Risk management and insurance [Long question]

 Risk management and insurance

 [Long question]

• Meaning of risk management
• Meaning of insurance
• Importance of insurance
• Principles of insurance
• Types of insurance
• life insurance
• Marine insurance
• Fire insurance
• Essentials of insurance contract

Meaning of risk

Risk is the variability of possible outcome from which was expected. It is the loss or injuries from unfavorable events like Natural factors, competition, changes in customer preference, changes in technology, changes in government policies, poor management etc. The term risk can have different meaning to the different people and situation i.e. loss is the risk for business, loosing the game is the risk for the player, accident is the risk for the driver etc.

Risk management is not an easy job or task because it cannot be eliminated but can be minimized. It is the process of systematic and scientific minimization of risk or uncertainties. For this purpose the concept of environmental adaptation and insurance were emerged.

Terminology of insurance

1. Insured

2. Insurer

3.Sum insured

4 .Claim

5. Indemnity

6. Nominees\ dependence

7. Policy\ contract

8. Premium

Terminology of insurance

1. Insured

It is the person\customer of the insurance company who wants to take the insurance. it is a person who contracts for an insurance policy that indemnifies him against loss of property or life or health etc.

2. Insurer

It is the insurance company or the organization who compensates the loss of the insured.

It is also known as an underwriter.

3. Sum insured

The total amount of money specified at the time of making the insurance contract is known as the sum insured.

4. Claim

Certain amount of money demanded by the insured to the insurer at the time of loss is called a claim.

5. Indemnity

The compensation\ actual amount of money provided by the insurer to insured is called indemnity.

6. Nominees\ dependence

The third person or family members who received the sum insured if insured dies before the maturity period.

7. Policy\ contract

Contract or agreement between the insured and insurer in which the terms and conditions are mentioned.

8. Premium

Certain amount of money charged by an insurer to insured to minimize the loss is called premium.

Meaning of insurance

It is a contract or agreement between the insurer and insured. Whereby insurance agrees to pay a certain amount of money to the insured at the time of loss as a compensation. However the loss should be accidental but not intentional. It is a Cooperative device through which risks of an individual can be minimized by transforming the risks to different individuals or groups who want to cooperate to bear it. For this, propose a certain amount of money to be charged to insured as a premium. Insurance minimizes the loss or risks of an individual by providing financial support at the time of unexpected events.

Importance of insurance

Insurance plays a vital role for the overall development of the nation, society, business and individual. It plays a significant role for the economic, social, political and moral development of the nation, society and individuals. The further importance of insurance can be discussed under the following categories.

A} For business organization

The following are the importance of insurance for business organizations.

1. Protection

Business organizations suffer from the losses due to the fire theft accident and other various factors. Insurance provides protection of business assets by providing financial support at the time of loss. As a result, growth, expansion and diversification of an organization is possible.

2. Increase efficiency

Insurance facilitates to increase Productivity and efficiency of organization and individual. If Businessmen ensure all assets of organizations then employees perform their job or work freely without any fear of loss or risk . if employees perform their jobs or works freely then the productivity and efficiency will be automatically increased.

3. Stability of business

Insurance of business means businessmen are free from loss or risk. Whenever loss occurs, the insurance company compensates for that loss and the business remains unaffected. It means business can run for a long period of time without any problems and difficulties.

4. Loan facility

Insurance indirectly helps to provide loans from banks and financial institutions by submitting insurance policy as a collateral. Therefore, insurance indirectly helps to promote industry and commerce.

5. Assists the foreign trade

6. Risk transfer etc.

B} For individual and family

The following are the importance of insurance for individuals and family.

1. Economic safeguard

Insurance provides economic protection to the individuals and families by providing financial support at the time of loss as a compensation. Therefore  insurance minimizes the loss of property and provides economic safeguard to insure.

2. Profitable investment

Insurance provides security to the person or property. Life insurance is like an investment because it encourages the saving and interest earning on the saving. As a result, saving grows with additional income in the form of interest and bonus.

3. Maintain living standard

Insurance is important to maintain the living standard of an individual and family. In case of life insurance , the insured and family members receive sum insured after finishing the maturity period and the death of the insured whichever is earlier. This lump sum amount helps to maintain the living standard of an individual and family.

4. Provide Employment opportunity

Insurance means business. To perform the business activity large amounts of skilled, Semi skilled and unskilled manpower are needed. The requirement of Manpower is fulfilled from the same labour market on the basis of their knowledge, skills and experience. It helps the government to solve the national problems of unemployment .

C} For society and government

The following are the importance of insurance for society and government.

1 Capital formation

Insurance collects and mobilizes the savings from the general public as a premium. This capital can be used to invest in Industrial and commercial activity. As a result, development of the nation is possible.

2 Economic development

Insurance invests large amounts of money for the utilization of natural, physical, financial, human and informational resources. As a result, economic development of the nation is possible.

3 Reduce social evil

Insurance indirectly helps to reduce social evils and traditional faith. Insurance compensates the loss of an individual and people may not be insolvent. It provides education, training and other facilities to the children and family members of the insured. It is also considered as the social values, norms and ethics of the society.

4 Provide Employment opportunity

Insurance means business. To perform the business activity a large amount of skilled, Semi skilled and unskilled manpower's are needed. The requirement of Manpower is fulfilled from the same labour market on the basis of the knowledge, skills and experience. It helps the government to solve the national problems of unemployment.

Principle of insurance

Principles and guidelines for effective insurance contracts. To make an effective or good insurance

contract, both insurer and insured should consider the following principles or guidelines

1 Principle of utmost good faith

Insurance contracts are based on the utmost good faith. It means both insurer and insured should disclose all material facts truly and faithfully at the same time as making an insurance contract. Good faith requires to tell the truth, the whole truth and nothing but the truth. The main motive of this principle is to avoid fraud and cheating. However, following facts should not be disclosed:

• Fact of common or public knowledge

• Fact which reduces the risk

• Facts which are included in the policy

• Facts which are not disclosed by the agent

• Facts which terminates the insurance contract.

2 Principle of indemnity

Insurance contract is based on the principle of indemnity except Life Insurance. It means Insurance Company compensate the loss of the subject matter of insurance by providing financial support at the time of unexpected events. However, compensation should not be greater than actual loss. This principle is not applicable in life insurance because life of a person cannot be measured in terms of money.

3 Principle of subrogation

This principle states that the right of a subject matter of insurance gets transferred from insured to insurer at the time of compensation. It means the ownership of damaged property can transfer to the Insurance Company. This principle is not applicable to life insurance.

4 Principle of contribution

An insured can get an insurance contract in two or more companies for a single asset or property. However, he or she receives an actual amount of loss from all insurance companies at the time of unexpected events by contributing to all insurance companies on the basis of the ratio of premium paid.

5 Principle of proximate cause

The term proximate cause means the nearest cause. This principle states that Insurance Company is liable to compensate the loss of the subject matter of insurance due to the cause specified in the policy. The remote or the causes which are not specified in the policy is not liable to compensate the loss of the subject matter of insurance.

6 Principle of mitigation of loss

The term mitigation of loss means the minimization of the loss. This principle states that insured should try to minimize the laws of the subject matter of insurance at the time of unexpected events as far as possible. However, he or she should not put his or her life at risk.

7 Principle of insurable interest

The term insurable interest means the relationship between the insured and the subject matter of insurance. This principle states that any one or user can get insurance of the subject matter of insurance. However, insurance companies provide financial support to the real owner of the subject matter of insurance only.

8 Principle of cancellation

This principle states that both insurer and insured may cancel or terminate the insurance contract at any time by performing the other party with suitable cause. This principle is suitable only for long term insurance.

Essentials of insurance contract

To make the effective or good or valid or legal insurance contract both insurer and insured should consider the following elements, components and Essentials.

1 . Two parties

To make effective insurance there should be two parties. They are insured and insurer. Insured is the person who is the customer of the insurance company who wants to take the insurance. It is a person who contracts for an insurance policy that indemnifies him against loss of property or life or health etc. Whereas an insurer is the insurance company who compensates the loss of the insured.

2. Offer and acceptance

The party willing to get insured, processes the insurance company by filling up the application form. Along with the form, the proposer submits other necessary documents on the other hand, the insurance company goes to the proposal, if satisfied, sends the notice of acceptance to the proposer.

3. Capacity to contract

The parties to the contract should satisfy certain qualifications to enter into contracts. A person who is the age of the majority according to the law and sound minded and is not disqualified by the law is qualified for contract. Hence, a person who is minor, lunatic, idiot and alike cannot enter into an insurance contract. Contract made by such incompetent parties will be invalid.

4. Free consent

For a valid insurance contract, parties entering into the contract should enter It by their free will and consent. There should not be any types of undue influence, fraud or misrepresentation Contract entered by undue force, fraud, hiding the facts is void by law.

5. Legal consideration

To make a valid contract, the object of the agreement should be lawful. An object that is not Forbidden by law is not Immoral or is opposed to public policy or which does not defeat the provinces of any law is lawful. If the object of insurance like consideration is found to be unlawful, the policy is void.

6. Writing and registration

The insurance contract must be in written form and duly signed, stamped and registered. The proposer signs the printed proposal form and submit it to the Insurance Company. The insurance company issues properly signed and stamped policy documents after proposal. It must read property tested by the witness and registered.

7. Indemnity

Indemnity is a contractual application of one party [insurer] to compensate the loss occurring to the other party [ insured] at the time of loss against the payment of premiums. It is known as compensation for damages or loss in the legal sense, it may also refer to an exemption from liability for damages.

8. Sum insured

The total amount of money specified at the time of making the insurance contract is known as sum insured.

9. Claim

An Insurance claim is a formal request to an insurance company for coverage or compensation for a covered loss or policy event. The third parties use any file claims on behalf of the insured person, but usually only the persons listed on the policy is entitled to claim payments.

10. Nominees\ dependence

The third person or family members who received the sum insured if insured dies before the maturity period is known as nominees or dependence. Nominees is an entity into whose name securities or properties are transferred if the insured dies. Dependents is the nearest family member of the insured who is liable to receive the amount if the name of nominees isn't mentioned in the contract.

Types of insurance

A- life insurance                                                B- Non life insurance

Whole life policy                                               * Marine insurance

Endowment policy                                              * Fire insurance

Term policy                                                         * Miscellaneous insurance

Meaning of life insurance

• It is the contract or agreement between insurer and insured where by insurer agrees to pay certain amount of money to the insured or nominees/dependence after finishing the maturity period or death of  insured which ever is earlier. It is the most important types of insurance than other forms of insurance. It is not a contract of indemnity because life of a person can not be measured in terms of monetary value. It is a security and investment.

Types of life insurance policy

Policies are the terms and conditions specified at the time of making an insurance contract. Different types of policies are issued by the insurance company to attract the potential customers. Some of the major types of life insurance policies are discussed as below:

A. Life insurance

Types of life insurance policy:

i. Whole life policy

1. Limited whole life policy

2. Single premium whole life policy

3. Convertible whole life policy

ii. Endowment policy

1. Pure endowment policy

2. Double endowment policy

3. Differed endowment policy

4. Anticipated endowment policy

5. Joint life endowment policy

iii. Term policy

1. Straight term policy

2. Renewal term policy

3. Convertible term policy

Whole life policy

Under this policy, a premium is paid up to the survival of the insured but the sum insured

will be payable to the nominees or dependent only after the death of the insured. Insured

doesn't gain out from this policy. This is done to protect the family. Rate of premium is

lower than other policies. It can be further classified into following three types:

I. Limited whole life policy

Under this policy premium is paid for the limited or specified period of time but the sum

insured will be payable to the nominees or dependent only after the death of the insured.

ii Single premium whole life policy

Under this policy, premium is paid once or one installment at the time of making an

insurance contract. But the sum insured will be payable to the nominees or dependence

only after the death of the insured.

iii. Convertible whole life policy

Under this policy, premium is paid for the specified period of

time. If insured services to the specified period of time, then the

whole life policy is converted into endowment or term policy. The

rate of premium is adjusted according to the new policy.

Endowment policy

This policy is done for a certain period of time that is 5, 10, 15, 20 years etc. Under this

policy, premium is paid for the specified period of time but the sum insured will be payable

to the insured or nominees for dependents after finishing the maturity period or the death of

the insured whichever is earlier. This is done to maintain the living standard and protect the

insured from financial crisis in old age. It can be further classified into following side types:

i. Pure endowment policy

Under this policy, premium is paid after the specified period of time but the sum insured will

be payable to the insured after finishing the maturity period. If insured dies before maturity

then nothing will be payable.

ii. Double endowment policy

Under this policy, premium is paid for the specified period of time. If the insured survives till

maturity then he or she will receive double the sum insured . If he or she died before

maturity then the nominees or dependents will get a single amount of sum insured .

iii. Deffered Endowment policy

Under this policy, premium is paid for the specified period of time. If the insured dies for

maturity then the nominees for dependents get sum insured after finishing the maturity

period the premium for the remaining period is not to be paid .

iv.  Anticipated endowment policy

Under this policy, premium is paid for the specified period of time. A part of the sum insured

is made available in the mid term of the policy period and the balance amount of sum

insured will be payable after finishing the maturity period. If insured dies before maturity

then the nominees or dependents will get the full amount of sum insured.

v.  Joint life endowment policy

Under this policy, the insurer insures the life of two or more people in the same insurance

contract . Basically this policy is suitable for the incidence of husband and wife and partners

in the partnership firm. The premium is paid for the specified period of time .If a person dies

then the survival will get sum insured.

Term policy

It is done for a very short period of time i.e. overnight to 364 days. Under this policy, premium is paid

for the specified period of time. If the insured dies before maturity then the nominees or dependents

will get the sum insured. If insured survive till the maturity period then nothing can be payable. This

policy is suitable for the insurance of debtors till the recovery of the debt amount. It can be further

classified into three types:

i.  Straight term policy

Under this policy, premium is paid once or at one installment at the time of making an insurance

contract. If the insured dies before the maturity then the nominees for dependents will get sum

insured.

ii. Renewal term policy

under this policy, premium is paid for a specified period of time. If insured survives till the maturity of

the policy then the existing term policy is renewed for next period of time . The rate of premium is

increasing because of the increasing age .

iii. Convertible term policy

Under this policy, premium is paid for the specified period of time. If the insured survives till the

maturity then the existing term policy is converted into endowment for whole life policy.

Types of marine Insurance policies

Policies are the terms and conditions specified at the time of making insurance contract. Different

types of policies are offered by the insurance company to attract the potential customer. some of the

major types of marine Insurance policy are discussed as below:

1. Valued Policy

Under this policy value of the subject matter of insurance is fixed at the time of making insurance

policy. The value maybe related with the ship, cargo and freight. The loss is compensated on the basis

of predetermined value. It is suitable for the insurance of ship and cargo.

2. Unvalued Policy

Under this policy, value of the subject matter of insurance is not fixed at the time of making insurance

contract. It should be determined at the time of loss. It creates conflict between insurer and insured,

therefore it is not popular in all types of Insurance, but essential for liability Insurance.

3. Time Policy

Under this policy, certain period of time is specified i.e. a month, a year, 5 year etc. Insurance

company is liable to compensate the loss of the subject matter of insurance within the specified

period of time. Basically it is suitable for the insurance of ship.

4. Voyage Policy

Under this policy, time period is not specified but the destination is specified i.e. India to Bangladesh.

Insurance company is liable to compensate the loss of the subject matter of insurance within the

specified destination. Basically it is suitable for the cargo insurance.

5. Mixed Policy

Under this policy, time period and destination both are specified at the time of making Insurance

contract i.e. India to Bangladesh for a year. Insurance company liable to compensate the loss of the

subject matter of insurance within the specified destination and time. It is suitable for the insurance

of cargo and ship.

6. Floating Policy

This policy is done by the cargo owner who transport cargo on a regular basis. The policy may be taken for a specified period of time. It covers all shipment during the period of time but the rate of premium is changed on the basis of changing levels of transporting goods.

7. Blanket Policy

Under this policy certain amount of premium is paid at the time of making Insurance contract but the actual amount of premium is adjusted at the end of policy according to actual amount of loss or risk. It also covers the loss or risk of property within a time limit placing in different geographical location.

8. Block Policy

It has a broad coverage than other marine policies. Sometimes it is called warehouse to warehouse policy. This policy covers the risk over land, sea, air when transporting cargo from seller to buyer.

9. Port risk policy

It is taken for the safety of the ship when it is stationed in a port. It provides safety to the ship for long staying at the port.

Fire Insurance

It is the recent development in the field of insurance concept. It covers

the loss or risk of the subject matter of insurance at the time of

unexpected events due to fire. It is a contract/ agreement between

insurer and insured whereby insurer agrees to pay certain amount of

money to the insured of the time of loss as a compensation due to fire.

The concept of fire insurance in was developed from Germany 17th

century. In 1666 A. D. The Great Fire occurred in London and destroyed

the property of millions of pound. As a result, people drew attention

towards the loss of assets or properties due to fire. In 1681 AD Dr.

Nicholas Barbon developed the concept of the fire Insurance.

Types of fire insurance policies

Policies are the terms and conditions specified at the time of making insurance

contract. Different types of policies are issued by the insurance company to attract

the potential customers. Some of the major types of fire insurance policies are:

1. valued Policy

Under this policy, value of the subject matter of insurance is fixed at the time of

making insurance policy. This value may be related with assets or property. The loss

is compensated on the basis of pre-determined value.

2. Unvalued Policy

Under this policy the value of the subject matter of Insurance is not fixed at the

time of making insurance contract. It should be determined at the time of loss. It

creates conflict between insurer and insured. Therefore, it is not so popular.

3 . Floating Policy

This policy is done by the property/asset owner who transport asset on a regular basis. The policy may

bet token for specified period of time. It covers all transportation during the period of time but the

value of premium changes on the basis of changing level of transporting goods.

4. Blanket Policy

Under this policy certain amount of premium is paid of the time of making insurance contract. It is

adjusted at the end of policy according to actual amount of loss or risk. It also covers the loss or risk of

property within a time limit and at different geographical location.

5. Comprehensive Policy

It has broad coverage than other fire insurance polices. Under this policy, Insurance company is liable

to compensate the loss other than fire like theft, accident, natural calamities etc. The rate of premium

is higher than other fire insurance policies .

6. Re-instalment/ Replacement Policy

Under this policy, insurance company replace/ re-install the same type of assets/ property at the time of unexpected events rather than providing financial support as a compensation. However, it is not popular.

7. Average Policy

Under this policy, the term average is specified of the time of making insurance contract. Insurance company compensate the average value. The average value is calculated by using the following formula

Compensation= Sum Insured x Actual loss

                         Actual value of property

8. Consequential Loss Policy

under this policy, insurance company compensate the loss of the subject matter of insurance within the specified period of time. It also compensates the loss of the profit within specified period of time.

9. Declaration policy

10. Excess policy

Miscellaneous Insurance

The marine and fire insurance are the most common form of non-life insurance. However,

there are some other non-life insurance policies. They are:

Motor / Accident Insurance

Motor insurance is mandatory in many countries. It provides compensation against the loss

of life as well as damage of the vehicle.

Commercial Package Insurance

If two or more policies are combined into a package, it is called commercial package

insurance. The insurance company offers a commercial package insurance policy that can be

purchased to indemnify against two or more kinds of risk.

Employer Liability Insurance

Employer liability insurance is concerned with working conditions, death, accident at work,

and unforeseen incidents while in employment.

Health/Medical Insurance

Health/medical insurance is the contract between insurer and inured

whereby the insurer in return of premium agrees to pay the insured for

medical treatment expenses against any disease during the insurance

contract period. It is one of the popular insurance policies.

Aviation Insurance

Aviation insurance compensates against damage or loss of aircraft. It

provides financial security to the people who have lost their

possessions in an aircraft accident.