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Risk management is of vital importance in the day to day business and human
activities. It is essential for not only prevention of risks but also for reduction of risks. It
provides maximum social advantage. It plays significant role in bringing about social,
political and economic development of a country. The importance f risk management is
laid down as follow:
1. To create the right corporate policies and strategy.
2. It is essential for effective managing of people and process.
3. To evaluate the risks of the business.
4. For effective handling of spreading the risk, monitoring and insuring against.
5. To introduce various plans and techniques to minimize the risks.
6. To give advice and make suggestions for handling the risks.
7. To create awareness about risks among the people.
8. To avoid cost, disruption and unhappiness in relating the risks.
9. To decide which risks are worth pursing, and which should be shunned.
10. To fix the sum assured under the policy and to decide on whether to insure or not.
11. To select the appropriate technique or methods to manage the risks.
Insurance ACTS
The insurance sector went through a full circle of phases from being
unregulated to completely regulate and then currently being partly deregulated. It
is the governed by a number of acts, with the first one being the Insurance Act,
1938.
1. The insurance Act, 1938
The Insurance Act, 1938 was the first legislation governing all forms of insurance
to provide strict state control over insurance business.
In all kinds of insurance, the fundamental legal principle is that one man
agrees to take the risk of another man’s life and business in consideration of
certain small payments which are called premiums.
Managing the Business Insurance
⇒ Insurance of property
Burglary insurance
For loss of or damage to the property following forcible and violent entry
into or exits form the premises. The business premises policy covers not only loss
of the insured property, but also damages to such property and damage to the
premises caused by burglars.
Cash insurance
For covering loss of cash whilst it is transit or at counters or in the safe. The
policy may be extended to cover infidelity of employees as also riot, strike and
terrorism damages.
Engineering insurance
Insurance protection is available for construction, erection, commissioning,
test run, operation, expansion etc. of plant, machinery or equipment. Providers
coverage for own damage as well as to surrounding property, coverage for bodily
injury to employees, to the third parties etc.
Engineering Boiler Explosion insurance is for stream generating vessels
like boilers, economizers, super heaters etc. contractors’ All risks policy has been
specially designed to protect the civil contractors against the damage to or
destruction of the various civil contractors against the damage to civil construction
works. Contractors’, plant and machinery insurance is for construction Plant and
Machinery which are essentially used at project sites. Deterioration of Stock
Insurance (refrigeration Plant Insurance) is a follow – up –cover to machinery
breakdown insurance and covers deterioration of goods stored in cold storage
which might arise due to a breakdown of refrigerating machinery.
Engineering Electronics Equipments Insurance provides all risks protection
for loss or damage to electronic equipments such as computers, telephone
exchanges and equipments used in hospitals, audio- visual equipments.
Engineering machinery breakdown insurance cover is available to take care
of the loss or damage to plant and machinery due to accidental failure caused by
electrical or mechanical breakdown.
⇒ Insurance of pecuniary losses
Fidelity Guarantee
For loss caused to the employer due to infidelity of the employee who are
responsible for dealing with cash or stores or such other valuables.
Loss of profits Insurance
To take care of the loss of profits (net profits) and standing charges incurred
by the insured due to the reduction in turnover. These policies are granted in
conjunction with the material damage policies and are available following Fire,
Machinery Breakdown and Boiler Explosion.
Advance Loss of Profit Insurance
When a major incident of damage to the works during construction phase
(or a number of small instances) is likely to result in delay in the commencement
Of the commercial operation of the plant thereby delaying the ability of earns the
revenue. Advance loss of profit connotes a form of profit insurance which, in
principle, follows the characterized of Consequential Loss Policy but is issued in
advance of the actual commencement of policy but is issued in advance of the
actual commencement of business. The financial consequences of this stoppage or
interruption of any earnings or manufacturing operation normally leads to delay of
commissioning of a project under erection and may effect- liquidity, profitability,
and growth. Advance loss of Profit cover offers protection in respect of fixed cost/
standing charges, estimated net profit, loss and increased cost of working as a
result of an insured peril occurring during the period of insurance, subject to the
initial time exclusion in the policy.
Principles of Risk Insurance Management
Risk insurance is a science though it is one of the most inexact of the social
sciences. Its principles may be defined as a systematic grouping of inter-related
principles, with a view to tying together and providing a framework to significant
knowledge. The principles of risk insurance management have so far been only derived
from the experience of risk insurance managers. The principles are as follow:-
⇒ Principles of Risk Identification
⇒ Principles of Risk Analysis
⇒ Principles of Taking corrective Decision
⇒ Principles of Evaluation
⇒ Principles of Alternative Course of Action
⇒ Principles of risk Control
⇒ Principles of Risk Retention
⇒ Principles of Risk Transfer
These principles are been discussed below in brief:-
Principles of Risk Identification: Proper identification of risk is essential to achieve
the several objectives of risk management such as preserving the operating
effectiveness of the organization, minimizing the cost of handling risk, etc. without
proper identification of risk; a firm’s operations have no meaning and direction. The
success of the risk insurance management depends on proper risk identification.
Principles of Risk Analysis: The risk manager should select various statistical tools
to analyze the identified risk on the basis of principles of analysis in order to achieve
the objectives of risk management. Analysis of risks is necessary not only to know
the severity of risk but also to determine the accuracy and relevance of risk exposure
at each stage.
Principles of Risk Assessment: necessary steps are to be taken by the executives in
order to make as assessment of cost of risk. This is essential to keep reducing the cost
of risk within the control. The following are important factors worth mentioning
about the risk assessment issues:
a) Frequency of risk
b) Monetary cost or financial severity
c) Human cost in terms of pain and suffering
d) Purpose of the assignment
e) Nature of the risk
f) Description of the project
g) Resources involved or affected
h) Scale of the impact
i) Benefits of the hazard
j) Mitigating factors
k) Contingency plans
l) Limitations of the assessment
m) Conclusions and recommendations
n) Action taken.
The risk manger has to evaluate the occurrence of losses or probability that it is
likely to occur. Certain risks are to be easily identified and evaluated but some
other critical risks are difficult to be exposure. For e.g. Incidents related Bhopal
and Chernobyle etc. disasters. On the basis of the possibility of losses, the
assessment of risk may be described as important risk and unimportant risk. The
importance of risk may vary from individual to individual and firm to firm
.
Principles of taking Corrective Decision: Corrective decision is an integral part of
the risk manager’s job. In risk management, decision making is a process involving
information, choice of alternative actions, implementation, and evaluation that is
directed to the achievement of certain stated goals. The decision for dealing with the
risk highlights three important aspects, they are:
i. To retain risk – this may be achieved with or without a reserve or a fund.
ii. To involve with the risk through loss prevention effective alternative solutions
applied for prevention of loss.
iii. To transfer the risk through insurance and this must be followed by the selection
of an insurer.
Principles of Evaluation: There may be many alternative courses of
action for handling of risk. But not all of them can be said to be equally
practicable or suitable. Each alternative plan has its strong and weak
points. A proper evaluation of these points is necessary for risk
management to determine which of the alternatives would be the bests.
Such evaluation has to be from different angles. How would any plan
contribute to the accomplishment of risk management’s desired
objectives? To what extent will it be able to face the effects of various
predictable and unpredictable factors? And so on.
Principles of alternative course of action: the final choice from among
the several alternative will be based on how efficiently the risk manager’s
chosen alternative will produce result which come up to the desired level.
In some cases, the decision as regards the final alternative will be
objective, but in a majority of cases it is subjective, based on the value.
Majority of cases are subjective based on the value judgment of the risk
manager concerned.
Principles of risk control: effective control provides the yardstick to
measure the effectiveness of performance at various levels of handling
risk. To achieve the risk management objectives, various financial
mechanisms can be used to control risk. This is essential to keep the cost
of risk within control. Risk control can be achieved through the following
effectives measures :-
Carrying out a supplier assessment.
Inspecting during manufacture.
Investigating complaints.
Increasing the level of supervision.
Improved detection
Improving financial controls and management systems.
Better working conditions
Improves staff morale and lower staff turnover
Improved standing in the local community
Minimizing the opportunity to steal etc.
• Identification of all major internal and external pure risks including the natural
risks and analysis of the impact of above risks
• Review of existing risk control measures and offering comments
• Scrutiny of all existing major insurance policies in respect of:
• Rationalization of basic rate of premium and widening of covers
• Applicability / eligibility of discounts in premium
• Application of suitable clauses, warranties and conditions
• Identification of possible areas for refund of premium and suggestions regarding
procedure for the same
• Selection of insurance coverage on the basis of risk analysis
• Providing guidelines for fixation of sum insured and illustrate the same on a
selected equipment
• Evaluation of business interruption exposure due to identified risks
trade and industry.