An Introduction to Risk There is no single definition for risk, but it is better understood in terms of uncertainty. In any event there is an element of risk or uncertainty attached to the outcome. Certainty and uncertainty are two extremes of a continuum and risk lies somewhere between the two. This unit defines risk with respect to insurance. It also discusses aspects like certainty, risk and uncertainty, classification of risk. Risk is classified based on the outcome of an event, the environment in which it occurs and the group of people it affects. It is important to know how to deal with risk if we cannot avoid it totally. This unit also discusses methods to resolve risks by using appropriate risk management strategies. Risk management is a process which manages the exposure to risk. The act of identification, evaluation, control, transfer, retention, sharing and hedging of risks constitutes risk management.

Definition and Meaning of Risk Risk is defined in many different ways. Risk theorists, economists, statisticians, behavioral scientists each have their own definition and meaning of risk. But generally risk can be well associated and understood in terms of uncertainty. We know that every action is followed by an outcome. Uncertainty is encountered when an action has many likely outcomes and not a single certain outcome. We can estimate risk on the basis of the certainty level of the outcome of an activity. Greater the accuracy of predicting an outcome lower is the risk. Risk is a possibility of an undesirable deviation from a desired outcome that is expected or the uncertainty about what outcome will occur. Hence risk with regard to insurance is defined as uncertainty associated with the occurrence of a loss. The term risk is used to identify the property or life being insured. As risk is defined as uncertainty, it can be distinguished as objective risk and subjective risk. Objective risk is the variation of actual loss from expected loss. It declines as the number of exposures increase. It can be calculated statistically by using measures of dispersion. When the numbers of exposures increase, the insurer is able to predict its future loss relying on the law of large numbers. Subjective risk is defined as uncertainty based on an individual’s state of mind. If a person experiences mental uncertainty concerning the occurrence of loss, the person’s behavior is affected. Risk can also be termed as peril or hazard. A peril is a cause of risk or the incident that may cause a loss. Fire, earthquake, collusion, flood are examples of perils. Hazard is a condition that fosters the frequency of loss. For example, theft is likely to happen in the absence of security.

The Effect of Risk The previous section defined the meaning of risk. This section analyses the effects of risk. Before we assess risk it is important to know from whose point it is viewed and assessed, whether from the point of view of the insurer or insured. Risk may result in gain or loss. We need to determine the adverse results following an occurrence .The result may be different from the expected because of uncertainty. Higher the degree of uncertainty higher will be the deviation. Risk here refers to a peril against which we need to take precautions. Therefore if we limit risk to occurrence of financial loss then it can be measured and to a certain extent be insured. Two concepts which are used to measure risks are chance of loss and degree of risk. Chance of loss Loss is the injury or damage borne by the insured in consequence of the happening of one or more of the accidents or misfortunes against which the insurer, in consideration of the premium, has undertaken to assure the insured. Chance of loss is defined as the probability that an event that causes a loss will occur. The chance of loss is a result of two factors, namely peril and hazard. Hazards are further classified into the following four types: Physical hazard - This is a danger likely to happen due to the physical characteristics of an object, which increases the chance of loss. For example defective wiring in a building which enhances the chance of fire. Moral hazard - It is an increase in the probability of loss due to dishonesty or character defects of an insured person. For example, Burning of unsold goods that are insured in order to increase the amount of claim is a moral hazard. Morale hazard - It is an attitude of carelessness or indifference to losses, because the losses were insured. For example, careless acts like leaving a door unlocked which makes it easy for a burglar to enter, or leaving car keys in an unlocked car increase the chance of loss.

Legal hazard - It is the severity of loss which is increased because of the regulatory framework or the legal system. For example actions by government departments restricting the ability of insurers to withdraw due to poor underwriting results or a new environment law that alters the risk liability of an organization. Degree of risk Degree of risk refers to the intensity of objective risk, which is the amount of uncertainty in a given situation. It can be assessed by finding the difference between expected loss and actual loss. The formula used is Degree of risk = Difference between the expected and actual loss

Expected loss

Degree of risk is measured by the probability of adverse deviation. If the probability of the occurrence of an event is high, then greater is the likelihood of deviation from the outcome that is hoped for and greater the risk, as long as the probability of loss is less than one. In the case of exposures in large numbers, estimates are made based on the likelihood of the number of losses that will occur. With regard to aggregate exposures the degree of risk is not the probability of a single occurrence but it is the probability of an outcome which is different from that expected or predicted. Therefore insurance companies make predictions about the losses that are expected to occur and formulate a premium based on that. . Certainty, Risk and Uncertainty The previous section analyzed the effects of risk. This section differentiates between certainty, risk and uncertainty. Certainty is when there is no doubt of the outcome of an event. But uncertainty is when there is doubt in the achievement of the desired outcome and the potential deviation in the outcome is called risk. The uncertainty in an event arises because of the knowledge which is not sufficient to predict the outcome with certainty. Uncertainty implies that the person does not have thorough knowledge and hence can only make a vague assessment about an objective risk situation. Uncertainty is a perceptual phenomenon that exists in different degrees to different people. It can be represented on a straight line called continuum. This continuum can be divided into different levels of uncertainty.

Uncertainty is zero Uncertainty is very high at this level

At level zero, the exposure to uncertainty is zero and at the right extremity the exposure to uncertainty is 100%. Therefore in this context risk is defined as exposure to uncertainty.

Level 0 (certainty) - There is no uncertainty at this level. The outcome of an event is known in certain. Events that come under the law of nature such as laws of physics and chemistry fall in this category. Level 1 (objective probability) - Lowest level of uncertainty, events occurring in this level are categorized by the likelihood of their occurrence. For example tossing of a coin, has an established fact that there are two outcomes either heads or tails, each with a probability 0.5. Level 2 (subjective probability) - In this level, the degree of uncertainty increases. The outcomes of the events in this level are known but assigning probabilistic values to these outcomes is difficult. Probability is assigned with respect to a person, scenario or circumstances. Therefore it is referred to as subjective probability. Level 3 (complete uncertainty) - The degree of uncertainty is the highest here. The outcomes of the events in this level are difficult to predict and hence the probability of occurrence is not known.

Classification of Risk The previous section explained the differences between certainty, risk and uncertainty. This section explains the different types of risks. Risks are classified or grouped into a similar category in the insurance industry to quantify risk and define the insurance premium to be charged. Classification of risks also helps in placing individual risks with similar

Certainty Uncertainty

expectations of loss in a group or class of risks. By classifying we can also estimate risks from probabilities associated with occurrence, timing and magnitude of events. Pure and speculative risk Pure risks are defined as situation in which there are only two outcomes that is the possibility of loss or no loss to an organization but no gain - the event either happens or does not happen.

When this risk happens, the chance of making any profit is very badly low. Few examples of pure risk are earthquake, theft, accident, fire etc. A car may or may not meet with an accident. If an insurance policy is bought for the car, then if accident occurs the insurance company incurs loss but on the contrary if accident does not occur there is no gain to the insured.

Speculative risks describe situations in which there is a possibility of gain as well as loss. The element of gain is inherent or structured based on the situation. Few examples are gambling on horses, investing in a stock market, merging with an organization. Thus most of the speculative risks are business related and some speculative risks are optional and can be avoided if desired. The distinguishing characteristics of pure and speculative risks which is of importance to insurers are the following: The contract of insurance is usually applicable only to pure risks but not to speculative risks. Insurance is meant to assure us against losses that arise as pure risk, but not to outcomes that lead to both loss and gain. Moreover a particular type of risk may appear speculative for the insurance company but a pure risk for the organizationThe law of large numbers is easily applicable to pure risks than to speculative risks. The law is important to insurers since it predicts future loss experience. An exception is the example of gambling, where the casino operators apply the law of large numbers in a most efficient way. Speculative risk may profit the society even if a loss occurs. It carries some inherent advantages to the economy. For example speculative activity in the stock market may lead to more efficient allocation of capital. The same does not apply to pure risk. A fire, flood, earthquake cannot benefit the society. Since pure risk is usually insurable, the discussion on risk is skewed towards pure risks only. Pure risk is broadly classified into the following four categories: º Property risk. º Personal risk. º Liability risk. º Loss of income risk.

Property risk This is a risk to a person in possession of the property which faces loss because of some unforeseen events. Property includes both movable and immovable possessions. Movable assets are personal assets like personal computer, any appliance. Immovable assets are land, building which suffers loss due to natural calamities. Property risk is further divided into direct and indirect loss. Direct loss - A direct loss is defined as a physical damage due to a given calamity or peril in a direct way. For example, if an office building is damaged by fire, the damage incurred in the direct way is the direct loss. Indirect loss - The additional expense incurred due to the destruction of the property is the indirect loss. Thus in addition to the physical damage after a fire, the office would lose profits for several months because of reconstruction. The loss of profits is a consequential loss as a consequence of the damage incurred. Personal risk Personal risks are risks that directly affect the individual’s income. This may either be loss of earned income or extra expenditure or depletion of financial assets. There are four major types of personal risks: Risk of premature death. Risk of insufficient income during old age. Risk of poor health. Risk of unemployment. Risk of premature death - Premature death occurs when the bread earner of a family dies with unfulfilled financial obligations. Therefore this can cause financial problems only if the deceased has dependents to support. There are four costs which results from this. First, the present value of the family’s share of the deceased breadwinner’s future earnings is lost. Secondly, additional expenses like funeral expenses, uninsured medical bills, inheritance taxes can result. Thirdly, due to insufficient income, the family of the deceased has trouble in making ends meet. Finally, intangible costs due to loss of role model, guidance, and counseling result.

Risk of insufficient income during old age - The risk arises when retired people do not have sufficient income after their retirement and it leads to social insecurity. Retired people need to have financial assets from which they can draw income or have access to other sources like private pension. Risk of poor health - The sudden disability of a person to earn income for living happens to be a disadvantage or sudden risk to that person. The risk of poor health includes payment of medical bills and the loss of earned income. The loss of earned income is a financial insecurity if the disability is severe. Employee benefits may be lost or reduced, savings are depleted and extra care must be taken for the disabled person. Risk of unemployment - This risk is due to socio-economic factors resulting in financial insecurity. Unemployment results due to business cycle down swings, technology and structure changes in the economy and imperfections in the labor market. Liability risk This risk arises to a person when there is a possibility of an unintentional damage caused by him to another person because of negligence. Therefore this risk arises when one’s activity causes adversity to another person. For example, construction of factories or dams which results in dislocating number of villagers. This risk arises due to government regulations and acts. It is quite different from the other risks as there is no maximum upper limit to the amount of the loss. A lien can be placed on one’s income and financial assets to satisfy legal judgment and the cost of legal defense could be huge. Loss of income risk This risk is due to an indirect loss from a certain given risk. For example if a firm is not able to operate due to legal issues or destruction by peril, it takes time to resume its normal operations. Therefore in this period, production stoppage will lead to loss of income. Fundamental and particular risk This classification is based on the people who are affected by the event. Those risks which affect an entire economy or a large group within the economy are termed as fundamental risks. For example, cyclic unemployment, epidemics, drought, political and economic changes, and terrorist attacks of recent times affect a large group of people and hence these are fundamental risks. On the other hand, losses that arise out of individual events and are felt by particular individuals and not by a community or a group is termed as particular risks. Examples are burning of a house or an automobile accident. The distinction between a fundamental and a particular risk is that an individual or a concern can have control over particular risk but fundamental risks can hardly be controlled. Social insurance and government insurance compensates for the loss incurred by a fundamental risk but in case of particular risk an individual or a particular enterprise bears the burden of loss. Static and dynamic risk Based on the nature of the environment, risks are classified as static and dynamic. Static risks are those which happen within a stable environment and are constant over an observed period of time. They have a regular pattern of occurrence and can be reasonably predicted. Dynamic risks arise from changes in the environment like economic, social, technological and political changes. They are generally less predictable because they do not occur in any degree of regularity. Static risks are immune to the changes in the environment. Dynamic risk resembles speculative risk and static risk resembles pure risk. Enterprise risk This is a risk which includes all major risks faced by a business firm. It encompasses risks such as pure risk, speculative risk, strategic risk, operational risk and financial risk. We already studied about pure and speculative risks. Strategic risk is when an organization is uncertain about its goals and objectives. Operational risks may result due to a firm’s business operations. Financial risk is when there is uncertainty of loss because of changes in interest rates, foreign exchange rates and value of money. Enterprise risk plays a vital role in commercial risk management, which is a process in an organization to treat all minor and major risks. Major risks can be addressed by bringing them all together and treating them as one single program. By doing so, the firm can offset one risk against another and also if some risks are negatively correlated overall risk can significantly be reduced.

Management of Risk. The previous section explained the different types of risks. This section explains the management of risks. Risk management helps an individual or an organization in achieving a planned objective. It is essential to avoid the risk of failure. Risk management is a process which identifies loss exposures faced by an organization and selects the most appropriate technique to treat the exposures. It also involves identification, analysis and assigns economic value of these exposures, which holds the earning capacity of an organization. Nature of risk management Risk management aims to have a hold over the risk exposure of a firm. It mainly aims to control the pure risk exposures. The risk management function can also be grouped with other management functions such as finance and human resource. The various risks faced by an individual and an organization are: Risk due to fire. Risk of theft. Loss of customers. Delay in delivery of raw materials. Breakdown of machinery. Accidents. Bad debts. The view of risk management differs from one organization to another. In the traditional view risk management does not change radically but it moves in increments therefore it is an evolving science. Hence insurance purchase is a risk management solution. According to the holistic view, risk management must not only cover insurable risks but also the ones that are uninsurable. This is based on formal risk management and addresses sources of system failures. It follows Total Quality Management principles and hence excludes external sources of failure. According to the ‘financial management view of risk’, risk management is associated with financial management and the decisions are evaluated in terms of their effect on the firm’s value. Therefore we can minimize the impact of risks by applying the right risk management policies. Risk management process The six risk management processes are: 1) Determination of objectives. 2) Identification of risks. 3) Evaluation of risk exposures. 4) Consideration and selection of risk management techniques. 5) Implementation of decisions. 6) Evaluation and review. Determination of objectives The prime objective is to ensure the effective continuous operation of an organization. The efficiency of risk management is hindered if the objectives are not clearly specified. If the objectives are specified clearly then the risk management process can be a holistic one instead of having isolated problems. The goals and objectives of an organization have to be linked with the risk management objectives. The various objectives of risk management can be classified broadly as: Post-loss Objectives º Survival of the organizationº Perpetuity of the organization’s operations. º Steady flow of income/earnings. º Social obligation. Pre-loss objectives º Economy. º Fulfillment of external obligations. º Reduction in anxiety. º Social obligations. Identification of risks Risk identification is a process of identifying property, liability and personnel exposures to loss on a systematic and continuous basis. There is no ideal method to identify risk, but a combination of methods is used. Some methods are appropriate for certain organizations and others for specific work environments. The general methods for risk identification are checklists, questionnaire, flowchart, financial statement analysis and close examination of the operations.

Risk analysis questionnaire - The questionnaire has to be a simple listing of points and phrases. It is helpful in identifying the possible risk of particular departments. The questionnaire is to be distributed among the employees. As it is more direct in approach, it directs the respondent. It covers both insurable and uninsurable risks. The only drawback of this method is that it is difficult to identify the industry specific risk as the questionnaire is general in nature. Checklist of exposures - This is a list for checking factors which may be risky to the organization. The list need not be exhaustive but it must cover the major potential risky operations that apply to all businesses in general. In such a case, certain exposures unique to a given firm may not be included. But the risk manager needs to make sure that the checklist reflects the potential losses the business is exposed to. Flowcharts - They can describe any form of flow within the company but they are system specific concentrating on specific events which are potentially risky. The activities are represented in a structural manner. The most important type is the one used in production flow. The risk manager with the help of this becomes acquainted with the technicalities and hence can ask a number of ‘what if’ questions to suggest answers. Analysis of financial statement - It is very vital for the risk manager to have a thorough knowledge of the source and utilization of funds. This method involves studying each account in detail and determining the potential losses created. The financial statements of a company include balance sheet, profit & loss account, cash flow statement, auditors report and report of chairperson. Evaluation of risk exposure After identifying all possible risks from all angles the next step is to evaluate and measure them. Before evaluating, the risk needs to be measured in two dimensions of loss frequency and loss severity. While evaluating risks, risk managers need to consider the following: The importance or the severity of a risk. All types of losses due to a given event and their financial losses. The specification of the exposure as to how many would be affected and the timing of the exposure. The importance or the severity of a risk is more important than the frequency of occurrence. Consideration and selection of risk management techniques This should be done by selecting the most appropriate technique or a combination of techniques for treating the loss exposures. These techniques are applied based on the following two broad methods: Controlling the risk - Here the frequency and severity of the loss is reduced hence the risk is controlled. This is done by avoiding the risk and through reduction of exposure. Financing the risk - This method provides the financing needed for the losses either by retaining the risk or transferring the risk. These two methods seem to be different but they are not mutually exclusive, rather they are complementary to each other. In most cases they are used in a combined manner. Implementation of decisions The firm after identifying the risks and choosing the correct technique needs to decide the financial and administrative resources required. The next step is to identify the insurance company and negotiate and start the policy statements. The statement must outline the risk management objectives and the company policy with regard to treatment of loss exposures. The development of a risk management manual is essential in order to train the employees. Evaluation and review Evaluation and review is to be done periodically to check if the set objectives are attained. This is done from the point of view of the loophole identified in the existing strategy adopted. The review process is a continuous and ongoing activity. New techniques are adopted to protect the firm from new risks and maximum care is taken to make sure that existing mistakes do not creep into future strategies. This step not only analyses the extent to which the objectives are achieved but lays foundation for future course of actions.

Risk Management Strategies The previous section explained the process of management of risks. In this section we will discuss the various risk management strategies used to handle both pure and speculative risk.

Risk avoidance

Risk avoidance is where a certain loss exposure is never acquired or the existing one is totally removed. This is one of the strongest methods to deal with risks. The major advantage of this method is that it reduces the chance of loss to zero. The two ways by which risk can be avoided are proactive avoidance and abandonment avoidance. In the first case, the person does not assume any risk and therefore any project which brings in risk is not taken up. For example a company which has chances of nuclear radiation will not set up the company, due to the perils which it can bring up. In the case of abandonment avoidance, the existing loss exposure is abandoned. All activities with a certain degree of risk are abandoned. The case of abandonment avoidance is very few. If a firm abandons risky activities, then it faces difficulties in remaining in the market. The firm in the process of abandoning might take up new activities which exposes to another type of risk. Risk reduction This strategy aims to decrease the number of losses by reducing the occurrence of loss, which can be done in two ways namely loss prevention and loss control. Loss prevention is a desirable way of dealing with risks. It eliminates the possibility of loss and hence risk is also removed. The examples of this are safety programs like medical care, security guards, and burglar alarms. Loss control refers to measures that reduce the severity of a loss after it occurs. For example segregation of exposure units by having warehouses with inventories at different locations. Insurance companies provide guidance and incentives to the company which has taken the policy to avoid the occurrence of loss. Risk retention Retention simply means that the firm retains part or all the losses incurred from a given loss. Risks may be knowingly or unknowingly retained by the organization. They are hence classified as active and passive based on this. Active risk retention is when the firm knows of the loss exposure and plans to retain it without making any attempt to transfer it or reduce it. Passive retention is the failure to identify the loss exposure and retaining it unknowingly. Retention can be used only under the following circumstances: When insurers are unwilling to write coverage or if the coverage is too expensive. If the exposure cannot be insured or transferred. If the worst possible loss is not serious. When losses are highly predictable. Based on past experience if most losses fall within the probable range of frequency, they can be budgeted out of the company’s income. Risk combination In this strategy, risks are retained in a proportion that reduces the overall risk combination to a minimum level. In order to minimize the overall risk, one risk is added to another existing risk instead of transferring a risk. This strategy is mostly used in management of financial risk. The risk is distributed over a number of issuers instead of putting it on a single issuer. This reduces the chances of default. For example it is better to have multiple suppliers instead of relying on a single supplier. Risk transfer If the risk is being borne by another party other than the one who is primarily exposed to risk then it is termed as risk transfer. In this case, transfer of asset does not take place but only the risk involved is transferred. The two parties involved in this strategy are the transferor (party transferring the risk) and the transferee (party to whom the risk is transferred). The contracts made in this strategy are grouped as exculpatory contracts. In this contract the transferor is not liable if the event of risk takes place. But if the transferor is supposed to pay for the risk incurred then it cannot be termed as risk transfer. Risk sharing This is an arrangement made by which the loss incurred is shared. For example in a corporation, a large number of people makes investments and hence each bears only a portion of risk that the enterprise faces. Insurance involves the mechanism of risk sharing. Risk hedging Hedging is buying and selling future contracts to balance the risk of changing prices in the cash market. A hedger is someone who uses derivatives to reduce risk caused by price movements. Derivatives are instruments derived from the base securities like equity and bonds. Forward contracts, futures, swaps and options are examples of derivatives.

Derivatives are based on the performance of separately traded commodities. These involve future commitments and hence are open to the possibility of benefiting from favorable price movements. Operators in the derivative market are hedgers, speculators and arbitrageurs. Hedgers are those who transfer the risk component of their portfolio. Speculators take the risk from hedgers intentionally to make profit. Arbitrageurs operate in different markets simultaneously to make profit and eliminate mispricing. Therefore the derivatives make provision by hedging to reduce the existing risk.

Risk Financing Risk financing refers to the manner in which the risk control measures that have been implemented shall be financed. It is necessary to transfer or reduce risks when risk exposure of a company goes beyond the maximum limit. But both these methods involve costs. Risk financing is defined as the funding of losses either by using the internal reserves or by purchasing insurance. The main objective of risk financing is to spread the losses over time in order to reduce the financial strain. Three ways through which risk is financed are: Losses are charged according to the present operating costs. Ex-ante provision is made for losses by procuring insurance or by constructing an unforeseen event for which losses are charged. Losses are financed with loans that are paid after few months. Risk financing provides the techniques for funding of losses after their occurrence. The major risk financing techniques are: Risk retention. Risk transfer. Risk retention Risk retention finances the loss by retaining the operating revenues and earnings. Most familiar type of risk retention is self insurance. Self-insurance is a strategy in which part of an organization’s earnings is set aside to deal with losses. In its general form, self-insurance assigns a contingency fund for all future losses. In its specific form, self-insurance plan assigns funds to specific loss categories like property, health care policies and so on. Risk retention implies that a firm always retains part or all the losses resulting from a given loss. Risk retention is generally active. Active risk retention defines a firm that knows about the exposure loss and plan in order to retain part or all of it. Risk transfer Risk transfer is defined as shifting the loss to another party through legislation, agreement and insurance. Risk of loss is transferred from one entity to another entity in different ways. It plays a key role in managing natural risks and mitigating them. In today’s scenario, risk transfer is the main component of overall risk management strategy. Latest developments use risk transfer methods like catastrophe bonds, catastrophe pools, index based insurance and micro-insurance schemes. All these transfer methods fall into three basic categories: Insurance: - Transmit to an insurer (under an insurance contract). Judicial - Transfer to another party by asset of a legal action. Contractual - Transmit to another party (under contracts other than insurance). Insurance as a Prime Risk Management Tool In general, risk management deals with risks by designing the procedures and implementing the methods that lessens the loss occurrence or the financial impacts. Insurance is a prime risk management tool which defines risk as „a pre-loss exercise reflecting an organization’s post loss goals‟. The main purpose of risk management is to minimize losses and protect people. Insurance is an easily affordable loss prevention technique. Insurance acts as contractual transfer for risks. Insurance is an appropriate management tool when the amount of loss is low and amount of potential loss is high. For smaller and medium sized organizations, insurance acts as risk management tool. In certain cases, larger-sized organizations may also need the services of insurance companies for loss settlements. Even after insuring a loss procedure, risk manager faces some problems. Hence risk managers need to choose an appropriate insurance company, policy and agent. Increasingly, insurance is a prime management tool which resolves the liability limitations. For example, if a production process requires chemical components, then special toxic risk insurance is needed.

Purpose, Functions and Advantages

Life insurance is a policy that provides the basis of protection and financial stability after one’s death in a family. Its function is to support the other family members with financial stability. So, it is important to understand the purpose, functions and advantages of life insurance. The primary objectives of life insurance are: Protection - The main objective of life insurance is to give protection. If a member in a family, particularly, the care taker of the family dies, the family faces many problems. Life insurance decreases the financial loss arising due to the death. After the death of insured member, the family is helped with the sum assured. People insure themselves with life insurance to make sure that their families do not face any difficulties upon their death. Investment - Life insurance not only protects a person from future risk, but also is a good mean of savings for the people. The ‘insured’ person invests small amounts, in the form of premiums, with an insurance company. If the insured person dies before the maturity date of policy, then the nominees of deceased gets more amount than invested. It helps the family to maintain the same standard of living. Purpose of life insurance The purpose of life insurance is to provide financial protection against the losses that may be incurred due to uncertain difficulties caused by ill-health, death of an earning family member or financial losses. A life insurance policy on a non-working spouse is considered as an essential part of a family life insurance plan since it would deliver income for a living parent with children at home. The events that cause losses may or may not occur during the running time of the contract of insurance. Insurance gives a kind of peace of mind to the ‘insured’. For example, Mr. X takes a life insurance policy, maturity period being 10 years. Annual premium for this policy is Tk.2000/-, while sum assured is Tk.25, 000/-. After paying premium for 4 years, the insured person dies. After his death, the total amount payable to his nominee would be Tk.25,000 + bonus, while he had paid only Tk.8000/- till his death as premium. On the other hand, if Mr. X lives for 10 years, then total amount payable to him, from that insurance company will be Tk.25,000 + bonus(which will be around 70% of the sum assured). In this manner, total amount received by insured will be Tk.42,500/- approximately, while he has paid premium Tk.20,000 only. Families need life insurance to: Provide financial security to their family members at the times of financial crisis. Protect the home mortgage. Plan their future financial requirements. Avail the benefit of retirement savings and other investments. Advantages of life insurance Life insurance provides major benefits to the society. The following are the advantages of life insurance: Reduces Worries - Life insurance reduces stress due to the financial security it offers. Investment opportunity - Life insurance contracts provide double benefits of both protection and investment, as the event assured against is sure to happen. In fact, a life insurance investment offers attractive returns. Credit enhancement - Businessmen would enjoy a better credit standing as they transfer the risks to the insurance company. Employment opportunity - Insurance companies are playing a very important role in challenging the problem of unemployment in the country by offering employment opportunities for many people. Moreover, there are large numbers of people working as insurance agents, professionals, etc. Tax Benefits - The premiums paid for certain life insurance are eligible for tax rebate under section 80C of the income tax act. Encourages thrift - As the premium paid is a form of compulsory savings, it promotes thrift and builds savings. Functions of life insurance In business, family and personal life, life insurance has important functions. In business, it plays a major role in calculated planning for future actions. Families purchase life insurance mainly as a security against future loss. Protection to stockholder - Companies with stockholders have life insurance contracts in place so any unpredicted transition goes easily. Both large and small companies insure the life of important employees, whose loss would distress business operations.

Small business actions - People having sole ownership businesses need life insurance to enable the business operations to continue even after their death, at least until there is time to arrange for forthcoming management. In a partnership, life insurance with an assigned beneficiary contract will give a chance to the business to sustain and weather the challenges of the business. Retirement complement - Some life insurance policies can be converted into an annuity that will pay bonuses to the policyholder after retirement. These are more expensive policies. Support to the family - Life insurance provides security to a family’s needy survivors with a financial help in their grief. Final expenditures - Many persons carry enough life insurance to cover funeral costs and other end-of-life expenses of the insured, and to repay unsettled dues. Gifts and special endowments - Another function of life insurance is to enable special endowments such as a major gift to a charity. A special facility in life insurance can be directed to fund education for a child. Parents of a child with an ill health may want to set apart a portion of their life insurance in a special fund to care for the child. Elements of Life Insurance The previous section discussed the purpose, need and advantages of life insurance. This section discussed the elements of life insurance. The two basic elements that all the individuals require from life insurance are the coverage of risk and savings for the future. It is necessary to understand the various elements of life Insurance. The following are the elements of life insurance: Premium - Premium is the amount of insurance payable by the policyholder. The price fixed for the premium depends on the sum assured, age and occupation of the policyholder. Grace period - Grace period is the days after the due date of the premium. Premium can be paid during the grace period. If the premium is paid as monthly instalments then seven or fifteen days of grace period is allowed to pay the premium. If the policyholder dies during the grace period without paying premium then the due amount will be deducted from the full amount of the policy. Proof of age - Date of birth is necessary as the rate of premium is decided on the basis of the age of the policyholder at entry. If date of birth is not provided at the entry level then it should be proved to the satisfaction of the insurance company at the time of claim. Nomination and assignment - The policyholder can nominate anyone at any time as nominee during the period of the policy. The person designated as nominee will get the benefit of the policy if the policyholder dies. Nomination is made by an endorsement in the policy. o Assignment of a policy means the transfer of the policy to a third party. A life insurance policy can be assigned to any person at any time freely with or without consideration. But it should be in writing, witnessed and registered. Assignment can be made on an endorsement or on a separate signed instrument. The person who makes the assignment is called Assigner and the person to whom the policy is assigned is called as assignee. Surrender value - Persons un-willing to pay the premium can surrender the policy and ask for the surrender amount which is the cash value of the policy. Surrender amount depends on the type of policy and premium paid. Generally, it is one-third of the premium paid till date. A person can apply for a surrender amount only if the premium has been paid for minimum three years. Paid-up value - Policyholders who want to close the policy can convert their policy into paid-up policy. Paid-up value is equal to the premium paid and greater than the surrender amount. But the Paid-up value amount is payable only at the maturity of the policy. A policy can be converted into paid-up policy only after two years. Indisputable clause - Under the Insurance act 1950, no life insurance policy can be disputed after it has run for two years except in case of proof of age or fraud. Penalty - The life insurance policy is penalised for non-payment of premium, concealment of material facts, furnishing wrong information and so on. Revival of lapsed policies - If premium is not paid within the grace period, the policy lapses. But the policy can be revived within a period of five years from the due date of the first unpaid premium amount and before the maturity date.

Basics of Underwriting This section covers the basics of underwriting, including its meaning. Underwriting is a process of evaluating the risk and exposures of potential clients. It is related to the rate-fixing function of an insurer. Underwriting is an insurance factor, which decides how much coverage the client should receive, how much clients should pay for it, or whether even to accept the risk and insure clients. Underwriting involves determining risk exposure and defining the premium that needs to be charged to insure that risk. Underwriting is the process that makes decisions regarding issuing insurance policies. The person, who evaluates, accepts or rejects risks and calculates premium is called as ‘Underwriter’. ‘Underwriting decision’ is the decision made by the underwriter regarding risk pricing and evaluation. . Underwriting decisions are very critical for insurers. Good underwriting in insurance companies makes them financially strong, and competitive.

Underwriting defined In the insurance industry, the term ‘underwriting’ refers to the process of evaluating risk. Important principle of insurance is the transfer of risk. The risk is taken away from the insured, and transferred to the insurer. The insurance company assumes the risks for a large number of persons. Since many people who are insured pay premiums, there are sufficient funds available to pay claims, and still permit the insurance company to pay its expenditures and make a sensible profit. In order to ensure that this is accurate, there must be a very good understanding of the risks and estimates must be made of how many claims are likely to be paid. When this data is understood, a premium rate can be determined that will guarantee that adequate funds are available. Underwriting is basically the evaluation of risk. Life insurance underwriting is the evaluation of factors such as, health and life expectation. This is done by the preparation of lifespan lists. These life lists are called humanity tables. They basically give the estimated lifespan of humans at a given age and given health condition. Life insurance underwriting is typically done on an individual basis. In this underwriting, every person presents a completely different condition. Individual health, age, life style, and even gender will be considered. The idea is to give a certain risk factor to an individual, and use this risk factor to determine the amount of premium to be paid for the insurance policy in order to make the statement of risk acceptable. The trade-off The underwriting isometrics is a trade-off between the business and survival. A trade-off has to be made between premium growth and underwriting profits. In general insurers hold more capital than the amount required by regulators. The main advantage of this buffer capital is that policyholders are sure that their claims will be paid and shareholders feel comfortable that the ability of the company to continue making profits is protected. The insurer’s indirect investment risk in the capital market is thereby improved by the process of underwriting risk. If the insurance company charges more for premiums, the company will lose competitive advantage. Hence, proper balance should be maintained for a good business. The conflict The underwriters need to consider the conflict between the insurers and the consumers. Consumers demand a lot of insurance coverage. But insurers shun risky exposures. For insurers evading their underwriting risks by combining negatively related lines of insurance seems natural. Positive correlation requires additional capitals for creditworthiness and thus the supply of insurance is limited. But, this argument oversees three facts. First, supposing that insurers want to limit volatility, they can still evade by holding assets that are positively related to their liabilities. Second, as long as risk increases with increased probability, an insurance company still seems attractive to investors. Finally, it is not clearly stated whether the shareholders of a company want management to avoid risk. Thus it is clear that positive correlation of risks causes consumers to demand more coverage but insurers to decrease supply. This causes conflict. Guiding principles of underwriting The two main underwriting principles are: Adverse selection. Persistency.

The underwriter should always secure himself against the adverse selection of risks, as the adverse selection will affect the policyholders in purchasing the policy. For example, a healthy person will be less interested in purchasing insurance than one who is often ill. Hence, the underwriter should assess these inherent risks carefully and fix the premium which minimises significant losses. In addition, the underwriter should only offer products which are affordable. The premium fixed for the policies should also support the cash flow model of insurers. The regular renewal of policies is essential to run the business smoothly. The underwriter should carefully analyse the paying capacity of likely customers before approving a policy. If many policies are surrendered or become lapsed, the company will incur huge losses.

Objectives and Principles behind Underwriting The previous section explained the basics of underwriting. This section will deal with the objectives and principles behind underwriting. Underwriting deals with the selection of risks. The main objective of underwriting is to ensure that the risks accepted by the insurer conform to the standards of the rating structure. The basic objective of underwriting is to analyse if the applicant accepted will have a loss experience or not which is quite different from the assumed scenario while formulating the rates. Hence, certain standards of selection should be maintained relating to physical and moral hazards that are set up when rates are estimated. For example, a company may decide that it will not consider any fire related insurance in areas where there is no fire brigade protection or any life insurance policy for a person having cancer for past five years. The objectives of underwriting are: Providing justified premiums - The underwriter should evaluate the risk in an application fairly and fix an appropriate premium for the consumer. Ensure deliverables to the consumer - Consumers are the concluding authorities who buy the product. If the marketing department fails to sell the product, then the product becomes undeliverable; the responsibility will be on the underwriter to carry an analysis of the various factors which causes differences between the consumers and company’s expectations. Financial feasibility to the insurance company - The underwriting profit should be replicated through financial statements. Although the underwriters are not involved in pricing the insurance products directly, yet their role is as important as that of actuaries. Generally, most of the insurance companies express underwriting policies, which offers the framework for underwriting decisions and It is also known as ‘underwriting philosophy’. The underwriting policy specifies: The line of insurance that will be written. Banned exposures. The amount of coverage to be allowed on different types of exposure. The area of the country in which each line will be written, and similar restrictions. Generally, the person who applies the underwriting guidelines and rules is called as ‘desk underwriter’. The underwriting philosophy can be considered as underwriting guidelines, which gives clear information about general standards that specify which applicants are to be allotted the risk recognised for each insurance product. In life insurance, underwriters are supported by physicians’ medical reports of the applicant, information from the agent, an inspection report of the applicant prepared by an external agency created for that purpose, as advised by the medical advisor of the company. In property and life insurance, the underwriter has the services of reinsurance facilities and credit departments to report on the financial standard of the applicants and also to review applicant’s loss histories.

Underwriting Steps The previous section dealt with the objectives and principles in underwriting. This section will describe the steps in underwriting process. The underwriting of life-insurance falls under a category that is different from all other forms of insurances. When the underwriter measures risk at beginning, the company assures a cover for 30 years or throughout life. Life assurance underwriting must consider factors, like, medical history, family details, occupational hazards, and person’s lifestyle.

The underwriting process for life insurance involves the following steps: 1) Execution of field underwriting. 2) Renewing the application in the office. 3) Gathering additional information, if required. 4) Taking and underwriting decisions. Additional information is always essential for the underwriter in order to take a decision. This additional information may be in the form of questionnaires, a detail medical report from proposal’s own doctor (Medical Attendant’s Report), and an examination by an independent doctor (Medical Examiner’s report). The general steps followed by Underwriters are: 1) Getting applications -The application for insurance is the main source of insurability information that the underwriter of the life insurance company evaluates first. Applications are generally collected by the field officers, the agents. A typical life insurance consists of: º General information - The general information consists of general aspects like name, age, address, date of birth, sex, income, marital status and occupation of the applicant. It also includes the details of requested insurance cover like type of policy, amount of insurance, name and relationship of the nominee, other insurance policies that the customer owns and the pending insurance applications as on date. º Medical information - The medical information consists of consumer’s health condition and several queries about health history and family history. The medical section of the application is comprehensive and it is mandatory to fill it completely with relevant information. Information is also collected through a medical examination, depending on age and face value of the policy. 2) The medical report - An average medical test is compulsory (which is free of cost to the applicant except in case of revivals). Depending on the information filed in the application, an insurance company may ask the physician of the consumer for further information. Gathering information is a standard method used in all domestic insurance companies. Basically, life insurance companies have several sources of medical and financial information to assist them in the underwriting process. These include personal medical records and physicians, the medical information department, inspection reports and credit records. 3) Underwriting review - After collecting all the relevant information about the applicant, an underwriter from the insurance company evaluates the information. During this evaluation, the underwriter will organise the risk offered to the company and also determines the premium for the policy depending upon the primary and secondary factors influencing the premium. The premium rates are set by the company’s registrars depending upon the applicants risk profile. During each step of the underwriting process, the life insurance agent usually provides details, and is well-informed about the insured status in the process. If the applicant offers more risk than the insurance company standards, then the underwriter rejects the application. 4) Policy writing - A special department writes the policy, whose main function is to issue written contracts according to the instructions from the underwriting departments. A register must be maintained as most policies are long-term. Insurance companies generally use computerised systems to maintain the records of the customers, premium payments, and they to verify that all the requirements of underwriting have been met.Sources of Underwriting Information The previous section dealt with the underwriting steps. This section will cover the sources of underwriting information. There are many sources of underwriting information. Some of these sources are: Application containing the insurer’s declarations - Customer application is the basic source of underwriting information, which will vary for each line of insurance and for each type of coverage. Depending upon the broadness of the contract, more information is required. The questions on the application help the underwriter to decide whether to accept or reject the application or ask for some more information. Information delivered by the agent - Agents have information about the cancellation or non-renewal of policies of a policy holder. Insurance companies use this information while underwriting policies. Prior experiences - Previous history of claims is also a source of information for underwriting. Insurance company penalises the policyholder in case if the policyholder’s claim experiences are unfavourable. Information collected by inspection - Company’s specialists will

conduct surveys to measure the accuracy of information written in the application. This information then becomes a source of underwriting information.

Insurance benefits to society

Stability of families Aids planning ability to businesses Facilitates credit transactions Anti-monopoly device Reduces credit costs Increases capital efficiency

The three primary types of objective underwriting data are as follows: º MVRs - Motor Vehicle Reports (MVRs) are provided by the respective state departments. Some states allow companies to submit reports directly, while others report through intermediaries. º Claims history reports - Companies that wish to order reports from the database are required to submit detailed information on the claims they pay. Accident history reports provide information on the insurance coverage and the claim amounts paid. º Other third party information products - Other third party information products include reports such as additional drivers at a given address and information about the title history and/or accident history of specific vehicles.

Basis of Claims Management Claims management comprises of all the managerial decisions, and the processes involved regarding the settlement and payment of claim with regard to the terms in the insurance contract. The main emphasis here is on monitoring and lowering the costs related in carrying out the claim process. The elements or the basis of claims management are claims preparation, claims philosophy, claims processing and claims settlement. Claims preparation - Claims preparation includes reporting the damages occurred to property, or injuries to people along with documentary proof of the assessment of loss and details of the loss. Claims philosophy - Claims philosophy deals with the claims handling methods and procedures. It also contains the guidelines required to prepare the receipt of claims from the insurers, analysis of the claim, the decision to be taken on the issue or dispute, evaluation of the claim cost and expenses, supervise the claim payment, and enhance the efficiency of claims settlement. Claims processing - The claim process deals with the claims procedures and handling of claims. Handling of claims is keeping track of the events which causes the loss to the insured and gives a cause to the insured to file a claim. The claims process has two procedures for the insurer and insured to be pursued. Considering from the view of the insured, it includes the loss or damage by understanding the cause for the loss, giving notice of the loss to the insurer, make available the required proof of the loss to the insurer or the loss assessor and surveyors. From the point of the insurer on receiving the receipt of the claim from the insured, the immediate steps such as verification of the claim, reviewing the claim application, responding to the insured and carrying out claims investigation, claims negotiation and claim settlement. Claims settlement - Settling a claim is a process of negotiation between the insured person and insurance provider. Insurance companies receive claims relating to accidents and medical procedures. If there is evidence to support claims, the claims settlement claims is very easy. The insurer may try to compare the claim with similar ones in the past and try to lower the settlement. Thus good negotiation skills are essential for an insured to get a good claims settlement.

Overview of Insurance Pricing This section gives an overview of insurance pricing.

The success of the competitive market depends on pricing. Basically, price is the value that sellers set on the products they offer for marketing. Insurance pricing determines the premiums collected for an insurance contract. Insurance pricing is a difficult actuarial technique. In insurance, the sales price or premium is collected before specific services, such as claim payments are made. It is difficult for the insurers to decide the price of insurance products. Insurers build a reserve from the premiums collected and invest it in financial markets according to the norms of the appropriate regulatory authority. Thus, insurance firms fulfil an important financial intermediary function. The basic principle of insurance pricing is that insurers selling policies or insurance coverage must receive premiums that are enough to fund their expected claim costs and managerial costs, and provide an expected profit to pay off for the cost of acquiring the investment necessary to support the coverage sale. The base premium is calculated using the equivalence principle on the basis of expected claims distribution as, P = E(s) + k + R Where, E(s) = Mathematical expectation of claims k = Ongoing company running costs R = Risk premium The risk premium allows for coverage of unforeseen deviations in the claims amount to be paid, but still provides the company with the standard pricing methods. Within large, expanded and identical underwriting securities, the claims payload should meet its expected value. Insurance prices or premiums consist of three components. They are pure premium, operating expenses, and margins and other income.

Types of Insurance Premiums Pure Premium - Pure premium is the most important component of the insurance premiums. It includes the amount that covers expected losses, and loss adjustment costs based on actuarial estimations. Operating Costs - Operating costs include the sales commission, marketing costs, taxes, and claims’ handling costs. These costs depend on the extent and variety of policyholder services which the insurer provides. Margins and Other Incomes - Margins and other incomes include an allowance for unforeseen events, and contingency funds. Contingency funds are necessary to meet unexpected increase in the number or amount of benefit payments, and underwriting profits are necessary to provide funds for growth and expansion.

PrinciplesInsurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur. The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring. In order to be an insurable risk, the risk insured against must meet certain characteristics. Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses.InsurabilityRisk which can be insured by private companies typically shares seven common characteristics:1. Large number of similar exposure units: Since insurance operates through pooling resources, the majority

of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London, which is famous for insuring the life or health of actors, sports figures, and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates.

2. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place, or cause is identifiable. Ideally, the time, place, and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.

3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event

for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable.

4. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses, these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.

5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, then it is not likely that the insurance will be purchased, even if on offer. Furthermore, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, then the transaction may have the form of insurance, but not the substance (see the U.S. Financial Accounting Standards Board pronouncement number 113: "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts").

6. Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.

7. Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the United States, flood risk is insured by the federal government. In commercial fire insurance, it is possible to find single properties whose total exposed value is well in excess of any individual insurer's capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.

LegalWhen a company insures an individual entity, there are basic legal requirements and regulations. Several commonly cited legal principles of insurance include: 1. Indemnity – the insurance company indemnifies, or compensates, the insured in the case of certain losses only up to the insured's interest.2. Benefit insurance – as it is stated in the study books of The Chartered Insurance Institute, the insurance company doesn't have the right of recovery from the party who caused the injury and is to compensate the Insured regardless of the fact that Insured had already sued the negligent party for the damages (for example, personal accident insurance)3. Insurable interest – the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The concept requires that the insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons. The requirement of an insurable interest is what distinguishes insurance from gambling.4. Utmost good faith – (Uberrima fides) the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed.5. Contribution – insurers which have similar obligations to the insured contribute in the indemnification, according to some method.6. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for the insured's loss. The Insurers can waive their subrogation rights by using the special clauses.7. Causa proxima, or proximate cause – the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded

8. Mitigation – In case of any loss or casualty, the asset owner must attempt to keep loss to a minimum, as if the asset was not insured.

Methods of insurance In accordance with study books of The Chartered Insurance Institute, there are the following types of insurance:

1. Co-insurance – risks shared between insurers2. Dual insurance – risks having two or more policies with same coverage3. Self-insurance – situations where risk is not transferred to insurance companies and solely retained by

the entities or individuals themselves4. Reinsurance – situations when Insurer passes some part of or all risks to another Insurer called

Reinsurer.

Underwriting and investingThe business model is to collect more in premium and investment income than is paid out in losses, and to also offer a competitive price which consumers will accept. Profit can be reduced to a simple equation:Profit = earned premium + investment income – incurred loss – underwriting expenses.Insurers make money in two ways: Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks By investing the premiums they collect from insured partiesThe most complicated aspect of the insurance business is the actuarial science of ratemaking (price-setting) of policies, which uses statistics and probability to approximate the rate of future claims based on a given risk. After producing rates, the insurer will use discretion to reject or accept risks through the underwriting process.

IndemnificationTo "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a specified event or peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather "contingent" insurance (i.e., a claim arises on the occurrence of a specified event). There are generally three types of insurance contracts that seek to indemnify an insured:

1. A "reimbursement" policy2. A "pay on behalf" or "on behalf of" policy[19]

3. An "indemnification" policyFrom an insured's standpoint, the result is usually the same: the insurer pays the loss and claims expenses.If the Insured has a "reimbursement" policy, the insured can be required to pay for a loss and then be "reimbursed" by the insurance carrier for the loss and out of pocket costs including, with the permission of the insurer, claim expenses. Under a "pay on behalf" policy, the insurance carrier would defend and pay a claim on behalf of the insured who would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language which enables the insurance carrier to manage and control the claim.Under an "indemnification" policy, the insurance carrier can generally either "reimburse" or "pay on behalf of", whichever is more beneficial to it and the insured in the claim handling process.An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy.When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a claim against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the premium. Insurance premiums from many insureds are used to

fund accounts reserved for later payment of claims – in theory for a relatively few claimants – and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (called reserves), the remaining margin is an insurer's profit

Insurance RatesRate making (aka insurance pricing) is the determination of what rates, or premiums, to charge for insurance. A rate is the price per unit of insurance for each exposure unit, which is a unit of liability or property with similar characteristics. For instance, in property and casualty insurance, the exposure unit is typically equal to $100 of property value, and liability is measured in $1,000 units.

Because an insurance company is a business, it is obvious that the rate charged must cover losses and expenses, and earn some profit. However, all states have laws that regulate what insurance companies can charge, and thus, both business and regulatory objectives must be met.

The main business objective is to charge an adequate premium to cover losses, expenses, and allow for a profit; otherwise the insurance company would not be successful. The pure premium, which is what is determined by actuarial studies, consists of that part of the premium that is necessary to pay for losses and loss related expenses. Loading is the part of the premium necessary to cover other expenses, particularly sales expenses, and to allow for a profit. The gross rate is the pure premium and the loading per exposure unit and the gross premium is the premium charged to the insurance applicant, and is equal to the gross rate multiplied by the number of exposure units to be insured. The ratio of the loading charge over the gross rate is the expense ratio.

Gross Rate = Pure Premium + Load

Gross Premium = Gross Rate × Number of Exposure Units

Expense Ratio = Load / Gross Rate

Other business objectives in setting premiums are:

1. Simplicity in the rate structure, so that it can be more easily understood by the customer, and sold by the agent; 2. Responsiveness to changing conditions and to actual losses and expenses; and 3. Encouraging practices among the insured that will minimize losses.

The main regulatory objective is to protect the customer. A corollary of this is that the insurer must maintain solvency in order to pay claims. Thus, the 3 main regulatory requirements regarding rates is that:

1. they be fair compared to the risk;2. premiums must be adequate to maintain insurer solvency; and3. premium rates are not discriminatory—the same rates should be charged for all members of an underwriting class with a similar risk profile.

Although competition would compel businesses to meet these objectives anyway, the states want to regulate the industry enough so that fewer insurers would go bankrupt, since many customers depend on insurance companies to avoid financial calamity.

The main problem that many insurers face in setting fair and adequate premiums is that actual losses and expenses are not known when the premium is collected, since the premium pays for insurance coverage in the immediate future. Only after the premium period has elapsed, will the insurer know what its true costs are. Larger insurance companies maintain their own databases to estimate frequency and the dollar amount of losses for each underwriting class, but smaller companies rely on rating bureaus for loss information.

Methods For Determining Insurance Rates

There are 3 methods for determining rates in property and liability insurance: judgment rating, class rating, and merit rating. Merit rating can be further classified as schedule rating, experience rating, and retrospective rating.

Judgment ratings are used when the factors that determine potential losses are varied and cannot easily be quantified. Because of the complexity of these factors, there are no statistics that can be used reliably to assess the probability and quantity of future losses. Hence, an underwriter must evaluate each exposure individually, and use intuition based on past experience. This rating method is predominant in determining rates for ocean marine insurance, for instance.

Class rating is used when the factors causing losses can either be easily quantified or there are reliable statistics that can predict future losses. These rates are published in a manual, and so the class rating method is sometimes called a manual rating. Class ratings are often used in pricing insurance products sold to the consumer because there are copious statistics and a large enough population of similar situations that make class ratings effective. It also allows agents to give an insurance quote quickly.

Merit rating is based on a class rating, but the premium is adjusted according to the individual customer, depending on the actual losses of that customer. Merit rating often determines the premiums for commercial insurance, and, in most of these cases, the customer has some control over losses—hence, the name. Merit rating is usually used when a class rating can give a good approximation, but the factors are diverse enough to yield a greater spread of losses than if the composition of the class were more uniform. Thus, merit rating is used to vary the premium from what the class rating would yield based on individual factors or actual losses experienced by the customer.

Types of Insurance:Business insurance can take a number of different forms, such as the various kinds of professional liability insurance, also called professional indemnity (PI), which are discussed below under that name; and the business owner's policy (BOP), which packages into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners' insurance packages the coverages that a homeowner needs.Auto insuranceAuto insurance protects the policyholder against financial loss in the event of an incident involving a vehicle they own, such as in a traffic collision.Coverage typically includes: Property coverage, for damage to or theft of the car Liability coverage, for the legal responsibility to others for bodily injury or property damage Medical coverage, for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.Health insuranceHealth insurance policies cover the cost of medical treatments. Dental insurance, like medical insurance, protects policyholders for dental costs. In most developed countries, all citizens receive some health coverage from their governments, paid for by taxation. In most countries, health insurance is often part of an employer's benefits.Accident, sickness, and unemployment insurance

Workers' compensation, or employers' liability insurance, is compulsory in some countries Disability insurance policies provide financial support in the event of the policyholder becoming unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgage loans and credit cards. Short-term and long-term disability policies are available to individuals, but considering the expense, long-term policies are generally obtained only by those with at least six-figure

incomes, such as doctors, lawyers, etc. Short-term disability insurance covers a person for a period typically up to six months, paying a stipend each month to cover medical bills and other necessities. Long-term disability insurance covers an individual's expenses for the long term, up until such time as they are considered permanently disabled and thereafter. Insurance companies will often try to encourage the person back into employment in preference to and before declaring them unable to work at all and therefore totally disabled. Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work. Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance. Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expenses incurred because of a job-related injury.CasualtyCasualty insurance insures against accidents, not necessarily tied to any specific property. It is a broad spectrum of insurance that a number of other types of insurance could be classified, such as auto, workers compensation, and some liability insurances. Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement. Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions could result in a loss.LifeLife insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. In most states, a person cannot purchase a policy on another person without their knowledge.Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies, are regulated as insurance, and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.In many countries, such as the United States and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.In the United States, the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.Burial insurance

Burial insurance is a very old type of life insurance which is paid out upon death to cover final expenses, such as the cost of a funeral. The Greeks and Romans introduced burial insurance c. 600 CE when they organized guilds called "benevolent societies" which cared for the surviving families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose, as did friendly societies during Victorian times.

PropertyProperty insurance provides protection against risks to property, such as fire, theft or weather damage. This may include specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.3. Advantages & Disadvantages of Insurance

AdvantagesSome insurance coverage, such as health insurance, is a necessity in a world where one serious illness can cause you to lose your home. If a fire or other disaster strikes, commercial insurance can be the difference between staying in business or going bankrupt. Depending on the policy, it can replace lost income and money, restore damaged or destroyed property, or provide a shield against a lawsuit. Commercial credit risk insurance can also reduce the risk of doing business, because it covers you against customer bankruptcy, refusal of delivery or other non-payment.The buyer's insolvency or bankruptcy Its inability to pay for financial reasons Repudiation of the shipment [when the buyer fails or refuses to take delivery of goods].Pre-credit risk; which is the risk related to losses caused by a buyer's insolvency during the manufacturing period but before delivery of the goods or completion of contractLife insurance provides an infusion of cash for dealing with the adverse financial consequences of the insured's death.Many life insurance policies are exceptionally flexible in terms of adjusting to the policyholder’s needs.  The death benefit may be decreased at any time and the premiums may be easily reduced, skipped or increased.A cash value life insurance policy may be thought of as a tax-favored repository of easily accessible funds if the need arises; yet, the assets backing these funds are generally held in longer-term investments, thereby earning a higher return.DisadvantagesTerm insurance provides coverage only for a limited period of time, although some term policies can be renewed indefinitely.Premium rates are guaranteed only until the end of the term. Depending on the policy, premiums may be level for a period of 1, 5, 10, 15, 20, 25, or 30 years and then cease without any renewal option, or offer continual renewals at a higher premium rate.Deteriorating health can trap you in a policy with rapidly increasing premiums.Typically, certain customer accounts will have specific coverage limits assigned to them by the insurer, and these limits may be far less than the dollar amount requested by the creditor company.Policies typically come with annual deductibles; as well as per loss deductibles...in other words commercial credit insurance is not a first dollar loss policy.There are usually other exclusions and limitations on coverage.Often, losses under a certain dollar amount are not covered losses.The insurer may require detailed periodic reports from the creditor company about the status of customers covered by the policy.The credit insurance policy is a contract in which the creditor company is required to comply with very specific requirements in order for bad debt losses to be covered. Failure to comply with any of the terms of the contract may invalidate the coverage.Credit insurance policies will usually not pay the creditor company if the debtor asserts that the balance due is in dispute...and customers in serious financial trouble often claim the balance due is disputed in order to delay collection or legal action. The narrower the "spread" of risk being submitted to the insurer, the more difficult it will be to get a credit insurance policy that is worth purchasing.Risk sharing accepted by the buyer including annual deductibles, specific account exclusions, per loss deductibles, the annual dollar cap on total paid losses, and a low dollar loss exclusions.

Usually, the insurer will decline to offer any coverage on certain customer accounts.Policyholders forego some current expenditure to pay policy premiums.  Moreover, life insurance is typically purchased for the benefit of others and usually only indirectly for the insured person.Cash surrender values are usually less than the premiums paid in the first several policy years and sometimes a policy owner may not recover the premiums paid if the policy is surrenderedThe life insurance purchase decision and the positioning of the life insurance can be complex especially if the insurance is for estate planning, business situations or complex family situations.The life insurance acquisition process can be annoying and perplexing

4. Current pattern of Insurance in BangladeshAfter the emergence of the People’s Republic of Bangladesh in 1971, the government nationalized the insurance industry along with the banks in 1972 by Presidential Order No. 95.By virtue of this order, all companies and organization transacting all types of insurance business in Bangladesh came under this nationalization order. This was followed by creation of five insurance companies in the life and non-life sector. Further changes were brought on 14th May, 1973. Through the enactment of Insurance Corporation Act VI, 1973 which led to creation of two corporations namely Sadharan Bima Corporation for general insurance and, Jiban Bima Corporation for life insurance in Bangladesh. In other words Sadharan Bima Corporation (SBC) emerged on 14th May, 1973 under the Insurance Corporation Act (Act No. VI) Of 1973 as theonly state owned organization to deal with all classes of general insurance & re-insurance business emanating in Bangladesh. Thereafter SBC was acting as the sole insurer of general Insurance till 1984. Bangladesh Government allowed the private sector to conduct business in all areas of insurance for the first time in 1984. The private sector availed the opportunity promptly and came forward to establish private insurance companies through promulgation of the Insurance Corporations (Amendment) Ordinance (LI of 1984) 1984.The Insurance Market in Bangladesh now consists of two state-owned corporations, forty three and seventeen private sector general & life insurance companies respectively, a total of 62 insurance companies.Thus the insurance sector in Bangladesh has grown up substantially and deepened remarkably with number of companies in both life and general segments. With the expansion of size of the insurance market, the volume of assets of the industry has also increased substantially. SBC is entitled to 50% of public sector business. Insurance Corporation (Amendment) Act 1990 provides that fifty percent of all insurance business relating to any public property or to any risk or liability appertaining to any public property shall be placed with the SBC and the remaining fifty percent of such business may be placed with this corporation or with any other insurers in Bangladesh. But for practical reason and in agreement with the Insurance Association of Bangladesh SBC underwrites all the public sector business and 50% of that business is distributed among the existing 43 private general insurance companies equally under National Co-insurance Scheme. In respect of reinsurance, the same act provides that fifty percent of a company’s reinsurance business must be placed with the Sadharan Bima Corporation and remaining fifty percent May beer insured either with this Corporation or with any insurer in Bangladesh or abroad. At present, nearly all the company’s place 100% of their reinsurance business with the SBC.

Bangladeshi Insurance laws and regulations:Insurance business is not new in Bangladesh. Almost a century back, during the British rule in India some companies started insurance business, both life and general, in this region. This business gained momentum in East Pakistan during 1947-1971, when 49 insurance companies were in operation with both life and general insurance schemes. The insurance sector was originally regulated by the Insurance Act, 1938 and after the Independence by the Insurance Act 1973.Since then the industry is growing steadily despite many odds. Several amendments were made in the insurance law since 1984. In order to facilitate the overall insurance business in Bangladesh, the concerned authority had always been alert. Considering the expansion of trade and commerce in the country and the aim to reduce risks in lives, the Insurance Act 2010 has been enacted by updating the provisions in the Insurance Act, 1938. The Insurance Development and Regulatory Authority Act 2010 has also been framed with a view to synchronising functions of the existing Insurance Department in the spirit of the newly-enacted Insurance Act, 2010 to

maintain proper control and supervision of the sector and protect the interests of policy holders and beneficiaries.Financial Performance summary:

The gross premium of the private general insurance companies has an average growth rate of 14.31% over the year 1999 to 2010. If we compare the amount of gross premium directly from 1999 to 2010, we get an increase in the gross premium of 279.24%. The underwriting profits of the companies have increased on an average at 22.30%. Now if we look at the scenario of investment made by the companies, it is observed that the industry has increased their investment activity at 19.38% whereas income from investment has increased by 20.36%. The size of the industry which is reflected through the total assets, has an average increment of 15.79%.

History of Insurance Market in Bangladesh:

Insurance industry in Bangladesh passed through a century long history of evolution, yet struggling to achieve its mature stage. Almost a century back, during British rule in India, some insurance companies started transacting business, both life and general, in Bangal.After liberation, as part of the nationalization process, the industry was nationalized vide Presidential Order.

We can define this history by two stages….

Developed Before 1971

The life insurance started in India in the 19 th century to transact life insurance business on the European model. Modern insurance appeared first in big cities and coastal towns. At that time Indians were in a majority of cases ignorant of the advantages and utility of life insurance. In fact, there was a well established superstition that to insure one’s life was to court death; and in vernaculars of the country, life insurance was described as Death Registration.An organized life insurance institution had been established in 1818 in the Indian subcontinent. That year, the British founded Oriental Life Assurance Company in Calcutta.

The insurance business began in East Pakistan with the relocation of the EFU personnel along with insurance personnel from few other companies in India. Most of the insurance companies moved to East Pakistan were foreign origin except three national companies, Eastern Federal, Muslim Insurance and Habib Insurance Company. After the Partition of Bengal in 1947, seven Bengali insurance personnel moved to East Pakistan from India and took charge of the insurance business of various companies.

The main force of insurance activities in East Pakistan was provided by the EFU staff when a section of the company personnel in Kolkata moved to Chittagong and Dhaka. Jamaluddin, a non-Bengali was first selected as Life Manager of the EFU in East Pakistan in 1951. After his sudden death in Dhaka in January 1952, Khuda Buksh was appointed as the Life manager of the EFU in East Pakistan in July 1952.

Developed After 1971

After the emergence of the People’s Republic of Bangladesh in 1971, the government nationalized the insurance industry along with the banks in 1972 by Presidential Order No. 95.By virtue of this order, all companies and organization transacting all types of insurance business in Bangladesh came under this nationalization order. This was followed by creation of five insurance companies in the life and non-life sector.

Further changes were brought on 14th May, 1973. Through the enactment of Insurance Corporation Act VI, 1973 which led to creation of two corporations namely SadharanBima Corporation for general insurance and, JibanBimaCorporation for life insurance in Bangladesh. In other words SadharanBima Corporation (SBC) emerged on 14th May, 1973 under the Insurance Corporation Act (Act No. VI) Of 1973 as the only state owned organization to deal with all classes of general insurance & re-insurance business emanating in Bangladesh.

Thereafter SBC was acting as the sole insurer of general Insurance till 1984. Bangladesh Government allowed the private sector to conduct business in all areas of insurance for the first time in 1984. The private sector availed the opportunity promptly and came forward to establish private insurance companies through promulgation of the Insurance Corporations (Amendment) Ordinance (LI of 1984) 1984.The Insurance Market in Bangladesh now consists of two state-owned corporations, forty three and seventeen private sector general & life insurance companies respectively, a total of 62insurance companies.

Thus the insurance sector in Bangladesh has grown up substantially and deepened remarkably with number of companies in both life and general segments. With the expansion of size of the insurance market, the volume of

assets of the industry has also increased substantially. SBC is entitled to 50% of public sector business. Insurance Corporation (Amendment) Act1990 provides that fifty percent of all insurance business relating to any public property or to any risk or liability appertaining to any public property shall be placed with the SBC and theremaining fifty percent of such business may be placed with this corporation or with any other insurers in Bangladesh.

But for practical reason and in agreement with the Insurance Association of Bangladesh SBC underwrites all the public sector business and 50% of that business is distributed among the existing 43 private general insurance companies equally under National Co-insurance Scheme. In respect of reinsurance, the same act provides that fifty percent of a company’sreinsurance business must be placed with the SadharanBima Corporation and remaining fifty percent May beer insured either with this Corporation or with any insurer in Bangladesh or abroad. At present, nearly all the company’s place 100% of their reinsurance business with the SBC.

Insurance Problems in Bangladesh

There should be vigorous campaign throughout the country to make the people aware of the utility and prospects of buying insurance. Bangladesh is a densely populated country and most of the people in our country are poor. They would definitively go for insurance for the security and the risks covered by the insurance. Therefore, the prospects of Insurance are very high in Bangladesh if the following measures can be adopted.

First of all, there is no alternative of quality service. Insurance being a service rendering entity must provide quick services. Policyholders are highly dissatisfied with service of JBC and SBC. Due to poor quality services, public corporations are losing market. In order to ensure their continuity, such corporation must pay adequate attention on their quality of service. Private companies also need put their all out efforts to improve quality of service so as to strengthen their position.

Secondly, the government should eliminate the difficulty in licensing procedure and should not delay in the approval of new companies if all the requirements are fulfilled. It will help not only to increase volume of business but also solve the problems of unemployment.

Finally, the policy holders are very much worried about the settlement of claims. Ordinary people also consider it main constraint. Therefore, instance companies should settle the claims as quickly as possible to create a healthy public image. For this purpose the claim settlement procedure can be simplified and the insurers can provide proper written guidelines of claim settlement to the policyholders.

If the above steps can be taken, more and more people in Bangladesh will be interested in buying insurance. Some of the problems are described below.

1. LOW PER CAPITA INCOME: Poor economic condition is considered to be the main reason for poor life insurance penetration in Bangladesh. The country has a very low per capita income and over 50% of our total population lives below the poverty line. Inability to save or negligible savings by a vast majority of population kept them away from the horizon of life insurance.

2. POOR KNOWLEDGE OF AGENTS: The marketing of insurance is greatly hampered in the remote village of Bangladesh where the agents are appointed from respected locality. This is because; educated young people are seemed to be reluctant to become insurance agents. Therefore, persons finding no job or persons having lesser knowledge become insurance agents whom cannot acquaint themselves fully with the whereabouts of insurance. Such agents cannot play efficient role in convincing a prospective policyholder.

3.  ILLETERACY: Mass illiteracy is another factor that adversely affects the marketing of insurance. About 70% of the population is floating in the sea of ignorance. Illiteracy leads one to think that the insurance is deception; it is no value in life. They cannot think rationality because they do not know what is insurance and what its importance as security for future.

4.  RELIGIOUS SUPERSTITION: Religious attitude of the people also stands against efficient insurance. The religious people believe that the future is uncertain, it is in the hand of Allah and they do not think it necessary to buy life insurance policy for them.

5.  LOW AWARENES: Insurance awareness is poor. Agents are not skilled enough. These agents cannot perform their job properly to make the people aware of life insurance.

6.  LOW SAVINGS: People of Bangladesh have a very small saving potentially and thus have less or no disposable income. Almost the whole of the income is exhausted in the process of maintaining the day-to-day life. Thus they are left with little amount, which may not deemed to sufficient for the payment of premiums. This factor discourages many to buy life insurance policy.

7.  LACK OF CONTINUITY: Discontinuation of insurance policy is found higher. This also adversely affects the market efficiency of insurance business.

8.  SHORTAGE OF FUND: Most of the policyholders cannot continue their policies owing to price spiral and shortage of fund.

9.  LACK OF REMAINDER: Increase in liability, lack of reminder notice from the insurance company causes for discontinuation of policy.

10. NEGLIGENCE OF POLICY HOLDERS: Many of the policyholders have expressed that; their policies lapsed for their own negligence to pay premium in time.

11. RESTRICTION: Another important reason for discontinuation is restriction investment allowance by the government relating to income tax.

12. POOR SERVICES TO CONSUMERS: An important reason for the dismal performance of insurance business in Bangladesh is poor client services provided by the insurance companies. The public image of service from life insurance institutions is very poor.

13. High lapses of life insurance policies do much to harm insurance image.

14. RED TAPISM TO OBTAIN COMPENSATION: When an accident takes place, a claimant for many difficulties to obtain money from the insurance company. This also discourages people for being a policyholder.15. LACK OF NEW PRODUCT: In a dynamic life insurance market, one can expect to see new product coming out every now and then. But still today one can hardly see any new product in the insurance market in Bangladesh.16. LOW RETURN: Partly for reasons of drastic fall in money value and partly for reason of nil or low bonus addition resulting from a combination of high management expenses and low investment return, life insurance has ceased to look as an attractive savings medium.

17. TRADITIONAL MARKETING: Both as a medium of savings and as a provider of financial security in the event of premature death of a bread winner and in old age, life insurance has relatively greater appeal among the mid-income people having steady income. For various reasons poor monetary benefit, poor services, no tax incentive to government employees etc.-the traditional marketer of insurance have drastically shrunk. So insurer

force to sell policies among different classes, such as business people, well-to-do farmers, traders etc. These peoples interest for life insurance is rather lukewarm. Soliciting business from them is harder.

18. TRADITIONAL INSURANCE ACT: The present insurance act was enacted more than half a century back. Many amendments have been made though since then but the basic character of the act has remained virtually unchanged. This act does not suit the needs of life insurance in the present day in Bangladesh. The all pervasive stringent regulatory functions carried and exercised by the office of the controller of Insurance (CI) is not consisted with the market liberalization policy of the government. In its present form, the act is obstructing, rather than helping, healthy growth of life insurance in the company.

19. RESTRICTIVE INSURANCE ACT: One would find it difficult not to admit that the Insurance Act is too restrictive in the matter of investment. The inflexible rigid rules put obstacles in the way of earning high profits for the life fund.

20. NATURE OF INTANGIBILITY: The current practice is that every company tries to promote its own products, but the benefits of insurance as such are not highlighted. In other words, the publicity is itemized, not general.

21. INADEQUATE TRAINING: In life insurance, for the sales personnel particularly, importance of training cannot be overemphasized. But unfortunately the present facilities for training, despite what the Insurance academy is doing, are meager.

22. ADVNTAGES OF PSC: Whatever may be in theory, in reality a public sector corporation (PSC) engaged in insurance business is not accountable to anyone. The controller of insurance (CI) cannot enforce its authority over the PSC, since the latter can easily disregard the CI without fear and any positive action. This gives the PSC, compared to private companies, many advantages. Of course, these so-called advantages are truly of an illusory nature since in the long run they will do much harm not only to the PSC itself but also to the life insurance industry as a whole.

23. DISCRIMINATORY ATTIRUDE: The private insurance companies are noticing that in any dispute arising between the PSC and the private companies, the authority, for some reasons is always found to take a position against the companies in favor of the PSC. This kind of discriminatory attitude does not indicate a sincere belief in free market concept.

24. LACK OF RELIABILTY: Peoples have lacking of reliability on the insurance company, because many insurance companies do not make payment they agree to pay in time of selling policy to the people.

25. LOW ATTRACTIVENESS OF OFFERINGS: The offerings of much of the insurance companies are not so much attractive that they can allure people to buy a life policy.

26. LACK OF ADVERTISEMENT: The lacking of proper advertisement and information about life insurance package are also important factor for poor life insurance business.

27. INABILITY TO SOLVE PROBLEMS: Many of the life insurance companies are unable to solve the problems of the policyholders.

28. LOW QUALITY SERVICE: Inability to maintain the quality of the services provided by the life insurance companies is also a problem.

29. DEARTH OF UNDERWRITER: In Bangladesh, there is a serious dearth of life insurance underwriters and for that reason-underwriting decision is delayed to the detriment of the sales force and the proposed policyholders.

Insurance business prospects in Bangladesh:

It is true that insurance business in Bangladesh is increasing day by day but the number of insured people, inventory, tangible assets are not remarkably increasing that much. Due to the undeveloped economical situation of overall market peoples are not willing to involve in any kind of insurance policy. Our export income is limited and 68%income comes from garments sector. So the types of economy are not suitable for insurance business. Bangladesh in one of the poorest countries in the world and most of the people in this country live under extreme poverty level .All of these people fight hard to earn their livelihood and are marginal in relation to the expenditure with the income. It is quite impossible for them to save some money for future need. Therefore they are quite unable to give the amount to the insurer which is called as premium and regarded as safety or precautionary measures against any accident. The number of people who can bear the premium to the insurance company is very few in regard to those mentioned above. Therefore the overall poor economic condition is creating obstacle to flourish the insurance business in Bangladesh. Most of the insurance companies are facing financial problems. First of all the except than three to four insurance companies all the companies cannot manage a good amount of funds and second of all they invest their money in poor securities and business which is vulnerable regarding getting back the money with profit as a result most of the companies are making loss year after year and because of these insurance companies cannot expand their business like office branches, skilled employees and policy maker so ultimately is causes a barrier to the growth in insurance business. One of the eye catching problems of this business is seen now a day is growing cost of business is another problem that insurance companies are facing now a day. They urge that government tax, house rent, utility, commission fee, stationeries are growing day by day. But their businesses are nor growing so fast with that rate. Besides this the policy holders are not willing to pay too much premium with growing cost that is hampering the strategies of insurance companies .so they are facing difficulties in running their business efficiently . Apart from all these, insurance companies in Bangladesh are failing to convince the individual clients, huge misconceptions are existing between clients and insurance companies. Individuals of our country thinks that insurance companies are fake, the way the offers the y do not keep their promises. In long run we strongly believe that we can certainly overcome these problems and can make insurance business not only popular but also profitable. We think several steps can could be enough to rescue this sector of business market but this cannot be done by overnight, it may takes several years. It needs long term planning. Besides making the people aware the insurance businessman should come forward with govt. to make this business famous. Coming from the existing problems following steps should be taken to make this business famous. . High publicity and insurance knowledge can led the people to make insurance policy more and more. Mass publicity activities are very essential to overcome from unwillingness wrong idea, doubt & unbelief of the people this country. The people media can provide an effective help regarding country interest. We also need to increase the training facilities to all the employees and all other people who are directly or indirectly involves in this business. Insurance business effective standard training facilities must be arranged for the manager & workers who are employed in this business. Insurance business is very complex and technical. To perform this business properly, obviously it needs vast knowledge regarding its performance. To achieve vast knowledge training has no alternative. So training is very necessary to overcome problem in insurance. Long term formulation of effective principles is compulsory to continue the insurance business successfully. To run the insurance smoothly, it is mandatory to implement the principles strictly. If everyone follows principles and rules, achieving goal is possible. Success of this type of business is depended on the trust of insured persons. To gain the trust insurance companies should come forward to compensate the real injured as soon as possible. Modernization of insurance business means to make the business much more modern and suitable for new generation. New policies can be introduced if it is familiar to other world. Everyone try to improve the present condition and serve clients more properly. More modern insurance business must attract the clients. Now-a-days

people of Bangladesh are so much aware of their future. They try their best level to be insured themselves against any type of hazard. It is a good sign for insurance market in Bangladesh. Every insurance company also tries to overcome the problems. So we can hope that if the insurance company can overcome every problems regarding insurance marketing in Bangladesh then the insurance marketing in Bangladesh will be facilitated. As well as the problems mentioned above, there are many good signs for the insurance business in Bangladesh. The factors that can facilitate the insurance business in our country are discussed below. These facts can be measured as the prospective fields for insurance business in Bangladesh. There is a big opportunity lies ahead for the insurance companies as the population of our country are increasing day by day. Although most of people of our country live under extreme poverty level and want to avoid insurance policy number of potential policy holders in Bangladesh is growing with growth of the population. There is somewhat relationship between growing populations with the number of public vehicle. As we know all public vehicle must have an insurance policy. So growing population also increase the motor insurance too. That is growth in population opens greater scope for every kind of insurance business that results in growing prospect for insurance companies. Insurance is not just a tool of risk coverage. It is also an attractive instrument of savings. The mixture of risk coverage with savings gives the opportunity for innovative product designing which means service diversification. In a dynamic insurance market one can expect to see new products being promoted at regular intervals. So far very little efforts have been taken to innovative and introduce need oriented insurance services in response to existing threats. The prospect of the insurance business in various sectors that affect our economy can be differentiated in the following way.The following facts have been traced out which may definitely helps this business if government and other influenced business individuals can come forward to overcome this traced problems and give time to the market with honesty minds and with intelligent moves then within a few years insurance business will be booming one the financial field of Bangladesh.

Recommendations

1) Relevant authorities in collaboration with supportive agencies may provide training to the life insurance producers like agents, development officers and the like to improve their insurance marketing skills regarding creation of new business, retention of the existing business and popularizing the life insurance programs to the target groups.2) Trained and skilled insurance producers like agents and development officers are prerequisites of effective insurance product marketing in the life sector but they are found lacking. The seminars and symposiums conducted at different prospective locality and arranging presence of prospective customers there is likely to create awareness among people as to necessity and worth of purchasing insurance policy.

3) Broad-based marketing network in the field of life insurance needs more marketing forces to keep the marketing effectiveness in motion and reach the message of the products and services to the furthest corner of the marketing domain. It is not possible on the part of the existing market forces to develop and maintain a broad-based marketing network. To fill in the demand for additional marketing forces, the moot point of introducing new scheme may be considered with top priority. Besides, attempts need to be made to introduce new scheme worth buying and easy to buy and payoff premium.4) Research and development program yet to get adequate attention. But adequate research may lead towards the target of success and fulfillment. Life insurance companies in Bangladesh should actively consider undertaking of research and development programs in the fields of consumer research, service research and research in service marketing policies and strategies etc. in order to find out the operating problems in the marketing sector and thrash out ways and means for their effective resolution.5) Commitment reportedly is lacking among some insurance personnel. Commitment is considered as the unquestionable allegiance of a group of individuals towards some human discipline from which they strive hard to get their livelihood. Moreover, commitment of the profession may improve the service offered to be insured on one hand, and may also play a positive role in the growth of professionalism in the life insurance sector on the other. So authorities are concerned need to give attention to this aspect.6)In order to exercise smooth marketing practices in the life insurance products marketing, existing insurance laws seem to be inadequate. Therefore it is thought imperative that necessary legal reforms are made in the existing insurance laws including those relating to life sector.7)Professional code of ethics in any discipline set standard of excellence. In cases, where those are least committed and least disciplined in professional matters, such code does not grow normally and uniformity in the professional behavior of the practitioners of that discipline. This may also hold true in the case of life insurance product marketing. As such concrete steps should be adopted to encourage the growth of professional ethics among the personnel of life insurance companies, particularly, their marketing personnel so that they may become quite acceptable to their customers.8)There should not be so many layers in life insurance companies between the branch office and the agents and one field officer in between the corporation and the agents should replace this unnecessary multi-tier organizational set up. This is essential for reducing the expenses that has gone beyond the tolerable limit. Special committee on insurance has also suggested this.

9) Fake agents such as ‘Benami Agents’, ‘Dummy Agents’ and ‘Benami employers of Agents’ who indulge in malpractices should be eliminated and selection of agents should be unbiased. Appointment of too may agents in a particular area should be stopped. Full- time agencies should be encouraged and part-time agencies should be stopped.10) There should be vigorous campaign through out the country to make the people aware of the utility and prospects of buying insurance.11) Since there are a few actuaries in the country who can not cope with the requirements of the industry’s need, services of qualified actuaries from other countries may be utilized to meet the requirement and necessary steps may be taken to train personnel within the country.12) The government should monitor the functions of insurance companies, appraise their performance, and seize the license of companies that are engaged in corruption. The government must take controlling responsibility in its own hands and must ensure proper application of law.13) The benefits of insurance should not be concentrated only in the urban areas. For the sake of integrated and balanced development, companies should expand their operations in the rural areas.14) There is no alternative of quality service. Insurance being a service rendering entity must provide quick services. Policyholders are highly dissatisfied with service of JBC and SBC. Due to poor quality services, public corporations are loosing market. In order to ensure their continuity, such corporation must pay adequate attention on their quality of service. Private companies also need put their all out efforts to improve quality of service so as to strengthen their position.15) Companies should set up its training program for the policyholders. The insurance academy is used for training the officers and insurance personnel but it has so far neglected the training of policyholders for which claim submission become complex and problematic resulting in delays in claim settlement.16) The government should eliminate the difficulty in licensing procedure and should not delay in the approval of new companies if all the requirements are fulfilled. It will help not only to increase volume of business but also solve the problem of unemployment.17) The policy holders are very much worried about the settlement of claims. Ordinary people also consider it as a prime constraint. Therefore, insurance companies should settle the claims as quickly as possible to create a healthy public image. For this purpose the claim settlement procedure can be simplified and the insurers can provide proper written guidelines of claim settlement to the policyholders.

18) Since life insurance business is not popular among low-income groups, the life insurers should pay special attention to industrial labor force, which ultimately will have greater mobility among rural people.

Math problems to solve in Insurance chapter

1. If there are 4 million Eid goers are getting out of Dhaka who an Insurance company is thinking of providing travel insurance. It believes it can charge 50 taka to each passengers for travel insurance which will be effective 5 days before the eid and 5 days after the eid. The insurance company believes 50% of those trevellers will buy insurance which will be included in their bus, train, and launch tickets. The company expects to earn 10% annual return from the premium it will earn. It hired an underwriter which charged the firm 2 million taka for the underwritings and provided the following information:

i) There is 0.025% chances of a death to each travelerii) There is a 0.075% chances of major injuries to each

traveleriii) There is a 0.050% chances of minor injuries to each

traveler.The firm decides to pay 1 million for the death. 0.30 million for major injuries and 0.050 million for minor injuries. Find the expected profit/loss for the insurance firm.