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Term Insurance for NRI is defined as term insurance plan designed for NRI, OCI cardholder

Term Insurance is a type of Life Insurance plan that provides financial coverage to the

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Definition of Insurance

There is no single definition of Insurance. Insurance can be defined from the viewpoint of several disciplines including law, economics, History, actuarial Science, risk theory and sociology.

There are different definition of Insurance-

Insurance means to reduce the risk of uncertainty.
Insurance means to distribute the risk of loss.
Insurance means to take an engine so that life will move smoothly because without an engine, car will not a move and without an insurance, life will not move appropriately.
According to Justice Tindall, insurance is a contract where the insured pays a sum of money to the insurer in exchange for the insurer’s agreement to pay a larger sum in the event of a specific contingency.
Emeric Fischer defines an insurance contract as an agreement between two or more parties where the insured pays the insurer a specific sum in exchange for the insurer indemnifying the insured for losses caused by certain risks, contingencies, or occurrences. For the agreement to be legally enforceable, the insured must have an insurable interest in the property being insured.
According to Baker (2008), insurance is a voluntary undertaking whose obligations are determined by the rules of contract law. However, by the mid-19th century, courts in the United States and Europe recognized that insurance policies are more like contracts of adhesion, where insurance companies and policyholders rarely have equal bargaining power.
Hence in Simple Terms Insurance is a legal agreement that is prepared between insured and insurer.
After careful study the commission of insurance terminology of American risk and Insurance Association has defined Insurance-

Insurance is a polling of fortuitous losses by transfer of such risk to insurers who agree to indemnity insured for such losses to provide other pecuniary benefit on their occurrence or to render services connected with risk.

Basic Characteristic of Insurance

A). Pooling of Losses

B). Payment of Fortuitous Loss

C). Risk Transfer

D). Indemnification

 Polling of Losses

Polling is a spreading of entire loss suffer by the few over the entire group so that in the process average loss is substituted for actual loss.

Polling of loss implies two things-

The Sharing of losses by entire group
The Prediction of entire loss of future with some accuracy based on Law of large number.

Note:

Law of large number states that larger the number of exposures greater the probability that actual loss experience will equal to expected loss experience.

For e.g.- if you flip a coin into the air the probability of getting “heads” is 0.5. if you flip the coin 10 times you may get heads 8 times. If you flip the coin 1 million times the actual number of heads would be approx. 500,000.

Thus a number of random toss increase, the actual result approach the unexpected result.

Payment of Fortuitous Loss

A fortuitous loss simply means which is cause as a result of Chance. It is unforeseen and unexpected kind if loss.
In other words the loss is like an accident.
These risk cannot be controlled.
For e.g. In Dehradun a big rock fall on the head of an individual.

Risk Transfer

It is an essential element of insurance.
With the expectation of self-insurance, a true insurance plan always involve risk transfer.
Risk transfer simply means that a pure risk is transferred from insured to the insurer who typically is in a stronger financial position to pay the loss than the insured.
Pure risk are typically transferred to insurer include-
Risk of premature death
Excessive longevity
Poor health
Disability
Destruction
Theft of property
Personal liability

 

Indemnification

Indemnification means loss is restored to his or her financial position.
g. If your office burn in fire a homeowner policy will indemnify you or restored you to your previous position.
Only the loss is restored but it also depend on the market value.

Characteristic of Ideally Insurable Risk

There are 6 Insurable risk –

There must be a large number of exposure unit.
The loss must be accidental & unintentional.
The loss must be determinable & measurable.
The loss should not be catastrophic.
The chance of loss must be calculable.
The premium must be economically feasible.

Large number of exposure unit

The first requirement of an insurable risk is a large number of exposure unit. E.g. – a large number of wooden frame dwelling in a city grouped together for the purpose of providing property insurance on dwelling.

The main purpose is to enable insurer to predict losses based on law of large number. The loss cost can then be spread over all insurer in underwriting class.

 

 Accidental & Unintentional loss

The loss should be unforeseen and unexpected by the insured and outside of insured control. If an individual deliberately

Cause a loss he or she should not be indemnified for loss.

Reason for Requirement-

Accidental – law of large number based on random occurrence of events

Moral hazard – it increase if insured deliberately intend to cause of loss.

Determinable and Measurable Loss

This means the loss should be defined as to cause, time, place and amount.

Some losses however are difficult to determine and measure. E.g. under a disability income policy the insurer promise to pay a monthly benefit to disability.

Some dishonest claim may deliberately fake sickness or injury to collect from insurer.

Steps to Determine & Measure loss

 

 No Catastrophic Loss

This means that large proportion of exposure unit should not incur losses at the same time. Insurers ideally avoid all catastrophic losses. In reality however it is impossible because catastrophic loss periodically result from flood, hurricanes, tornado, earthquake, forest fires and other natural disaster.

Catastrophic loss can also result from act of terrorism.

Finally financial instrument are now available for dealing with catastrophic loss. The instrument include catastrophic bond, it is design to help fund catastrophic loss.

Calculable Chance of loss

The insurer be able to calculate both average frequency and average severity of future loss with some accuracy. It is important so that proper premium can be charged that is sufficient to pay all claim and yield a profit during policy period.

There are some loss which cannot be calculated – flood, wars, unemployment.

Thus without assistance these losses are difficult for private carriers to ensure.

Economically Feasible Premium

The insured must be able to afford premium. Every time the insured have to take appropriate premium plan so that it will equal to chance of loss.

With this one view if chance of loss 40% the cost of loss policy exceeds the amount that the insurer must pay under contract.

Types of Insurance

 

Life Insurance

Life insurance simply means to reduce the risk of life in terms of “Financially and mentally”. It give mental peace to individual. It remove the burden of dependency on children, because you are financially secure as well as your retirement is secure.

It pay death benefit to beneficiaries when insured dies, with additional bonus and reversionary bonus.

There are various product of life insurance-

Term Insurance
Whole life Insurance
Annuity
Pension
Endowment
Investment(SIP,ULIP)

There are various companies who provide life insurance- LIC (Life Insurance Corporation), ICICI prudential life Insurance, HDFC Life Insurance, TATA AIA Life Insurance Company.

Some life insurance companies also sell individual & group health insurance plan that cover medical expense because of sickness or injury.

Health Insurance

Health Insurance simply means to reduce the financial security for “emergencies”. Today time the hospital expenses touching the heights. In now days people have to save about 50 thousand annually for emergencies.

Planning always have to be SMART-

S for Specific
M for Measurable
A for Achievable
R for Relevant
T for Time bound

There are various reason to save for health insurance, there can be any emergency.

Regarding operation, child admit, OPD, treatment of any health issues.

LIC offers 200+ health issues plan. There are end number of issues.

That why it is called to take mediclaim and health insurance. Mediclaim give security for hospital expenses and health insurance give financial security. Mediclaim and health insurance for child, married and old people are available with different premium.

It is important mostly for old age people because hospital is our second home at that time and normally approx. 10 thousand require every month.

There are companies who provide insurance- LIC, HDFC, Care health.

There are agents and brokers who sell insurance.

 

General Insurance

General Insurance simply means providing “financially peace” from non-life expenses. There are end number of product in general insurance which are insured- cargo, marine, property, liability, casualty etc.

Casualty insurance is a broad field of insurance that cover whatever is not covered by fire, marine and life insurance , casualty line include auto, liability, compensation and health insurance.

Property & Casualty Insurance Coverage

Personal Line

Private passenger auto Insurance
Homeowner Insurance
Personal Umbrella liability Insurance
Earthquake Insurance
Flood Insurance

Commercial Line

Fire and allied line Insurance
Commercial multiple peril insurance
General liability Insurance
Product Liability Insurance
Worker Compensation Insurance
Commercial auto Insurance
Accidental & health Insurance
Professional Liability Insurance
Boiler & Machinery Insurance
Crime Insurance

Government Insurance

There are various proposals and schemes of government insurance programme at present times.

Government insurance can be divided into Social Insurance and other Insurance.

Social Insurance

These programme are designed by government with certain characteristic.

These programme are financed entirely by mandatory contribution from employers, employees and not by general revenue of government.

Major Programmes in India-

Mahatma Jyotiba Phule Jan Arogya Yojana
Pradhan Mantri Suraksha Bima Yojana
Atal Pension Yojana
Karunya Health Scheme

Other Government Insurance

There are both state and national level.

State-

Dr YSR Aarogyasri Health Care Trust
Arogya Raksha
Working Journalist Health Scheme
Employee Health Scheme

National-

Central Government Health Scheme
Ayushman Bharat
Aam Aadmi Bima Yojana
Pradhan Mantri Jeevan Jyoti Bima Yojana

Risk Management

Risk management is a process that identifies loss exposure faced by an organisation and select the most appropriate technique for treating such insurance exposures.

Risk manager typically term loss exposure to identify potential loss.

Loss exposure is any situation or circumstances in which a loss is possible, regardless of whether a loss typically occurs.

For e.g. In Corporate the owner of company know the risk of information data they always take insurance.

There are two objective of Risk Management –

Pre loss Objective
Post lost Objective

Pre loss Objective

Important objective before a loss occur include economy, reduction of anxiety and meeting legal obligation.

The first objective is that firm should have to prepare for potential loss.

This preparation involve – cost of safety programmes, insurance premium paid, cost associated with different technique.

The second objective is reduction of anxiety.

For e.g. the threat of catastrophic lawsuit because of a defective product can cause greater anxiety than a small loss from a minor fire.

The final objective is to meet the legal obligation.

For e.g. in government regulation it require a firm to install safety device to protect worker from harm to dispose of hazardous waste materials property and to label consumer product appropriately.

Post loss Objective

Risk management also has a certain objective after a loss occurs.

The objective are – survival of firm, stability of earning, continued growth.

And in all the three objective survival of firm is the most important objective.

Survival firm means after loss occur firm resume at least partial operation with time period.

Stability of earning means earning per share can be maintained if firm continue to operate.

Continuous growth means the loss that occur in his/her life beside this then also situation give the ability to grow.

Steps in Risk Management

 Identify Loss Exposure

The first step in risk management process is to identify all major and minor loss exposure.

Important loss exposure include-

Property Loss Exposure

Building, plant & other structure
Furniture, equipment, supplies
Inventory
Computers and it’s software

Liability Loss Exposure

Defective product
Environmental pollution
Sexual harassment
Misuse of internet

 

Business Income Loss

Loss of income from covered loss
Continuing expense after loss
Extra expense

Human resources loss

Death
Disability
Retirement
Injury

Crime loss

Robberies
Fraud & embezzlement
Theft of intellectual property

Foreign loss

Act of terrorism
Plant & business property
Kidnapping of key personnel

Measure & analyse loss

Risk manager can use several sources of information to identify preceding loss exposure.

They include-

Historical data
Financial statement
Flowchart
Physical inspection
Risk analysis

Risk control

Avoidance

It means certain loss exposure will never happen or undertaken or an existing loss exposed is abandoned.
For e.g. flood loss can be avoid by building a new plant on high ground above a floodplain.

Loss Prevention

It refer to that measure that reduce frequency of particular loss.
For e.g. measure that reduce truck accident include – training, no alcohol.

Loss Reduction

It refer to the measure that reduce the severity of a loss after it occur.
For e.g. include installation of automatic sprinkle.

Duplication

It refer to having a backup of document especially important document or property available in case of loss occurs.
For e.g. Business files records.

Separation

It refer to the dividing of assets into 2 or more parts.
For e.g. Cosmetic Company divide industry in 4 parts.

Diversification

It refer to reduction of loss by spreading the loss.
For e.g. mutual fund.

Risk Finance

It refer to that technique that provide the payment of loss after they occur.

Retention

It refer to that in which firm retain parts or loss that can result from a given loss.
Retention can either be active or passive.
Active risk retention means that firm have to be aware of loss and keep the ability to retain the part of loss.
For e.g. risk manager decide to retain physical damage loss of cars.
Passive retention is failure to identify a loss and also forget to act.
For e.g. risk manager fail to identify all company risk that could be damage in earthquake.

Non Insurance Transfer

It refer to that risk in which pure risk and financial consequences are transferred to another party.
For e.g. contract, lease.
A company contract with a construction firm to build a new plant can specify that the construction firm is responsible for any damage to plant while it is being built.

Insurance

Insurance is appropriate for loss exposure that have low probability of loss but severity of loss is high.

Things to keep in mind for buying insurance policy-

Know your current life stage
Plan for a specific financial goal
Calculate an amount of life cover that you need
Choose the longest possible term
Verify all charges and benefit
Understand claim settlement
Stay alert for all changes and offers