Q.1 Explain the steps involved in risk management process?

Ans:- Risk management activities occur before, during, and after losses. Most planning is done before losses occur. Losses involving natural disaster and other emergencies also require action while losses are happening. After the loss, the Risk Manager must file insurance claims and analyze loss patterns. The risk management process involves four steps: 1. 2. 3. 4. Identifying potential losses, Evaluating potential losses, Selecting the appropriate techniques for treating loss exposures, and Implementing and administer the programme.

Each of these is discussed in some detail in the following section: 1. Identifying Potential Losses The first step in the risk management process is to identify all major and minor loss exposures. This step involves a painstaking analysis of all potential losses. Important loss exposures relate to the following: (a) Property loss exposures Building, plants, other structures Furniture, equipment, supplies Electronic Data Processing (EDP) equipment; computer software Inventory Accounts receivable, valuable papers and record Company planes, boats, mobile equipment

(b) Liability loss exposures Defective products Environmental pollution (land, water, air, noise) Sexual harassment of employees, discrimination against employees, wrongful termination Premises and general liability loss exposures Liability arising from company vehicles Misuse of the Internet and e-mail transmission, transmission of pornographic material Directors and officers liability suits

(c) Business income loss exposures Loss of income from a covered loss Continuing expenses after a loss Extra expenses

Contingent business income losses

(d) Human resources loss exposures Death or disability of key employees Retirement or unemployment Job-related injuries or disease experienced by workers

(e) Crime loss exposures Hold-ups, robberies, burglaries Employee theft and dishonesty Fraud and embezzlement Internet and computer crime exposures

(f) Employee benefit loss exposures Fairly to comply with Government regulations Violation of fiduciary responsibilities Group life and health and retirement plan exposures Failure to pay promised benefits

(g) Foreign loss exposure Plants, business property, inventory Foreign currency risks Kidnapping of key personnel Political risks

2. Evaluating Potential Losses The second step in the risk management process is to evaluate and measure the impact of losses on the firm. This step involves an estimation of the potential frequency and severity of loss. Loss frequency refers to the probable number of losses that may occur during some given time period. Loss severity refers to the probable size of the losses that may occur. Once the Risk Manager estimates the frequency and severity of loss for each type of loss exposure, the various loss exposures can be ranked according to their relative importance. For example, a loss exposure with the potential for bankrupting the firm is much more important in a risk management programme than an exposure with a small loss potential. Catastrophic losses are difficult to predict because they occur infrequently. However, their potential impact on the firm must be given high priority. In contrast, certain losses, such as physical damage losses to cars and trucks, occur with greater frequency, are usually relatively small, and can be predicted with greater accuracy.

3. Selecting the Appropriate Techniques for Treating Loss Exposures The third step in the risk management process is to select the most appropriate techniques for treating loss exposures. These techniques can be classified broadly as either risk control or risk financing. Risk control refers to techniques that reduce the frequency and severity of accidental losses. Risk financing refers to techniques that provide for the funding of accidental losses after they control. Many Risk Managers use a combination of techniques for treating each loss exposure. (a) Risk Control Risk control encompasses techniques that prevent losses from occurring or reduce the severity of a loss after it occurs. Major risk control techniques include avoidance and loss control. Avoidance: Avoidance means a certain loss exposure is never acquired, or an existing loss exposure is abandoned. For example, flood losses can be avoided by not building a new plant in a flood plain. A pharmaceutical firm that markets a drug with dangerous side effects can withdraw the drug from the market. Loss Control: Loss control has two dimensions Loss prevention and loss reduction. Loss prevention refers to measures that reduce the frequency of a particular loss. For example, measures that reduce truck accidents include driver examinations, zero tolerance for alcohol or drug abuse, and strict enforcement of safety rules. Measures that reduce lawsuits by the consumer of a defective product include installation of safety features on hazardous products, placement of warning labels on dangerous products, and institution of quality control checks.

(b) Risk Financing Risk financing refers to techniques that provide for the funding of losses after they occur. Major risk-financing techniques include retention, non-insurance transfers and commercial insurance. Retention: Retention can be effectively used in a risk management programme under the following conditions: First, no other method of treatment is available. Insurers may be unwilling to write a certain type of coverage, or the coverage may be too expensive. Non-insurance transfers may not be available. In addition, although loss prevention can reduce the frequency of loss, all losses cannot be eliminated. In these cases, retention is a residual method. If the exposure cannot be insured or transferred, then it must be retained. Second, the worst possible loss is not serious. For example, physical damage losses to automobiles in a large firms fleet will not bankrupt the firm if the automobiles are separated by wide distances and are no likely to be simultaneously damaged. Finally, losses are highly predictable. Retention can be effectively used for workers compensation claims, physical damage losses to automobiles, and shoplifting losses. Based on past experience, the Risk Manager can estimate a probable range of frequency

and severity of actual losses. If most losses fall within that range, they can be budgeted out of the firms income. Non-insurance Transfers: Non-insurance transfers are another type of risk financing technique. Non-insurance transfers are methods other than insurance by which a pure risk and its potential financial consequences are transferred to another party. In a risk management programme, non-insurance transfers have several advantages: i. ii. iii. The Risk Manager can transfer some potential losses that are not commercially insurable. Non-insurance transfers often cost less than insurance. The potential loss may be shifted to someone who is in a better position to exercise loss control.

However, non-insurance transfers have several disadvantages. They are summarised as follows: i. ii. iii. (c) Insurance Commercial insurance is also used in a risk management programme. Insurance is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is high. If the Risk Manager uses insurance to treat certain loss exposures, five key areas must be emphasized. They are as follows: 1. 2. 3. 4. 5. Selection of insurance coverages Selection of an insurer Negotiation of terms Dissemination of information concerning insurance coverages Periodic review of the programme The transfer of potential loss may fail because the contract language is ambiguous. Also, there may be no court precedents for the interpretation of a contract that is tailor-made to fit the situation. If the party to whom the potential loss is transferred is unable to pay the loss, the firm is still responsible for the claim. Non-insurance transfers may not always reduce insurance costs, because an insurer may not give credit for the transfers.

4. Implementing and administering the Risk Management Programme At this point, we have discussed three of the four steps in the risk management process. The fourth step is implementation and administration of the risk management programme. This step begins with a policy statement. (a) Risk Management Policy Statement

A risk management policy statement is necessary to have an effective risk management programme. This statement outlines the risk management objectives of the firm, as well as company policy with respect to treatment of loss exposures. It also educates top-level executives with regard to the risk management process, gives the Risk Manager greater authority in the firm, and provides standards for judging the Risk Managers performance. (b) Co-operative with other Departments The Risk Manager does not work alone. Other functional departments within the firm are extremely important in identifying pure loss exposures and methods for treating these exposures. These departments can co-operate in the risk management process in the following ways: Accounting. Internal accounting controls can reduce employee fraud and theft of cash. Finance. Information can be provided showing how losses can disrupt profits and cash flow, and the effect that losses will have on the firms balance sheet and profit and loss statement. Marketing. Accurate packaging can prevent liability lawsuits. Safe distribution procedures can prevent accidents. Production. Quality control can prevent the production of defective goods and liability lawsuits. Effective safety programmes in the plant can reduce injuries and accidents. Human resources. This department may be responsible for employee benefit programmes, pension programmes, safety programmes, and the companys hiring, promotion, and dismissal policies.

This list indicates how the risk management process involves the entire firm. Indeed, without the active co-operation of the other department, the risk management programme will be failure. (c) Periodic Review and Evaluation To be effective, the risk management programme must be periodically reviewed and evaluated to determine whether the objectives are being attained. In particular, risk management costs, safety programmes, and loss-prevention programmes must be carefully monitored. Loss records must also be examined to detect any changes in frequency and severity. Finally, the Risk Manager must determine whether the firms overall risk management policies are being carried out and whether the Risk Manager is receiving the total co-operation of the other departments in carrying out the risk management functions. Q.2 Explain the concept of banassurance and bring out the latest development in the banking Industry for promoting banassurance products. Ans:- The Concept of Bancassurance Bancassurance is a concept that has rewritten the way in which insurance products are distributed in many parts of the world and has the potential to do the same in many other markets. By offering a holistic financial services package, encompassing banking, insurance, lending and investment products, banks can maximise distribution of products to a captive customer base. In

markets where it is firmly established bancassurance channels can take an impressive market share of new life business around 55% in France and between 20% and 30% in many other European countries. Bancassurance a term coined by combining the two words bank and insurance (in French) connotes distribution of insurance products through banking channels. Bancassurance encompasses terms such as Allfinanz (in German), Integrated Financial Services and Assurebanking. This concept gained currency in the growing global insurance industry and its search for new channels of distribution, with their geographical spread and penetration in terms of customer reach of all segments, have emerged as viable sources for the distribution of insurance products. However, the evolution of bancassurance as a concept and its practical implementation in various parts of the world, have thrown up a number of opportunities and challenges. Aspects such as the most suited model for a given country with its economic, social and cultural ramifications interacting on each other, legislative hurdles, and the mindset of persons involved in this activity, have dominated the study and literature on bancassurance. Bancassurance is the distribution of insurance products through the banks distribution channel. It is a phenomenon wherein insurance products are offered through the distribution channels of the banking services along with a complete range of banking and investment products and services. To put in simple terms, bancassurance tries to exploit synergies between both the insurance companies and banks. Bancassurance if taken in right spirit and implemented properly can be win-win situation for all the participants viz., banks, insurers and the customer. Latest development in the banking Industry for promoting banassurance products Bancassurance has developed in parallel to the dramatic expansion of the worlds life insurance market since the mid-1980s. This expansion has relied mostly on savings-type insurance products, a significant portion of which are very close to traditional banking products such as fixed-income securities or mutual funds. European wide, bancassurance has been far more successful selling savings-type products than risky products such as those relating to longevity or disability. For these kind of risky products, as well as for property and casualty insurance, traditional insurers have kept their market leadership. While they also have expanded very significantly in the life insurance business, it has been at a slower pace than bancassurance institutions, which have benefited from the recycling of savings deposits into life products in several countries. This has notably been the case in France, Belgium, Spain and Portugal. A range of bancassurance business models exists and this affects the type of legal structures used. Nevertheless, these legal structures fall into three main above- mentioned categories: Partnerships, Joint ventures or captives. (a) The Partnership Model In this model, the insurance company distributes its products partly, though not exclusively, through a banking channel. In addition, there is no dedicated legal entity to underwrite this

business, which is in practice directly accounted for on the insurers balance sheet. Under this model, the insurance company typically pays distribution commission to the bank, which is in turn offset by entry and management fees charged to policyholders. The relationship between the bank and the insurer may also be complemented by a more or less significant shareholding or cross-shareholding. The business logic for such a model is the recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers while being unable or unwilling to develop such expertise internally. In some cases, it may also be a way for the bank to create competition among various insurance providers to attract clients by adding value to its distribution capabilities. Examples 1. In the UK, Legal & General with Barclays Bank provides a range of life insurance products and pays sales commission to the bank. At the same time, this business is accounted for in Legal & Generals balance sheet. There is no strategic cross-shareholding between the two groups and the partnership is not exclusive. 2. In France, CNP Assurances distributes its life policies through the network of la Poste, the French Post-Office, which receives commissions for bringing insurance business to CNP. The partnership is on an exclusive basis. In this case, the Post Office has a significant indirect shareholding in CNP, although at 18% it is not a controlling stake. In certain situations, what is in practice as partnership has many similarities with the captive model (see below). In these cases, no dedicated unit carries the bancassurance activity and the arrangement is in no way exclusive in that the insurance companies involved use alternative, exclusive or non-exclusive distribution channels but there is a very strong shareholding from the bank in the insurance company or vice versa. (b) The Joint Venture Model This business model relies on a more or less balanced shareholding between one or several banks and an insurance group in a joint venture insurance company. This joint venture distributes its products only through the network of its banking parent(s). In addition, the relationship between the bank and the insurer is sometimes reinforced by a strategic shareholding. The joint venture typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charges to policyholders. In addition, the bank also benefits from the joint ventures profitability through dividends paid. As in the case of the partnership model, the business logic for creating a joint venture is a recognition by a bank of a real need to be in a position to offer (mostly life) insurance products to its customers with an intention to build up expertise in this area. Typically, the joint venture is granted exclusive access to market insurance products through the banks network. Examples

1. Ecureuil Vie in a joint venture in France 50% owned by the Caisses d Epargne Group and 50% by CNP Assurances. There is a significant indirect 18% strategic shareholding of Caisses d Epargne in CNP. 2. In Italy, BNL Vita is 50/50 owned by Banca Nazionale del Lavoro (BNL) and Unipol. Interestingly, the value of this partnership may be such for Unipol that it has been used as an argument to launch a takeover on BNL to avoid it being bought by Banco Bilbao Vizcaya Argentaria. In a limited number of situations, the joint-venture shareholding is unbalanced between the bank and the insurance partners, although the business model is still considered a joint venture. (c) The Captive Model According to this model, an insurance company markets its products almost exclusively through the distribution channel of its banking parent. In such cases, the ownership by the bank in the insurer is typically very high, often 100%. The captive insurance company typically pays distribution commissions to the bank, which are in turn offset by entry and management fees charged to policyholders. In addition, the bank also benefits from the insurers profitability through dividends paid. When compared to the partnership model or a joint venture, the logic for the captive business model is the recognition by the bank of a real need to be in a position not only to offer (mostly life) insurance products to its customers but also to keep the full know-how and profitability of the business in-house. The insurance captive becomes an important tool of the banks marketing policy and is a separate legal entity only due to regulatory constraints. Nevertheless, it is very important that the bank management has sufficient understanding of the insurance business. Depending on the group structure, the insurance captive may be a direct subsidiary of the bank or a sister company, both owned by the same holding company. This difference in terms of legal structure generally reflects the significance of the business written by the insurance captive through non-group channels. For instance, KBC Bank and KBC Insurance are sister companies, both owned by KBC Group. Although KBC Insurance distributes the bulk of its business through the banks network, a significant portion of its premiums, particularly those coming from Central Europe, are sold via alternative distributors, mostly tied agents. Examples with One Banking Shareholder 1. In France, Sogecap ranks among the largest domestic life insurers. The company is 10% owned by Societe Generale and distributes its products almost entirely through the banking network of its parent where it enjoys exclusivity. 2. In Spain, BBVA Seguros, 100% owned by Banco Bilbao Vizcaya Argentaria, is the banks dedicated vehicle to provide its network with insurance products. In various circumstances, several banks, usually co-operative in nature, share a common exclusive insurance provider. In these cases, ownership in the insurer is typically split among the

various banks distributing the products, and sometimes with the involvement of an external insurance company. Q.3 Detail the future growth and opportunities of Indian Insurance Industry Ans:- Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent to the country's GDP. Insurance is a federal subject in India and Insurance industry in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. The industry is not just growing in terms of number of insurers, branch offices, employees or agents. The growth is also reflected in the business figures. There was a phenomenal growth in the New Business Premium, Renewal Premium, Total Premium Income as well as the number of policies sold. The following table portrays the picture of life insurance business during the past decade. There was about 10 fold increase in the new business life insurance premium collected over a period of 9 years. The continuous growth witnessed in this parameter after the enactment of IRDA Act was reversed for the first time during 2008-09, when the New Business Premium declined by 7.2%. This indicates that the fallout of sub-prime crisis was visible in terms of the new business procured by the Indian life insurers. However, the total premium collected by the insurers increased by over 10% and crossed the whopping figure of Rs.2.21 lakh crores as against Rs.2.01 lakh crores during the previous year. Although the growth in total life premium continued during 2008-09, the rate of growth was slower at 10.2% compared to 29% growth witnessed during the previous year. There was a growth of above 738% in the total premium collections since the entry of private players in the year 2000. As far as the number of new policies sold is concerned, the figure tripled from 1.69 crore policies in FY 2000 to 5.09 crore policies during FY 2009. Of course, the number of policies increased marginally by about 1 lakh (0.2% change over the previous year). Number of in force policies, which were just above 10 crores at the end of FT 2000, crossed 29 crores as at 31st March, 2009, registering a growth of 186%.
Table - 4: INDIAN LIFE INSURANCE INDUSTRY BUSINESS FIGURES Pre-IRDA Parameter FY 1999 - 2k 8,299 17,951 26,250 14,036 1.69 FY 06-07 75,649 80,427 156,076 55,765 4.61 FY 07-08 93,713 107,638 201,351 62,728 5.08 Post-IRDA % change over 06-07 23.9 33.8 29.0 12.5 10.2 FY 08-09 87,005 134,78 6 221,79 1 57,383 5.09 % change over 07-08 -7.2 25.2 10.2 -8.5 0.2 % change over 99-2k 948.4 650.9 738.8 308.8 201.2

New Business Premium (Rs. Cr) Renewal Premiums (Rs. Cr) Total Premium (Rs. Cr) Benefits Paid (Rs. Cr) New Business Policies (In Cr)

In force Policies (In Cr)

10.14

22.7

25.93

14.2

29

11.8

186.0

Source: IRDA, Life Insurance Council (FY 09 data is provisional)

1. Opportunities i) Untapped Market New comers will get the benefit of untapped market. While nationalized general insurance companies and LIC of India have done a commendable job in extending their services throughout the country but the choices available to the insuring public are inadequate in terms of services, products and prices the untapped potential in quite large. The Malhotra Committee, which went into various aspects of Indias insurance industry, estimated that in life insurance, 22% of the insurable population has been tapped so far. In India, premium per capita is only 2 and premium as percentage of GDP is 0.55%, which is very less in comparison of USA where premium per capita is 1381 and premium as percentage of GDP is 480. This huge gap from the global bench mark is itself lucrative. ii) Mandatory Insurance In disaster-prone areas, Government of India is going to make insurance mandatory. The interim report of the high-powered committee set up by the Centre for disaster management, has proposed mandatory insurance of life and property by people residing in disaster-prone areas such as coastal belts, flood- prone areas, sites near nuclear, chemical and hazardous industries and thickly populated areas. iii) More Products Offered A state monopoly has little incentive to offer a wide range of products. It can be seen by a lack of certain products from LICs portfolio and lack of extensive categorization in several GIC products such as health insurance. More competition in this business will spur firms to offer several new products and more complex and extensive risk categorization. iv) Growth of Economy With allowing of holding of equity shares by foreign company either itself or through its subsidiary company or nominee not exceeding 26% of paid up capital of Indian Insurance Company, various joint ventures between foreign investors and Indian partners will be operated resulting into supplementing domestic savings and economic progress of the nations. v) Opportunity for Banks Banks with their wide area network with branches in all the parts of the country will have very good opportunity to enter the insurance business. They will succeed in this sector because they have data base of customers, trained staff, a good network of branches besides synergy benefits. vi) Better Customer Services

It would result in better customer services and help improve the variety and price of insurance products. Competition will compel the players to bring new and innovative product, wider choice of prices and quality service to consumers. CONCLUSION: The present report covers overall insurance industry in India, including life and general insurance and their products such as marine, motor and health insurance. It provides the structure and process of the industry. Market density and penetration gives an idea of the chances of further development of the industry. Health insurance is offering opportunities in the insurance sector. Future outlook helps to form new strategies and provide better understanding of upcoming market growth.