Download - 1_Overview of Insurance Markets

8/13/2019 1_Overview of Insurance Markets

1/34

INSURANCE

MARKET


2/34

INSURANCE MARKET

INSUREDS INSURER REINSUREDS RETROCESSION

COINSURERS

INTERMEDIARIES INTERMEDIARIES INTERMEDIARIES

COINSURERS

LARGE NOS.

EFFECTIVE U/W

PORTFOLIO PRINCIPLE

RISKS POOLING SHARING - TRANSFER


3/34


4/34

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


5/34

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


6/34

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 !


7/34

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%


8/34


9/34


10/34


11/34

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


12/34

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


13/34

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


14/34

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.


15/34


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.


16/34


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


17/34

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


18/34

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.


19/34

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.


20/34

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.



21/34

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.



22/34

INSURANCE PROTECTS THE CAPITAL

IN INDUSTRY - It helps release the samefor further Expansion



23/34

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


24/34

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.


25/34

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.


26/34

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.


27/34

Characteristics of InsuranceContracts

Principle of indemnity

Rules of insurable interest Principle of subrogation Doctrine of adhesion Doctrine of utmost good faith


28/34

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


29/34

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


30/34

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


31/34

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


32/34

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


33/34

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


34/34

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

Download - 1_Overview of Insurance Markets

Top Related