Insurance Ii

INTERMEDIARIES  

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Agent/insurance advisor/ insurance planner: They are trained to be sensitive to the dominant issues in life to sell the product. Agents may be; Composite insurance agent- an agent who holds a license to act as an insurance agent for a life and a general insurer. Corporate agent- a person other than an individual that is a firm or a company formed under companies act including a banking company.

Issue and Renewal of license A person desiring to obtain/renew a license for an insurance agent shall have to apply to designated authority in the format given in Form-IRDA- VA (for individuals)/ VC (for companies). For composite agency two separate applications has to be made.  Application form should accompanied by prescribed fees.  On receipt of application, the authority scrutinize the form and sanction license on fulfillment of following points ; i) qualification- minimum 12th standard or equivalent. ii) Completion of practical training of 100 hrs. iii) Passing of pre-recruitment examination. iv) Has furnished the application complete in all respect. v) Has requisite knowledge to solicit and procure business. vi) Is capable of providing the necessary service to the customers. In case of refusal the reasons should be informed to the applicant. 

Cancellation of license- due to any disqualification the license shall be cancelled by the authority. Fees- Rs.250/- shall be payable to obtain license. Issue of duplicate license- shall be made by the authority on payment of Rs.50/-. These regulation is applicable to the existing agents before the commencement of these regulation. Sources of recruitment of agents- normally insurance companies consider the following sources; a) Advertisement b) employment Agencies (both public & private) c) life insurance agency career d) colleges and other institutions, e) on campus selection f) employee recommendation g) labour union.

Selection of agents- following process is

adopted for selection; 1. Screening the application. 2. Selection test. 3. Interviews. 4. Checking of references. 5. Physical examination. 6. Approval by the appropriate authority. 7. Placement. Training of Agents- on the job training and off the job training. On the job training includes sharing experience, coaching, under study, special lecture, carrier agent schemes, vestibule school, time management, etc. Off the job training includes special courses, conference, case analysis, role playing, sensitive training, field force analysis.

Duties of the agents: 1.

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Discharge the duties for achievement of objective of the company. Maintain good relationship with customer and the authority. Provide personal help wherever necessary. Ready to solve any servicing problem of the customer. Take due care and act reasonably for success of any plan. Made market research and provide feedback information. Help the customer in claim settlement. Any other service as required by the authority.

Code of conduct for agent: 1. 2. 3. 4.

5. 6. 7. 8. 9.

Disclosing the license to the prospect on demand. Explaining all available options to the prospect. Explain the information required in proposal form. Informing the insurer about any adverse habits and material facts of the person to be insured. Revealing of commissions , if necessary. Advising policy holder to effect nomination. Not interfering in other’s activities. Should show his honesty and integrity. Not demanding or receiving share of proceeds under an insurance contract.

Rights of the agent: 1. 2.

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Can issue renewal notice. Can give receipt for premiums collected. Can introduce business on behalf of the insurer. Can collect premiums from policy holders directly. Is entitled to agreed payment for his duties. Entitled to receive reimbursement of any payment properly made on behalf of his insurers.

Termination of agent 1. In case of cancellation or non renewal of license. 2. Permanent incapacity of an agent. 3. Conviction of any criminal offence. 4. Involvement in breach of trust. 5. Involve in cheating or forgery. 6. Terminated by insurer in terms of the appointment of the agency. 7. Termination due to non-performance. 8. Violation of code of conduct.

Third Party Administrator "TPA" means a Third Party Administrator who, for the time being, is licensed by the Authority, and is engaged, for a fee or remuneration, by whatever name called as may be specified in the agreement with an insurance company, for the provision of health services;

Conditions of and Procedure for Licensing of TPA (1)

Only a company with a share capital and registered under the Companies Act, 1956 can function as a TPA. (2) The main or primary object of the company shall be to carry on business in India as a TPA in the health services, and on being licensed by the Authority, the company shall not engage itself in any other business. 3. The minimum paid up capital of the company shall be in equity shares amounting to Rs. 1 crore (Rupees One crore only); 4. At no point of time of its functioning the TPA shall have a working capital of less than Rs. 1 crore;

5. At least one of the directors of the TPA shall be a qualified medical doctor registered with the Medical Council of India; 6. The aggregate holdings of equity shares by a foreign company shall not at any time exceed twenty-six percent of the paid up equity capital of a third party administrator. 7. Any transfer of shares exceeding 5% of the paid up share capital shall be intimated by the TPA to the Authority within 15 days of the transfer indicating the names and particulars of the transferor and transferee. Explanation : For the purpose of this subregulation "working capital" means the difference between the aggregate of the current assets and current liabilities as on the date of reckoning

Procedure for obtaining license. (1) The TPA shall obtain from the Authority a licence to function as a TPA for rendering health services. 2. The application for licence shall be made in writing to the Authority in Form TPA-1 appended to these regulations and shall be accompanied by a non-refundable processing fee of Rs. 20,000 (Rupees Twenty Thousand only) to the Authority by way of a crossed demand draft in favour of the Authority payable in Delhi. 3. The Authority may, in the course of examination of the application, call for such information or ask for production of such documents, as it may deem fit, and it shall be incumbent upon the applicant to furnish the same within the specified time. contd..

4. The Authority, on examination of the application and details furnished by the applicant, may issue a licence, if it is satisfied that the applicant TPA is eligible to function as a TPA. 5. Every TPA approved by the Authority shall pay a further sum of Rs. 30,000 (Rupees Thirty Thousand only) to the Authority as licence fee before the licence is granted to it and the same shall be paid to the Authority in the manner as stated in subregulation (2) of this regulation. 6. A TPA whose application has been rejected by the Authority shall not, for a period of two years from the date of such a rejection, apply once again to the Authority for a licence.

Code of Conduct for TPA

A TPA licensed under these regulations shall as far as possible act in the best professional manner. 2. In particular and without prejudice to the generality of the provisions contained above, it shall be the duty of every TPA, its Chief Administrative Officer or Chief Executive Officer and its employees or representatives to :(a)    establish its or his or their identity to the public and the insured/policyholder and that of the insurance company with which it has entered into an agreement. contd.. 1.

(b)   disclose its license to the

insured/policyholder/ prospect. (c)    disclose the details of the services it is authorized to render in respect of health insurance products under an agreement with an insurance company; (d)   bring to the notice of the insurance company with whom it has an agreement, any adverse report or inconsistencies or any material fact that is relevant for the insurance company’s business;

(e)    obtain all the requisite documents pertaining to the examination of an insurance claim arising out of insurance contract concluded by the insurance company with the insured/policyholder; (f)     render necessary assistance specified under the agreement and advice to policyholders or claimants or beneficiaries in complying with the requirements for settlement of claims with the insurance company; (g)    conduct itself /himself in a courteous and professional manner;

(h)   refrain from acting in a manner, which

may influence directly or indirectly insured/policyholder of a particular insurance company to shift the insurance portfolio from the existing insurance company to another insurance company; (i)    refrain from trading on information and the records of its business; (j)    maintain the confidentiality of the data collected by it in the course of its agreement;

(k)  refrain from resorting to advertisements of its business or the services carried out by it on behalf of a particular insurance company, without the prior written approval by the insurance company; (l)    refrain from inducing an insured/policyholder to omit any material information, or submit wrong information; ( m)  refrain from demanding or receiving a share of the proceeds or indemnity from the claimant under an insurance contract; (n)   follow the guidelines/directions that may be issued down by the Authority from time to time.

Miscellaneous Provisions

     The Authority may, from time to time, constitute

Committees consisting of members drawn from various sources including the TPAs, insurance companies, Authority, or any other persons as may be decided by the Authority to look into the proper and efficient performance of the TPAs. 2    (1) Every TPA shall furnish to the insurance company and the Authority an annual report and any other return, as may be, required by the Authority on its activities. .

(2)  The Annual Report, duly verified by a director of TPA and the Chief Administrative Officer or the Chief Executive Officer shall be submitted in Form TPA-4 (No. 1 to 7) within a period of sixty days of the end of its financial year or within such extended time as the Authority may grant. (3)    The TPA shall also make available to the Authority for inspection, copies of all contracts with insurance company

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General :(1)   Any changes made from time to time in the agreement entered into by an insurer and a TPA shall be filed with the Authority; (2)   A TPA shall not charge any separate fees from the policyholders which it serves under the terms of the agreement with the insurance company. (3)   If any person fails to furnish any document, statement, return, etc., to the Authority, the same shall be construed as a non-compliance of the Act.

S Are professionals who assess the specific insurance needs of the client, evaluate the risk and suggest a suitable insurance cover. Brokers perform following activities to provide his advisory services; 1. On specific insurance need of the client by assessment of risk. 2. Mitigation of specific risk factor. 3. Optimal policy structure. 4. Carry out preparatory work for insurance contract. 5. Claim administration and management. 6. Assist in administration and performance of the contract. 

Classification of brokers

Category-I Direct General insurance broker. Category-II – direct life Insurance Broker. Category-III – Re-insurance Broker Category- IV – Composite Broker Category- V- Insurance Consultant.

IMPORTANT PROVISIONS NET WORTH: 1. Composite Broker- Rs.2.50 crores (with 26% foreign participation). 2. Reinsurance Broker- Rs2.00 crores 3. Direct Broker- Rs.50 lakh. 4. Consultant- Rs. 5 lakh Bank guarantee. Brokerage Commission- not more than 30% of the premium. Solvency Margin- Rs.25 lakh or 10% of the gross brokerage and fee received in the previous year, whichever is higher. Auditor’s statement and certification in this regard is required. Maintenance of books of account and submit annual report within 60 days of completion of financial year. Preserve records for at least 5 years. Disclose all the required information and facilitates inspection whenever required.

Benefits 

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Brokers are retained by the insured and therefore their primary responsibility is towards the insured. Benefits are; Improvement in customer services. Transfer of technology and managerial know-how. Benefit to insurance company. Foreign exchange considerationincrease in retention capacity by associating with international firms. Assist to develop new products.

BANCASSURANCE The provision of insurance and banking products and services through a common distribution channel or to a common client base. Pressures on Banking 

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Customer retention in the face of competitioncommoditisation of basic banking products Squeeze on margins of fund based revenue Staff retention and motivation Universal Banking- approach to provide all financial product under one roof ; a broader relationship approach Optimum utilization of infrastructure and resourcesmaximize revenue

Pressures on Insurance Companies 

Channel diversification from traditional direct sale

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Access to a high quality customer base

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Establishing brand equity in a new market

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Achieve the geographical reach within minimum time and cost Ensure higher probability of success in the sales process

Bancassurance- A win-win solution Bank 

Customer retention

Satisfaction of more financial needs under the same roof 

Insurance Company Revenue and channel diversification 

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Revenue diversification

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More profitable resource utilisation

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Enriched work environment

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Establish sales orientated

Quality customer access

Quicker geographical reach Creation of brand equity

Leverage service synergies with Bank 

Establish a low cost

Bancassurance Model options Insurer employs sales force to follow up on Bank generated leads

Separate Sales Force

Insurer employs sales force to follow up on Bank generated leads

Integrated

Insurer employs sales force and deploys them at bank branches

Hand In Glove

Quick to implement

Process managed by Bank

Quick to implement

Reduced bank management time

Insurer only product/service provider

Both partners strengths utilised

Little integration required Least effective in maximising opportunities from the Bank database Insurer controls sales process

Minimal cross cultural issues Strengths of insurer not utilised

Bank as introducer, insurer sales force as converters Cultural fit key, since insurer staff deployed at Bank branches

Greater change management required to engender sales culture

Decision- Utilise mutual strengths; level of integration desired; existing organisational structure

Pattern of distribution alliance 

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Banks selling product of their insurance subsidiary exclusively. Banks selling products of an insurance affiliate on exclusive basis. Banks offering product of several insurance companies as “Super Market”. This brings various regulatory issues based on followings; Corporate Agency Model- which attracts the issue of responsibilities and code of conduct and also raises question about the relevancy in case of banks. Corporate Broker Model- raises question about the regulatory and operational issues.

Types of model 1.

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Distribution Alliance- tie-up for distribution of products. Joint Venture- Banks provides the lead and its reputation and brand name while insurer brings products, underwriting and servicing expertise. The partners combine their individual expertise to forge a best practice bancassurance operation with tailored products, tailored distribution and lead generation mechanism. Leveraged Life Distribution- insurance company takes the lead and banks act as corporate agent to provide access to middle market leads. Leveraged Bank Distribution- banks takes the lead and insurance companies supply products for its bancassurance efforts.

Advantag e 1.

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Enhanced customer service- providing convenience, simplicity and value in a “one stop” environment. Leverage of existing assets- valuables, offer customer data base. More Income- better customer retention. Greater productivity. Quality sales culture-that is customer driven. Improved staff retention- provide good training and better remuneration. Cross selling opportunities

Implementing Bancassurance: Key challenges in Indian context; 

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Creating an environment of top level involvement of bank management. Bringing relevance motivation and skill development at the operating level at bank branches. Resolving possible conflicts of interest between the bank and the insurer. Setting up distribution procedure consistent with the manual systems in most banks. Establishing credible service level agreement between the bank and the insurer.

Surveyor and loss Assessor. 

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Surveyors & loss assessor are independent professionals appointed by an insurance company to assess the loss when a claim is notified under a policy issued by them. Licence is issued to technically qualified people, who are qualified in insurance subject. Surveyors are classified into 3 categories such as category ‘A’ ‘B’ and ‘C’ based on their professional qualification, training undergone, experience as surveyor & loss assessor and other professional experience and any other criteria as decided by the authority.

Duties of Surveyor and loss assessor. 1. 2.

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Investigate & confirm the cause of loss. Advice the insured to take good care of salvage to mitigate the loss. To ensure that insured has taken all necessary steps to contain the loss. Assess the quantum of loss. Determine the liability of the insurer within the framework of the policy condition. To act on behalf of the insurance company in disposal of salvage to realize maximum value.

Loss Adjuster Vs. Loss Assessor 1. 2.

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Represent insurer There to see a fair indemnity in line with the policy cover. Earns flat fees based on final settlement or brand value. FSA compliant. Represented by chartered institutes. Access to wide range of specialists. Subrogation- has a responsibility to try and recover insurer’s outlay.

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Represent claimants. There to get best settlement possible for claimants. Earns fixed percentage of the final agreed figure. Not all are FSA compliant. Trade organizations are not chartered. Limited access to specialists. Unless any uninsured losses has no interest in subrogation.

Eligibility conditions for surveyor 1.

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3. 4. 5. 6.

Satisfies all the applicable requirement of section 64UM read with section 42D of the act and rule 56A of the Insurance Rules,1939. Possesses such additional technical qualification as may be specified by the authority. Furnish evidence of payment of fees. Has undergone practical training for 12 months. Any other information required by the authority. A corporate surveyor has to fulfill the requirement of section 64UM(1)D(i) of the act.

Code of conduct 1.

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Behave ethically and with integrity in the professional pursuits. Strive for objectivity in business judgment. Act impartially. Not accept or perform survey work where he is not competent or for which no license has issued. Carry out the work with due diligence, care and skill. Maintain proper records and keep all necessary information regarding his job and profession. Submit annual statement in form-IRDA-12 to the authority. Furnish all documents for inspection whenever necessary.

Types of insurance companies 

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From legal point of view insurance companies are either stock companies or mutual companies. Stock Companies- owned and controlled by its common stockholders. In India most companies are stockholders type. The policy cover issued by these companies are non- participating implies that none except the benefit contracted shall be paid to the policyholders and no dividends accordingly shall be paid. These companies do sell participating policies and in this case policyholders not only get the policy dividend but also stock dividend.

Mutual Companies 

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Popularly known as mutuals, are generally nonprofit organization owned by the policyholders. Policyholders in a mutual companies are just shareholders and enjoy the benefits accordingly. Mutuals are following types; Assessment Mutuals - the policy owner may or may not pay a premium when policy begins, but they are responsible for a premium based on their fair share of the losses and expenses at the end of the period. Advance premium Mutuals - policy owners pay their premium at the beginning of the policy and eligible for dividend when the policy period ends. contd..

3. Factory Mutuals - provides substantial loss prevention services including regular inspection of insured premises. Large up- front and multilayer deposits are made which generally tie up funds. 4.Farm Mutuals - are community based and owned by the policyholders. It serve the insurance needs of local home owners, farm and other business operators. 5.Perpetual Mutuals- charge a single large advance premium which earns enough investment income to cover all future losses and expenses. 6.Fraternal Mutuals - are primarily social organization, most of which are organized to serve particular religious, nationality, or labor groups. In US most of the fraternal issuers issue nonassessable policies.

Reciprocal or Inter-Insurance Exchanges 

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It is an association, the members of which exchange insurance. They are not-for-profit, unincorporated, association of individuals. An individual is granted the legal ability to transact business for the group and identified as the ‘attorney-in-fact’ and is responsible for providing all administrative services needed including sales and underwriting. Initial capital is obtained from either prepayment of excessive premium by members or contribution in the form of subordinate loans made by ‘attorney-in-fact’. Surplus is also accumulated by retention of earnings. The attorney-in-fact receives percentage of premiums.

Lloyd’s of London 

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Is one of the largest and best known insurer in world. It is an association, individual members of which engage in insurance and not an insurance company. Its underwriters sometimes insure ‘unusual’ loss exposures, and thereby lloyd’s receives a good deal publicity. Its worldwide reputation for prompt and fair claim settlement, on even the largest losses. Its financial capacity to handle larger exposures. Its reputation for innovation and expertise in many technical areas.

Registration of Insurance Companies (3a)     

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Legal form of insurance company. Capital and Deposit requirements Business plan Projected Balance Sheet for 5 years Suitability of Owners and Sr. Management ‘Fit and proper” test for Key Management appointments Assurance to infuse additional capital as and when required

Legal Form of New Company (3-b) 

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Only permitted legal form is a joint stock company or cooperative societies No insurer other than an Indian insurance company, shall carry on any class of insurance business Separate companies for life and non-life business Foreign companies permitted to enter into a joint venture arrangement with an Indian company with a share holding not exceeding 26%. Holding of the foreign partners in the Indian promoter companies is considered while deciding on this limitation of 26%. No promoter to have more than 26% share and where it is in excess, it should be divested in phased manner. Preference for registration to those who underwrite Health insurance. Rationale   

Regulatory Comfort More Transparent Better Corporate Governance

Minimum Capital Requirement (3-c) 

No insurer carrying on the business of life or general insurance or reinsurance in India shall be registered unless: 

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a paid-up equity capital of rupees one hundred crore (US $ 25 mn) in case of a person carrying on life insurance or general insurance or a paid-up equity capital of rupees two hundred crore (US $ 50 mn) in case of a person carrying on exclusively the business of reinsurance.

Rationale 

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Financially strong players capable to meet the liabilities of the policyholders are in the market. Entry barrier for small and marginal applicants.

Deposit Requirement (3-d) 

Amount to be deposited with the Reserve Bank of India is: 

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In the case of life insurance business, a sum equivalent to one percent of its total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn) In the case of general insurance business, a sum equivalent to three percent of the total gross premium written in India in a financial year not exceeding rupees 10 crores. (US$ 2.5mn) In the case of reinsurance business, a sum of rupees 20 crores (US$ 5mn)

Rationale 

Additional financial cushion for protection of policyholders liabilities.

Business Plan (3-e) 

Application form requires a five-year business plan:    

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Premium Income/ Amount of sales Size of sales force/ sales support/ administrative staff Investment income Commission and other related expenses/ Expenses of management Statutory reserves/ Required solvency margin Profit and Loss Accounts and balance sheets Break-even periods and return on capital Geographical spread of business Market Segmentation

Rationale  

Long term commitment Increased insurance penetration in the country

Suitability of Owners (3-f) 

IRDA needs to be satisfied that 

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Due diligence regarding the background 

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the financial condition and the general character of management of the applicant are sound the interests of the general public will be served if the certificate of registration is granted to the applicant Regulatory clearances from Indian regulators like RBI, SEBI, Income Tax clearances in case of Indian promoter Foreign promoters track record from home country regulator

Rationale 

Comfort for the insured and the regulator

Suitability of Directors & Sr. Mgmt (3-g) 

Application details include: 

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Name, address and the occupation of the directors, the proprietors, manager in India and key persons Detailed information required is spread over  academic and professional qualifications  working experience over 15 years  reputation and character  association with a company which was wound up or under receivership during the period of their association Key persons are defined as chief executive, chief marketing officer, appointed actuary, chief investment officer, chief internal audit and chief financial officer

Rationale 

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Professionally qualified persons are appointed to handle the affairs of the company Ensure that good people with reputable background act as trustees

Investment of Funds (5-c) 

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No insurer shall directly or indirectly invest outside India the funds of the policy holders Mandatory investment of funds in infrastructure & social sectors Investments only in graded securities with minimum rating of AA of Standard & Poor or its equivalent Every insurer to have an Investment Committee consisting of CEO, 2 non executive directors, Chiefs of Finance & Investment and A.A. Exposure Limits set for i) Investee Company; ii) Investee Group; iii) Industry Sector; iv) Promoter’s Group Rationale   

Pattern of Investments designed to control risk Ensure adequate spread of investments and diversification Maximise return on investments and have adequate safety of securities

Monitoring of Rural& Social Sector Obligations (7) 

Rural Sector 

Life Insurer 

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General Insurer 

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2% (1st F.Y.)/ 3% (2nd F.Y.)/ 5% (thereafter) of total gross premium income written direct in that year

Social Sector – Life and General Insurer 

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7% (1st F.Y.)/ 9% (2nd F.Y.)/ 12% (3rd F.Y.)/ 14% (4th F.Y.)/ 16% (5th F.Y.) of total policies written direct in that year

5,000 (1st F.Y.)/ 7,500 (2nd F.Y.)/ 10,000 (3rd F.Y.)/ 15,000 (4th F.Y.)/ 20,000 (5th F.Y.) lives

Rationale 

To carry out the mandate of the Parliament so that benefits of insurance reforms reach the poor and socially weaker classes.

Protection of Policyholder's Interest (8) 

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Prospectus of any product shall clearly state the scope of the benefits, extent of cover, warranties, exceptions and conditions of the cover. Provide all material information to the prospect to enable him to decide on buying the product. Insurers, agents and intermediaries to abide by the code of conduct. Proposal shall be processed within 15 days. Proper grievance handling system, information on ombudsman. Surveyor should reach site of accident within 72 hrs. After receipt of report settlement within 30 days. Penal interest @ 2% above bank rate for delay in payment of claim Rationale 

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Mission of the Authority

Protect interests of policyholder in its dealing with the insurers Empower policyholder to demand minimum levels of service

Development Issues (9)

-Brokers, Agents, Referrals -Pre Licensing Trg. & Exam -Code of conduct

Distribution

-Life and Gen Ins Councils -Act. Soc of India -Surveyors Inst. -IBAI -No listed Ins co. -Mgt. practice

Self Regulation

Corporate Governance

-Cross subsidy? -Market based pricing -Risk sensitive prem rate -Aligning data base with rating factors

Health Insurance Development Role

Detariffing in Gen. ins

Rural and Social

-Wkg. Gp. -Database -Protocols -TPAs

Micro insurance

-Role of coops and NGOs -Referrals -Risk carrier?

-Regulatory Obligation -Rural Agent - New channels

Upcoming Issues (10) 

Health insurance 

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Unit Linked business 

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Guidelines framed to prevent regulatory arbitrage between life insurance industry and mutual fund industry. More disclosure requirements kept.

Detariffing 

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Recommendation made to the Government to reduce capital requirements Creation of centralized health database, training in ICD-10 coding, new product innovation and design undertaken.

General insurance companies asked to show to the Authority that they have basic infrastructure such as i) upgrading underwriting skills of the underwriters; ii) IT systems to retrieve and analyse data; iii) ways and means to protect the policyholders; iv) scientific and adequate pricing of covers, etc. in place.

Market conduct  

Mis-selling/ Rebating/ Payouts Advising and counseling insurance companies/ Establishment of Self Regulatory Organizations (SRO’s)/ Target Examinations

RISK MANAGEMENT 

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It is an integrated process of delineating specific areas of risk, developing a comprehensive plan, integrating the plan and conducting on going evaluation. The objective is to prevent financial disaster and achieve the objective of capital management. Involves loss control, loss financing and risk reduction Risk management includes the followings; Risk analysis. Risk control Risk financing.

RISK MANAGEMENT PROCESS  1.

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Involves following process; Defining the objectives of the risk management exercise. Identifying the risk exposure. Evaluating the exposures. Critical analysis of risk management alternatives and selecting one of them. Implementation and review.

RISK ANALYSIS  A)

B)  

It includes; Risk identification- can be made through checklist method, financial statement method, flow chart, onsite evaluation, interaction with others, contract analysis, statistical record of losses. Risk Evaluation- includes; Probability of loss occurring, and Its severity.

Risk Control 

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Covers all those measures limiting the severity of the losses that do happen. It can be exercised in following ways; One way is to enhance and monitor the level of precautions taken to minimize the losses due to exposures. Control and minimize the risk operations, internal risk control techniques includes diversification and/or investment in getting information of loss exposures so as to control them.

RISK FINANCING 

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Refers to the means in which the risk control measures that have been implemented shall be financed. The objective is to spread more evenly over time cost of risk in order to reduce the financial strain and minimize risk costs. Risk costs are financed in following ways; Losses may be charged as they occur to current operating costs. Ex-ante provisions may be made for losses either through the purchase of insurance or by building up a contingency fund to which losses can be charged. When losses occur they may be financed with loans, which are repaid over the next few months or years.

OBJECTIVES OF RISK MANAGEMENT  1. 2. 3.  1. 2.

3.

Before occurrence of losses; Reduction in worry and fear. Economical way of handling risk. Overcome legal obligations. After occurrence of losses; Survival. Congruence with mission and objectives. Optimising social effects.

TECHNIQUES IF RISK FINANCING

It is risk retention and risk transfer. Risk Retention- refers retained or assumed of risk by the party or the organization. It is a deliberate decision for business firms inherited with following characteristics; 1. The consequential losses are small, 2. Losses shown as operating expenses or can be funded with retained profit. 3. Self insurance is one form of planned retention where a part or full of the exposure is retained by the firm. It is exercised by the firm when opportunity cost of transfer is less than the cost of insurance and have large pool of funds. 4. Captive insurance represent a special case risk retention. A captive insurance company is an entity created and controlled by a parent, whose main purpose is to provide insurance to its corporate owners. In US it is known as ‘ trade association of insurance companies. 

Risk Transfer 

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Refers transferring of risk to another party. This can be done through; Insurance. Non-insurance transfer- it includes the followings; Hold-harmless agreement or indemnity agreement, indicating the losses shall be borne by the designated party. Incorporation- changing organizational structure. Hedging- popular instrument is ‘derivatives’. Diversification- across business or geographic location justified or coupled with synergies or economies of scale can also significantly reduce risk in aggregate.