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Risk Management & Insurance Planning
Gopi Prasad
AFP-Insurance
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Risk Management & Insurance Planning
1Introduction to Risk Management
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Risk Management & Insurance Planning
• Introduction to Risk Management– Meaning of Risk– Basic Categories of Risk– Types of Pure Risk– Property Risk– Liability Risk– Methods of Handling Risk
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Risk Management & Insurance Planning
Meaning of Risk– Probability of loss– Uncertainty of occurrence
Loss: Out come of risk occurrence.
Peril: Cause of risk.
Hazard: Situation or symptom that aggravates risk.
Insurability: Loss measurable in terms of money.
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Risk Management & Insurance Planning
Meaning of Risk– Probability of loss– Uncertainty of occurrence
Loss: Car theft,
Peril: Death, Accident, Flood, Earth Quake etc
Hazard: Ditch on road, Hole in the heart etc
Insurability: Death :- Person loss and Income loss.
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Basic Categories of Risk• Pure & Speculative Risks• Fundamental & Particular Risks
Pure Risk: Possibility of loss or no loss.
Speculative Risk: Possibility of Profit or Loss.
Fundamental Risk: Affects the entire economy, large group
Particular Risk: Affects only individuals not entire economy
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Basic Categories of Risk• Pure & Speculative Risks• Fundamental & Particular Risks
Pure Risk: death, catastrophe,
Speculative Risk: price change of stock result profit or loss
Fundamental Risk: inflation, floods, earth quake
Particular Risk: Car theft, Bank robbery
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Types of Pure Risks:• Personal Risks: Directly affect individual
Premature death, Insufficient income on retirement, Poor Health, Unemployment
• Property Risk: Damage, Distraction or Theft of Property
Direct Loss-Earth quake
Indirect Loss-Renovation of restaurant• Liability Risk: Legal liability to some ones loss
Third party insurance, Professional Indemnity
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Methods Of
Handling Risk
Avoid
Transform
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Jack Mack
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2Insurance and Risk
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Risk Management & Insurance Planning
InsuranceIs the pooling of fortuitous (unexpected) loses by transfer of such risks to insurers, who agree to indemnify insured's for such losses, to provide other pecuniary (financial) benefits on their occurrence, or render services connected with risk.
Basic Characteristics of Insurance• Pooling of losses• Risk Transfer• Indemnification
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Village
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3 die every year
3 Families loose income
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Risk Management & Insurance Planning
• How much money would keep a family financially independent in the event of loosing the bread winner?
• Rs1,00,000/-• How Many die every year?• 3• Does any one know who the 3 are going to be?• How many people are facing the same risk?
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• What is the fund to be pooled by the village to face the risk collectively?
• Rs3,00,000/-
• How much should each contribute to pool Rs3,00,000/-
• Rs300/-
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• This concept is called Pooling of losses
• “Spreading of losses incurred by the few over the entire group, so that in the process average loss is substituted for actual loss.”
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Insurable Risks
• Large number of exposure units
• Loss to be uncertain
• Measurable
• Not catastrophic
• Calculable
• Premium economically feasible
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Risk Management & Insurance Planning
Insurance and gambling
Insurance is pure risk and gambling is a speculative risk. Non transferable
Insurance and hedging
Hedging though the risk is transferable it cannot be reduced by application of law of large numbers.
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Benefits of Insurance to Society– Indemnification for loss– Less worry and fear– Source of investment funds– Enhance credit
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Risk Management & Insurance Planning
Cost of Insurance
Cost of doing business
Fraudulent Claims
Inflated Claims
Risk Management & Insurance Planning