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• Financial risk is the possibility of financial loss.

Types of Risks

• Low-level daily risks, such as catching a cold.
• Substantive future risks, such as house robbery or car accidents.
• Risks are shown as a probability between 0% (never occur) and 100% (guaranteed).
• Risks can be split into two categories, High probability (age-related health issues / demise) and Low probability (house damage freak weather).

Speculative Risk

• Speculative risks have the possibility of either profit or loss.
• Insurance doesn’t cover speculative risks.
• Examples of this are gambling, starting a business, and investing in stocks.

Pure Risk

• Pure risks only have the potential for loss.
• There is no possibility of profit or gain.
• Insurance coverage is often available for pure risks.
• Examples include loss of income, death or illness, and property damage.

Risk, Perils, and Hazards

• Insurance policies specify a list of perils they cover.
• Perils are the causes of losses, for example, hail and fire cause property damage, and cancer can lead to disability or death.
• Hazards increase the chance of a peril.
• Examples of physical hazards are road conditions or driving under influence.
• Examples of moral hazards, like faking death to claim insurance.
• Examples of morale hazards, such as forgetfulness or carelessness.
• Property damage is a type of substantive future risk.

Examples of Risks, Perils and Harzards

• Property Damage (=Substantive future risk)
• Perils (=Specified in Policy), Fire, hail, lightening and Theft, robbery
• Hazards: (= increased chance of peril), Lack of fire safety in building and High crime rate in locality

Risk Management

• Risk management addresses concerns related to insurable and uninsurable risks.
• Identify risk management goals.
• Collect information to identify risk exposures facing the client.
• Analyze and evaluate the information.
• Construct a risk management strategy to determine appropriate risk treatment methods.
• Implement the recommendations.
• Monitor the recommendations for any needed changes.

Risk Managment Techniques

• For each aspect of life, you can develop a risk strategy
• For e.g., for a person who actively treks in the mountains, it's important to use risk managment.
• You can reduce (wear proper safety gear), avoid (stop trekking), retain (take the risk that an accident may happen while trekking), transfer (buy insurance for possible accidents while trekking).

Insurance advice

• When a risk management decision is not obvious, check if the following apply to the situation and act accordingly
• Consider the odds: The higher the odds of a risk occurring means the premium will be higher and insuring a high-probability risk will be exorbitant.
• Don't risk a lot for a little: Don't carry a catastrophic loss if the cost to insure is small.
• Don't risk more than you can lose: Don't be greedy and take calculated risks that will not ruin you if they fail.

Insurance

• Insurance gives a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium
• Insurer underwrites a risk, then issues a policy
• Consumers buy the policy & pay premiums
• Consumers can then claim compensation.

Underwriting

• Underwriting is when a risk has been accepted by an insurer
• To underwrite a risk, the underwriter will consider 4 factors
  • The 1st and 2nd factors relate to risk probability, the 3rd and 4th relate to commercial viability
• Law of large number
  • Foundational principle
  • Enough data helps predict the probability of loss
  • Risk of insuring 20,000 homes against fire can be predicted, and premiums can be calculated
• Loss by Chance
  • Loss must be a result of an accident or random event
    • The likelihood of a house catching fire is random/fortuitous
• Measurable and defined Loss
  • Loss to the insurer must be measurable by the insurer in monetary terms
    • Value of each house to be insured can be measured and defined by insurer
• Loss to Insurer is not catastrophic
  • Loss amount should not result in the insurer going bankrupt
    • A catastrophic loss (i.e., all 20,000 houses catching fire) would ruin the insurer

Principles of an Insurance Policy

• Insurance principles*:
• Insurable interest
• Indemnity
• Utmost good faith
• Subrogation
• Legal principles*:
• A legal activity as per law
• Must fall under some jurisdiction
• Involves legal parties (able to enter contract)
• Offer and acceptance (by insurer to insured)
• Have a consideration (payment/performance)

Insurable Interest

• Insurable interest is the basis of all insurance policies.
• To pass this check, there needs to be an object and associated financial hardship.
  • The insured incurs financial hardship if a defined object occurs.
• To exercise insurable interest, the policyholder must buy insurance on the item or entity.
• Any change in the insurable interest usually requires a new policy.
• Company insures its CEO
  • Object = Life of CEO
  • Financial hardship = cost of rehiring and retraining
• Flat-owner insures own flat
  • Object = Damage to flat from perils
  • Financial hardship = catastrophic loss
• Individual buys health insurance
  • Object = Healthcare for self
  • Financial hardship = cost of healthcare

Indemnity

• Indemnity means to make whole, i.e., restore condition to what it was prior to loss.
• It restricts the policyholder to the amount of covered loss, ensuring the policyholder does not make a loss or a profit from a policy.
• In effect, indemnity ensures a policyholder can't claim more than their loss.
• Indemnity does not strictly apply to life or personal accident insurance, since they're classified as "contingent" risks.
• House insured for Rs 50 lacs
  • Event: Fire
  • Insurance received: Rs 50 lacs
  • The fact that the current market price of the house was Rs 80 lacs does not matter
• Gold insured for Rs 2000
  • Event: Theft
  • Was valued 3 years ago
  • Since then, gold has appreciated 100%; the insurer still pays Rs 2000
• Life insured
  • Event: Death
  • Unable to make whole

Doctrine of Utmost Good Faith

• Means the highest degree of honesty and sincerity
• Pre-policy: policyholder discloses relevant information prior to accepting policy; questionnaires used today minimize such gaps.
• Post-policy: fraudulent claims by policyholders and delay tactics employed by insurers.
• Individual buys life insurance
  • They don't disclose a life-threatening job or profession at the time of taking the policy.
  • Policy can be void.
• Individual buys health insurance
  • They don't disclose diabetes at the time they make the policy since premium would go up.
  • Policy can be void.
• Insurer has to pay life insurance
  • They delay the process by six months citing the file was lost or that the signing authority was unavailable.

Subrogation

• Insurer can legally pursue the party that caused loss to the policyholder
  • For example, the insurer pays its client’s claim for losses directly, then seeks reimbursement from the other party’s insurance company.
• By law, the insurer can also sue the party to recover due money.
• It restricts the insurer from making a profit on the clai

Subrogation Examples

• Auto insurance:
  • Insurer pays the car owner for damage to the car
  • Insurer claims this amount from the insurer whose policy owner caused the damage.
• Health insurance:
  • If a policyholder is injured in a car accident, the insurer can recover the claim from the party at fault
• Special case:
  • Occasionally a policy can have subrogation waived by the policyholder
    • In such cases, the insurer will raise the premium since they cannot subrogate.

Insurance Contract information

• Terms (important)

  • Aleatory: Financial participation unequal
  • Adhesion: Insurer made it, so must abide by terms
  • Unilateral: One-directional from insurer to holder
  • Conditional: Conditions to be followed for claims

• Sections

  • Duty of disclosure: Reminds holder of obligations
  • Declarations: Statements made by policyholder
  • Insuring agreement: What is being insured
  • Conditions: Rules to be followed to claim
  • Exclusions: Things not covered by policy

Underinsurance / Co-Insurance

• Underinsurance (= problem):
  • Arises when insured value is lower than the actual value
    • For example, a home valued by the insurer at 100,000, but insured by the homeowner for 70,000
• Underinsurance becomes a problem when all policyholders do the same thing.
  • The insurer then receives insufficient premiums to maintain the pool's viability.
• Coinsurance (= solution), applied in the case of Underinsurance:
  • Only complete destruction will result in payment of sum insured
  • In all other cases, the coinsurance (or average) formula will apply for partial damage.
    • (Actual Amount of Insurance / Required Amount) * Amount of Loss = Amount of Claim
      • For example, 70000/100000 or 70% of loss amount will be paid under the coinsurance clause.

Insurance in India

• A well-built insurance sector provides the government with a safety net from loss-causing events and enhances its risk-taking ability.
• Benefits of Insurance to the Government
  • To fund infrastructure projects – Funds collected by insurance companies are available for the long term, so infrastructure projects can be fast-tracked.
  • Attract investments & FDI growth – deregulation (allowing private players to participate) and opening to FDI in insurance companies.
  • Individual safety nets – On basis, insurance money supports the family in the event of loss due to death, immobility, work restraints, or illness.
  • Stimulate society – due to external risks being managed through insurance, society can focus on productive activities like buying homes, expanding businesses, and demand.

Indian Insurance Laws

• Laws help
  • Protect the customer
  • Regulate the insurance companies
  • Acts
  • The Insurance Act, 1938
  • The Insurance Laws (Amendment) Act, 2015
  • Indian Contract Act, 1872
  • Consumer Protection Act, 2015
  • Doctrines of Waiver and Equitable Estoppel

The Insurance Act, 1938

• The primary legislation governing all types of insurance to furnish strict state jurisdiction over insurance businesses
• It was Amended in 2002, applicable to the whole of India.
• Part I of this Act lays down definitions
• 'the insurance company'
• insurer
• insurance agent
• actuary
• intermediaries
• others related to all aspects of the Insurance industry.
• Part II is the main section, dealing with provisions applicable to the insurers.
• Part V lays down the penalty for default in complying with this Act.
  • It also gives power to the Authority (IRDA) to make regulations.

The Insurance Laws (Amendments) Act, 2015

• Amended three previous Acts related to the insurance sector in India:
  • The Insurance Act, 1938.
  • The General Insurance Business (Nationalization) Act, 1972.
  • The Insurance Regulatory and Development Authority Act, 1999.
• Under the new Act:
  • Provisions related to investments by insurance companies and prohibiting investment of funds outside India have been strengthened.
  • The Authority's power of investigation and inspection has been further increased.
  • Provisions related to assignment/transfer of insurance policies, nomination of policyholder, prohibiting payment by commission have been strengthened.
  • Revised limitations of management expenses in insurance businesses have been set.
  • New provisions related to the appointment/record of insurance agents have been inserted.
  • Cap on Foreign Direct Investment (FDI) in Indian insurance companies has been raised to 49%, providing additional capital flow in the insurance sector per Section 7A.
  • The Securities Appellate Tribunal (SAT) has been made the appellate authority to IRDAI's order to set up an efficient grievance redressal system.

Indian Contract Act, 1872

• Section 182: an "agent" is a person employed to do any act for another, or to represent another in dealings with third persons, known as the "principal."
• It is important for a financial advisor to understand agency laws because nearly all business transactions worldwide are conducted through the relationship between the Agent and the Principal.
• An Agency is created when one person delegates authority to a different person or appoints them to do some specific tasks in their specified areas of work.
• It also deals with the appointment and authority of agents/sub-agents, the agent's duty to the principal, and the principal's duty to the agent among other important subject matters.

Consumer Protection Act, 2019

• The Act protects consumer interests in India.
• Makes provision for timely/effective administration and settlement of consumer disputes; applies to all goods and services.
• The 2019 Act repeals the 1986 Act, substantially enhancing the scope of protection afforded to consumers by bringing advertising claims, endorsements, and product liability within its purview.
• The Act continues to have Dispute Redressal Commissions at the District, State, and National, and the monetary value of complaints that can be entertained has been substantially increased.
• The 2019 Act introduces the power of judicial review, which will allow Consumer Commissions to review their orders.
• IRDA act along with Consumer Protection Act, 1986 protect the interests of consumers and give them the right to seek consumer redressal; providers offer consumers the right to prevent consumers from fraud and unfair practices while availing insurance services.

Doctrines of Waiver & Equitable Estoppel

• Doctrines are directly related to the responsibilities of insurance agents.
• Doctrines are important to individuals because they can work to their advantage when dealing with an insurance company.
• Waiver: Conscious and discretionary giving up of a known legal right, which can be express or implied.
• Express waiver: Could be oral or written; clear statement that a right is being given up.
• Implied waivers: Created through the conduct of the waiving party- e.g., if the insurance company accepts the premium from a policyholder after the expiration of a certain period, the company has impliedly waived its right to claim that the policy had lapsed.
• Estoppel: a legal rule that prevents someone from changing their mind about something they have previously said is true in court, often described as a rule of fair play.
• From the insurance point of view, an insurer may waive a right, and after the policyholder has relied upon the waiver and acted upon it, the insurer will be stopped from claiming the right.
• Example: Individual fails to disclose some information in the insurance proposal form, and the insurer issues the insurance policy without a request; in the future when a claim arises, the insurer cannot question the contract because of non-disclosure, and this is estoppel.

Structure of Indian Insurance

• Two categories: Life and General
• Both are governed by the Insurance Regulatory and Development Authority of India (IRDAI)
  • IRDAI was established via the Insurance Regulatory and Development Authority (IRDAI) 1999 Act.
  • Exempt from the purview of IRDAI is that the Indian postal department provides life insurance through Postal Life Insurance
• As of 2019, 70 insurance companies are active
  • 24 are life insurance (including LIC ).
  • 27 are general insurance.
  • 7 are stand-alone health.
  • 12 are re-insurers.

About IRDAI

• The Insurance Act, 1938 provides the powers to IRDAI.

• IRDAI is an autonomous and statutory body incorporated in 2000 following recommendations of the Malhotra Committee.

  • It has a 10-member board, appointed by the government (Chairman, 5 full-time directors, 4 part-time directors).

• Mission: to protect the interests of holders of insurance policies, to regulate, promote, and ensure the orderly growth of the Insurance industry

• Goals:

  • Encourage systematic growth of industry
  • Protect interest of policyholder
  • Promote high standards of integrity in the market
  • Speed up claim settlement
  • Set standards, conduct vigilance

IRDAI Duties, power and function

• Section 14 of the IRDAI Act includes the following
  • Registering and regulating insurance companies
  • Protecting policyholders’ interests
  • Licensing and establishing norms for intermediaries
  • Promoting professional organizations in insurance
  • Regulating and supervising premium rates and the terms of general insurance covers
  • Specifying financial reporting norms of insurance companies
  • Regulating investment of policyholders’ funds by insurance companies
  • Ensuring the protection of solvency margin by insurers
  • Safeguarding insurance coverage in rural and weaker areas of society

Licensing & Governance of Insurance companies and Intermediaries

• Rules were evolved over time by IRDAI as follows
  • 2009 -outlined comprehensive guidelines on Corporate Governance practices of insurance functions.
  • 2013 - Companies Act changed, used to review the 2009 guidelines
  • 2016 - recast as Corporate Governance Guidelines for Insurers in India - 2016
• Key aspects of these rules:
  • Governance structure
  • Board of Directors
  • Key management functions
  • Role of appointed actuaries
  • External auditor appointment
  • Disclosures
  • Relationships with stakeholders
  • Whistle-blower policy

Apex Insurance Regulator and Industry Watch-Dog

• IRDAI as the Apex body overseeing all insurance in India sets the following rules
  • Every insurance company needs to be registered under IRDAI
  • IRDAI sets all the rules for the industry
  • IRDAI served as Watch Dog for insurance / reinsurance
  • It must protect the interest of policyholders
  • Oversee the economic growth of the sector
  • All companies and associates (agents, TPA's, brokers etc.) must follow IRDAI rules and reporting guidelines

Supervision of Tariff Advisory Committee (TAC)

• TAC is a statutory body established by the Insurance (Amendment) Act, 1968, and mandated to "control and regulate the rates, advantages, terms, and conditions that may be offered by insurers in respect of general insurance business."
• TAC is a complementary body to IRDAI; the following describes its current composition (basis various acts):
  • IRDAI chairman is TAC chairman
  • A senior officer of IRDAI is the TAC vice-chairman
  • It has 10 elected members from the Indian insurance market
• TAC's decisions are final and binding to all non-life insurers as well as the insured in India and is tasked with the duties and functions given in Section 14(2) of IRDAI Act
  • Inspection of Risks
  • Drawing up and Updating Tariffs
  • Publishing Tariffs and Other Regulations
  • Ensuring Implementation of the Tariffs
  • Collection of Data and Analysis
  • Clarifying Queries of Insurers

Power to Issue Guidelines and Directions

• Power to delegate to the Chairperson, or any other member, any of its powers and functions
• Can form members' committees and delegate to those committees the powers and functions of the Authority by general or special order
• Can establish a Committee (known as the Insurance Advisory Committee (IAC))
• In consultation with the IAC, makes regulations consistent with the Act and the rules made under it to bring out the purposes of the Act
• However, such changes must be laid before the House of Parliament while in session

Insurance Councils/General Insurance Council

• Were constituted in 2001 under Section 64C of the Insurance Act 1928
• A forum of all stakeholders (government, statutory bodies, etc.) that works as an active link between the Indian insurance industry and the global markets.
• Life Insurance Council: assists the life insurers in maintaining high standards of service to policyholders and aims to transform the life insurance industry into a profitable service along with the welfare of policyholders.
• General Insurance Council: promotes a better understanding of the non-life insurance industry and aims to strengthen it
  • the council develops codes of conduct for the members companies, compliance programs to observe rules and regulations, etc.

Insurance Information Bureau of India (IIB)

• Insurance is data-driven; hence, IRDAI constituted IIB in 2009 to support it as an advisory body; in 2012, IIB was registered as an independent society.
• IIB has dedicated IT/ data support verticals for Life, Health, Motor, Property, Fire, etc.
• IIB also provides services for third-party motor insurance data (V-Seva package) and handles the Central Index Server (a nodal point between insurance repositories, helping de-duplicate demat accounts).
• The main functional areas of IIB includes:
  • Single source for insurance industry data
  • Provide benchmark rates for the industry
  • Publish reports to help IRDAI and insurers
  • Publish reports for the advantage of the entire industry
  • Provide inputs for policy analysis
  • Detect any fraud, insurance gaps, etc
  • Ensure data is accessible to market players

Insurance Ombudsman

• Created in 1998 by a Government of India Notification in the stated of objective to ensure impartial and hasty handling of public grievances
• A person who has suffered under the insurance company can complain in writing to the ombudsmen

Insurance Ombudsman rights

• Has the power to counsel and mediate over the insurer
• Has the power to act as a counselor and mediator for complaints including: • Repudiation of claims by the insurer • Delay in settlement of claims • Dispute regarding premium paid or payable • Dispute on the legal build of the policies • Non-issuance of insurance documents to policyholders after receipt of premium

Appointments for Insurance Ombudsmen

• Assigned from civil services from the insurance industry.
• Administrative services and judicial services.
• Must be 70 years of age or younger by 3 years.
• Executive Council of Insurers allocates to the 17 Ombudsmen across the country within different geographical areas.

Insurance Institute of India

• Introduction:

  • Formed in 1955 in Mumbai, as the Federation of Insurance Institutes (apex education and training provider).

• It awards Certificates and Diplomas to candidates.

  • These have been recognised by the Indian Government, the IRDAI and the Insurance companies (India and Abroad).

• Education & Training:

  • IRDAI recognizes it as an examining body to conduct pre-recruitment examinations for Insurance Agents, Corporate Agents, Web Aggregators, Insurance Marketing Firm and Renewal of Insurance Broker exams, pre-licensing test for Insurance Surveyors and Loss Assessors, examining body for Postal Life Insurance Agents.

• Functions

  • To run college and conduct examinations within the insurance field and award certificates, diplomas and degrees
  • To prepare and provide reading materials and similar alternative education methods
  • To form and maintain a library.
  • To provide scholarships, grants and prizes for research or any other educational work pertaining to insurance.
  • To ascertain the law and practice and to disseminate such knowledge among those interested in insurance.
  • Assist people in the insurance industry to acquire necessary skills and expertise.

Parties involved in Insurance

• Insurance involves multiple parties. There are various additional parties involved in Insurance
• Six parties directly involved in of policies, and 3 provide support to insurances
• Insurance Intermediaries involved:*
• Agents
• Others
• Web aggregators
• Insurance Brokers
• Insurance marketing firms
• Point of sales person
• Surveyors
• Medical examiners
• Third party administrators (TPA's)
• Insurance Repositories
• Cashflow and assests
  • Loss of Income as assests
• Health & Life
  • What if Unforseen Event happens?
• Legal
  • Client expousre in litigation