insurance on the set of management accounting objects and to develop a mechanism of relevant information for insurance risk management. Principles of Risk Management and Insurance. R. B. Drennan, Ph.D. Associate Professor and Chairman. Department of Risk, Insurance and. DOWNLOAD PDF · Life Insurance Risk Management Essentials. Read more Careers in Insurance and Risk Management, Edition · Read more.
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PDF Drive is your search engine for PDF files. As of today Alternative Risk Transfer: Integrated Risk Management Through Insurance, Reinsurance, and the . We see how insurance companies determine which risks they will cover and what prices Most people think of risk management as simply downloading insurance. PDF | Thece market, insurance occupation, ins book contains 13 chapters in Arabic mainly about risk management,, insurance, insurance market,, insurance.
If the party fails to pay the credit. So, allowance should be made for the financial effect of non-payment of reinsurance and of the non- payment of premium debtors. It is the risk that a firm has insufficient financial resources to meet its obligation as they fall due or can only secure the resources at excessive cost. It in the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and system or from External events.
It is common knowledge that life insurance companies are subject to 3 major risks while entering into contracts with their policy holders: Risk Based Capital RBC formula comprises asset risk, credit risk, underwriting loss, underwriting premium risk and off balance sheet risk. The importance of proper reserving cannot be over-emphasised.
The failure to provide adequately for future claims is attributed to 'under reserving' or 'under provisioning'. Reserves can be VOL. Alternate Risk Managements: These are several alternate risk management strategies such as risk transfer reinsurance , risk hedging through interest ratio etc.
Solvency I Solvency I is based on minimum solvency standards. The solvency I directive adopted in left the solvency calculation unchanged but only adjusted some other components. Solvency requirements should be fulfilled at all times rather than only at the time the financial statements are drawn up. All life insurers are required to Gold capital of at least the Solvency I minimum guarantee fund, or the Solvency I required solvency margin plus the resilience capital requirement.
Solvency capital requirement will be calculation by applying either the standard approach or the insurer's won internal risk model.
It assesses the capital requirements in which lives of business may exhibit above-average volatility the loss rations of five non-life lives of business. EU commission is expected to adopt the solvency II directive in mid After its adoption by EU Parliament and the council of Ministers, the implementation is scheduled to be complete by One of the objectives of Solvency II is to establish a solvency capital requirement which is better matched to the risks of an insurance company.
The characteristic of solvency II are based on principles and not rules. These are two levels of capital requirements under solvency II, i. MCR is the minimum level below which ultimate supervisory action will be triggered. SCR should deliver a level of capital that enables an insurance undertaking to absolute significant unforeseen losses and gives reasonable assurance to policy holders that payment will be made as they fall due.
Solvency II deals with quantitative requirements, supervisory review powers and for insurer's internal control and risk management and disclosure and transparency to reinforce market mechanism and risk based supervisors. Risk Management Processes: Managing risks in Insurance Industry is imperative for achieving success in competitive markets. Risk management processes are cyclic process which starts from identification of a risk and it may result in identification of another new risk.
The company need to have a process or processes in place for risk management to be effective. Here are the five steps the company can use for risk management: Plan actions to eliminate the risks or enhance the opportunities. Action plans should be appropriate, cost effective and realistic. If risks occur then implement the risk strategy based on action plan VOL. Diagram Source: George E. The U. Enterprise Risk Management ERM uses culture, currency, regulation, economic factors, geographical differences Time Zone Language, distance from home office, credentials, loss of control etc.
The RMC has to lay down a risk management strategy across various lines of business and the Operating Head must have direct access to the Board. However IRDA left it to the companies in the Insurance sector to work out the details of how risk management functions were to be suitably organized by the respective companies, given their size, nature and complexity of the business.
But that should in no way undermine the operative independence of the risk management head. Because of this leeway, most of the Indian insurance companies have given the risk management responsibilities to their actuaries, which is not a very strongly recommended path.
Thus insurance products could be considered along these two flows. There is a large risk that any of these assumptions or models could be incorrect, leading to first, the pricing risk and the solvency risk- that arises from inadequate reserves and the company runs out of capital.
As many insurance companies have large fixed income holdings or equity position, there is also credit and market risk associated with their investment portfolio.
Moreover, the processes, people and the systems of an insurance company are also exposed to risks. These are operational risks and present throughout the company. Additionally, like other corporations, an insurance company is exposed to other strategic risks such as liquidity, reputation, legal, business planning and so on. The time lag between selling of an insurance coverage and the claim payments can be extremely long in life insurance sector. This lag makes life insurance particularly a difficult to manage.
There are also a variety of cultural reasons that complicate insurance risk management. There is a strong belief by some insurance companies that the insurance business is strictly an underwriting game.
Under these circumstances, risk management functions obviously take a back seat. The Risk Management within the insurance company entails a strong governance structure so that the Board and the Management should know how risks are being managed.
This involves appointing a Chief Risk Officer CRO for risk management and the organizational culture too should support it. In large insurance companies, it is common to form a separate risk management unit staffed by a multi- disciplinary team. The insured and uninsured perils are identified. Replacement possibilities are calculated on the basis of valuation. The book value is the minimum loss value of the property because it denotes the download price and depreciation of the property.
But it is not economic value which is the real loss of the property. Market value is very near to economic value. If the firm does not get value of the property any benefits of use of value; it will be equal to market value. Replacement cost is considered for insurance as it is the cost of replacement of damaged property but it exceeds the market value as the new property value increases due to inflation, Fire insurance, marine insurance, motor insurance, machine insurance, profit insurance etc.
992 (30 CII credits – Advanced Diploma level)
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 Life Risk: Human life is exposed of several risks e. Some responsibilities such as education and marriage of children, starting of their career, business responsibilities, key men employees, etc.
Liability: Liability mainly legal liabilities arise because of contractual relationship. Third party insurance of motor insurance, product liability and professional liability and many new liabilities are added in recent years.
Other Risks: There are several other risks which influence the cost and production. Profit insurance is taken for the purpose. Machine breakdown and crop insurance etc.
Risks are measured using probability methods. Last experiences and variance analysis with standard deviation are used for measuring risks. The probability is modified with the present situation and future expectation. Control of Risk: The risks are controlled through insurance with the principle of pooling; cooperation and transfer of risks, Insurance of risks are becoming a gradual and continuous process.
The Indian experience is very positive wherein insurance is expanding with more than 15 percent per annum. Over the many decades of its existence, the insurance industry has become quite proficient at predicting the future and adapting according to the dangers it foresees. This is largely due to the advent of predictive models, a tool used throughout the industry to calculate risk and price coverage accordingly. Solvency Margin: The insurer makes assumptions into future for parameters such as mortality, morbidity, expenses, interest etc.
The purpose of MAD is to build a buffer for miss-estimations of the best estimate or adverse fluctuations. But it does not cover for volatility and catastrophe risks for which separate excess assets known as Solvency Margin should be provided by the insurer.
Risk Based Capital: Risks based capital includes asset default risk, mortality morbidity risk, volatility risk, catastrophe risk, margin risk and fund risk. Each company needs to develop implement and maintain appropriate and effective procedures to manage its capital position, i.
The capital management planning identifies the quantity, quality and sources of additional capital required, availability of any external sources, estimating the financial impact of raising additional capital, taking into account the plans and requirements of various business units of the company, Risk Based Capital is an amount of capital based on an assessment of risk that a company should hold to protect policy holders against adverse developments.
Risk based capital involves identifying the key risks and quantifying them. The kinds of risks faced by insurance companies are listed with a brief description: i Insurance Risk: It is underwriting, risk associated with the uncertainty of business written in the future ii Market Risk: It is the risk associated with movements in interest rates, forcing exchange rates or asset prices lead to an adverse movement in asset values iii Credit Risk: If another party fails to perform them in time i.
If the party fails to pay the credit. So, allowance should be made for the financial effect of non-payment of reinsurance and of the non- payment of premium debtors. It is common knowledge that life insurance companies are subject to 3 major risks while entering into contracts with their policy holders: first, the mortality rate of the insured lives may turn out to be higher than anticipated second, the management expenses of the companies may be higher than those forecast and third, circumstances may lead to a portfolio yield which is lower than that assured while calculating the premiums.
Risk Based Capital: Risk Based Capital RBC formula comprises asset risk, credit risk, underwriting loss, underwriting premium risk and off balance sheet risk. Reserving: The importance of proper reserving cannot be over-emphasised. The failure to provide adequately for future claims is attributed to 'under reserving' or 'under provisioning'.
Reserves can be VOL. Alternate Risk Managements: These are several alternate risk management strategies such as risk transfer reinsurance , risk hedging through interest ratio etc. Solvency I Solvency I is based on minimum solvency standards. The solvency I directive adopted in left the solvency calculation unchanged but only adjusted some other components.
Solvency requirements should be fulfilled at all times rather than only at the time the financial statements are drawn up. All life insurers are required to Gold capital of at least the Solvency I minimum guarantee fund, or the Solvency I required solvency margin plus the resilience capital requirement.
Answer: Peril: Peril is the cause of a loss or damage. Individuals or business organizations are subject to face different perils in every moment. A peril must be unpredictable but measureable. For example, fire, theft, windstorm, explosion, collision, premature death and accidents are the best sample of peril. Peril may be defined as the cause of a loss. People are subject to loss or damage from many perils. Typically perils are fire, windstorm, explosion, collision, premature death, accidents and sickness, negligence, and crime.
Often it is beyond the control of anyone who may be involved. In this way, we can say that storm, fire, theft, motor accident and explosion are all perils. More specifically, peril is that cause by which a person or a business organization faces different risky situations. Hazard: Hazard is the factor which may influence the result or consequence of a particular peril.
In general, hazards are the condition which creates the chance of loss arising from a certain peril. Factors that may influence the outcome are referred to as hazard. On the other hand, moral hazard is an individual characteristic of the insured that increase the probability of loss.
Life Insurance Risk Management Essentials
So, hazard refers to the condition of a material condition increasing the chance of loss or an individual characteristic creating the probability of loss.
Risk Management: Risk management is the branch of the discipline management which is concerned with the overall management of risk and concerning aspects. More specifically, risk management is the study of identifying, analyzing, interpreting, and controlling of different economic risks which can endanger the individual or business organization.
We could define risk management as: The identification, analysis and economic control of those risks that can threaten the assets or earning capability of an enterprise. Risk management similarly utilizes men, materials and machines in accomplishing its objectives, and furthermore, the application of risk management tools and the implementation of decisions in this area require highly trained personnel and proper equipment.
After analyzing risk, it provides the possible directions on the basis of findings.
Risk management functions to measure the probability of risk and give appropriate solution. Risk is obvious in every individuals life and in every business organization. These are the ultimate function which is being accomplished by risk management. The functions of risk management show the summary of risk managements function and its importance.
Answer: Risk Management Process: The steps for achieving the risk management goal are: 1. To identify or discover the risk problems 2. Risk avoidance b. Risk retention c. Loss control d. Risk transfer 3. This step includes four steps for selecting the method or methods, as, a.
The proper implementation of the selected risk measurement tools should be reviewed and observed in this stage of risk management process. This is the risk management process through which one can get the possible result for the better handling of risk and other concerning materials. Answer: Ways to Determine the Risk: As the premium of the insurance depends on the size and pattern of the insurance contract, the risk of the certain insurance policy is different from each other.
So, on the basis of the acuteness of risk, we classify risk into four classes, as, Super standard risk Standard risk Sub-standard risk Un-insurable risk a. Super standard risk: In numerical ratting system of evaluating risk, some risks ranges 75 to less, is called super-standard risk. Standard risk: According to numerical ratting system of evaluating risk, rages 76 to , is called standard risk.
Sub-standard risk: The risk which ranges from to is called sub-standard risk. Un-insurable risk: When the policy amount is so high that is it exceeds the and above is known as uninsurable risk for the business organisation or individual. Super Standard Risk Below 75 Standard Risk From 76 to Sub-standard Risk From to Un-insurable Risk From to above The risk should be taken considering some factors which actually affect or which should take care for the purpose of determining risk of a certain investment.
Application form b. Personal statement c. Doctors report d. Agents report e. Report of supervision f. Information from the relatives of the insured g. Commercial records if any etc. Considering the above aspects of the concerned matters, there have two ways to determine the risk. They are, as follows, a. Judgement method b.
Numerical Rating System By using these two ways to determine the risk of a particular investment, the insured or insurer apply these two ways specifically. If a risk is in the class of standard level then it will be said the risk is standard risk.
If the risk specifies the super standard range then it will be considered as the super standard risk. If the risk specifies the sub-standard range then it will be considered as the sub-standard risk. Or otherwise, the risk will be uninsurable by the both side insurer and reinsurer. Answer: Factors regarding which care should be taken in taking the risk for indemnification: a.
Insurance and Risk Management
Age: Age in life insurance is so important in consideration of the indemnification. Physical condition: Physical condition is another way to consider the indemnification of the insured person.
Personal history: History of personality is important for the determination of the indemnification of the certain type of insurance contract.
Family history: History of family is another essential factor to get the indemnification of the insurance contract. Occupation: Occupation of the individual is deeply considered when the insurer consider the indemnity of the possible loss.
Residence: Residence is also consider when there is taken step to make a insurance contract.
Present habits: Habit of the individual should be taken into account because the individual may behave in a deviant way later. Morale: Morale of the individual portrays the shape of his or her attitude. So it will be effective to judge the appropriate manner of the concerned individual.
Race and nationality: Race of the people and nationality of the persons help to determine the indemnification of the concerned insurance. Sex: Sex is another important factor which is considered to make an insurance. Economic status: Economic status is also helpful to consider about the indemnification of the insurance amount of premium.
Defence service: If the insured has the defence services then it will be a positive for the indemnification.However the reality is little far from that. Morale of the individual portrays the shape of his or her attitude. This classification would include earthquakes, floods, famine, volcanoes and other natural disasters. Hazard may be reduced. It assesses the capital requirements in which lives of business may exhibit above-average volatility the loss rations of five non-life lives of business.
All over the world, the insurance companies write the policies that deal with specific risks, and in many cases even underwrite exotic risks.
But it is not economic value which is the real loss of the property. Pure risks involves a loss or, at best, a break-even situation.
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