Tag: Principles of Insurance Osmania University b.com Notes

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.

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.

The most important insurance company operations consist of the following:

• Ratemaking
• Underwriting
• Production
• Claim settlement
• Reinsurance

Insurers also engage in other operations, such as accounting, legal services, loss control, and information systems.

Rating and Ratemaking

• Rating is a process of multiplying a rate determined by actuaries by the number of exposure units, and then adjusting by various rating plans.
• In life insurance, the actuary determines the premiums for life and health insurance policies and annuities also determine the legal reserves a company needs for future obligations.
• In property and casualty insurance, actuaries also determine the rates for different lines of insurance and also determine the adequacy of loss reserves, allocate expenses, and compile statistics for company management and for state regulatory.

Rating and Ratemaking

• Ratemaking refers to the pricing of insurance and the calculation of insurance premiums.
• A rate is the price per unit of insurance.
• An exposure unit is the unit of measurement used in insurance pricing, which varies by line of insurance.
• The person who determines rates and premiums is known as an actuary. An actuary is a highly skilled mathematician who is involved in all phases of insurance company operations, including planning, pricing, and research.

Underwriting

• The insurer’s underwriting policy is determined by top-level management in charge of underwriting.
• The underwriting policy is stated in detail in an underwriting guide that specifies the lines of insurance to be written; territories to be developed; forms and rating plans to be used; acceptable, borderline, and prohibited business; amounts of insurance to be written; business that requires approval by a senior underwriter; and other underwriting details.

Insurance Service Operations services

Operating model enhancement: Assessing process, technology, and organization and performance management against other insurers as well the company’s own strategy and goals to help transform its operating model, including shifting of fixed costs to variable, shedding non-differentiating processes and technology, and increasing focus on growth, distribution, and product innovation objectives.

Streamlining legacy processes and supporting technologies: Identifying ways to help improve customer service, employee morale, and cost efficiencies by upgrading policy administration and other systems, streamlining processes, and creating an efficient customer experience across product lines and distribution channels.

Performance benchmarking: Evaluating carrier performance against industry leaders to identify areas for potentially improving operations and customer service quality while managing costs.

Improved inforce management: Leveraging data and analytic tools and techniques to support cross-sell and up-sell programs, help improve retention, and enhance risk selection capabilities.

Strategic underwriting: Helping insurers create a base of profitable customer relationships by executing more effective risk selection and sound underwriting decisions that help balance risk and price. We also help carriers grow the business by identifying potentially profitable and high-risk customer segments using predictive tools and analytic models.

Claims cost containment: Streamlining and automating claims administration, devising ways to anticipate potential claim losses, enhancing processes for managing third-party suppliers, creating processes to help improve litigation results, and employing advanced fraud detection processes to help mitigate losses.

Enterprise cost management: Developing sustainable, cost-effective approaches to managing resources in alignment with the company’s strategic goals, as well as striving to refine processes, simplify the organization, rationalize infrastructure, and improve spend management.

Potential bottom-line benefits

• Improve profitability
• Reduce operating expenses by up to 20 percent
• Increase process standardization and compliance
• Improve system reliability and accuracy
• Lower underwriting loss ratios by up to 7 points in an 18- to 24-month time frame
• Reduce claims costs through improved claims management
• Improve system reliability and accuracy
• Enhance the customer experience (for both policyholders and distribution partners)
• Increase ability to adapt to changing customer demands

The world we live in is full of uncertainties and risks. Individuals, families, businesses, properties and assets are exposed to different types and levels of risks. These include risk of losses of life, health, assets, property, etc. While it is not always possible to prevent unwanted events from occurring, financial world has developed products that protect individuals and businesses against such losses by compensating them with financial resources. Insurance is a financial product that reduces or eliminates the cost of loss or effect of loss caused by different types of risks.

Apart from protecting individuals and businesses from many kinds of potential risks, the Insurance sector contributes significantly to the general economic growth of the nation by providing stability to the functioning of businesses and generating long-term financial resources for the industrial projects. Among other things, Insurance sector also encourages the virtue of savings among individuals and generates employments for millions, especially in a country like India, where savings and employment are important.

Spreads Risk: Insurance facilitates moving of risk of loss from the insured to the insurer. The basic principle of insurance is to spread risk among a large number of people. A large population gets insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of corpus of funds collected from the millions of policyholders.

Promotes Economic Growth: The Insurance sector makes a significant impact on the overall economy by mobilizing domestic savings. Insurance turn accumulated capital into productive investments. Insurance also enables mitigation of losses, financial stability and promotes trade and commerce activities those results into sustainable economic growth and development. Thus, insurance plays a crucial role in the sustainable growth of an economy.

Provides Safety and Security to Individuals and Businesses: Insurance provides financial support and reduces uncertainties that individuals and businesses face at every step of their lifecycles. It provides an ideal risk mitigation mechanism against events that can potentially cause financial distress to individuals and businesses). For instance, with medical inflation growing at approximately15% per annum, even simple medical procedures cost enough to disturb a family’s well-calculated budget, but a Health Insurance would ensure financial security for the family. In case of business insurance, financial compensation is provided against financial loss due to fire, theft, mishaps related to marine activities, other accidents etc.

Provides Support to Families during Medical Emergencies: Well-being of family is important for all and health of family members is the biggest concern for most. From elderly parents to newborn children, medication and hospitalization play important role while ensuring well-being of families. Rising medical treatment costs and soaring medicine prices are enough to drain your savings if not well prepared. Anyone can fall victim to critical illnesses (such as heart attack, stroke, cancer etc.) unexpectedly. And rising medical expense is of great concern. Medical Insurance is a policy that protects individuals financially against different type of health risks. With a Health Insurance policy, an insured gets financial support in case of medical emergency.

Generates Long-term Financial Resources: The Insurance sector generates funds by way of premiums from millions of policyholders. Due to the long-term nature of these funds, these are invested in building long-term infrastructure assets (such as roads, ports, power plants, dams, etc.) that are significant to nation-building. Employment opportunities are increased by big investments leading to capital formation in the economy.