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