Insurance Industry

Insurance
Insurance is a means of protection from financial loss. It is a form of
risk management primarily used to hedge against the risk of a
contingent, uncertain loss.

The primary purpose of insurance business is the spreading of risks.

For a payment known as a premium, insurance companies undertake
to relieve the policyholder of all or part of a risk and to spread the
total cost of similar risks among large groups of policyholders.
Life Insurance
Life insurance entities provided life and health insurance products
and a variety of financial services products that meet the customers’
needs for services related to retirement and investment.
• Life insurance contracts
• Accident and health insurance contracts
• Annuity (investment) contracts
Non-life Insurance
Non-life insurance entities offer general, property and liability insurance. Important lines of insurance
include:
• Fire and allied lines
• Ocean marine
• Inland marine
• Worker’s compensation
• Automobile
• Multiple peril
• Professional liability
• Fidelity bond
• Surety bond
Principles of Insurance
1. Principle of Utmost Good Faith
This is a primary principle of insurance. According to this principle, you have to
disclose all the information that is related to the risk, to the insurance company
truthfully.
You must not hide any facts that can have an effect on the policy from the
insurer. If some fact is disclosed later on, then your policy can be cancelled. On
the other hand, the insurer must also disclose all the features of a life insurance
policy.
Principles of Insurance
2. Principle of Insurable Interest
According to this principle, you must have an insurable interest in the life
that is insured. That is, you will suffer financially if the insured dies. You
cannot buy a life insurance policy for a person on whom you have no
insurable interest.
3. Principle of Proximate Cause
While calculating the claim for a loss, the proximate cause, i.e., the cause
which is the closest and the main reason for a loss should be considered.
Though it is a vital factor in all types of insurance, this principle is not used
in Life insurance.
Principles of Insurance
4. Principle of Subrogation
This principle comes into play when a loss has occurred due to some other
person/party and not the insured. In such a case, the insurance company has a
legal right to reach that party for recovery.
5. Principle of Indemnity
The principle of indemnity states that the insurance will only cover you for the
loss that has happened. The insurer will thoroughly inspect and calculate the
losses. The main motive of this principle is to put you in the same position
financially as you were before the loss. This principle, however, does not apply
to life insurance and critical health policies.
Principles of Insurance
6. Principle of Contribution
According to the principle of contribution, if you have taken insurance
from more than one insurer, both insurers will share the loss in the
proportion of their respective coverage.
If one insurance company has paid in full, it has the right to approach
other insurance companies to receive a proportionate amount.
7. Principle of Loss Minimisation
You must take all the necessary steps to limit the loss when it happens.
You must take all the necessary precautions to prevent the loss even after
purchasing the insurance. This is the principle of loss minimization.
 Major Transaction Cycles
1. Underwriting
a. Evaluating risks and their acceptance or rejection involves
• A review of exposure and potential loss based on both the review of dailies
(office copies of policies) and the endorsement to existing policies
• An investigation of risks in accordance with procedures established by
company policy and state statutes

b. Setting premium rates – Determining premiums is one of the most

difficult tasks in the insurance business
 Major Transaction Cycles
c. Reinsurance – spreading the risks among the insurance
companies
d. Issuing policies
e. Billing and collecting premiums
f. Paying commissions and other costs of acquiring business
g. Adjusting premiums
h. Recording
Major Transaction Cycles
2. Processing and Payment of Claims – An insurance
company’s claim department accepts, investigates, adjusts, and
settles claims.
a. Notify the company that a loss has occurred
b. Investigation and adjustments – whether a loss occurred
and whether loss is covered by the policy. This may be
done by “claims adjusters” who investigate claims.
c. Claim process – payment or denial of claim
 Major Transaction Cycles
3. Loss reserving – Loss reserves are an insurer’s estimates of its
liability for the unpaid costs of insured events that have occurred.
This includes incurred but not reported (IBNR) claims. Auditors may
use specialists in evaluating loss reserves.

4. Investing – To meet the claims of the policyholders, investments of

insurance companies should be both financially sound & sufficiently
liquid. Insurers should plan investments so that the maturities of
their investment portfolio match their claim payment patterns
(asset and liability management or asset/liability matching).
 Business Risk Considerations
The principal risk for the insurance industry is related to the risk that actual cash
flows will be different from anticipated cash flows. The broad categories of risk to
consider are:
1. Asset risk (or asset quality risk) – this is the risk of asset default or impairment
of value
2. Insurance risk or underwriting risk – this is the risk of loss as a result of adverse
mortality or morbidity experience and erroneous pricing assumptions other
than asset and interest assumptions.
3. Interest rate risk – this is the risk of loss due to changes in interest rate levels.
4. Business risk – general and management risk common to most entities.
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