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Management Notes

Voucher of Cash and Trading Transactions

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Vouching of cash receipts (debit side of cash book)

(i) Opening Balance of Cash Book

Opening balance of cash book represents cash in hand at the start of the year and should verified from the balance sheet of last financial year.

(ii) Cash Received from Debtors

Consider the following points for verification of cash received from debtors:

  • The carbon copies or counterfoils of cash receipt book should be verified.
  • Cash receipt should be serially numbered.
  • Cash received should be entered on the same date when the cash is actually received.
  • The discount allowed to customers should be properly authorized by a responsible officer.
  • Correspondence with customer and ledger account should be tallied.

Following are the different ways used for misappropriation of cash:

  • Cash received from customer not recorded in books and no cash receipt may be issued.
  • Issuance of receipt for lesser amounts than amount actually received.
  • Using teeming and lading method; it is a very common method to misappropriate the money, in which the cash received from any customer not recorded in the books and the cash received from same customer at a later instance or another customer recorded in the books and so on.

(iii) Repayment of Loan by Others

Repayment of loan by others may be verified in the following ways:

  • Calculation of interest received and interest should be credited to interest received account.
  • Verification from bank statement if directly deposited by party into bank.
  • Checking of carbon copies or counterfoils of cash receipts.
  • To ensure that there should be no violation of Income Tax rules as payment of loan exceeding Rs. 20,000/- cannot be repaid in cash. It should be through Cheques, Demand Draft, NEFT, RTGS or any other available banking channels.

(iv) Rent Received

  • To check rental agreement or lease deed
  • In case where the rental income is received from more than one property, separate account for each property should be maintained.
  • The Auditor should verify that the rent for all the twelve month is received or not.
  • The amount of rent should be verified from the rent deed or the lease deed.
  • If TDS (Tax Deducted at Source) is deducted by the party, there should be proper accounting of TDS.

(v) Sale of Investments

  • To check bank statement if the sales proceeds have reached the bank account.
  • To verify broker commission, note or debit note, if investments are sold through broker.
  • To ensure separate accounting is being done for capital receipts and revenue receipts. Dividend or profit or loss on sale of investment is a revenue receipt and the sales proceeds of the investment cost should be booked as capital receipt.

(vi) Subscription

Subscriptions are received from the members of a club and the following points need to be considered by the Auditor while vouching subscription:

  • Subscription register should be verified.
  • Verification of subscription received during the year and the subscription receivable.
  • Counterfoil of cash receipt should be verified.

(vii) Sale of Fixed Assets

  • To check minutes of the meetings of the Board of Directors.
  • Sale agreement or sale contract.
  • Verification of agent account if sale is made through an agent.
  • Profit or Loss on sale of fixed assets should be booked to revenue account.
  • Authorization of sale of fixed assets.
  • Sale proceed of fixed assets should be credited to fixed assets account after deducting expenses on sale of fixed assets if any.

(viii) Interest and Dividend Received

  • Verification of the dividend warrant letter along with the covering letter for verification of dividends in case of dividends received through cheque.
  • Verification of bank statement, if the dividend is directly credited to the bank account
  • Interest on security can be vouched from the securities schedule.
  • Interest on fixed deposit can be verified from bank statement and TDS certificates
  • Interest received from outsiders to whom company has granted loan could be verified from statement of account of party along with TDS certificates.
  • Provision should be made for interest accrued but not due
  • All interest received and accrued should be properly accounted for in the books of accounts

(ix) Commission Received

  • Verification of agreement on the basis of which the commission is received
  • Calculation of the commission receivable
  • The commission received should be verified from counterfoils, bank statements, cash receipts, etc. and the provision for commission receivable should be rightly accounted for in the books of accounts
  • Commission receivable on “sale of goods sent on consignment” should be verified from sale account

(x) Installments Received on Hire-Purchase Sale

  • Study of the Hire-Purchase agreement for hire-purchase-sale price, number of installment, rate of interest etc.
  • Segregation of principle amount and interest amount should be done and both should separately account for
  • Profit on sale on hire-purchase should be duly calculated on the basis of installment received during the year

Vouching of cash payments (credit side of cash book)

All the payment made to creditors, expenses incurred in cash and all other payments done appear on the credit side of cash book and the Auditor is required to vouch cash payments because chances of cash misappropriation are very high.

Following points need to be considered for different types of cash payment:

(i) Opening Balance

The opening balance of cash book can never be credited because cash of company cannot be in negative but the credit bank balance represents the overdraft account from bank or utilization of cash credit limit as sanctioned from bank.

(ii) Payment to Creditors

Payment to creditors may be examined by the following:

  • Receipt issued by the creditors
  • If the creditor is paid amount as full and final settlement, the balance amount, if any stands in the ledger account of the creditor; this amount should be credited to discount received
  • If any advance payment is made to creditor that should be clearly mention
  • Statement of account of creditor

(iii) Payment of Salaries

Depending upon the adequacy of internal control system in an organization Auditor will decide his audit Program. It is very important for Auditor to check the following:

  • Attendance record of employee and salary register
  • Appointment letter of new employees
  • Comparison of current month salary with last month’s salary and if there is any abnormal change in amount, Auditor should verify the same
  • Alteration in amount of deductions on account of advance, loan, fine, funds, insurance, TDS, etc.

(iv) Payment of Wages

At the time of vouching of wages paid, the Auditor should verify the following points to avoid misappropriation of cash:

  • Adequacy of Internal Control System
  • Payment of wages at higher rate than allowed
  • Payment shown to ex-workers in the current month
  • Lower or non-deduction of advance or other deductions due
  • Payment to fictitious workers
  • Payment to workers who were absent from duty
  • Wages sheet should compare with wages register
  • Comparison of current month wages with last month’s wages and proper verification should be there for extra ordinary changes
  • Detailed verification for payment to casual workers
  • Vouching and verification of treatment accounting treatment for unpaid wages

(v) Purchase of Plant and Machinery

The Auditor should pay attention to the following:

  • Purchase invoice of machinery
  • Freight inward charges, installation charges, erection and commissioning charges should be capitalized
  • Treatment of Excise duty according to the excise rules

(vi) Purchase of Land & Building

Purchase of Land and Building can be vouched as follows:

  • Study of Lease hold agreement, if land is purchased on lease hold basis
  • Payment should be as per lease term
  • All the expenses incurred to acquire lease hold property should be debited to respective property account
  • Auditor should study the conveyance deeds in case property is purchased under free hold basis
  • For verification of payment, the Auditor can check the payment receipt and the conveyance deed

(vii) Rent Paid                   

Consider the following points for the verification of rent by the auditor:

  • Rent Deed
  • Rent receipt from Land lord
  • Provision for unpaid rent at the end of the year

(viii) Insurance Premium

Consider the following points for the verification of Insurance Premium:

  • Insurance policy issued by the Insurance Company
  • Insurance premium receipt
  • Insurance premium should not be related to any official of the company

(ix) Income Tax

Consider the following for the verification of Income:

  • Advance Tax Challan
  • Self-Assessment Tax challan
  • Income Tax demand notice
  • Assessment order

(x) Excise Duty

Consider the following for the verification of Excise Duty:

  • Rate of Excise Duty
  • Excise records and sale invoice for verification of excise duty
Management Notes

Issue of Materials to Production

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Issues from stores must be efficiently organised so that the requirements of the production/operations department can be met.

Issue per schedule:

In a batch production unit sometime, the requisition for issue of stores is sent well ahead indicating when, i.e., the time and date it is required. The stores department will collect all the materials and keep them ready.

Then it will intimate the indenting department about this. Depending on the prevailing practice of the industry either they are collected from stores or delivered at the shop floor. This is desirable in order to prevent any loss of man-hour caused by sudden absenteeism of a worker in the production department.

Issue on request:

This is the most orthodox way of issue wherein the indenting department normally sends a man and collects the materials from stores.

Imprest issues:

In this system a list of certain items especially for tools and components and in specified quantities is approved. The list is then held in a sub-store or tool kit near the shop floor.

Replacement issue:

In most engineering industries a large number of workshop machines are used. So, there will be considerable requirements of tools and gauges. When a fresh issue has to be made the machine shop operator may be asked to return the old ones to the stores and obtain new one for replacement. This is done without issue notes and the storekeeper has to maintain proper records of such replacement.

Loan issues:

The issue of stores on loan should, as far as possible, be discouraged. Situations often arise where some amount of spares; electrical fitting, etc. are required on emergency basis due to some breakdowns. In such cases the materials are to be issued on a loan basis. However, the storekeeper is to maintain a separate record and ensure that they are returned before year-ending when annual stock-taking begins.

Stock records:

In a store-house where thousands of transactions take place some amount of records are to maintained. This makes it possible for the storekeeper to make an entry of all transactions.

Management Notes

Revenue Curves Relationship between Total Marginal and Average

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Cost and revenue are just like two different faces of the same coin. The costs and revenues of a firm determine its nature and the levels of profit. Cost refers to the expenses incurred by a producer for the production of a commodity. Revenue denotes the amount of income, which a firm receives by the sale of its output. The revenue concepts commonly used in economic are total revenue, average revenue and marginal revenue.

Total Revenue

Total revenue refers to the total sale proceeds of a firm by selling its total output at a given price.

Total revenue is the amount of money that a firm receives for the offer of goods and services in the market. A firm’s total revenue can be calculated as the quantity of goods sold multiplied by the price. The total revenue includes the product of the quantity sold and the price.

Total revenue=Total Quantity Sold × Unit Price

Mathematically,

TR = PQ

TR = Total Revenue

P = Price

Q = Quantity sold.

Average Revenue

Average revenue is the revenue per unit of the commodity sold. It is obtained by dividing the total revenue by the number of units sold.

Average revenue is used as price in a perfectly competitive market. This can be found by the ratio of the firm’s total revenue and the number of goods sold.

AR = Total Revenue/ Total Output Sold

Mathematically

AR = TR/Q;

Where,

AR = Average revenue

TR = Total revenue

Q = Quantity sold.

Marginal Revenue

Marginal revenue is the addition to total revenue by selling one more unit of the commodity.

Marginal revenue refers to the extra money received by selling one more additional unit of the commodity. It is an addition to the total revenue of a firm as new additional units are sold. By selling an additional unit, a firm earns additional revenue that adds to the total revenue and this addition to revenue is called marginal revenue.

Algebraically it is the total revenue earned by selling ‘n’ units of the commodity instead of n-1. Thus,

MRn = TRn – TRn-1; where MRn = Marginal revenue of the nth unit

TRn = Total revenue of n units

TRn-1 = Total revenue of n-1 units

N = Any given number of units sold.

Relationship:

Both AR and MR are Calculated from TR:

The average cost and marginal costs are calculated from total cost. In the same fashion, average revenue and marginal revenue can also be calculated from total revenue.

When AR and MR are Parallel to X-axis:

If average revenue and marginal revenue are parallel to horizontal axis then it means both AR and MR are equal to each other i.e. AR = MR.

When both AR and MR are Straight Lines:

Under imperfect competition, when AR falls, MR also falls and it is always below AR line because there are large numbers of buyers and sellers, products are not homogeneous and the firms can enter or exit the market.

If AR Curve is Rising Upward from Left to Right:

In case AR curve is rising upward from left to right, then MR curve will also move upward. It means MR will be greater than AR.

When AR and MR are Convex:

AR and MR curves are convex to the origin. It means as more and more units of a commodity are sold, average revenue falls at lower speed. MR curve also moves in the same direction. The convexity shows that MR falls but at a faster speed.

When AR and MR are Concave:

If AR is concave to the origin, MR will also be concave to the origin. It means average revenue is falling at a higher rate for each additional unit of a commodity sold. Similar would be the case for MR curve.

Revenue and Elasticity:

The elasticity of demand, average revenue and marginal revenue has a close relationship. If a firm knows any two of the three elements viz; average revenue and marginal revenue then it can easily find out the third element i.e. elasticity of demand.

The formula for the calculation is:

E = A / A-M

Where,

E = elasticity of demand

A = average revenue

M = marginal revenue

Management Notes

Business Economics Role

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The vital role which business firms play in increasing social welfare is quite clear. It is due to the working of business firms that a high rate of economic growth has been achieved in the United States and other western countries.

Benefits of this economic growth have been widely shared. The high rate of economic growth has resulted in improving social well-being and removing poverty. To put in the words of Adam Smith, the father of economics, business firms have greatly increased the ‘wealth of nations’ (that is, the volume of output of goods and services) in the capitalist world.

The social benefits conferred by business firms on the communities are despite the fact that businesses work to maximise their profits or maximise the value of their firms. In their bid to maximise profits, business firms organise the work of production by engaging and combining the various productive resources and bringing about coordination between them. The suppliers of capital, labour, raw materials and other resources receive rewards from the firms for their contribution to the production of goods and services.

These business firms generate income and employment for labour, the owners of capital, land and other resources. This has greatly benefited them and contributed to their well-being. Besides, consumers too have gained from increasing quantity of goods and services produced by business firms for their consumption.

Apart from the gain to the resource owners and consumers, business firms contribute a good deal of revenue to the government. Taxes on profits (i.e. income of business firms), excise duties on their production, sales tax on the goods produced by them and other such taxes yield a lot of public revenue which are used by the Government to expand the services provided by it and to increase public investment for economic growth.

All the above mentioned contributions of business firms to economic growth and social well-being depend on the efficiency with which they use national resources and allocate them among products and services, A fundamental question that has been often raised is how business firms, which in their productive activities are guided by maximisation of private profits, work to increase social welfare.

The answer to this question was provided by Adam Smith, the author of now well-known classic ‘Wealth of Nations’. Advocating for a free-market system he clarifies the role of business in promoting social well-being despite the fact that it pursues the goal of profit maximisation.

Adam Smith argues that it is the profit-driven market system (also called price mechanism) that drives business firms to promise welfare though they work for private’s gain. It is worth quoting him. “Every individual endeveavours to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it.

He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectively than when the realty intends to promote it.

Business economist applies economics in decision­-making. He uses the tools of economic analysis in clarifying problems, in organizing and evaluating information and in comparing alternative courses of action. He is concerned with analytical tools that are useful, that have proven themselves in practice or that promise to improve decision-making in the future.

The economist is an expert model builder and this is the most important thing which the economic theorist can contribute to the work of management science. In management science it is important to be able to recognize the structure of a managed problem. The second way in which economic theory can help management science is to provide a set of analytical methods.

A managerial economist can become a far more helpful member of a management group by virtue of his studies of economic analysis, primarily because there he learns to become an effective model builder and because there he acquires a very rich body of tools and techniques which can help him to deal with the problems of the firm in a far more rigorous a far more proving an a far deeper manner.

The economic department is a relatively recent addition to corporate management in most developed countries of the world the business economist is an important member of the management group. This is possible so because he has developed a technique which can help the company to manage its business more efficiently.

Modern business is a very complex affair because organizations have become vast in size and they can be run only with a well coordinated management cadre specialized in different aspects of business. In the words of Prof. Galbraith it is management by technically.

A managerial economist is an important piece in this zig saw puzzle. In countries like ours businesses are small but the management is no more a one man show. It consists of a number of specialized personnel and the managerial economist has now become a familiar face.

Management Notes

Exposure to Perils

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A peril is a potential event or factor that can cause a loss, such as the possibility of a fire that could engulf a house. A hazard is a factor or activity that may cause or exacerbate a loss, such as a can of gasoline left outside the house door or a failure to regularly have the brakes of a car checked.

Risk, peril, and hazard are terms used to indicate the possibility of loss, and are often used interchangeably, but the insurance industry distinguishes these terms. A risk is simply the possibility of a loss, but a peril is a cause of loss. A hazard is a condition that increases the possibility of loss.

Peril means danger, and it has a connotation of imminent danger. A rockslide is a peril to anyone standing underneath the cliff when the rocks start sliding.

In insurance contracts, the perils that are covered are usually specified. Fire, wind, water, and theft, are the perils that are commonly listed. However, note that the language may indicate that the damage will not be covered in certain circumstances, such as if the insurance company finds that neglect by the insured caused the damage or made it worse.

This is the root cause of many disputes between insurer and insured. For example, the insurer may deny a claim for roof damage after a storm, citing owner neglect in not replacing an old roof.

Speculative risk differs from pure risk because there is the possibility of profit or loss, such as investing in financial markets. Most speculative risks are uninsurable, because they are undertaken willingly for the hope of profit. Also, speculative risk will generally involve a greater frequency of loss than a pure risk, since profit is the only other possibility. So, although many people take precautions to protect their lives or their property, they willingly engage in speculative risks, such as investing in the stock market, to make a profit; otherwise, a person could avoid most speculative risks simply by avoiding the activity that gives rise to it.

Legal risk is a particular type of personal risk that you will be sued because of neglect, malpractice, or causing willful injury either to another person or to someone else’s property. Legal risk is the possibility of financial loss if you are found liable, or the financial loss incurred just defending yourself, even if you are not found liable. Most personal, property, and legal risks are insurable

Personal risks are risks that affect someone directly, such as illness, disability, or death. Property risk affects either personal or real property. Thus, a house fire or car theft are examples of property risk. A property loss often involves both a direct loss and consequential losses. A direct loss is the loss or damage to the property itself. A consequential loss is a loss created by the direct loss. Thus, if your car is stolen, that is a direct loss; if you have to rent a car because of the theft, then you have some financial loss a consequential loss from renting a car.

Pure risk is a risk in which there is only a possibility of loss or no loss there is no possibility of gain. Pure risk can be categorized as personal, property, or legal risk. Pure risk is insurable, because the law of large numbers can be applied to estimate future losses, which allows insurance companies to calculate what premium to charge based on expected losses.

Static and dynamic risks are distinguished by their temporality. The possibility of loss is uniform over an extended period of time for static risks, so static risks are more predictable, and, therefore, more insurable. Dynamic risks change with time, making them less predictable and less insurable. For instance, the risk of unemployment changes with the economy, so it is difficult to predict what unemployment will be next year. On the other hand, the number of houses that burn down within a given year within a specific geographical area is steadier, not cyclical, and so is more predictable.

Management Notes

Insurance Customer Behavior

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Triggering moments

A common misperception is life events are point-in-time when, in fact, they are small journeys in a consumer’s life: “marriage,” for example, may begin with the decision to propose and may end with thoughts on future financial decisions (e.g., family planning), with the wedding itself as a step in the journey. Similarly, homeownership may begin with the decision to purchase and potentially end with the resale of the home itself.

To buy or not to buy

The decision to buy or not to buy life insurance goes well beyond life events and the helpfulness of advice. Non-buyers cite a variety of reasons for not purchasing insurance, including unclear benefits, complexity, and lengthy application process. There is a clear disconnect between prospective buyers’ views on short term financial goals and priorities and the potential longer-term financial benefits associated with purchasing life insurance.

Loyalty is good for business. Carriers that win the loyalty of their customers find that they stay longer, buy more products and recommend the company to their friends and colleagues. Higher loyalty means lower churn, and that can help companies reduce costs and expand margins.

Insurers have made concerted efforts in recent years to build customer loyalty. They’ve embraced digital platforms, retrained employees and started to redesign customer episodes. These initiatives can pay off. Our survey shows that insurers that concentrate on building loyalty can gain considerable ground as much as 20 percentage points in Net Promoter Scores over a three-year period. Conversely, insurers that lose focus can find their loyalty scores slipping by similar margins.

Insurer have to adapt the operating hours to service consumers specially in digital channels since users are “always” online and it is minutes of winning, the faster with adequate information respond wins.

Some organizations implemented Chatbot to interact with customers as first tier, some organization has dedicated team who support online customers with all enquiries. This is really depends on interaction and transaction volumes of each company to consider whether it is worth to invest on the dedicate team to support online consumers 24/7.

All these 3 keys behavior has definitely impact and affect insurance company especially at the pre-purchase stages. Moving forward, insurers do have to think ahead in offering products and services specially for online consumers which might also involve KYC, automate-underwriting approval, modular products for consumers to drag and drop, digital identity verification, and etc.

Management Notes

Common and specific terms in Life and Non-Life Insurance

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Life assured:

Life assured is the insured person. Life assured is the one for whom the life insurance plan is purchased to cover the risk of untimely death. Primarily, the breadwinner of the family is the life assured.

Life assured may or may not be the policyholder. For instance, a husband buys a life insurance plan for his wife. As the wife is a homemaker, husband pays the premium, thus the husband is the policyholder, and wife is the life assured.

Policyholder:

The policyholder is the one who proposes the purchase of the life insurance policy and pays the premium. The policyholder is the owner of the policy and may or may not be the life assured.

Sum assured (coverage):

Life insurance is meant to provide a life cover to the insured.

The financial loss that may arise due to the passing away of the life assured is generally chosen as a life cover when buying a life insurance plan. In technical terms, ‘Sum Assured’ is the term used for an amount that the insurer agrees to pay on death of the insured person or occurrence of any other insured event.

Policy tenure:

The ‘policy tenure’ is the duration for which the policy provides life insurance coverage. The policy tenure can be any period ranging from 1 year to 100 years or whole life, depending on the types of life insurance plan and its terms and conditions. Many a times, it is also referred to as policy term or policy duration.

The policy tenure decides for how long the company is providing the risk coverage. However, in the case of whole life insurance plans, the life coverage is till the time life assured is alive.

Nominee:

The ‘nominee’ is the person (legal heir) nominated by the policyholder to whom the sum assured and other benefits will be paid by the life insurance company in case of an unfortunate eventuality. The nominee could be the wife, child, parents, etc. of the policyholder. The nominee needs to claim life insurance, if the life assured dies during the policy tenure.

Premium:

The premium is the amount you pay to keep the life insurance plan active and enjoy continued coverage. If you are unable to pay the premium before the payment due date and even during the grace period, the policy terminates.

There are various options on how you can pay the premium; regular payment, limited payment term, single payment.

Policy tenure:

The ‘policy tenure’ is the duration for which the policy provides life insurance coverage. The policy tenure can be any period ranging from 1 year to 100 years or whole life, depending on the types of life insurance plan and its terms and conditions. Many a times, it is also referred to as policy term or policy duration.

Maturity age:

Maturity age is the age of the life assured at which the policy ends or terminates. This is similar to policy tenure, but a different way to say how long the plan will be in force. Basically, the life insurance company declares up front the maximum age till which the life insurance coverage will be provided to the life insured. For instance, you are 30 years old, you opt for a term plan with a maturity age of 65 years. That means the policy will have a coverage till you are 65 years old, which also means, the maximum policy tenure for a 30-year-old is 35 years.

Automobile Insurance Terminology

Requirements regarding auto insurance vary state by state, but the following definitions can be helpful for understanding the basics when shopping for auto insurance:

Insured: The person(s) covered by the insurance policy.

Premiums: The monthly or annual amount that you must pay in order to have the exchange for insurance coverage.

Deductible: The amount of money that you must pay out of pocket for damages sustained, such as in a collision, before your insurance kicks in and starts to make payments.

Collision Coverage: The type of coverage that pays for the damages to your vehicle sustained as a result of a collision with another vehicle or object.

Comprehensive Coverage: The type of coverage that pays for damage to your vehicle sustained as a result of fire, theft, vandalism, or various other stated causes.

Medical Payments Coverage: The type of coverage that pays for medical and funeral expenses for anyone covered under your insurance policy in the event of an accident, regardless of fault.

Uninsured Motorist Coverage: The type of coverage that pays for injuries, including death, which you and/or other occupants of your vehicle sustain as a result of a collision with an uninsured driver who is at fault.

Bodily Injury Coverage: The type of coverage that pays for medical expenses and/or funeral costs of other individuals injured, or killed, in an accident for which you are liable.

Health Insurance Terminology

The Patient Protection and Affordable Care Act enables more Americans to have access to quality, affordable health insurance. The federally facilitated marketplaces are just one place where people can compare plans. Here is some of the basic terminology for health insurance:

  • Insured: The person(s) covered by the insurance policy.
  • Deductible: The annual amount of money that you must pay out of pocket for medical expenses before your insurance kicks in and starts to make payments.
  • Premiums: The monthly or annual amount that you must pay in order to have the insurance coverage.
  • Co-payment: A flat fee that you must pay toward the cost of medical visits, your insurance provider pays the remaining balance. For example, you could be responsible for a $10 co-pay for each visit to the doctor.
  • Coinsurance: The percentage that you must pay to share responsibility for your medical claims after you meet your annual deductible.
Management Notes

Constituents of Insurance Market

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The insurance market has evolved from the establishment of the first automobile insurance policy to the various types of life insurance products that are available today. The insurance market has a structure that involves property and casualty insurers, life insurers as well as health insurers. Each of these types of insurers have regulations that apply to the policies that they provide. Insurers are regulated by a combination of state and federal laws, depending on the type of insurance they offer.

Common Ownership

Many insurance companies are under a common ownership in which one corporation has one or more insurance business that act as independent companies. The most common type of common ownership for an insurance company is when it is established as a captive insurer. A captive insurer can be formed to provide coverage for various types of business risks. The most common type of captive insurer provides reinsurance coverage. This is a type of insurance where multiple insurance companies share the same loss.

Mutual Insurance Companies

A mutual insurance company is a company owned by policyholders. This means that each policyholder is given a vote to decide who will sit on the board of directors. A mutual insurance company can sell types of insurance or only provide one type of product or service to their customers. The earnings from a mutual insurance company are distributed to policyholders in the form of dividends.

Health Insurance

The insurance market also contains companies that provide health insurance policies to individuals as well as employers in the form of a group health insurance policy. Companies that provide a group health insurance policy to an employer are regulated by a combination of federal and state laws. States can also provide health insurance to residents if it is unavailable from a private insurer because of cost or ineligibility.

Life Insurance

Property and casualty insurers can also provide types of life insurance. A life insurance company can be a mutual insurance company or part of a stock insurance company. Companies that provide life insurance usually offer financial products to their policyholders, such as annuities and certain types of mutual funds.

Stock Insurance Companies

A stock insurance company is a company owned by stockholders. Unlike a mutual insurance company, a stock insurer not only needs to protect its policyholders but also maximize profits for the company’s policyholders. A stock insurance company can pay dividends to stockholders but generally do not pay dividends to their policyholders.

Property and Casualty

Property and casualty insurers offer various types of insurance for individuals to purchase, such as automobile and homeowners insurance. A property and casualty insurer can also offer types of commercial insurance, such as a small business package, general business liability, umbrella policies and workers compensation. Property and casualty insurers are regulated by laws in each state where they sell policies.

Management Notes

Importance of Ethical Behavior in Insurance Sector

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The Insurance Institute encourages the highest professional and ethical standards in insurance and financial services worldwide.

The Council and membership of The Insurance Institute look to all members to meet these standards and to maintain the reputation of The Insurance Institute by following this Code of Ethics and Conduct (the Code). It sets down the principles which all members should follow in the course of their professional duties.

Members are obliged to comply with this Code. If they do not comply, this may result in the Institute taking disciplinary action against the member.

The key values which set the standards for the behaviour of all members in respect of the key stakeholders in sections 1 to 5 are:

(a) Behaving with responsibility and integrity in their professional life and taking into account their wider responsibilities to society as a whole. Acting in a courteous, honest and fair manner towards anyone they deal with. Being trustworthy and never putting their interests or the interests of others above the legitimate interests of their stakeholders;

(b) Complying with all relevant Laws (including the laws of the Institute) and meeting the requirements of all applicable regulatory authorities, and appropriate codes of practice and codes of conduct.

(c) Demonstrating professional competence and due care including:

Meeting the technical and professional standards relating to their level of qualification, role and position of responsibility;

Completing their duties with due skill, care and diligence;

(d) Upholding professional standards in all dealings and relationships;

(e) Respecting the confidentiality of information;

(f) Applying objectivity in making professional judgements and in giving opinions and statements, not allowing prejudice or bias or the influence of others to override objectivity.

Members should respect the traditions and cultures of each country in which they operate. They should carry out business in any country according to all applicable local Laws, Rules and Regulations. Where there is a conflict between local custom and thevalues stated above, the Code will act as a guide to help members act professionally.

A member operating in a professional capacity has duties, arising from these key values, to a number of different groups. Within these relationships a member should always act ethically and their behaviour and conduct should meet the following principles:

Relations with customers

Members will seek to earn and maintain the trust of their customers at all times and should:

  • Give fair and proper consideration and the appropriate priority to the interests and requirements of all customers. Obtain and provide relevant information, including all necessary documentation and respect the confidentiality of information;
  • Avoid conflict between personal interests, or the interests of any associated company, person or group of persons, and their duties to all customers;
  • Avoid conflict between any competing interests of one or more customer(s), stepping aside in one or all matters if such conflicts cannot be resolved;
  • Act at all times with due skill, care and diligence;
  • Act only within the limits of personal competence and any limits of authorisation;
  • Act in a financially honest and prudent manner, including ensuring the protection of any money and /or property held on behalf of customers;
  • Act openly, fairly and respectfully at all times, providing all customers with due respect, consideration and opportunity;
  • Be honest and trustworthy with customers and communicate with them in a clear, prompt and appropriate manner;
  • Provide suitable and objective recommendations to customers;
  • Comply with all Laws and Regulations regarding the supply of goods and services to customers;
  • Not provide or accept money, gifts, entertainment, loans or any other benefit or preferential treatment from or to any existing or potential customer or provider, other than occasional gifts, entertainment or remuneration, which are provided as part of accepted business practice, and which are not likely to conflict with duties to customers.

Relations in employment

Members should aim to ensure good relations with their employer and employees and should:

  • Avoid conflict between personal interests, or the interests of any associated company or person, and their duty to their employer;
  • Not make improper use of information obtained as an employee or disclose, or allow to be disclosed, information confidential to their employer;
  • Seek to be a responsible employer or employee and be honest and trustworthy at work;
  • Act openly, fairly and respectfully at all times, treating other employees, colleagues, customers and suppliers with equal respect, consideration and opportunity;
  • Aim to take every opportunity to improve their professional capability, knowledge and skills;
  • Accurately and completely account for and report in employer records all business dealings;
  • Not provide or accept money, gifts, entertainment, loans or any other benefit or preferential treatment from or to any existing or potential supplier or business associate, other than occasional gifts, entertainment or remuneration, which are provided as part of accepted business practice, provided this is not likely to conflict with any duty that is owed to their employer.

In addition, where a member holds a position of influence within an organisation they should:

  • Provide, or encourage their employer to provide, suitable arrangements for the internal review of decisions, policies and actions where an employee raises concerns of unethical behaviour. (Employees should not be penalized for raising matters of ethical concern even if this results in a loss to the organisation or a customer);
  • Incorporate, or encourage their employer to incorporate, ethical standards into the organization’s governance standards, including the development of an ethical code.
  • Not disclose any employer/organisational confidential or sensitive information in written assignments.
Management Notes

Management of Risk by Individuals and Insurers

indiafreenotesby indiafreenotes1

Insurance Risk Management is the assessment and quantification of the likelihood and financial impact of events that may occur in the customer’s world that require settlement by the insurer; and the ability to spread the risk of these events occurring across other insurance underwriter’s in the market. Risk Management work typically involves the application of mathematical and statistical modelling to determine appropriate premium cover and the value of insurance risk to ‘hold’ vs ‘distribute’.

Risk = Probability x Severity

Probability is the likelihood of an event occurring, and severity is the extent and cost of the resulting loss.

Speculative Risk: Risks where the possible outcomes are either a loss, profit, or status quo. It includes things like stock market investments and business decisions such as new product lines, new locations, etc.

Pure Risk: Risks where the possible outcomes are either a loss or no loss. It includes things like fire loss, a building being burglarized, having an employee involved in a motor vehicle accident, etc.

Steps to Implement Risk Management:

  • Quantify and prioritize: Risk mapping is one way to do this. Essentially, you chart all of the identified risks on the map. The map will make you aware of those risks on which you need to focus. Work with your broker to make sure that you are covered for all of the appropriate risks and look for ways to prevent and mitigate these risks. The image on the right is a sample of a common risk map. However, risk maps are often altered to reflect organizational needs.
  • Risk identification: It is a good idea to chart your risks in a way that allows you to identify the more common and serious risks so that you know the areas to which you need to commit resources.
  • Be risk sensitive, not risk adverse: Being risk sensitive is not the same as being paranoid. Realize that there are risks associated with everything. Take a deliberate and methodical approach to dealing with risk, while at the same time being realistic.
  • Identify risk in business decisions: Identifying risks in business decisions is much the same as with the process of identifying any risk. The key is to be thorough and use all the sources available. These risks can be prioritized and mapped in the same way as all other risks.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick and mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

  • Implement controls for mitigation and prevention.
  • Invest in adequate insurance coverage.
  • Develop a foolproof business continuity plan that is proactively communicated with your entire organization.

Product or service issues

When customers feel that their product did not meet expectations, challenges and risks are inevitable.

Mitigation options:

  • Implement ERM software into your organization to prevent negligence claims.
  • Invest in professional liability insurance.
  • Conduct vendor due diligence to prevent third party providers from producing products or services that don’t meet your organization’s standards.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick-and-mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

  • Implement controls for mitigation and prevention.
  • Invest in adequate insurance coverage.
  • Develop a foolproof business continuity plan that is proactively communicated with your entire organization.
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