Principles & Practice of Insurance

TOPIC

Insurance & capital markets in India:Application and Management concept in the field of insurance.

CONTENTS Insurance Important terms usedCharacteristicsPrincipleFunctionRelevance Capital market Purpose of capital market RiskCauses of RiskTypes of RiskPrinciples of Risk ManagementSteps in Risk ManagementRisk Management TechniquesReason for Risk or Risk Management practices

INSURANCEInsurance is defined as a form of contract between two parties whereby one party(insurer) agrees to compensate the other party (insured) against a loss which may or may arise against a payment of a consideration (premium).

IMPORTANT TERMS Insured InsurerPremium Compensation Insurance policy Insured amount Risk ContingencyPeril

CHARACTERISTICS Contract Consideration Sharing of financial risk Co-operative device Risk evaluation in advance Good faith Contract of indemnity Amount of payment Insurance is not a gambling Insurance is not a charity

PRINCIPLES Principle of indemnity Doctrine of subrogation Principle of causa proximaPrinciple of insurable interest Principle of utmost good faith

FUNCTIONS

Primary FunctionsSecondary FunctionsOther Functions

Primary FunctionsProvides certainityProvides protectionRisk-sharingProvides security

Secondary function Prevention of loss Provides capital Improves efficiency Economic progress

Other functions Encourages savings Feeling of Self confidence & goodwill Credit facility

RELEVANCE OF INSURANCERelevance to an IndividualRelevance to BusinessRelevance to Society

Relevance to an Individual Insurance provides security & safety Life insurance encourage savings Life insurance provides profitable investment Life insurance fulfils the need of a person

Relevance to Business Uncertainty of business losses is reduced Business efficiency is increased enhancement of credit Businesses continuation Welfare of employees

Relevance to Society Wealth of the society is protected Economic growth of the country Reduction in inflation

Capital market Capital market is a market for long term securities (equity & debt).Capital market is a place where buyer & sellers engaged In trade of financial securities like bond ,stock etc

Purpose of Capital MarketMobilize long term saving to finance long

term investment Provide risk capital in the form of equity Encourage broader ownership of productive

assets Lower the cost of transaction & information Provide liquidity with a mechanism enabling

the investor to sell financial assets

RISK By risk we mean 'uncertainty'.In other words,it refers to 'possiblity ' or change of meeting a danger or suffering or change of exposure to adversity or danger.

CAUSES OF RISK Natural CausesUnnatural Changes

Natural Causes Seasonal Changes Geographical Changes Natural Changes

Unnatural CausesHuman forces Economic causesGovernment policy

Other causes: the above list is illustrative ,not exhaustive. Therfore , in addition to the above mentioned natural and unnatural causes , sometimes causes like inefficient management lower quality of product ,etc.

Type of risks Financial and non-financial risks Pure and speculative risksDynamic risks and static risks Fundamental and particular risks

Principles of risk management Control of speculative risks Control of pure risk

Steps in risk management Identification of source of risk Measurement of riskTreatment of risk Selecting suitable method of risk handling Implementing the selected method Evaluation

Risk handling techniques

Avoiding risk Risk reduction Assumption of risk Transfer of risksInsurance

Reason for risk or risk management practices Industries and business have grown in size,

diversification ,process and strategic alliances

Increase in business relations with suppliers, consumers, employees and government.

Business operations face many contingency due to tough competition between enterprises.

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