product innovation,streamlining of sales and distribution channels along with targeted advertising andmarketing campaigns.

The kid's insurance segment in the insurance sector is witnessing increased activity.According to industry estimates, currently, 20-30 per cent of business of manycompanies comes from children-specific insurance policies alone.

Emerging lifestyle trends amid a changing fabric of the Indian society have alsomodified social and financial behavior. For instance, an increase in the number ofworking women has led to a demand for life insurance policies, which in turn has helpedwomen through a micro-entrepreneurship initiative (women have flexibility - managinghome and being financially independent as distributors of insurance). The Road

Ahead Market penetration tends to rise as incomes increase, particularly in lifeinsurance. India, with its huge middle-class households and growing economy hasexhibited huge potential for this sector. Current estimates say that, for every one percent increase in the GDP, insurance premiums increase by at least 4 per cent.

The domestic insurance industry in India is estimated to be around US$ 60.5 billion by2010, of which US$ 35 billion will come from rural and semi-urban areas. While the lifeinsurance market is expected to grow to US$ 35 billion, non-life insurance market willtouch an estimated US$ 25 billion.

Regulators have identified derivatives as risk management tools for insuranceorganizations. Hence insurance companies use these within the quantitative andqualitative limits determined by the legislation, supervisory authority and the internalprocedures of the organizations. The insurance companies need to obtain priorauthorization needs for every derivative it intends to use. Additionally, the managementof the organization should develop a system of estimation, quantitative limitation and

supervision of risks.

In case of investment choices, the administrators and supervisors must improve riskslike credit risk, market risk, legal and operational risk. VAR (Value at Risk) models areaccepted by banking and insurance organizations as a risk management tool to controlrisks. VAR is defined as the maximum potential change in value of financial instrumentsportfolio with a provided probability for certain time period. VAR approach is useful for

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risk management and regulatory purpose. The main aim of VAR approach in riskmanagement and capital regulation is to bring capital requirements close to underlyingrisks of assets in a portfolio. This approach is really important for insuranceorganizations as they operate the sufficient capital to cover the liabilities and claims infuture on a long-term basis. Risk exposure is also covered through investment rules byrestricting asset categories. Because of VAR tools, the quantitative objection in riskmanagement tools is decreasing.

VAR is a financial engineering tool used by insurance companies. Some other toolsinclude credit assessments of individuals, pricing of risks and valuations of combinedrisks of companies that engage in multiple markets. Asset liability management andrevenue management are optimized tools for financial management and riskmanagement.

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Q.3 What is premium accounting and claim accounting?

Ans:- Premium accounting

For the businesses that have a fixed rate like that of fire insurance, motor insuranceetc., the premium is charged based on the rate. Where as in businesses that do nothave fixed rate, the premium is charged based on the guideline rates fixed by therespective technical departments of the insurers Head Office. According to section64VB of the Insurance Act, 1938; the insurer cannot assume any risk unless thepremium is received in advance.

Apart from collection of premium by cash, cheque DD etc., the IRDA recently haspermitted to collect the premium by other type of receipt like the credit card, debit card,E transfer etc. However, the same has to be collected before assumption of the risk.Service tax of 8% (presently) has to be collected on taxable premium and depositedwith the respective excise authorities within prescribed time limit. If the same businessis shared among more than one insurer as preferred by the policy holder, then the leadinsurer has to collect the full premium along with service tax. But only one share ofpremium is accounted as premium and the balance is shown as the amount that is dueto other co-insurers. As per the Stamp Act, a policy stamp has to be affixed and has tobe accounted properly by debiting policy stamp expenses. A premium register isgenerated in the system on a daily basis.

According to the IRDA Regulation, the premium has to be identified as the income overthe contract period or the period of risk, whichever is suitable. Most of the generalinsurance policies are annual contracts and therefore the premium earned is worked outusing 1/365 method. In the insurance policies in which the same is not practicable, it isworked out either using 1/24 or 1/12 method. According to the section 64V(1)(ii)(b) ofthe Insurance Act, 1938, the unearned premium is compared with the reserve for

unexpired risks at the end of the financial year and if there is any shortfall it isaccounted as unearned premium.

Claims accounting

Claims outgo is the major outgo of an insurance company. The respective technicaldepartment does the processing of claims and the competent authority approves it. Theaccounts department does the payment and accounting of the claims. When claim ismade for a policy that has more than one insurer the lead insurer pays the full amountof claims. Only own share of claim is accounted as claims cost and the balance isshown as amount recoverable from the other insurers (co-insurers). If a claim is made

but not settled by the end of the financial year, then enough provision is made for suchoutstanding claims. By the end of the financial year the IRDA needs the actuarialvaluation of the claims liability of an insurer that the appointed actuary makes and ifthere is any shortfall, it is provided as Incurred But Not Reported (IBNR) losses.

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Q.4 What factors indicate that there is a good potential for growth of insuranceservices in rural markets?

Ans:- Rural insurance covers areas like fisheries, horticulture, floriculture, cattle andliving stock. This insurance is accepted to be a high-cost, low premium business whichrequires different type of skills. It involves various government organizations, agenciesand departments.

Need and potential of rural insurance

With the increase in income of the rural community, the rural population is purchasingconsumer durables, constructing houses and purchasing vehicles. These assets needinsurance. Therefore the efforts by private insurance companies backed by properbusiness can have direct impact on the rural economic growth. In the farm sector,insurance supplements the advances in science and technology.

The following factors indicate that there is a good potential for growth ofinsurance services in rural markets:

Improving economic conditions.

Low penetration level of insurance products in the rural sector.

Rising rural demand for insurance products.

Increasing disposable income levels.

LIC (Life Insurance Corporation) and GIC (General Insurance Corporation) have beenproviding insurance cover for the rural areas, but they are not sufficient. The peopleresiding in rural areas state that claim lodgment and settlement procedure is timeconsuming and burdensome. Cattle and crop insurance by the government, have not

met the expected results.

To set up or improve the rural insurance, the following needs to be done:

Create products according to the rural requirements, and establish efficientmethods of premium collection and claims settlement.

Educate the rural about the need of insurance products.

The government should encourage the private and foreign insurance companiesto provide insurance to rural assets.

The educated young people of the villages need to be trained and taught aboutthe need for insurance.

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Q.5 Critically evaluate the role of agents in insurance industry

Ans: Insurance agents are people who possess specialized knowledge in the field offinance. They play an important intermediary role between the customer and theinsurance company. They are also known as insurance agents. Insurance agents canbe either of the following:

An individual

A commercial business entity

Insurance Brokers: Well Informed and Unbiased

Insurance brokers or agents have a thorough knowledge and extensive experience inthe insurance sector and are quite conversant with the contingent risks of life and theirpossible risk-management. They actually broker the insurance deal between theinsurance company and the consumer and in lieu for this, extract a commission.

Insurance brokers are basically financial planners who acquire suitable insuranceschemes in accordance with the needs of the insurance clients. Insurance brokers arenot tied to any specific insurance companies but to multiple ones. So, there is littlechance of them favoring insurances of any specific company/companies. An insurancebroker is expected to perform extensive research while choosing the right insurancescheme/policy for the clients requirements without any prior biases.

Insurance Brokers: Serving a Large Client Base

The job of an insurance broker varies from firm-to-firm because in such cases, sizedoes matter. In large business entities, they have a wide range of client base along withtheir wide range of requirements. However, it is impossible for a single broker to meetall these need. So, each broker in a big business house has categorical specializationsaccording to the needs of the clients.

Insurance brokers in small business entities who have comparatively less businessesand a small number of clients are required to do all the associated work themselves.

Insurance Brokers: A Brief Job Description

Generally, an insurance broker is involved with the following work:

Acquisition of clients in need of insurance - Even if people don't have the demandfor insurance in a specific field, brokers generate this demand throughadvertisements and other methods. This is known as business development.

Giving proper and adequate service to the client to maintain an ongoingrelationship between the insurance company and the client - This is commonlyknown as servicing of client.

Constantly remaining in touch with the clients and catering to their problems bygathering proper information and assessing their risk profile and requirements.

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Renewing the policies of the existing clients in a hassle-free manner and withappropriate judgment and guidance.

Giving proper advice to clients in a customized way by gauging their risk profilecoupled with extensive research.

Keeping abreast with new policies and schemes of the insurance companies sothat they can choose the right policy for their clients personal needs.

Collecting regular premiums paid by the clients. Processing the accounts of the clients

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Q.6 Explain product design and development process in Insurance Industry

Ans:-One main issue in the liberalized scenario of the insurance sector is in the area ofdeveloping new products. Constant activity in this area is very important for determiningthe overall profitability, and growth of any insurance company. The main reason for theliberalization of the insurance sector is that it the public sector was not practical in theprocess of developing products that satisfied the needs of the customer.

Product development process is an important process for an insurance company.Developing insurance products include the following steps:

Customer requirement analysis - In the first step, the customer requirementsare analyzed. In this phase, the information on the amount to be insured, totalincome, client biometrics such as age and family size, current purchasing habits,and so on are analyzed.

Business analysis - In the business analysis stage of product development,different departments of the insurance company have the followingresponsibilities.

1. Marketing department has to perform the market analysis to know thecustomer needs, and make a forecast for sales.

2. Underwriting department has to prepare the manuals.3. Customer service department assesses the procedural requirements of

the new products.4. Actuarial department develops the specifications of the product, and the

resulting impact on product portfolios.5. Accounting department reports the financial requirements of the new

product.6. Information systems department checks whether the insurer has enough

operating systems to accommodate the new product or not.7. Investment department along with the actuarial department determines the

investment needs for the new product.

Prototype development - In this step, a prototype of the product is designedand testing is carried out.

Pricing the product - The pricing of the insurance products plays an importantrole in the design and development of the product. The price of the productshould include the risk premium that the insurance company needs for acceptingthe policy, and the cost for distributing and administering the product to the client.The policy price that is charged to the client includes the risk premium and the

cost of the distributor. Product release - This stage is called as the technical design stage. It involves

creation of drafts for policy documents, commission structure, underwriting, formsand procedures and issue specifications. Before the product is released to themarket the insurance companies have to take care of the following:

1. Arrangement of training material.

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2. Designing promotional materials for the products.3. Releasing all the information that is needed to understand the product.4. Administration of the product after release.5. Complete policy filing, the process by which the organization obtains all

the regulatory approvals from all the applicable authorities that are neededto release the product.

6. Educating and training the staff and the sales agents on administrativeprocedures and forms that are needed to sell, administer and service theproduct.

The environment in which the insurer functions inspires its product development. Thiscomprises of the legal framework which the insurance industry has to follow and socialand economic factors. Any stage of product development has to be carried out inaccordance with the customers interest. Thus, since 1973, the Indian Insurance sectorhas directed the product development towards meeting this goal. In the last threedecades, the General Insurance Company (GIC) together with its four subsidiaries hasdeveloped 150 new products, and has met its customer requirements. To controlpoverty and provide employment in the rural areas, the insurance sector developed the

Integrated Rural Development Program (IRDP).