Sunday, January 6, 2013

MF0018 – Insurance and Risk Management

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August/Fall 2012
Master of Business Administration - MBA Semester 4
Subject Code – MF0018
Subject Name – Insurance and Risk Management
4 Credits
(Book ID: B1319)
Assignment Set- 1 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Explain chance of loss and degree of risk with examples [10 Marks]
Answer : Chance of loss
Loss is the injury or damage borne by the insured in consequence of the happening of one or more of the accidents or misfortunes against which the insurer, in consideration of the premium, has undertaken to assure the insured. Chance of loss is defined as the probability that an event that causes a loss will occur. The chance of loss is a result of two factors, namely peril and hazard. Hazards are further classified into the following four types:
· Physical hazard – This is a danger likely to happen due to the physical characteristics of an object, which increases the chance of loss. For example defective wiring in a building which enhances the chance of fire.
· Moral hazard – It is an increase in the probability of loss due to dishonesty or character defects of an insured person. For example, Burning of unsold goods that are insured in order to increase the amount of claim is a moral hazard.
· Morale hazard – It is an attitude of carelessness or indifference to losses, because the losses were insured. For example, careless acts like leaving a door unlocked which makes it easy for a burglar to enter, or leaving car keys in an unlocked car increase the chance of loss.
· Legal hazard – It is the severity of loss which is increased because of the regulatory framework or the legal system. For example actions by government departments restricting the ability of insurers to withdraw due to poor underwriting results or a new environment law that alters the risk liability of an organisation.
Degree of risk refers to the intensity of objective risk, which is the amount of uncertainty in a given situation. It can be assessed by finding the difference between expected loss and actual loss. The formula used is
Degree of risk = clip-image0022
Degree of risk is measured by the probability of adverse deviation. If the probability of the occurrence of an event is high, then greater is the likelihood of deviation from the outcome that is hoped for and greater the risk, as long as the probability of loss is less than one. In the case of exposures in large numbers, estimates are made based on the likelihood of the number of losses that will occur. With regard to aggregate exposures the degree of risk is not the probability of a single occurrence but it is the probability of an outcome which is different from that expected or predicted. Therefore insurance companies make predictions about the losses that are expected to occur and formulate a premium based on that.

Q.2 Explain in detail Malhotra Committee recommendations [10 Marks]

Q.3 What is the procedure to determine the value of various investments?[10 Marks]
Q.4 Discuss the guidelines for settlement of claims by Insurance company [10 Marks]
Q.5 What is facultative reinsurance and treaty reinsurance? [10 Marks]
Answer : Facultative reinsurance

Q.6 What is the role of information technology in promoting insurance products [10 Marks]
Answer : Role of Information Technology in Insurance

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August/Fall 2012
Master of Business Administration - MBA Semester 4
Subject Code – MF0018
Subject Name – Insurance and Risk Management
4 Credits
(Book ID: B1319)
Assignment Set- 2 (60 Marks)
Note: Each question carries 10 Marks. Answer all the questions.

Q.1 Explain risk avoidance, risk reduction and risk retention [10 Marks]
Answer :  What Is Risk Management?
The Board of Regents has approved a policy giving responsibility for the preservation of assets, both human and physical, to the Office of Risk Management. This is accomplished by identifying, evaluating, and controlling loss exposures faced by the University. Risk Management's goal is to minimize the adverse effects of unpredictable events. For example, it is not known if a fire will ever occur in your office, but if it does, the adverse effect of that fire will be reduced if proper risk management tools have been utilized.

There are four main ways to manage risk:
·         risk avoidance,
·         risk transfer,
·         risk reduction and
·         risk retention.
Each is applicable under different circumstances. Some ways of managing risk fall into multiple categories. Multiple ways of managing risk are often utilized simultaneously.

Risk Avoidance (elimination of risk)

Completely avoiding an activity that poses a potential risk. While attractive, this is not always practical. By avoiding risk we forfeit potential gains, be it in life, in business or in with investments.

Risk Transfer (insuring against risk)

Most commonly, this is to buy an insurance policy. The risk is transferred to a third-party entity (in most cases an insurance company). To be more clear, the financial risk is transferred to a third-party. For example, a homeowner’s insurance policy does not transfer the risk of a house fire to the insurance company, it only transfers the financial risk. A house fire is still just as likely as before. Risk sharing is also a type of risk transfer. For example, members assume a smaller amount of risk by transferring and sharing the remainder of risk with the group.

Risk Reduction (mitigating risk)

This is the idea of reducing the extent or possibility of a loss. This can be done by increasing precautions or limiting the amount of risky activity. For example, installing a security alarm, smoke detectors, wearing a seat belt or wearing a helmet are ways of employing risk reduction. Diversification of assets and hedging are forms of risk reduction with investments. Investments in information are a way of mitigating risk because you are better informed, thus reducing the uncertainty. Another way of employing risk reduction is the safety in numbers approach. When discussing risk transfer, we spoke briefly about risk sharing. The larger the number of people sharing risk, the less severe the shared effects will be. Statistically, only a small number of individuals in the group will experience an unfortunate event. Insurance companies exist based on this concept.

Risk Retention (accepting risk)

Risk retention simply involves accepting the risk. Even if the risk is mitigated, if it is not avoided or transferred, it is retained. Retention is effective for small risks that do not pose any significant financial threat. The financial status of the family or individual will determine the acceptability of a risk. A couple of examples of risk retention: A billionaire may not have to worry about insuring his car. An individual may not be able to afford or obtain health insurance. Both individuals are retaining risk, one is because they’re able to, the other is because they have to.  Risk retention augments risk transfer through  deductibles.  With a deductible, we retain or ‘self-insure’ small, frequent occurrences and only utilize insurance for needs over a particular dollar threshold, our deductible limit.

Q.2 What are the challenges faced by Indian Insurance Industry and what measures are taken to overcome them? [10 Marks]
Q.3 What is premium accounting and claim accounting? [10 Marks]

Q.4 What factors indicate that there is a good potential for growth of insurance services in rural markets? [10 Marks]

Q.5 Critically evaluate the role of agents in insurance industry [10 Marks]
Q.6 Explain product design and development process in Insurance Industry [10 Marks]

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