1_Overview of Insurance Markets
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INSURANCE
MARKET
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INSURANCE MARKET
INSUREDS INSURER REINSUREDS RETROCESSION
COINSURERS
INTERMEDIARIES INTERMEDIARIES INTERMEDIARIES
COINSURERS
LARGE NOS.
EFFECTIVE U/W
PORTFOLIO PRINCIPLE
RISKS POOLING SHARING - TRANSFER
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INSURANCE & FINANCE
SUBSTITUTABILITY
L. I. of FDs
L.I. of Real Estate
Annuities of FDs
Annuities of Real Estate
G.I.
Loss Prevention
Safety Devices
Self Insurance
OVERALL THESE ARE WEAKER THAN COMPLEMENTARITIES
UNIQUE PLACE TO INSURANCE
PRODUCS RANGE CAN CREATE PROBLEMS
INCOME EFFECTS
RICH -- DONT NEFD EXCEPT FOR TAX
POOR -- CANT AFFORD
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INSURANCE & FINANCE
SUBSTITUTABILITY
Life Products substitutes
Esp. Inv Oriented / Short term with Surrender Facilities
Int. Rate Shift to L.I.s from FDs / MMMFs / Embedded Options
MATURITY PROCEEDS MF PENSION
Int. Rate -- Surrender / Loan / Maturity
Proceeds Investment Vehicles
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INSURANCE & FINANCE
COMPLEMENTARITY
eg. Secured property insured
Credit Insurance
Home Loans Secured by Life Insurance
Theft Insurance Durable Finance
Motor Insurance HP / Leasing
FINANCE PROVIDER STARTS INSURANCE
CLIENT DIVERSITY
ACCM OF RISKS
ISSUE U/W/LOAN GUARANTEE ARE INSURANCE LIKE SERVICES
BUSINESS COMPROMISES FAVOURABLE EXPERIENCE CLIENT PUTS PRESSURE
FOR INVESTMENT / LOAN
FEE / FUND BASED BUSINESS MAY BE COMPROMISED !
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BANKS IN LIFE INSURANCE
BANKS SHARE OF INDIVIDUAL ANNUITIES
1990 -- 18%
1994 -- 38%
BANKS SALE OF VARIABLE ANNUITIES (1 MILL)
1990 -- 100
1994 -- 5600
BANKS SHARE OF LIFE MARKET (EUROPE)
1985 1996
UK 3% 16%GERMANY 2% 28%
HOLLAND 13% 25%
SPAIN 8% 48%
FRANCE 23% 52%
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WHAT IS INSURANCE ?
Insurance Indemnifies Assets & Income.Every Asset has a value and generatesIncome to its Owner. There is a normallyexpected Life-time for the Asset during which
time it is expected to perform. If the Asset gets lost earlier, being destroyed
or made Non-functional through an Accidentor other unfortunate event the Owner isPrejudiced.
Insurance helps to reduceCONSEQUENCES of such Adverse
Circumstances which are called Risks
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WHAT IS INSURANCE (Contd.)
Insurance is the SCIENCE OFSPREADING OF THE RISK. It is thesystem of spreading the losses of anIndividual over a group of Individuals
Insurance is a Method of sharing offinancial losses of a FEW from aCOMMON FUND formed out ofContribution of the MANY who areequally exposed to the same loss
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WHA T IS INSURANCE Co n td ..
What is UNCERTAIN for an Individualbecomes a CERTAINTY for a Group. Thisis the basis of All Insurance Operations.Thus INSURANCE CONVERTSUNCERTAINTY TO CERTAINTY
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THE CON CEPT OF RISK
The object of Insurance is to provideprotection against Financial Lossescaused by Fortuitous Events. ThusInsurance is a protection against theConsequences of RISK.
RISK is defined for Insurance Purpose asthe UNCERTAINTY OF A FINANCIALLOSS.
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THE CON CEPT OF RISK
Element of RISK is Inherent in Life. RiskMeans that there is a possibility of loss
or damage. To the common Man, Risk means
Exposure to Danger.
In Insurance, the word Risk may beused interchangeably with Peril-whichmeans the Event or Occurrence which
CAUSES the Loss.
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THE CON CEPT OF RISK
In Insurance, the word Risk may also referto the Property or Subject Matter ofInsurance
The Subject Matter of Insurance can beLife, Limb, Property, Interest & Liability
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PURPOSE A ND NEED OF INSURA NCE
The Problem of Risk in Economic andCommercial Activities can be dealt within FOUR WAYS.1. Risk Avoidance2. Risk Retention3. Risk Transfer
4. Risk MinimisationInsurance is ONE of the most Importmethod
of Risk Transfer
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PURPOSE A ND NEED OF INSURA NCE
Insurance spreads the Risk among theCommunity and the likely Big Impact onONE is reduced to Smaller ManageableImpacts on ALL. Thus Insurance acts asa SHOCK ABSORBER.
A RISK OF TRADE is Insurable but aTrade Risk is not Insurable. In a Risk of
Trade there can only be a LOSSwhereas in a Trade Risk, there can beLOSS OR GAIN Risks of Trade are
called PURE RISKS.
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PURPOSE AND NEED OF INSURANCE
Only Economic or Financial Losses canbe compensated by Insurance.
The Business of Insurance is the
Pooling of RISK and RESOURCES. It is a technique which provides for
collection of small amounts of
PREMIUM from many Individuals andFirms out of which losses suffered bythe FEW are paid. Insurers act as
TRUSTEES of the Common Pool.
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INSURANCE ACTS AS A SOCIALSECURITY
Social Shock Absorber
Solarium Fund for Hit & Run Victims ofRoad Accidents.
PASS (Personal Accident & Social
Security) scheme launched by the Govt. ofIndia
Crop Insurance Schemes and other Rural
Insurance covers for the Rural Masses.
PURPOSE AND NEED OF INSURANCE
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INSURANCE CONTRIBUTES TONATIONAL WEALTH It contributes to a vigorous Economy
and National Productivity. LIC & GIC funds formed out of the
savings of People are channelled intoInvestments for Economic Growth.
HUDCO, IDBI, IFCI, use funds siphonedfrom Insurance Money for lending toEntrepreneurs.
PURPOSE AND NEED OF INSURANCE
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INSURANCE PROTECTS THE CAPITAL
IN INDUSTRY - It helps release the samefor further Expansion
PURPOSE AND NEED OF INSURANCE
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Classification of InsuranceBusiness
Life Insurance Traditional Life Unit Linked Plans Annuity Plans
General Insurance Fire Marine Miscellaneous :Aviation, Engineering, Liability,
Motor, Personal Accident, Agricultural, others Reinsurance
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Classification of Insurance Business Life insurance : all insurances covering
human lives Non-life or General Insurance covers non
human objects like animals, agricultural
crops, goods, factories, cars etc. calledproperty and casualty insurances in somecountries.
Sickness and accidents to human beings areclassified as non life insurance in India,although life insurance policies may cover theaccident and sickness risks as additional
coverages.
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Liability Insurance : Non-life also coverslosses through individual behaviours likefraud, burglary, non-fulfillment of promises(repayment of mortgage loans), professionalnegligence of doctors.
Non-life insurance policies are mostly forshort periods of one year. Some policies with
long tails e.g. illness contracted at work maybecome manifest a few years later, creating aclaim.
Every asset has a value cost price, marketvalue, amount of insurance is generallylimited to this value : the business ofinsurance is designed to make good thelosses and not to provide benefits / profits.
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Insurance indemnifies a person againstthe loss only compensates.
Principle of indemnity not applicable incase of life insurance : there is no limitto the value of the life of human being.
A person can insure his life for anyamount. But the insurance company willhave other considerations, like hisability to pay and the purpose ofinsurance etc. to ensure that there is nofoul play, fraud etc.
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Characteristics of InsuranceContracts
Principle of indemnity
Rules of insurable interest Principle of subrogation Doctrine of adhesion Doctrine of utmost good faith
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Principle of Indemnity
Insurance Contract provides forcompensation for losses
Insured not to profit from an insurancetransaction
Indemnity makes the insured to be in thesame position after, as he was before theinsured loss
Life insurance is an exception
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Principle of Insurable Interest
To ensure that the object of insurance islawful distinct from gambling
It is the financial interest that the personseeking insurance should have on theloss insured against
Link to the principle of indemnity
Generally insurable interest should existboth at the time of contract and at thetime of the loss
Exception in case of life insurance
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Insurable Interest Presumptions
Every person has unlimited insurableinterest on his own life
Husband has insurable interest on the lifeof the wife and vice-versa
Creditors have it on the lives of debtors Partners on each others lives Employer on the lives of his key employees
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Principle of Subrogation
Legal substitution of one person in anothersplace
A corollary from the principle of indemnity
If the loss suffered by the insured isrecoverable from third parties who areresponsible for the loss, the insureds rights ofrecovery are transferred or subrogated to theinsurers when they indemnify the loss .
Not applicable in case of life Insurance
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COROLLARY
The principle of contribution which is also acorollary of the principle of indemnity, providesthat if the same property is insured under morethan one policy, insured can not recover morethan his loss; he can recover only a rateableproportion of the loss under each policy.
Contribution
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Doctrine of Adhesion
Insurance contracts are classified asContracts of Adhesion to protect theinterest of the insured
Difference in the level of knowledge In case any provision of the contract being
found ambiguous (leading to more thanone interpretation), then it will beconstrued against the person who draftedit
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Doctrine of Utmost Good Faith
Person buying Insurance is held to the higheststandard of honesty Penalty for a lesser level of truthfulness is the
insurers right to void the contract Misrepresentations
Ordinary contracts tell nothing but the truth Insurance contracts tell the whole truth
Non-disclosure or Concealment Material facts not only what he considers to
be but are actually are Indisputability clause Sec. 45 of Insurance Act