Rmi 1-3

B.N.M.
Institute of Technology
Module 1
Risk-Risk and Uncertainty-Types of Risk-(Cost)Burden of Risk-Sources of Risk-Methods of

handling Risk-Degree of Risk-Management of Risk. Risk Identification- Business Risk
Exposures-Individual Exposures-Exposures of Physical Assets -Exposures of Financial
Assets -Exposures of Human Assets - Exposures to Legal Liability - Exposure to Work-
Related Injury. (Theory).
1. Define Risk , peril and Hazard

• A risk can be defined as an unplanned event with financial consequences
resulting in loss or reduced earnings
• Perils: refers to cause of loss or contingency that may cause loss.
• Hazards: are conditions that increase severity of loss or the conditions
affecting perils
2. Explain the various Individual Risk Exposures

• Personal exposure: Death, disability, old age, unemployment, sickness etc
which may result in a direct and indirect loss.
• Financial exposure: Loss arising out of wrong investment, Interest rate
changes, exchange rate fluctuations inflation etc.
• Exposure to legal liability: Loss arising out of legal claims to others.
3. Distinguish between direct and Indirect Losses

• -Direct Loss is the expense of the loss that has occurred while Indirect Loss is
the loss which arises as the consequence of Direct Loss.
• Eg: If a car meets with an accident, the direct loss is the damage repair cost
while the time spent in getting it repaired is the indirect loss.
4. Define Financial Risk and state the sources of it

• Financial risk is the risk arising from the change in the measurable financial
variables. It is applicable to both corporate and Individuals
• Organizations exposure to change in market prices like interest rates,
exchange rates and commodity prices.
Risk Management (18MBAFM402) Page 1

B.N.M.Institute of Technology
• Actions of or transactions with vendors, customers etc
• Internal actions or failures of organizations particularly people, processes and
systems
5. Differentiate between Risk and Uncertainty

• Uncertainty is the case when the decision-maker knows all the possible
outcomes of a particular act, but does not have an idea of the probabilities
of the outcomes.
• On the contrary, risk is related to a situation in which the decision-maker
knows the probabilities of the various outcomes. In short, risk is a
quantifiable uncertainty.
• In case of uncertainty outcome is not certain or is unknown. Uncertainty is a
state of mind characterized by doubt based on the lack of knowledge about
what will or what will not happen in the future.
6. Explain the various types of Risk

• Financial and Non financial Risk.
A financial risk is concerned with a financial loss. A non financial risk does
not result in a financial loss and hence difficult to measure.
Eg: Selection of a wrong course to study, wrong career selection.
• Individual and Group Risk.
Group risk is macroeconomic in nature and affects the entire population. It
may be socio economic, political or natural calamities.
Individual risks are confined to Individual identities or small group. Eg:
Theft, robbery, fire accident
• Pure and Speculative risk.
Pure risk result in a possibility of a loss or no loss but there is no gain. Pure
risks are Insurable, Eg: Gen Insurance policy.
Speculation activity may result in a gain. These are not insurable in nature
Eg. Investment in a shares/currency
• Quantifiable and Non quantifiable risk

Quantifiable risk can be measured using numerical scales whereas situation which
may result in a repercussions like tension, loss of peace are called as non-
quantifiable risk..
• Static and Dynamic Risks
Static risks are predictable and not affected by economic factors hence
these are covered by Insuerance. Eg: Loss due to destruction in financial
asset or changes in possession due to dishonesty of human faith
Dynamic risks results from changes in economy or environment. These are
difficult to anticipate.. These are not covered by Insurance
Eg: Change in Technology, income Inflation
7. Explain the various types of Business Risk
a. Price Risk: Uncertainty over magnitude of cash flow due to possible

change in input and output prices.
Commodity Price risk: arises from fluctuations in price of a commodity
eg: Coal , copper, gas, oil
Exchange rate risk: Due to globalization o/p and i/p prices are affected by
foreign exchange rates
Interest rate risk: o/p and i/p prices fluctuates due to Interest rates
Eg: increase in interest rates may alter firm’s revenue (credit allowed and
credit borrowed)
b. Credit Risk: The risk that a firm’s customers and parties to which it has
lent money will delay or fail to make promised payments.i.e risk of default

c. Pure Risk: The risk of reduction in value of business due to physical
damage e.g.: theft, Risk of legal liability for damages for harm to
customers, suppliers and other parties Risk associated with paying benefits
to injured workers
The risk of death, illness and disability of employees
8. List the causes for Personal/ Individual Risk and explain

• Earnings Reduction Due to: Death, disability, aging and unemployment.
• Medical expenses: The health care costs a large unexpected expense to the
family
• Liability to others: the loan repayment and interest payment for the sum
borrowed to purchase Automobile and Home
• Loss/damage to physical assets: like Automobile, house, Boats, electronics
may incur unexpected cost of replacement
• Loss due to investment in financial assets: The money invested in Stocks and
Bonds expecting a speculative income may incur loss due to the market
behavior and other unforeseen causes of the economy
• Longevity: This risk is borne by the individual when the retired person outlives
their financial resources
9. Briefly explain the methods of handling Pure Risk

• Avoidance of Risk: Avoiding the circumstances that may lead to the losses is
one method of handling risk. Eg: To avoid the risk of losing life in a plane
crash , the person can avoid flying
• Loss Control.- consists of activities that reduce frequency and severity of loss
Ø Loss prevention: aims at preventing probability of loss eg: safety
lockers can be used to safeguard the jewels from theft, security check
at airport
Ø Loss reduction: Some loss inevitably occur, the extent of damage can
be controlled by taking loss reduction techniques. eg: fire fighting
equipments in a building , first aid box etc
• Risk Retention: firm retains all or part of risk.

Eg: cash flow may drop for a transport company when price of fuel increases,
The house owner retains the risk of small repairs
• Non –Insurance Transfers: certain risks can be transferred or shifted
Ø Transfer of risk by contract- Un3wanted risk can be transferred by
contract eg: AMC, fixed price for contract of purchase of raw material
for construction
Ø Hedging the price risks: It is the technique for transferring the risk of
unfavorable price fluctuations to a speculator by purchasing a forward
contract
Ø Incorporation of a business firm- In case of Sole proprietorship ,
owners personal assets can be attached for creditors satisfaction
• Insurance: By purchasing an Insurance the risk is transferred to the Insurer
10. State the classification of Financial Risk

• Credit Risk: It’s a risk faced due to failure of counter party to meet their
obligation. Eg: borrower defaults to supplier , missing deadlines
• Market risk: change in the value of assets due to change in underlying
economic factors such as interest rates, foreign exchange rates, stock prices,
and commodity prices etc.
• Operational risk: it’s the risk that people, processes or system will fail or
that an external event will negatively affect the company
11. Define Risk Management and state the process

• Risk management involves understanding, analyzing and addressing risk to
make sure organizations achieve their objectives
• The process includes the following steps
a. Identifying all significant risks
b. Evaluating the potential frequency and severity of losses.
c. Develop and analyze the methods for managing risk.
d. Select the methods for managing the risk.

e. Implement the risk management method chosen.
f. Monitor the performance and suitability of the risk management methods
and strategies on an ongoing basis.
12. Explain the methods of Risk Management
These methods are not mutually exclusive and can be broadly classified as above.
• Loss Control: The loss can be controlled by either reducing the extent of
performing risky activities or by taking suitable precautions. Eg: Inspection
for mechanical problems in an aircraft can reduce the probability of accidents,
Installing airbags in the automobiles would reduce the extent of injuries
• Loss Financing: These are the methods used to obtain funds to offset losses
that occur .This techniques include self Insurance, Insurance, Hedging
• Internal Risk Reduction: This technique allows the business to reduce the
risk by transferring it to another entity or businesses.
Ø By diversification, i.e not putting all eggs in one basket the risk due to
loss in one investment can be reduced
Ø Investments in Information: Will help the businesses forecast better
about the expected losses. Eg: Marketing risk of potential demand can
reduce the risk of output price risk.
13. State the objectives of Risk Management and explain

Pre loss objectives: before loss
Reduction in worry and fear.: RM should be able to reduce the anxiety and fear in the
likely exposed unit

Economy: The firm should be prepared for the potential losses in a most economic
way
Meeting legal obligations: The firm should be able to meet all legal obligations as
stated by the governing body Eg: Installation of safety devices as instructed by the
government
Post loss objectives (after the loss occurred)
Survival: The firm should be able to resume to operations even after being affected
and survive in the competitive market conditions
Continued operations : After the loss, the business should continue to provide its
services Eg: Airlines , banks should continue to service its customers and not lose its
business to the competitors
Stability of earnings: Post Loss, the organization to take measures to stabilize its
earnings in the next period
Continued growth : After the stability the firm should concentrate on increasing the
growth rate of business
Optimizing social effects: The firm should try and minimize he effect of the loss on
another individual or society as a whole. Eg: shutting down of entity in a town creates
unemployment to the employees and also social distress to the small shops in the town
14. Briefly explain the various components of Cost of risk
The cost of any risk has 5 major components

• Expected cost of losses: It includes expected cost of both Direct and Indirect
losses. Eg: If a pharmaceutical company produces a wrong drug the direct loss
will be decrease in sales while Indirect loss will be damage to the brand, legal
expenses etc
• Cost of Loss Control: It reflects the cost of Increased precautions In case of
Pharmaceutical company the cost incurred to test the medicine would reduce
the later damage
• Cost of Loss Financing: Includes the expenses of Insurance, loading of
Premium, transacting costs in arranging & negotiating. Cost of Self Insurance
includes the cost of maintain the reserve funds to pay losses
• Cost of Internal Risk Reduction: The transaction costs of diversification and
the cost of obtaining the information to obtain more accurate forecasts. In
some cases it may also include paying for external firms for Information.
• Cost of Residual Uncertainty: The cost of uncertainty that remains (left-over)
once the firm has selected a suitable technique to tackle the risk. Eg: The
compensation the that investors require to hold a firm’s stock
15. Define Business Risk Exposures and state and explain the types
• Is a quantified loss potential of business. It is usually calculated by
multiplying the probability of an incident occurring by its potential losses.
• The various Business Risk Exposures are :
Ø Exposure of physical assets, properties,: The firm should choose a right
technique to value the physical assets and other properties it possesses.
It valuation should also consider the methods of replacing it and the
extent of the damage
Ø Exposure of financial assets: The loss that is incurred in investment of
Financial assets like stocks, crypto currency which are affected by
macro economic factors
Ø Exposure of Human assets Losses in the firm due to workers injuries, ,
disability, retirement, death etc
Ø Exposure to legal liability: Losses due to legal obligations like
compensation to injured workers, legal obligation with suppliers,
vendors, The lawyer and court fees etc

Module 2
Risk Measurement-Evaluating the Frequency and Severity of Losses-Risk Control-Risk

Financing Techniques-Risk Management Decision Methods-Pooling Arrangements and
Diversification of Risk.
Advanced Issues in Risk Management: The Changing Scope of Risk Management-

Insurance Market Dynamics-Loss Forecasting-Financial Analysis in Risk Management --
Decision Making Other Risk Management Tools
1. Explain the frequency of Loss measurement process

• The frequency of loss measures the number of losses in a given period of
time.
• If historical data exist on a large number of exposures, then the probability of a
loss per exposure (or the expected frequency per exposure) can be estimated by
the number of losses divided by the number of exposures.
2. Explain the severity of Loss measurement process

• The severity of loss measures the magnitude of loss per occurrence.
• One way to estimate expected severity is to use the average severity of loss per
occurrence during a historical period.
• If the 1,500 worker injuries for Sharon Steel cost $3 million in total (adjusted for
inflation), then the expected severity of worker injuries would be estimated at
$2,000
• ($3,000,000/1,500). That is, on average, each worker injury imposed a $2,000
loss on the firm.
3. Explain the steps Analyze Frequency and Severity
STEP 1. Assign a category for the frequency of occurrence of a loss event. For example, if
back injuries frequently or continuously occur, then category “5 – Frequent” is the proper
category. Another example is if at least one civil rights claim is filed annually, then the
proper category is category “4 – Probable.” A third example is a fire loss to a building that

may occur within the lifetime of the organization; then, category “3 – Occasional” is the
proper category.
1 – Frequent Loss event occurs frequently or is continuously experienced.

(Value=5) Eg: weekly
2 – Probable Loss event occurs at least on an annual basis.(Value=4) Eg: Monthly
3 – Occasional Loss event is likely to occur sometime in the lifetime of the

organization [i.e., occurs once in a 25-year time period]. (Value=3) Eg: Annually
4 – Remote: Loss event is not likely to occur within the average lifetime of an
organization, or is unlikely to occur, but is possible. (Value=4) Eg: Ina decade
5 – Extremely: Likelihood of a loss occurrence Improbable cannot be distinguished

from zero. (Value=1)
STEP 2. Assign a category for the severity of the loss event. For example, a workers’
compensation claim for a back injury may cause moderate to severe injury; therefore, the
proper severity category is category “3 – Serious.” A civil rights claim that progresses into
federal court can have a serious effect on the overall budget of a small state agency; so, the
proper severity code is category “4 – Critical.” Similarly, a fire loss to a state agency located
in a single building can cause extensive loss of life and/or property; therefore, the proper
category is “5 – Catastrophic.”
1 – Catastrophic May cause death or loss of property. A single event would

threaten the existence of the organization.(Value=5)
2 – Critical May cause severe injury/illness or serious property damage. A single

loss is likely to have a serious effect on the overall budget of the
organization. (Value=4)
3 – Serious May cause moderate to serious injury or moderate property damage. A

single loss event is likely to have a moderate impact on the organization’s
budget. (Value=3)
4 – Marginal May cause minor injury/illness or property damage. Individual losses
will not significantly affect the organization.(Value=2)
5 – Negligible Likely to not result in injury/illness or measurable property

damage. (Value=1
STEP 3. Multiply the frequency value from step 1 by the severity value from step 2.The
resulting product of multiplication is the qualitative rating of the combined frequency and
severity for the given loss exposure. For example, if the frequency from step 1 is “1″ and the
severity from step 2 is “3,” then the resulting product of multiplying 1 times 3 is 3 (1 x 3=3).
Therefore, the frequency/severity rating for this particular loss exposure or event is 3. This
qualitative rating for frequency and severity is graphically depicted on the
Frequency/Severity Matrix contained in the Appendix to this chapter.
Severity of Injury
Likely hood of Negligi Marginal Serious Critical Catastrophic
Occurrence ble (1) (2) (3) (4) (5)
Frequent(5) 5 10 15 20 25
Probable (4) 4 8 12 16 20
Occasional (3) 3 6 9 12 15
Remote (2) 2 4 6 8 10
Improbable/ 1 2 3 4 5
Extremely (1)
STEP 4. Prioritize the ratings for all loss exposures. This numerical rating system
automatically produces priorities. Those exposures that receive a rating of “1″ for combined
frequency/severity should receive the highest priority for risk control. A rating of “25″ for
frequency/severity is the lowest rating, and should receive the least attention in the
development of risk control strategies.
4. Explain Risk Control and various techniques of it

• Risk control is often referred to as “loss control

a. Risk Avoidance Risk avoidance is the most effective means of controlling
risks. Risk avoidance simply means to not undertake an activity, action or
program that would produce an undesirable loss exposure. Avoiding certain
risks is not always practical.
b. Risk Prevention Risk prevention techniques focus on methods to prevent a
peril from occurring. Prevention measures concentrate on reducing the
frequency of losses
c. Risk Reduction The concept of risk reduction assumes “it is not feasible” or
“impossible” to eliminate or prevent an exposure. Risk reduction techniques
are therefore utilized to reduce the effects of perils
d. Segregation of Exposures Exposure segregation is a specialized form of both
risk prevention and risk reduction. An organization’s activities and programs
may be either separated, diversified, or duplicated so a single peril cannot
cause a catastrophic loss to all.
e. Risk Transfer
The transfer of risk involves the concept that the financial and/or legal
liabilities associated with an identified risk can be shifted to an outside
organization.
5. Explain the key Risk management issues

• Technology risk management
• Third party risk management
• Fraud and misconduct
• Crisis management
• Data security
• Achieving compliance program effectiveness
• Improving risk data aggregation and reporting
• A lack of risk decision making structure and lack of accountability for risk
decisions in an organization.
• The lack of meaningful risk assessment process.
• A lack of an open, risk -ware culture.

6. Explain the Important factors influencing the insurance market

1) THE UNDERWRITING CYCLE-This cyclical pattern in underwriting stringency
premium levels, and profitability is referred as the underwriting cycle a number of
measures can be used to ascertain the status of the underwriting cycle. two obvious
factors affect property and liability insurance pricing and underwriting returns.
• Insurance industry capacity in the insurance industry, capacity refers to the relative
level; of surplus. it is the difference between an insurer’s assets and its liabilities.
• Investment returns In reality insurance companies are in two business underwriting
risks and investment premiums . if insurers expect favorable investment results , they
can sell their insurance coverage at lower premium rates hoping to offset
understanding losses with investment income.
2)CONSOLIDATION IN THE INSURANCE INDUSTRY- the combining of business

organizations through mergers and acquisitions. a number of consolidation trends have
changed the insurance marketplace for risk managers.
• A)Insurance Company Mergers And Acquisitions- the market structure of the

property and liability insurance industry , insurance company consolidations do not
have severe consequences for risk managers.
• B)Insurance brokerage mergers and acquisitions-Insurance brokers are
intermediaries who represent insurance purchasers. insurance brokers offer an array of
services to their client, including attempting to place their clients business with
insurers. the number of large , national insurance brokerages has declined
significantly in recent years because of consolidation.
• C) Cross-industry consolidation- consolidation in the financial services area is not
limited to mergers between insurance companies or between insurance brokerages.
boundaries separating institution with depository functions, institutions that
underwrite risk, and securities business were enacted in depression –era legislation.
7. Explain the various techniques of Loss Forecasting

a. PROBABILITY ANALYSIS- chance of loss is the probability that an adverse event
will occur. Some probabilities of events can be easily deduced. The probability that a
fair coin will come up heads or tails. if one buildings are located close together, and
one building catches on fire the probability that the other building will burn is
increased
b. REGRESSION ANALYSIS- regression analysis is another method for forecasting
losses. regression analysis characterize the relationship between two or more
variables and then uses this characterization to predict values of a variable. it is not
difficult to envision relationship that would be of interest to risk managers in which
one variable is dependent upon another variable .
c. FORECASTING BASED ON LOSS DISTRIBUTIONS- another useful tool for
the risk manager is loss forecasting based on loss distributions. a loss distribution is a
probability distribution of losses that could occur. The risk manager to estimate the
number of events, severity, and confidence intervals. Many loss distributions can be
employed, depending on the pattern of losses.
8. Explain the other Risk Management tools used in an Organization
• RISK MANAGEMENT INFORMATION SYSTEMS- it’s a
computerized database that permits the risk manager to store and analyze
risk management data and to use such data to predict and attempt to control
future loss levels. its may be of great assistance to risk managers in decision
making such systems are marketed by a number of vendors, or they may be
developed in house.
• RISK MANAGEMENT INTRANETS AND WEB SITES- some
organizations have expanded the traditional risk management web site into
a risk management intranet. an intranet is a web site with search
capabilities designed for a limited, internal audience. for eg. a software
company that sponsors trade shows at numerous venues each year might
use a risk management intranet to make information available to interested
parties within the company.
• RISK MAPS- risk maps are grids detailing the potential frequency and
severity of risks faced by the organization. in addition to property, liability,
and personnel exposures, financial risks and other risks that fall under the
broad umbrella of enterprise risk may be included on the risk map.

• VALUE AT RISK ANALYSIS- A popular risk assessment technique in
financial risk management is value at risk analysis. VAR is the worst
probable loss likely to occur in a given time period under regular market
conditions at some level of confidence. for eg. a mutual fund may have the
following VAR characteristics there is a 5 percent probability that the value
of the portfolio may decline by $50,000 in any single trading day.
• CATASTROPHE MODELING- it’s a computer –assisted method of
estimating losses that could occur as a result of a catastrophic event. a
number of organization provide catastrophe modeling services, including
RMS, AIR a subsidiary of the insurance services. catastrophe models are
employed by insurers, brokers, ratings agencies, and large companies with
exposure to catastrophic loss.
9. Explain Financial Analysis in Risk Management Decision Making
• Financial risk management is the practice of economic value in a firm by using
financial instruments to manage exposure to risk, particularly credit risk and market
risk.
• Other types include Foreign exchange risk, Shape risk, Volatility risk, Sector risk,
Liquidity risk, Inflation risk, etc.
• Similar to general risk management, financial risk management requires identifying
its sources, measuring it, and plans to address them.
• The risk manager’s decisions are based on economic interests of the company and its
stockholders.
• Financial analysis can be applied to assist in risk management decision making.
• To make decisions involving cash flows in different time periods the risk manager
must employ time value of money analysis.
• Risk managers must make a number of important decisions, including whether to
retain or transfer loss exposures, which insurance coverage bid is best, and whether to
invest in loss control projects.
10. Explain the Pooling Arrangement and Diversification of Risk

Pooling arrangement means sharing loss and risks equally or split evenly any accident costs.
As a result pooling arrangements reduce risks (standard deviation) for each participant. In
pooling arrangements the average loss is paid by each person
The probability distribution of accident costs facing each person is reduced by pooling
arrangements.
The pooling arrangement decreases the probabilities of the extreme outcomes. In pooling
arrangements each person’s risk is reduced but each person’s expected accident cost is
unchanged.
Suppose, A and B each are exposed to the possibility of an accident in the coming
year. In particular we assume that each person has a 20 percent chance of an accident
that will cause a loss of $2500 and an 80 percent chance of no accident. Because both
A and B each have a 20 percent chance of having an accident that causes $2500 in
losses, the expected costs and the standard deviation for each person without pooling
arrangements will be:
Event Cost Average Cost Probability
Both A and B do not 0 0 0.8*0.8
meet with accident
Only A meets with 2500 1250 0.2*0.8
Accident
Only B meets with 2500 1250 0.2*0.8
Accident
Both A and B meet 5000 2500 0.2*0.2= 0.04
with accident
Due to pooling arrangement the probability of spending 2500 reduced to 4% from 20%
in case of Individual Risk
11. Explain The Changing Scope of Risk Management
Risk management was limited in scope to pure loss exposures, including property risks,
liability risks, and personnel risks. Some business have gone a step further, expanding their
risk management programs to consider all risks faced by the organization.

Financial risk management
Commodity price risk

Interest rate risk
Currency exchange rate risk
Market risk
Interest-rate risk
Equity Risk
Currency risk
exchange-rate risk
Credit-spread risk
Volatility risk
Operational risk
Structural risks
Structural exchange rate risk
Structural risk in the equity portfolio.
Liquidity risk
Credit risk

Module 3
Introduction to Insurance
Risk and Insurance- Definition and Basic Characteristics of Insurance-Requirements of an

Insurable Risk-Adverse Selection and Insurance-Insurance vs. Gambling Insurance vs.
Hedging- Types of Insurance-Essentials of Insurance Contracts.
Indian Insurance Industry -Historical Framework of Insurance, Insurance sector Reforms

in India- IRDA-Duties and powers of IRDA-IRDA Act 1999-
1. State the major recommendations of Malhotra Committee

• Govt. stake in the Insurance Co. to be brought down to 50%.
• Take over the holdings of GIC and its subsidiaries so that these subsidiaries
can act as independent corporations.
• Allowing the private company with a minimum paid up capital of INR one
billion to enter the sector.
• No company should deal in both life and general insurance through a single
entity.
• Foreign company to enter the industry only through collaboration with Indian
company.
• Setting up of an independent insurance regulatory body.
• Reduce the mandatory investment of LIC Life Fund in government securities
to 50% from 75%.
• GIC and its subsidiaries are not to hold more than 5% in any company. 9-
Payment of interest by LIC on delays in payment beyond of 30 days.
• Computerization of operations.
• Issues of long-term unit linked insurance plans
2. Define Insurance
• Insurance is a contract, represented by a policy, in which an individual or
entity receives financial protection or reimbursement against losses from an
insurance company. The company pools clients' risks to make payments more
affordable for the insured.

• Insurance may also be defined as a financial service, where in insurance
company under-takes to pay a fixed amount of money on the happening of a
particular event, which may be certain or uncertain. This financial service is
provided by insurer to insured in exchange a fixed sum known as premium.
3. State and Explain the characteristics of Insurance

• It is a contract for compensating losses.
• Premium is charged for Insurance Contract.
• The payment of Insured as per terms of agreement in the event of loss.
• It is a contract of good faith.
• It is a contract for mutual benefit.
• It is a future contract for compensating losses.
• It is an instrument of distributing the loss of few among many.
• The occurrence of the loss must be accidental.
• Insurance must be consistent with public policy.
4. State and Explain the prerequisites of Insurable Risk

• Large numbers of exposure units: The theory of insurance is based on the
law of large numbers. Therefore the prime necessity for a risk to be insurable
is that there must be a sufficiently large number of homogeneous
exposures in order combine losses that are reasonably predictable. Lost
data can be compiled over time, and losses for the group as a whole can be
predicted with some accuracy. The loss costs can then be spread over all
insured’s in the underwriting class. Also, the probabilistic estimates used by
the insurance company, by logic, assume a large number of units in a
distribution and insurance products are priced accordingly.
• Define and measurable loss: A second requirement is that the loss should be
both determinable and measurable. This means the loss should be definite
as to cause, time, place, and amount. Life insurance in most cases meets this
requirement easily. The cause and time of death can be readily determined in
most cases, and if the person is insured, the face amount of the life insurance
policy is the amount paid.

• Determinable probability distribution: The probability distribution of
happening of an adverse event if determinable. This condition is necessary to
establish the free premium according to the theory of equivalence. If there is
not determinable distribution, there is no question of issuing a cover by
an insurance company.
• Calculable chance of loss: A fourth requirement is that the chance of loss
should be calculable. The insurer must be able to calculate both the average
frequency and the average severity of future losses with some accuracy.
This requirement is necessary so that a proper premium can be charged that is
sufficient to pay all claims and expenses and yield a profit during the policy
period. Certain losses, however, are difficult to insure because the chance of
loss cannot be accurately estimated, and the potential for a catastrophic loss is
present.
• Fortuitous/ Random loss: The adverse event may or may not occur in future
and once which the insurance company has not control. Naturally, if the event
is non-random or the loss has occurred in the past, there is no question of
insurance.
• Non-catastrophic loss: The losses should be non-catastrophic. Not all the
units in a homogeneous group will be subject to an adverse event. This means
that a large proportion of exposure units should not incur losses at the same
time.
• Premium should be economically feasible: It is the final requirement that
the premium should be economically feasible. The insured must be able to
pay the premium. In addition, for the insurance to be an attractive purchase,
the premiums paid must be substantially less than the face value, or amount,
of the policy.
5. Define Adverse Selection

• Adverse selection refers generally to a situation where sellers have
information that buyers do not have, or vice versa, about some aspect of
product quality. In the case of insurance, adverse selection is the tendency of
those in dangerous jobs or high-risk lifestyles to get life insurance

6. Differentiate between Insurance and Gambling

• .A contract of insurance is bound by the general principles of the law of
contract but a gambling contract is not enforceable at law. The purpose, of
having an insurance policy is to indemnify oneself against unforeseen loss
and is mainly based on the principle of mutual co-operation.
• The financial motivation of gambling is provided by the gain in the event of
winning, while in the case of insurance it consists in the desire to have
protection against loss. On the other hand, the amount received by the insured
is not a gain. It is a compensation or financial aid after loss. The money that a
gambler wins is a profit. But in insurance, there is no element of profit.
• Insurance is not a game of chance. The amount of money required to meet the
likely future claims can be measured by applying the law of large numbers. It
is possible to calculate the average number of motor accidents, fire losses etc.
per year. Speculative risks are not accurately predictable and measurable and
therefore, not insurable.
• applicability of insurable interest is a fundamental requirement for an
insurance contract. This means without having any insurable interest on the
subject matter of insurance, no one an effect the contract. But in case of a
gambling contract, the gambler is not supposed to have any interest on the
subject matter of insurance. The gambler is not interested to protect the
property.
• gambling is not useful and desirable to the society, whereas insurance
provides a valuable service to the society, therefore, is desirable.
7. Differentiate between Insurance and Hedging

• Insurance and hedging both reduce your exposure to financial risk, but they
do so in different ways. Insurance typically involves paying someone else to
bear risk, while hedging involves making an investment that offsets risk.
• Insurance Shifts Risk. Buying an insurance policy that protects your home
against fire does not guarantee that your home won't burn down. Having auto
insurance doesn't mean you won't crash your car, and life insurance won't
keep you from dying.

• Hedging Offsets Risk. Hedging reduces uncertainty, which is really just
another word for risk. For a simple example, say you do a lot of business with
Europe, and you've discover that you lose money if the exchange rate rises
above $1.50 per euro. So you buy a series of options contracts that give you
the right to buy euros for, say, $1.40 per euro. Those options offset your risk
from rising exchange rates.
• Costs Involved. Both insurance and hedges cost money -- premiums in the
case of insurance, and the price of the options in the hedging example. But
those costs are less than the losses you're protecting yourself against. That's
why the expense is considered worthwhile.
8. State and in detail explain the various types of Insurances

Insurance can be classified as Life Insurance and General Insurance (nonlife)
ü Life Insurance Life Insurance is different from other insurance in the sense that,
here, the subject matter of insurance is the life of human being. The insurer will pay
the fixed amount of insurance at the time of death or at the expiry of the certain
period. At present, life insurance enjoys maximum scope because the life is the most
important property of an individual.
ü General Insurance The general insurance includes Property Insurance, Liability
Insurance, and Other Forms of Insurance.
• Property Insurance Under the property insurance property of person/persons
are insured against a certain specified risk. The risk may be fire or marine
perils, theft of property or goods damage to property at the accident
• Marine Insurance Marine insurance provides protection against loss of
marine perils. The marine perils are a collision with a rock, or ship, attacks by
enemies, fire, and captured by pirates, etc. these perils cause damage,
destruction or disappearance o’ the ship and cargo and non-payment of
freight. So, marine insurance insures ship (Hull), cargo and freight.
• Fire Insurance Fire Insurance covers the risk of fire. In the absence of fire
insurance, the fire waste will increase not only to the individual but to the
society as well. With the help of fire insurance, the losses arising due to fire
are compensated and the society is not losing much. The individual is

preferred from such losses and his property or business or industry will
remain approximately in the same position in which it was before the loss.
• Liability Insurance The general Insurance also includes liability insurance
whereby the insured is liable to pay the damage of property or to compensate
the loss of persona; injury or death. This insurance is seen in the form of
fidelity insurance, automobile insurance, and machine insurance, etc.
• Social Insurance The social Insurance is to provide protection to the weaker
sections of the society who are unable to pay the premium for adequate
insurance. Pension plans, disability benefits, unemployment benefits, sickness
insurance and industrial insurance are the various forms of social insurance.
• Personal Insurance The personal insurance includes insurance of human life
which may suffer loss due to death, accident, and disease Therefore, the
personal insurance is further sub-classified into life insurance, personal
accident insurance, and health insurance.
• Guarantee InsuranceThe guarantee insurance covers the loss arising due to
dishonesty, disappearance, and disloyalty of the employees or second party.
The party must be a party of the contract. His failure causes loss to the first
party. For example, in export insurance, the insurer will compensate the loss
at the failure of the importers to pay the amount of debt.
• Other forms of InsuranceBeside the property and liability insurances, there
are other insurances which are included in general insurance. The examples of
such insurances are export-credit insurances, State employees insurance, etc.
whereby the insurer guarantees to pay a certain amount at the certain events.
9. State and explain the essentials of Good Insurance

• Utmost Good Faith: An insurance contract is known as a contract of
'Uberrimate Fidel' or a contract based on 'utmost good faith'. It means both the
parties must disclose all material facts. Any fact is material which goes to the
root of the contract of insurance and has a bearing on the risk involved.
• Indemnity: A contract of insurance is a contract of 'indemnity'. It means that
the insured, in case of loss against which the policy has been issued, shall be
paid the actual amount of loss not exceeding the amount of the policy, i.e. he
shall be fully indemnified.

• Insurable interest: It means that the insured must have an actual interest in
the subject matter of insurance. A contract of insurance effected without
insurable interest is void. A person is said to have an insurable interest in the
subject matter if he is benefited by its existence and is prejudiced by its
destruction.
• Cause Proxima :The rule of 'causa proxima' means that the cause of the loss
must be proximate or immediate and not remote. If the proximate cause of the
loss is a peril insured against, the insured can recover. When a loss has been
brought about by two or more causes, the real or the nearest cause shall be the
causa proxima, although the result could not have happened without the
remote cause.
• Risk :In a contract of insurance the insurer undertakes to protect the insured
from a specified loss and the insurer receives a premium for running the risk
of such loss. Thus, risk must attach to a policy.
• Mitigation of loss: In the event of some mishap to the insured property, the
insured must take all necessary steps to mitigate or minimise the losses, just
as any prudent person would do in those of loss attributable to his negligence
. But it must be remembered that though the insured is bound to do his best
for his insurer, he is, not bound to do so at the risk of his life.
• Subrogation: The doctrine of subrogation is a corollary to the principle of
indemnity and applies only to fire and marine insurances. According to it,
when an insured has received full indemnity in respect of his loss, all rights
and remedies which he has against third person, will pass on to the insurer
and will be exercised for his benefit until he(The insurer) recoups the amount
he has paid under the policy.
• Contribution: when there are two or more insurances on one risk, the
principle of contribution comes into play. The aim of contribution is to
distribute the actual amount of loss among the different insurers who are
liable for the same risk under different policies in respect of the same subject
matter. Any one insurer may pay to the insured the full amount of the loss
covered by the policy and then become entitled to contribution from his co-
insurers in proportion to the amount which each has undertaken to pay in case
of the loss of the same subject matter.

10. State the duties, powers and functions of IRDA as per Section 14 of IRDA Act,
1999
• Subject to the provisions of this Act and any other law for the time being
in force, the Authority shall have the duty to regulate, promote and
ensure orderly growth of the insurance business and re-insurance
business.
• Without prejudice to the generality of the provisions contained in sub-
section (1), the powers and functions of the Authority shall include:
(a) Issue to the applicant a certificate of registration, renew, modify, withdraw,
suspend or cancel such registration;
(b) Protection of the interests of the policy holders in matters concerning assigning of
policy, nomination by policy holders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of insurance;
(c) Specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;
(d) Specifying the code of conduct for surveyors and loss assessors;
(e) Promoting efficiency in the conduct of insurance business;
(f) Promoting and regulating professional organizations connected with the insurance
and re-insurance business;
(g) Levying fees and other charges for carrying out the purposes of this Act;
(h) Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organizations connected with the insurance business;
(i) Control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee
(j) Specifying the form and manner in which books of account shall be maintained
and statement of accounts shall be rendered by insurers and other insurance
intermediaries;
(k) Regulating investment of funds by insurance companies;
(l) Regulating maintenance of margin of solvency;
(m)Adjudication of disputes between insurers and intermediaries or insurance
intermediaries;

(n) Supervising the functioning of the Tariff Advisory Committee;
(o) Specifying the percentage of life insurance business and general insurance
business to be undertaken by the insurer in the rural or social sector; and
(p) Exercising such other powers as may be prescribed
11. State the steps taken by IRDA to protect the interest of the insurers
• Policy proposal documents in easily understandable language; claims procedure in
both life and nonlife; setting up of grievance redressal machinery; speedy settlement
of claims; and policyholders' servicing. The Regulation also provides for payment of
interest by insurers for the delay in settlement of claim.
• The insurers are required to maintain solvency margins so that they are in a position
to meet their obligations towards policyholders with regard to payment of claims.
• It is obligatory on the part of the insurance companies to disclose clearly the benefits,
terms and conditions under the policy. The advertisements issued by the insurers
should not mislead the insuring public.
• All insurers are required to set up proper grievance redress machinery in their head
office and at their other offices.
• The Authority takes up with the insurers any complaint received from the
policyholders in connection with services provided by them under the insurance
contract

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Risk-Risk and Uncertainty-Types of Risk-(Cost)Burden of Risk-Sources of Risk-Methods of

1. Define Risk , peril and Hazard

2. Explain the various Individual Risk Exposures

3. Distinguish between direct and Indirect Losses

4. Define Financial Risk and state the sources of it

Risk Management (18MBAFM402) Page 1

5. Differentiate between Risk and Uncertainty

6. Explain the various types of Risk

Risk Management (18MBAFM402) Page 2

7. Explain the various types of Business Risk

a. Price Risk: Uncertainty over magnitude of cash flow due to possible

Risk Management (18MBAFM402) Page 3

8. List the causes for Personal/ Individual Risk and explain

9. Briefly explain the methods of handling Pure Risk

Risk Management (18MBAFM402) Page 4

10. State the classification of Financial Risk

11. Define Risk Management and state the process

Risk Management (18MBAFM402) Page 5

12. Explain the methods of Risk Management

13. State the objectives of Risk Management and explain

Risk Management (18MBAFM402) Page 6

14. Briefly explain the various components of Cost of risk

The cost of any risk has 5 major components

Risk Management (18MBAFM402) Page 7

Risk Management (18MBAFM402) Page 8

Risk Measurement-Evaluating the Frequency and Severity of Losses-Risk Control-Risk

Advanced Issues in Risk Management: The Changing Scope of Risk Management-

1. Explain the frequency of Loss measurement process

2. Explain the severity of Loss measurement process

3. Explain the steps Analyze Frequency and Severity

Risk Management (18MBAFM402) Page 9

 1 – Frequent Loss event occurs frequently or is continuously experienced.

 2 – Probable Loss event occurs at least on an annual basis.(Value=4) Eg: Monthly

 3 – Occasional Loss event is likely to occur sometime in the lifetime of the

 5 – Extremely: Likelihood of a loss occurrence Improbable cannot be distinguished

 1 – Catastrophic May cause death or loss of property. A single event would

 2 – Critical May cause severe injury/illness or serious property damage. A single

 3 – Serious May cause moderate to serious injury or moderate property damage. A

 5 – Negligible Likely to not result in injury/illness or measurable property

4. Explain Risk Control and various techniques of it

Risk Management (18MBAFM402) Page 11

5. Explain the key Risk management issues

Risk Management (18MBAFM402) Page 12

6. Explain the Important factors influencing the insurance market

2)CONSOLIDATION IN THE INSURANCE INDUSTRY- the combining of business

• A)Insurance Company Mergers And Acquisitions- the market structure of the

7. Explain the various techniques of Loss Forecasting

Risk Management (18MBAFM402) Page 13

Risk Management (18MBAFM402) Page 14

10. Explain the Pooling Arrangement and Diversification of Risk

Risk Management (18MBAFM402) Page 15

11. Explain The Changing Scope of Risk Management

Risk Management (18MBAFM402) Page 16

 Commodity price risk

Risk Management (18MBAFM402) Page 17

Risk and Insurance- Definition and Basic Characteristics of Insurance-Requirements of an

Indian Insurance Industry -Historical Framework of Insurance, Insurance sector Reforms

1. State the major recommendations of Malhotra Committee

Risk Management (18MBAFM402) Page 18

3. State and Explain the characteristics of Insurance

4. State and Explain the prerequisites of Insurable Risk

1 – Frequent Loss event occurs frequently or is continuously experienced.

2 – Probable Loss event occurs at least on an annual basis.(Value=4) Eg: Monthly

3 – Occasional Loss event is likely to occur sometime in the lifetime of the

5 – Extremely: Likelihood of a loss occurrence Improbable cannot be distinguished

1 – Catastrophic May cause death or loss of property. A single event would

2 – Critical May cause severe injury/illness or serious property damage. A single

3 – Serious May cause moderate to serious injury or moderate property damage. A

5 – Negligible Likely to not result in injury/illness or measurable property

Commodity price risk