Name:Sree Hari
Selvam.K.C
Class and Section: 11th-
B
BUSINESS RISKS AND
INSURANCE
Business risk arises from
various factors that can
impact a company’s
operations and financial
stability. Here are some
common causes:
1. Market Fluctuations:
Changes in consumer
preferences, demand, and
sales volumes can
significantly affect a
business
2. Economic Conditions:
The overall state of the
economy, including
inflation, recession, and
interest rates, can
influence business
performance
3. Competition: The actions
of competitors, such as
new product launches or
pricing strategies, can
pose risks
4. Regulatory Changes:
New laws, regulations, or
changes in existing ones
can create compliance
challenges and additional
costs
5. Technological
Disruptions: Rapid
technological
advancements can render
existing products or
services obsolete
6. Supply Chain
Disruptions: Issues like
delays, shortages, or
geopolitical factors can
disrupt the supply chain
7. Operational Risks:
Internal factors such as
management decisions,
employee actions, or
system failures can also
contribute to business risk.
Insurable and non-insurable
risk
Insurable risks are those
that insurance companies
are willing to cover
because they can be
quantified and predicted to
some extent. These risks
typically have a large
enough pool of similar risks
to allow for accurate
predictions and
calculations. Examples
include:
Property Damage: Risks
related to damage or loss
of physical assets due to
fire, theft, natural
disasters, etc.
Health Risks: Medical
expenses and health-
related issues.
Liability Risks: Legal
liabilities arising from
accidents, injuries, or
negligence.
Life Risks: Risks
associated with the death
of an individual, covered
by life insurance policies.
Non-insurable risks, on
the other hand, are those
that insurance companies
are not willing to cover
because they are too
unpredictable, too
catastrophic, or too difficult
to quantify. Examples
include:
Market Risks:
Fluctuations in market
prices, demand, and
competition.
Political Risks: Changes
in government policies,
political instability, or war.
Technological Risks:
Rapid technological
changes that can render
products or services
obsolete.
Operational Risks:
Internal business risks such
as management decisions,
employee actions, or
system failures.
Meaning of insurance
Insurance is a financial
arrangement that provides
protection against
potential future losses or
damages. It involves a
contract between an
individual or entity (the
insured) and an insurance
company (the insurer).
Here are the key
components:
1. Premium: The amount
paid by the insured to the
insurer, usually on a
regular basis (monthly,
quarterly, annually), to
maintain the insurance
coverage.
2. Policy: The contract that
outlines the terms and
conditions of the insurance
coverage, including what is
covered, the duration of
coverage, and any
exclusions.
3. Coverage: The specific
risks or events that the
insurance policy protects
against, such as accidents,
health issues, property
damage, or liability.
4. Claim: A request made by
the insured to the insurer
for payment or
compensation when a
covered event occurs.
5. Deductible: The amount
the insured must pay out-
of-pocket before the
insurance company pays
for a covered loss.
Insurance helps individuals
and businesses manage
risk by transferring the
financial burden of
potential losses to the
insurance company. This
provides peace of mind
and financial stability in
the face of unforeseen
events.
Objective and purpose of
insurance
The objective and purpose
of insurance are to provide
financial protection and
peace of mind by
managing risk. Here are
the key points:
Objectives of Insurance
1. Risk Transfer: Insurance
transfers the financial
burden of potential losses
from the insured to the
insurer.
2. Financial Stability: It
helps individuals and
businesses maintain
financial stability by
covering unexpected
expenses.
3. Loss Minimization:
Insurance encourages risk
management practices
that minimize potential
losses.
4. Resource Allocation: It
allows for better allocation
of resources by reducing
the need to set aside large
reserves for potential
losses.
Purpose of Insurance
1. Protection: To protect
against financial losses due
to unforeseen events such
as accidents, illnesses,
natural disasters, or theft.
2. Security: To provide a
sense of security and
peace of mind, knowing
that there is a safety net in
place.
3. Economic Growth: By
mitigating risks, insurance
supports economic growth
and stability, allowing
businesses to invest and
expand.
4. Social Welfare: Insurance
contributes to social
welfare by providing
support in times of need,
such as health insurance
covering medical
expenses.
Principles of insurance
The principles of insurance
are fundamental guidelines
that ensure the proper
functioning of insurance
contracts. Here are the key
principles:
Utmost Good Faith
(Uberrima Fides): Both
parties (the insurer and the
insured) must act in good
faith and disclose all
relevant information
truthfully. Any
misrepresentation or
concealment of facts can
void the contract
Insurable Interest: The
insured must have a
legitimate interest in the
subject matter of the
insurance. This means the
insured would suffer a
financial loss if the insured
event occurs
Indemnity: Insurance
contracts are designed to
compensate for losses, not
to provide a profit. The
insured is restored to the
same financial position
they were in before the
loss.
Subrogation: After
compensating the insured
for a loss, the insurer gains
the right to pursue any
third parties responsible
for the loss to recover the
amount [Link]:
If the insured has multiple
insurance policies covering
the same risk, each insurer
will contribute
proportionately to the
compensation.
Proximate Cause (Causa
Proxima): The insurer is
liable only for losses that
are directly caused by the
insured peril. This principle
helps determine the actual
cause of the loss when
multiple factors are
involved
Loss Minimization: The
insured must take all
reasonable steps to
minimize the loss or
damage to the insured
property. Failure to do so
can affect the
compensation received.
These principles ensure
fairness and transparency
in insurance contracts,
protecting both the insurer
and the insured.
Re- insurance and double
insurance
Reinsurance and double
insurance are two distinct
concepts in the insurance
industry, each serving
different purposes.
Reinsurance
Reinsurance is a practice
where an insurance
company (the ceding
company) transfers a
portion of its risk to
another insurance
company (the reinsurer).
This helps the primary
insurer manage large risks
and maintain financial
stability. Here are the key
points:
Risk Management:
Reinsurance allows the
primary insurer to spread
its risk, reducing the
potential impact of large
claims.
Capacity Enhancement:
It enables insurers to
underwrite policies with
higher coverage limits than
they could handle alone.
Financial Stability: By
sharing risks, insurers can
protect themselves from
catastrophic losses.
Double Insurance
Double insurance occurs
when the same risk is
insured by multiple
insurance policies, either
with the same insurer or
different insurers. Here are
the key points:
Increased Coverage:
Individuals or businesses
may opt for double
insurance to ensure they
have sufficient coverage
for a particular risk.
Proportional Claims: In
the event of a loss, the
claim is shared
proportionally among all
insurers based on the sum
insured.
Legal and Compliance:
The insured must disclose
the existence of other
policies to all insurers
involved.
Comparison
Purpose: Reinsurance is
primarily for insurers to
manage their risk, while
double insurance is for
policyholders to increase
their coverage.
Beneficiaries: In
reinsurance, the primary
insurer benefits from risk
transfer. In double
insurance, the policyholder
benefits from additional
coverage.
Claims: In reinsurance, the
reinsurer compensates the
primary insurer. In double
insurance, all insurers
involved share the claim
proportionally.
Advantages of insurance
Insurance offers numerous
advantages for individuals,
businesses, and society as
a whole. Here are some
key benefits:
1. Financial Protection
Insurance provides a
safety net against
unexpected financial
losses due to accidents,
illnesses, natural disasters,
theft, and more. This
protection helps individuals
and businesses maintain
financial stability.
2. Risk Sharing
By pooling risks among
many policyholders,
insurance companies can
manage and mitigate the
impact of individual losses.
This collective risk-sharing
mechanism makes it
possible to cover large and
unpredictable risks.
3. Encourages Savings
Certain types of insurance,
like life insurance, also
serve as a savings
tool. Regular premium
payments can accumulate
over time, providing a
financial reserve for future
needs.
4. Self-Sufficiency
Insurance helps individuals
and businesses become
self-sufficient by providing
financial support during
crises. This reduces the
need to rely on external
financial aid
5. Loan Facility
Many insurance policies
allow policyholders to
borrow against the policy’s
value. This can be
particularly useful in
emergencies when quick
access to funds is needed
6. Employment
Opportunities
The insurance industry
creates numerous job
opportunities, contributing
to economic growth and
stability
7. Encourages Foreign
Trade
Insurance reduces the
financial risks associated
with international trade,
encouraging businesses to
engage in global markets.
8. Reduces Inflation
By providing financial
stability and reducing the
need for large reserves,
insurance can help control
inflation.