Risk Analysis

and Insurance
Planning

Prakash Praharaj, CFPCM

Introduction to Risk
Analysis

Meaning of Risk
Basic categories of risk
Types of pure risk
Property risk
Liability risk
Methods of handling risk


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Meaning of Risk
It deals with known uncertainties. i.e
Deviations from expected outcomes.


The probability of the unexpected happening -

the probability of suffering a loss.


Risk management is asking what might happen

the other 1 % of the time .


Systematic way of protecting the Company’s

resources and income against losses, so that
the goals of the business can be achieved
without interruption.
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 Basic Categories of Risk
Financial and Non Financial
Risk(Reputation)


Objective and subjective Risk



Fundamental and Particular Risk



Static and Dynamic Risks

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Pure Risk and Speculative Risk

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 Types of Pure Risk
- Personal Risk(Mortality, Longetivity,
Disability , Illness)


- Property Risk(Loss of property, Loss of

income, Indirect Loss)
-
- Liability Risk(Statute, Common Law and
Contract)

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Methods of handling Risk
 Indentify the Risks
 Individual -Death , Longetivity, Disability, Medical,
Property,Liability
 - Young and unmarried
 - Married
 - Married and Children
 - Retired
 Business- Death, Disability, Damage to propery, Liability
(WC, Professional, Premises)
 Analyze and Evaluate the Risks
 Alternatives for handling risks
- Control measures(prevention)
 - Financing measures(Risk transfer and risk retention)
 Implement (Eliminate, Prevention, Retention,Transfer
,Insurance)
 Monitoring
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Insurance and Risk(1/2)
Basic characteristics of Insurance
- Transferring risk from the individual to the group
- Sharing of losses by all members of the group
- Indemnification of the loss
- Elements of Insurance transaction(Contractual
agreement, Premium payment, A benefit
payment, Pool of resources by the Company)
Requirements of insurable risks (Large number of
homogeneous exposure units, Measureable loss,
Loss fortuitous/accidental, Not catastrophic
Difference between insurance and gambling or
hedging(Gambling creates a risk. Insurance
transfer the risk

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Insurance and Risk(2/2)
Advantages of insurance in handling risks
- Indemnification of unexpected loss
- Reduction of uncertainty
- Funds for investment(Returns, Infrastructure and Risk
Management)
- Loss control(Loss prevention and loss reduction)
Disadvantages
 - Expenses
 - Moral Hazards
Benefits and costs of insurance to society
- Helps people to stay financially stable
- Help communities prosper(Ordinary loss and
Catastrophic loss)
- Protection against financial consequence of death
- Employer, Tax payer and investor
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
 Risk analysis process
Meaning and objective of risk management
- The combination of perils and hazards create
risks.
- Risk management is identifying, evaluating
and controlling the risks.
- The objective of risk management is to
minimize the financial and other losses.
Steps in personal risk analysis
- Identification of risks
- Analysis and evaluation of Risks(Likelihood
and impact)
- Mitigation strategy and Treatment Plans
- Risk Control and risk financing
-
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 Risk Mitigation Strategy
Ruin

Risk Impact
Loss Containment

Risk Containment

No Impact

Risk Probability Certainty

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 Treatment Plans
Accept low severity and low frequency risks


Accept low severity and high frequency risks but

take action to minimize its impact


Transfer high severity and low frequency risks :

Outsourcing /Insurance


High severity high frequency –

 Re engineer/Eliminate/Cease to perform the
activity



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 Treatment Plans
•Transfer •Eliminate
Ruin

•Out source •Reengineer

•Insure •Exit
Impact

•Accept •Retain

•Monitor •Increase controls

Low

•Scale back activity

Low Likelihood Certainty

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Insurance market Dynamics and
the underwriting cycle
- Commoditynature of Insurance(Motor third
party)
- De-commoditising insurance products
(Brand, supply side restrictions,(UW),claims
management, cost control, commission
- Business Cycle: Low supply-Losing money-
Raising prices-High profitability-New firms-
Excess capacity-Low profitability
- Easy of entry and exit-Investments in Data
processing and Furnitures, Regulatory road
blocks
- Reserves management – Longer cycle
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 Loss Forecasting
-
Coin tossing- Law of large numbers
Probability distributions: Motor accidents
No of accidents Number of vehicles C Relative
frequency
 0 40 .40
 1 32 .72
 2 18 .90
 3 6 .96
 4 4 1.00
Loss forecasting using probability and regression
analysis,
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 Case study
Anurag married four years back and is staying
in a rented house at Kharghar. He plans to
buy a house by availing a loan. They are
blessed with a daughter recently. He travels
to Fort, Mumbai everyday to his office. He
also travels frequently across the country on
official duty. His wife is a practicing
cardiologist. They want their newly born
daughter to follow her footstep. Mr. Anurag
loves trekking and wants to own a holiday
home at Mahabaleswar. He is attracted by
waterfalls and loves to visit Kharghar hills
especially during rainy season .
Task: Identify the risks and recommend the

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 Thanks!

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