Section I E Module Outline plan Maharaja Surajmal Institute Affiliated to GGSIPU Delhi Course Bachelor of Business Administration Subject Module On Principles of Insurance BBA B I Semester II Credit 4 Module Contributor s Dr Parul Deshwal Ms Harshita Gupta 1 Syllabus 2 CONTENTS Unit Name Unit No Page Number C Concept of risk II III 3 12 13 29 30 66 Lesson1 Risk and Risk Management Lesson 2 Pooling of risk and Insurable Risk Concept of Insurance Lesson 1 Relevance of Insurance in Socio Economic Development Lesson 2 Types of Insurance Organizations Lesson 3 Intermediaries in Insurance Business Formation of Insurance Contracts Lesson1 Lesson 1 Life Insurance Lesson 2 FIRE INSURANCE Lesson 3 MARINE INSURANCE Lesson 4 MOTOR INSURANCE Lesson 5 FUNDAMENTALS PRINCIPLES OF GENERAL INSURANCE Classification of Insurance Lesson1 Life and General Insurance Lesson2 Pension plans and social security benefits in India Glossary Key Words Insurance Risk Life insurance Insurance Intermediaries IV 67 78 3 Lesson 1 Risk and its Management Unit 1 Concept of Risk In an investor context risk is the amount of uncertainty an investor is willing to accept in regard to the future returns they expect from their investment Risk tolerance then is the level of risk an investor is willing to have with an investment and is usually determined by things like their age and amount of disposable income Risk is generally referred to in terms of business or investment but it is also applicable in macroeconomic situations For example some kinds of risk examine how inflation market dynamics or developments and consumer preferences affect investments countries or companies Risk in simple terms is a possibility of something dangerous or unpleasant happening a situation that could be dangerous or have a bad result Risk is the situation under which the decision outcomes and their probabilities of occurrences are known to the decision maker and uncertainty is the situation under which such information is not available to the decision maker Example You meet a person Now there is uncertainty if that person and you might become best of friends or worst of enemies or might not see each other ever again This is uncertainty wide range of possible outcomes with complete lack of certainty If someone asks you take their guarantee you will not want to do that because there is complete uncertainty about their behaviour unless you get to know them Now let s assume you get to know that person and really like him her You both become friends and you take financial guarantee for that person since that person has shown good financial behaviour for as long as you have known them and also you have not heard any foul information about them Now there is a risk that despite being the good person as you know him her to be he she might probably default on their financial obligations This risk is measurable and probabilities can be assigned to them Types of Risk 1 Financial risk are the risk where the outcome of an event i e event giving birth to a loss can be measured in monetary terms The losses can be assessed and a proper money value can be given to those losses Non Financial risk are the risk the outcome of which cannot be measured in monetary terms There may be a wrong choice or a wrong decision giving rise to possible discomfort or disliking or embarrassment but not being capable of valuation in money terms 4 2 Pure risk are those risk where the outcome shall result in loss only or at best a break even situation Speculative risk are those risk where there is the possibility of gain or profit 3 Fundamental risk are the risk mostly emanating from nature These are the risk that arise from causes that are beyond the control of an individual or group of individuals Particular risk are as opposed to what has been narrated herein before there are risk which usually arise from actions of individuals or even group of individuals 4 Static risks are risks that involve losses brought about by acts of nature or by malicious and criminal acts by another person Dynamic risk is a risk brought on by sudden and unpredictable changes in the economy As an example this can occur through changes in pricing income brand preference or technology Risk Management Opposed to what many insurance agents are telling you insurance is actually all about mitigating risk The risk management process is a framework for the actions that need to be taken There are five basic steps that are taken to manage risk these steps are referred to as the risk management process It begins with identifying risks goes on to analyze risks then the risk is prioritized a solution is implemented and finally the risk is monitored In manual systems each step involves a lot of documentation and administration 1 The first step is to identify the risks that the business is exposed to in its operating environment There are many different types of risks legal risks environmental risks market risks regulatory risks and much more It is important to identify as many of these risk factors as possible In a manual environment these risks are noted down manually 5 2 Once a risk has been identified it needs to be analyzed The scope of the risk must be determined It is also important to understand the link between the risk and different factors within the organization To determine the severity and seriousness of the risk it is necessary to see how many business functions the risk affects 3 Risks need to be ranked and prioritized Most risk management solutions have different categories of risks depending on the severity of the risk A risk that may cause some inconvenience is rated lowly risks that can result in catastrophic loss are rated the highest It is important to rank risks because it allows the organization to gain a holistic view of the risk exposure of the whole organization 4 Every risk needs to be eliminated or contained as much as possible This is done by connecting with the experts of the field to which the risk belongs In a manual environment this entails contacting each and every stakeholder and then setting up meetings so everyone can talk and discuss the issues 5 Not all risks can be eliminated some risks are always present Market risks and environmental risks are just two examples of risks that always need to be monitored Under manual systems monitoring happens through diligent employees Risk Control Techniques 1 Avoidance To cancel or postpone the activity involving risk 2 Acceptance To bear