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Risks in Insurance - Know the Policy Research Team | Posted On Thursday, February 18,2010, 08:05 PM

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Risks in Insurance - Know the Policy



Risk in Insurance

Every person and every business faces risk. Risk involves uncertainty that an adverse event will occur. Different people have different attitude towards the risk. For e.g. jumping out of a plane with a parachute may be risky thing to do for some and may not be risky for others who indulge in specific sports activity. A person aversion to risk is a key factor in the extent to which they will try to manage their risks.

People often think of risk as the chance of something bad happening. “Bad” and “Chance” are two key elements of risk. Bad refers to an event or outcome that is adverse and is also relative for e.g. losing more money is worse than loosing less money.

Types of Insurance Risks

The different types of insurance risk are summarized below

  • External Risk
  • Operational / Organizational Risk
  • Financial Risk
  • Personal Risk

External Risk

External risk includes the following

  • Infrastructure: power supply, suppliers, dependency on internet
  • Economic: interest rates, exchange rates, inflation
  • Legal and Regulatory: health and safety legislation
  • Environmental: fuel consumption, pollution
  • Political: possible political constraints like a change of government
  • Market: competition and supply of goods
  • “act of God”: fire, flood, earthquake

Operational / Organizational Risk

Operational / Organizational Risk includes the following

  • Policy: appropriateness and quality of policy decisions
  • Operational: procedures employed to achieve particular objectives
  • Information: adequacy of information used for decision making
  • Reputational: public reputation of the organization and consequent effects
  • Transferable: risks that can be transferred
  • Technological: use of technology to achieve objectives
  • Innovation: exploitation of opportunities to make gains
  • Personnel: availability and retention of suitable staff
  • Project: project planning and management procedures

Financial Risk

Financial Risk includes the following

  • Budgetary : availability and allocation of resources
  • Fraud of theft : unproductive loss of resources
  • Insurable : potential areas of loss that can be insured against
  • Capital investment : making appropriate investment decisions
  • Liability : the right to sue or be sued in certain circumstances

Personal Risk

Personal Risk includes the following;

  • Death
  • Disability
  • Personal injury

There is also other kind of risk such as public risk, property risk etc.

what is risk management?

Risk management is very crucial thing in the present scenario. It is the process of making decisions and carrying it in such a way that risk is minimized. To minimize the effect of various kinds of risk and to successfully achieve the different life goals, individual should do risk management. Risk management simply fights the risk and decreases loss.

How Risk Management is done?

Firstly one needs to identify the sources of property, income, liability and personnel risks from which losses may arise. It begins by taking a close look at each of the clients business operations and assess what could cause a loss.

After identifying the risk one need to evaluate the risk involved in each exposure in terms of expected frequency, severity and impact. Now when the risk is evaluated one need to try to terminate the risk by various ways such as :

Avoidance : not getting into something which has risk, it is simple but not appropriate strategy for dealing

Retention : there are certain risk which are retained but not addressed, this strategy is appropriate for risks that occur frequently but are of low severity for e.g. risk of getting tyre punctured.

Risk transfer : risk can be transferred by insurance and non insurance transfers for e.g. any contractual agreement

Loss Control : it means minimizing the severity of the losses if they should occur for e.g. relocating valuables from home to safety deposit box in banks to prevent from the risk of theft.

Once risk management program is implemented than its need to monitor to assure that it is serving its purpose effectively.

What is an Insurance?

Insurance is an instrument which covers the risk. Insurance is for everyone and all kinds of people buy insurance. The insurance means paying someone i.e. insurance company so that they take on our risk and the amount paid is called premium.

Types of Risk in Insurance

Categories of Insurance

The various categories of insurance are;

  • Life insurance : provides insurance benefit when person insured dies
  • Health insurance (Mediclaim) : covers certain medical expenses and prescription medications
  • Property insurance : pays a benefit if the property is damaged
  • General insurance : includes fire insurance, loss of income insurance

See Also: Life Insurance Policies

Insurance Need Analysis

Insurance is the need for everyone because everyone is exposed to some or other risk so everyone needs different kind of insurance. Let’s take up different cases and analyze their insurance needs

Insurance considerations for an unmarried individual having no dependent:

If the individual is single with no dependent than premature death will not impact the financial obligation of that person’s family so he does not require life insurance. He can take health insurance and other general insurance as per his requirement.

Insurance considerations for an unmarried having dependants

The person who is single but has dependant on him has to look forward for the following issues

  • Loss of income
  • Health care coverage
  • Repayment of debt
  • Other people who rely on him
  • Life insurance coverage

Insurance for family

If the family includes spouse and young children, an individual has a lot to think about. The individual will need to consider protecting the spouse and children if something should happen to both parents at the same time.

  • Living expenses for children
  • Healthcare for the families
  • Education of the children
  • Family events, transportation expense and household support

Amount of life insurance should individual own:

According to the rule of thumb insurance amount should be eight to ten times of the gross annual income of an individual. It is simple to apply and easily understood by the people.

Types of Life Insurance

Term life insurance

Term plan provide life insurance protection for a specific period of time or term. The beneficiary gets the benefit if the insurer dies during the coverage period. A person receives nothing if he does not die during the term.

Different types of term plan are

  • Level term insurance
  • Decreasing term insurance
  • Increasing term insurance
  • Renewable term insurance
  • Convertible term insurance
  • Term insurance with return of premium

Whole life policy

A whole life policy is an insurance cover against death, irrespective of when it happens. Policy holders pay the premium until his death.

Endowment policy

This policy covers the risk with financial savings. It is most popular policies in the world of life insurance. In an Endowment Policy, the sum assured is payable even if the insured survives the policy term.

Unit linked policies

These policies have two components, expenses (including mortality) and savings like an endowment policy. The saving part is invested in the equity and debt as chosen by the policy holder and returns are based on the performance of such portfolio.

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