The outcome of this session is to understand the fundamentals of insurance, the risk management techniques ,Principles of Insurance contracts & Key Insurance terminologies

1. Sri Krishna Arts and Science College
Department of Commerce
Faculty:Mrs. S. Akhila

2. UNIT-I
RISK
INSURANCE FOR BPS

3. Agenda
 Learning Objectives
 Expected Outcome
 Key terms
 Summary
 Test your knowledge (MCQ)
 Introduction to next session

4. Learning Objectives
Risk Management – Fundamental of Insurance– Characteristics of
ValidContract – Principles & practices of Insurance Contract – Key
Insuranceterminologies

5. Expected Outcome
The outcome of this session is to understandthe fundamentals
of insurance, the risk management techniques ,Principles of
Insurance contracts & Key Insurance terminologies.

6. Risk Management

7. Risk Management
Risk Prevention or Avoidance
Risk Control
Risk Retention
Risk Transfer
Risk management is the identification, evaluation, and
prioritization of risks.
Risk can be managed in the following ways:

8. Risk Prevention or Avoidance
Risk Management
It is a risk management technique whereby risk of loss is prevented
or avoided by not indulging in those kind of activities e.g., A man
avoiding bad habits which may cause health hazards.
Risk Control
It is a risk management technique of putting up adequate safety and
security measures to minimize the severity of losses.
E.G installing fire extinguishers in factories.

9. Risk Retention
It is a risk management technique where some losses in future are
ascertained and it is retained by the insured in the form of
insurance cover.
Risk Transfer
It is a risk management technique where the risk on the asset is
transferred by the owner and compensated by the insurance
company.

10. Fundamentals of Insurance
Insurance is a promise made by
the insurer to the insured to
compensate against any significant
potential losses which are financial
in nature, in exchange of a periodic
payment the insured makes to the
insurer.
INSURANCE

11. WHY INSURANCE ?
 One buy’s insurance to ensure safety
against any significant financial losses he/she
may face in future.
Insurance also helps financial planning and
provides tax benefits to the insured.
PURPOSE OF INSURANCE
 To Provide protection against financial loss.
It can only provide compensation for the loss
that occurs as a result of the insured event
happening.

12. BENEFITS OF INSURANCE
Life Risk Cover
Death Benefits
Return on Investment
Tax Benefits
Loan Options
Life Stage Planning
Assured Income Benefits
Riders

13. An insurance policy is a financial
contract between a policyholder and an
insurer, which is almost always an
insurance company.
Insurance works on the concept of Risk
Pooling where the loss incurred by the
few is shared by many in the same group
having similar risk exposure.
How does INSURANCE work?

14. Characteristics of valid contract
An insurance policy is a legal contract, i.e. an agreement enforceable by
law, between the insurance company (insurer) and the insured person.
There are certain essential elements to make a contract valid:
Offer & acceptance
Consideration
Capacity to contract
Consensus ad idem
Legality of object or purpose
Capability of performance

15. Offer & acceptance
Characteristics of valid contract
In a contract there must be at least two parties one of them making the
offer and the other accepting it. There must thus be an offer by one party
and its acceptance by the other. The offer when accepted becomes
agreement.
Consideration
Consideration is something of value which is exchanged. Any valid
contract must have a consideration. A contract without consideration is a
‘wagering contract’ or ‘betting’. Consideration could be in cash or in kind.
In an insurance contract, Premium is the consideration.

16. The parties in an agreement must have the mutual consent i.e. they
must agree upon the same thing and in the same sense. This means that
there must be consensus ad idem (i.e. both parties having the same
understanding ).
Capacity to contract
Characteristics of valid contract
Persons entering in to contracts should be competent to do so. Following
are the criteria:
The person is a major by age ( age 18 & above )
The person is of sound mind.
The person is not disqualified, by law, from entering in to contract.
Any contract entered into without following any of the above criteria will
become null and void.
Consensus ad idem

17. Characteristics of valid contract
Legality of object or purpose
The objective of both the parties to the contract should be to
create a legal relationship. One cannot purchase insurance
for any illegal purpose or to make monetary gains.
Capability of performance
The contract must be capable of being performed by both the
parties.

18. Principles & Practices of insurance contract
a) Insurable Interest
When an individual gains from the existence of
another individual or property and suffers financial
loss on death or disability of the other individual or
damage or destruction of the property, there is
insurable interest.
Eg. Employers have insurable interest on their
employees because of their monetary contribution
to the business and if an employee falls sick &
remains absent from workplace for a long time it
will adversely impact the work.

19. Relevance of Insurable Interest
In order to buy any kind of insurance, an
individual has to have insurable interest in the
subject matter they wish to insure.
A person’s own life, other’s life, property, etc.
are examples of subject matter of insurance.
Insurable interest is deemed to exist in the
following circumstances:
Own Life
A person has insurable interest in his own life,
where he gets insurance policy for himself.

20. Spouse
A husband has insurable interest in the life of his wife and vice versa.
Children
Parents has insurable interest on their dependant children and the children also
take insurance out of their insurable interest on their dependent parents.
Assets
A person has insurable interest in the assets he owns as he will use the assets for
his benefit and will suffer if the assets get damaged.
Creditor
A creditor has insurable interest in the life of the debtor to the extend of the money
lended.

21. Employer-Employee
Employers have insurable interest on their employees because of their
monetary contribution to the business and if an employee falls sick &
remains absent from workplace for a long time it will adversely impact the
work.
Keyman Insurance
A company has insurable interest in the lives of certain people whose
expertise is extremely significant for company’s operations.
Partners
Partners in a business have insurable interests in the lives of each other.

22. In life insurance, insurable interest needs to exist at
the time of purchasing the policy,.
In case of general insurance, insurable interest
must exist at the time of purchase of the policy and
also at the time of making a claim.
In marine insurance, insurable interest need to exist
only at the time of the claim.

23. b) Utmost good faith
 Utmost good faith is a common law principle (sometimes called Uberrimae
Fidei).
The principle means that every person who enters into a contract of insurance
has a legal obligation to act with utmost good faith towards the company
offering the insurance.
A person must, therefore, always be honest and accurate in the information
they give to the insurance company.
 The insurance company also has a responsibility to act with good faith in all its
dealings with the insured.
It helps the underwriter to decide on two things:
a) Whether to accept the risk in the proposal or to reject it and ;
b) If the proposal is to be accepted, then at what price (premium) it should be
accepted.

24. Breachof the dutyof utmost goodfaith
Non-Disclosure or omission of a material fact by the proposer, either
intentionally or unintentionally. E.g.: the proposer does not disclose that
he had undergone a surgery in his childhood as he feels he has
completely recovered from the surgery.
Concealment of a material fact. E.g.: the proposer consumes alcohol
regularly and before applying for life insurance he stops consuming
alcohol for a month so that it does not get detected during the medical
test.
Fraudulent Misrepresentation or statements made with the intention of
deceiving the insurer. E.g.: the proposer declares his age to be less than
his actual age and provides forged proof of age documents.
Innocent misrepresentation or inaccurate statements which the
proposer believes to be true.

25. Consequences of non- disclosure
If the insured is guilty of breach of the duty of disclosure, the insurer may avoid
the contract entirely, from the beginning. In that case no claim will be payable
and insurer may keep the premium.
Life insurance- duty of disclosure
In the case of life insurance, the duty of disclosure arises at the time of applying
for the coverage until the time the risk is accepted by the insurance company
and the policy cover has commenced.

26. Indisputability Clause (Section 45)
 Section 45 of the insurance Act specifies that within the first two years of the
policy, if the insurance company comes to know that some material facts have
not been disclosed by the proposer or have been misrepresented, it can declare
the policy to be null and void.
 The insurance company may also keep all the premiums paid.
Indemnity
The principle of indemnity makes sure that the insured is compensated only to
the extent to which he has suffered loss and that insurance is not used to make
profit.
So in the event of a loss the insurance company compensates (indemnifies) the
insured for the loss he incurs as per the terms and conditions of the policy.

27. Key insurance terminologies
Premium
Premium is the ‘consideration’ paid by policy holder to the insurance
company in order to get coverage from an insurance policy as per the
terms of the ‘insurance contract’
SumAssured
The maximum amount of money that an insurer will have to pay as claim
as per the terms of the insurance contract.
Policy Term
The defined period for which the insurance coverage is valid.

28. Claims
Claim is the demand for fulfillment of the promise made by the
insurer at the time of entering into the contract with the insured.
Lapse
The policy holder has to pay regular premiums on the due dates.
However if the policyholder does not pay the premium within
the grace period , then on expiry of the days of grace the policy is
said to be ‘Lapsed’. The benefits of the policy stops as well.

29. Key Terms
Risk
Management
Premium
Insurance
Valid contract
Risk Prevention
Risk Retention
Risk Transfer
Consideration
Risk Control

30. Summary
Risk management is the identification, evaluation, and
prioritization of risks.
Risk can be managed by following ways:
-Risk Prevention or Avoidance
-Risk Control
-Risk Retention
-Risk Transfer
Insurance is a promise made by the insurer to the insured to
compensate against any significant potential losses which are
financial in nature

31. Summary
An insurance policy is a legal contract, i.e. an agreement
enforceable by law, between the insurance company (insurer)
and the insured person.
 In life insurance, insurable interest needs to exist at the time
of purchasing the policy
In case of general insurance, insurable interest must exist at
the time of purchase of the policy and also at the time of making
a claim.
In marine insurance, insurable interest need to exist only at the
time of the claim.

32. MCQ ???????

33. 1.Which risk-management technique does self-
insurance satisfy?
a. Risk reduction
b. Risk assumption
c. Risk avoidance
d. Risk elimination
(b) Risk assumption

34. 2. To be insurable, a risk must have potential losses that
are
a. under the control of the insured.
b. centrally located.
c. predictable.
d. unmeasurable.
(c) predictable

35. 3. Which type of insurance protects the policyholder against
loss or damage to a ship or its cargo on
the high seas?
a. hazards
b. inland
c. transportation
d. marine
(d) marine

36. 4. A type of insurance that combines protection with an
investment plan is called
a. whole life.
b. endowment.
c. limited-pay.
d. universal.
(d) universal

37. 5. Choosing not to ride in a car is an example of
a. shifting risks.
b. risk reduction.
c. risk avoidance.
d. risk assumption.
(c) riskavoidance

38. Next Hour-
History of Insurance

39. History of Insurance
The history of insurance
describes the development of the
modern business of insurance
against risks, especially regarding
cargo, property, death, automobile
accidents, and medical treatment.

40. SKASC-Department of Commerce BPS & CM