insurance fundamentals 20090302 1of2

Life Insurance Fundamentals

February, 2009CONFIDENTIALCopyright 2008 by Infosys Consulting, Inc.

*CONFIDENTIALCopyright 2008 by Infosys Consulting, Inc.

Course AgendaModule 1: Concept of Risk

Module 2: Insurance is a Contract

Module 3: Functions of Insurance

Module 4: Insurance Principles

Module 5: Industry segments


RiskRisk is uncertainty about the future

Not all risks are significantLoss of an umbrella

In insurance parlance, risk is theuncertainty about potential losses which could cause financial setbacks


Managing RiskRISKCONTROLAVOIDTRANSFERRETAINBest option, but not very practicalScientifically possible for property insurance; difficult for life insuranceEasiest option, but most expensivePossible in property insurance; limitations for life insurance


Types of RiskPureSpeculativeLossNo LossNo LossGainLoss


Risk and InsuranceOnly Pure Risks are insurable

Insurance results in the risk being transferred to the insurance company

Sharing of risk among large groups is the basis for insuranceLoss of some, when borne by many, will not break any


Characteristics of Insurable RisksLoss shouldoccur by chancebe quantifiable (measurable)be predictable (Law of large numbers should be applicable)not be catastrophic to the insurer (eg: War risk on land)not be due to illegal acts








Insurance is a contract ..INSURER

Agrees to undertake the insureds risk in return for an agreed consideration (premium)INSURED

Offers his risk for transfer to the insurer and agrees to pay consideration in return for the coverage


Characteristics of Insurable RisksOccur by chance

Quantifiable (measurable)

Not against Public policy

Not Illegal

Not be catastrophic to the insurer (example: Terrorism)




Module 3: Functions & Elements of Insurance




Primary functionsSecondary functionsFunctions of InsuranceCollective bearing of riskProvide certaintyProvide protectionPrevention of lossesSmall capital to cover large risksContribution towards developmentSource of savings, therefore investmentsForeign exchange earningsRisk free trading


Essential elements of Insurance








Principles of InsuranceUtmost Good FaithInsurableInterestProximateCauseIndemnityContributionSubrogation


Principles in detailUtmostgood faithThe Applicant (Policyholder) is bound to make full disclosure of all material factsThe Insurer is bound to make full disclosure of all provisions in the contract(Material Facts - Facts that influence the insurers judgment and rate of premium to be charged)Insurableinterest Insured should have a pecuniary (financial interest) in the subject matter of insurance and he should suffer a financial loss on the occurrence of the insured event Helps to separate insurance from gambling Implies legal right to insure Does not arise from relationship aloneUtmost Good FaithInsurableInterestProximateCauseIndemnityContributionSubrogation


Principles in detailProximatecause The admissibility of a claim under a policy is determined by confirming whether the proximate cause leading to the event is covered It is defined as:~ the active efficient cause ~ that sets in motion a train of events ~ which brings about a result ~ without the intervention of any forces from a new/independent sourceIndemnity An insured can recover a loss under a policy only if he has insurable interest He can recover the loss only to the extent of his insurable interest Insurance of persons are usually not policies of strict indemnity, because the value of life is not exactly ascertainableUtmost Good FaithInsurableInterestProximateCauseIndemnityContributionSubrogation


Principles in detailSubrogationSubrogation is the transfer of rights of rights and remedies of the insured to the insurer who has paid the loss This arises out of the indemnity principle that the insured can not recover more than his insurable interestObviously not applicable to Life InsuranceContributionContribution is the right of an insurer who settles a claim to recover from other insurers who are liable for the same lossLike subrogation, not applicable to Life InsuranceUtmost Good FaithInsurableInterestProximateCauseIndemnityContributionSubrogation








Insurance industry segmentsLife & AnnuitiesProperty & CasualtyHealthLoss of Life

Savings for future

Retirement benefits

Individual and group Loss of Assets / Property

Loss due to Liability

Personal / Commercial

Individual and group Health Risks

Disease & Disability

Healthcare in old age

Individual and group


Life & Annuity Only Human Beings are subject matter for insurance

Provides range of products for risk coverage & savingProvides Insurance Cover against death (Early Death)

Provides annuity benefits when grow older (Long Living)


Property & CasualtyProvides Insurance Cover for property against damages

Generally classified as Marine, Fire, Motor, & Miscellaneous insuranceCompensates the insured to the extent of damage subject to insured amount

Ensure Business continuity & indemnity


Health Insurance & Supplemental CoverageHealth Insurance provides coverage againstHospital expensesSurgical expensesPhysicians expensesSupplemental Coverage provides coverage againstDread diseaseCritical illnessLong-term careDental & vision care


Insurance jargonInsuredInsurer / Insurance CompanyLiabilityInsurable InterestInsurable RiskAgentApplication Broker PerilPhysical hazardMoral HazardPolicyCover NoteCoverageEndorsementIndemnityExclusion


The contents of this document are proprietary and confidential to Infosys Consulting Inc. and may not be disclosed in whole or in part at any time, to any third party without the prior written consent of Infosys Consulting Inc.

2008 Infosys Consulting Inc. All rights reserved. Copyright in the whole and any part of this document belongs to Infosys Consulting Inc. This work may not be used, sold, transferred, adapted, abridged, copied or reproduced in whole or in part, in any manner or form, or in any media, without the prior written consent of Infosys Consulting Inc.

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