INSURANCE AND RISK MANAGEMENT By Dr.U.PRIYA Head & Assistant

INSURANCE AND RISK MANAGEMENT By Dr.U.PRIYA Head & Assistant Professor PG & Research Department of Commerce Bon Secours College for Women, Thanjavur

INSURANCE Insurance refers to a contractual arrangement in which one party, i.e. insurance company or the insurer, agrees to compensate the loss or damage sustained to the Insurer, i.e. the insured, by paying a definite amount, in exchange for an adequate consideration called as premium.

INSURANCE 1. Financially Security - the best way to become financially secure is to cover yourself, your family, and your assets with insurance. You can buy or renew insurance online and receive a payout for financial support, in case there happens to be an unforeseen event 2. Transfer of Risk - The contract of insurance works on the ‘principle of transfer of financial risk from the insured to the insurer’. As an insured, you pay premiums to receive compensation from the insurer, in case of occurrence of an unforeseen event. 3. Complete Protection for You and Your Family - This is why it is important to make sure that you and your family are completely secure to face any emergency. 4. No More Stress or Tension During Difficult Times -None of us can see the future or predetermine the future events. The insurance to take care of the outcomes of such tragedies such as illness, injury or permanent disability, even death- it can save our self and our family from tension and stress. 5. Some Types of Insurances are Compulsory - Insurance is necessary because sometimes it is mandatory as per the law. As per the Motor Vehicle Act of 1988, it is compulsory to have at least a third-party motor insurance for every motor vehicle plying on road in India 6. Peace of Mind - Having insurance offers you financial security and also peace of mind. No amount of money can replace your peace of mind.

ADVANTAGES OF INSURANCE 1. Providing Security - Insurance provides a cover against any sudden loss. In case of marine and fire insurance the loss suffered by the insured is fully compensated and he is restored to his earlier position. In the same way, if a bread-bringing member of the family dies prematurely, the family is provided with money to continue with its livelihood. So, insurance gives security to both individual and business-man. 2. Spreading of Risk - The basic principle of insurance is to spread risk among a large number of people. A large number of persons get insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of funds of the insurer. 3. Source for Collecting Funds - The premium is received regularly in instalments. These funds can be gainfully employed in industrial development of a country. 4. Encourage Savings - The amount of policy is paid to the insured or to his nominees. In case of fixed time policies, the insured gets a lump-sum amount after the maturity of the policy. 5. Encourage International Trade - International trade involves many risks in transporting goods from one country to another. Insurance provides protection against all types of sea-risks. It has helped the development of international trade on a large scale.

BENEFITS OF INSURANCE MANAGEMENT I. Benefits of Individuals 1. 2. 3. 4. 5. 6. 7. Provision of safety and security Protection of mortgaged property offering peace of mind Eliminating dependency encouraging saving habits providing profitable investment Life insurance fulfils the needs of a person A. family needs b. old age needs c. Re-adjustment needs (like disability , unemployment, death) D. Special Needs (old age or death, The clean up needs ( marriage, settlement of children, 8. Clean up funds ( tax benefits)

II Benefits to business 1. uncertainty of business and loss is reduced - Uncertainty comes from changes in economic social and political trends. So the insurance plays an important role in the avoidance of risk and uncertainty and minimization of losses to the maximum level. 2. Continuation of business (eg. Partner death business continue through the policy) 3. Encashment of credit(pledging the policy) - Business man enjoy better credit standing as the risks are transferred to the insurance company by pledging as collateral for the loan. 4. Efficiency of the business is increased – A business man is free from unnecessary botheration and devotes more care and energy to maximize the profit and wealth of his concern. 5. key man indemnification – means particular man whose capital, expertise, experience, energy , ability to control, goodwill and dutifulness make him the most valuable asset in the business and whose absence will reduce the income of the employer till the time such employee is not substituted . On that time the insurance will help the family)

III. Benefits to the society 1. protection of society’s wealth - Insurance not only protect humans and their property resources but also protects the overall wealth of the society against damage, destruction, disappearance and degradation. 2. stimulates economic growth of the country – If any such damage arises due to loss of assets, it can be replaced without loss of production. Thus, the insurers accelerate the production cycle thereby, stimulating the economic growth of the country. 3. Reduction in inflation – Pressure of inflation can be reduced by insurance in the form of premium the insurance company generates from the public and by providing sufficient funds for productive purposes leading to reduction of inflation.

FUNCTIONS OF INSURANCE 1. Insurance provides certainty It provides payment for risk of loss. There are different types of uncertainty of a risk. The risk will occur or not, when will occur, how much loss will be there?. i.e, there are uncertainty and the assured is given certainty of payment of loss. 2. Insurance provides protection It provides protection against the probable of chances of loss. This insurance cannot check the happening but it can compensate the losses.

3. Insurance shares the risk the share is obtained from each and every insured in the shape of premium without which the insurer does not guarantee protection. 4. Insurance provides capital formation The insurance provides capital to the society. The scarcity of capital of the society is minimized to a greater extent with the help of investment of insurance. 5. Insurance prevents losses The insurance companies assist financially to the health organization, fire brigade , educational institutions and other organization, which are engaged in preventing the losses of the masses from death or damage.

INSURANCE ORGANIZATION IN INDIA 1. Departmental organization Central govt. – postal insurance and state govt. – Sickness, maternity, medical, disability and pension insurance) 2. Corporations a. LIC b. General insurance like National insurance com, The new India Assurance company, The oriental fire and general insurance, The united India insurance company . c. Employee state insurance d. Deposit insurance corporations 3. Govt. companies - eg. Export risk insurance corporation – 1957 and its name is converted into Export credit and Guarantee corporation in the year 1964.

INTRODUCTION TO RISK Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.

MOST RISKY SITUATION – ELEMENTS Outcome is uncertain There is a probability that on or other’s may occur. Two possible outcomes for a given situation Out of possible outcome One is unfavourable or not liked by the individual

UNCERTAINTY It means a situation where the outcome is not certain or unknown. It refers to a state of mind characterised by doubt, based on lack of knowledge about what will or what will not happen in the future. Eg. Some weights or probabilities can be assigned into risky situations but uncertainty, the psychological reaction to the absence of knowledge lacks this privilege. (Decisions depends upon the skill, the judgement and of course luck).

TYPES OF RISK Financial and Non – Financial Risks Quantifiable (Financial risk) and Non – quantifiable (tension or loss of peace) Risks Types of Risk Static (Inflation & technology changes) and Dynamic (loss due to law) Risks Individual and Group Risks Pure (Car meet with an accident) and Speculative (stock market – gain or loss) Risks

1. Financial and Non-Financial Risk Financial risk - It involves three important elements in risky situation That some one is adversely affected by the happening of an event The assets or income is likely to be exposed to a financial loss from the occurrence of the event The peril can cause the loss

2. Individual and Group Risks Individual Risk - Particular risks are confined to individual identities or small group, theft, robbery, fire, etc. Group risk - These risk factors may be social – economic or political or natural calamities for eg. Earthquakes, floods, wars, unemployment. 3 . Pure and Speculative (stock market – gain or loss) Risks Pure Risk - It is a category of threat that is beyond human control and has only one possible outcome if it occur: loss. Pure risk includes such incidents as natural disasters, fire or untimely death. Speculative risk – This risk that can be taken on voluntarily and will either result in a profit or loss. For eg. Investment in a stock market – we may wither gain or loss.

4 .Static and Dynamic Risks Static Risk – This risk are more or less predictable and are not affected by the economic conditions, the possibility of loss in a business or unemployment after undergoing the professional qualification, loss due to act of others etc, are static and accordignly suitable for insurance Dynamic Risk - The risk of loss resulting from changes in culture, taste or policy. . It is related to political risk, but primarily it denotes cultural changes.

5. Quantifiable and Non – quantifiable Risks Quantifiable risk – The risk which can be measured like financial risk Non – quantifiable risk – Which may result in repercussions like tension or loss of peace.

Pure Risks Personal Risks (It is directly affect the individual’s capacity to earn income) Premature Death Old age Sickness or disability Unemployment Property Risks ( The risks to the person in possession of the property being damaged or lost) Immovable (flood, earthquake, fire) Liability Risk (It arising out of the intentional or unintentional injury to the persons or damages Workman’s compensation

METHODS OF HANDLING PURE RISK Avoidance (patents / copy rights) Loss Control Loss preservation (Smoking) Loss reduction (First aid boxes - & fire fighting equipment) Retention (Fully aware of the risks) Transfer Contractual agreements (insurance ) Corporatizing (partnership company liability )

INVESTMENT PLANS Investment Plans are financial products that provide the opportunity to create wealth for future. Investment plans offer to help individuals in disciplined and periodic investment into different funds overtime so as to achieve their future financial goals.

WHY DO YOU NEED SAVINGS AND INVESTMENT PLANS? Savings and Investment plans help you save regularly and be adequately prepared to meet family’s financial needs in the future. These online investment plans offer various features that help meet your specific financial needs with investments made according to your appetite to take risks.

INVESTMENT SCHEMES Most investors want to make investments in such a way that they get sky-high returns as fast as possible without the risk of losing the principal money. This is the reason why many investors are always on the lookout for top investment plans where they can double their money in few months or years with little or no risk. It is a fact that investment products that give high returns with low risk do not exist. In reality, risk and returns are inversely related, i.e., higher the returns, higher is the risk, and vice versa.

THINGS TO CHECK BEFORE INVESTMENT PLANNING 1. Goal Planning - objectives that you want to fulfill through your investment plans. Eg. Short term objectives may be planning for a world tour or purchasing a car or a home, while long term ones may be arranging for your child’s higher education and/or marriage, or building a corpus for your retired life. 2. Dependents - we need to plan for our self only or future need to secure our family financially i.e. we , consider the number of our dependents – spouse, children and aged parents 3. Current Expenses - Decide on the amount that you would be able to contribute towards your investment plan without compromising on your existing lifestyle and expenses. 4. Future Expenses - Predicting future expenses is difficult, More so, because we need to consider the rising expenses and inflationary effects. Therefore, it is recommended that our plan for a higher amount than what you need to support your current lifestyle. 5. Major Expenses - expenses like your own marriage plans, child’s education and marriage, or any other necessities or aspirations that you may have to decide on the amount that you can invest in other investment plans. 6. Insurance Cover - Your insurance cover should be sufficient to meet all your and your family’s financial requirements, irrespective of life’s uncertainties

7. Fund Planning - Debts – Remember to calculate the prevailing debts like loans and EMIs against your name while deciding on other investment plans. 8. Provision for Alternate Income - Unforeseen incidents make it necessary for you to financially safeguard your life and that of your dependents against all odds. A lack of stable source of income may arise not just after retirement, but also due to total or partial disability or even death due to an accident. Opt for a life cover that will financially support you and your family, in case such a situation arises. 9. Supplementary source of regular income – to share the premiums that you pay towards investment plans, or one of you can bear the current family expenses while the other pays towards the investment plans. 10. Calculation of the Premium Amount - Know the exact premium that you have to pay towards your chosen investment plan. This will enable you to plan our finances well and, most importantly, decide whether it suits your pocket. Online premium calculator available on the websites of investment companies offer investors the convenience of getting free premium quotes.

COMPARE BEFORE APPLYING FOR INVESTMENT PLANS 1. Cover - 2. Add-on Riders - 3. Premium - 4. Option to Increase or Decrease Premium - benefits being offered by each investment plan and compare between them before purchasing one. Opt for one that meets your unique investment needs. every plan may not be necessary for every investor. Know about the features and benefits of each rider and opt for only the ones that are suitable for your unique needs. Start with a premium that you can afford and increase it as and when you can. It is recommended that you opt for an investment plan that enables you to customize it as per your requirements even during its policy years. This allows you the convenience of starting with a lower cover and gradually increasing it as per your rising annual income.

5. Returns - The investment plan you should invest in will depend on the returns you expect to receive and whether you are looking for a short term or long term investment plan. This, in turn, will be determined by your risk appetite. The higher your risk appetite, the higher will be your scope for enjoying higher returns 6. Type of Payouts - There are some investment plans that offer regular pay outs, others offer a one-time payment, while still others that offer a mix of both. Choose the option that best suits your purpose of investment. 7. Alternative Investment and Insurance Options - A single investment plan may not be sufficient to meet multiple aspirations for the future and securing the financial needs of your family. Hence, it would be wise to invest in more than one investment plan, each meant for a different goal.

RIDERS OF INVESTMENT PLANS Accidental Death Riders - Accidental & Total Permanent Disability Rider - Critical Illness Rider - Waiver of Premium - Accelerated Death Benefit Rider - If the policyholder dies the accidental death, the insurance company will pay the sum assured plus the rider benefit to the nominee. If the policyholder suffers total permanent disability due to the accident, the insurance company gives the rider benefit to the life insured On diagnosis of any major critical illnesses such as heart attack, cancer, stroke, kidney failure, paralysis, coma, the insurance company pays the rider benefit. In case of a vanilla term insurance, if the life insured suffers any disability because of which is unable to pay any future premiums, the policy terminates On diagnosis with a terminal illness, such as Cancer, Leukemia. AIDS, Ebola, the insurance company pays a part of the sum assured in advance and the rest to the nominee.

Thank you