RISK

PRIYANKA LOHAR

Risk means the chance or possibility of a loss or damage occurring due to an uncertain event in the
future. It refers to the event or condition that may cause harm to life, property, or any insurable
interest, which the insurer agrees to cover in return for a premium.

The risk must be: Uncertain in nature (may or may not happen),Accidental (not
deliberate),Financially measurable.

NATURE OF RISK The nature of risk in insurance refers to the possibility of loss or damage that can be
measured and managed through insurance coverage. It involves uncertainty regarding future events that may
cause financial harm to individuals, businesses, or property. Insurance deals primarily with pure risks—those
that involve only the chance of loss, not gain. These risks must be definite, measurable, accidental, and large
enough to create a financial burden. By pooling such risks, insurance companies provide financial protection
and stability to policyholders.

SCOPE OF RISK :. The insurance protects the person from a variety of risks which might befall on him or
his family on the happening of a specified event. The event must involve some kind of financial loss to the
insured or atleast exposed to some adverse event called risk. The event may be death of insured in case of life
insurance, marine-perils, fire, theft, accident etc. New varieties of events have been added during passage of
time in modern times such as third party risk and liability insurance. It is a device to transfer certain risks or
measurable economic loss suffered by the contributors that would otherwise be borne by the contributor
alone. The gravity of risk or probability of loss is calculated at the time of insurance. The risk is evaluated only
then the person is insured after charging the amount of share called consideration of premium. The risks can
be evaluated by various methods. If more loss is expected, higher premium may be charged. The probability
theory is used to evaluate the risk or we can say that the probability of loss is calculated before or at the time
of insurance. The insurance serves a two-fold purpose, the immediate or short-range and the remote or long-
range. The immediate purpose is served by paying a definite sum or amount at damage or death of the
insured. The remote purpose is served when indirectly the economic growth of the country is accelerated. The
savings or funds of numerous policyholders are invested in organised commerce and industry. Insurance is just
opposite of gambling. In the gambling, a person exposes himself to the risk, the risk of losing whereas in the
insurance, the insured is always opposed to risk. Insurance is a kind of business as in consideration of premium
it guarantees the payment of financial loss. But the liability of the insurer is confined only to the risk insured
and he could not be held liable for any alteration in the risk insured. But if the does not affect the essence of
policy even it increases the danger of loss, it does not vitiate the insurance contract and the risk insured
remains effective

KINDS OF RISK:

o 1. Pure risk: This risk type is when the affected party can only incur a loss
or remain in the same position. The individual cannot gain anything from a
pure-risk event. The companies, for example, may make a loss or cover
the costs. It cannot lead to a profit for the firm. An example can be a
natural calamity. A person may lose their house in such an event.
However, their house may remain the same and not be affected by the
calamity. They cannot gain anything in that event.
o 2. Speculative Risk: This type of risk involves uncertainty where the outcome can result in a
gain, a loss, or no change. Unlike pure risks, speculative risks allow the possibility of profit.
For example, when a person invests in company shares, the value of those shares may
increase (profit), decrease (loss), or remain unchanged. Because the outcome is based on
speculation, it involves both risk and opportunity.
o 3. Financial Risk: This type of risk forms the core basis of insurance. It involves situations
where there is a possibility of measurable financial loss. Insurance companies assess these
risks and provide compensation if such losses occur. For instance, if a company’s goods are
destroyed in a warehouse fire, it results in a financial loss. Insurance helps the company
recover that loss by covering the damages.
 o 4. Non-Financial Risk: This type of risk involves losses that cannot be measured in terms of
money. Since the loss is not quantifiable, insurance companies do not provide coverage for
such risks. For example, if someone is unhappy after buying a poor-quality phone, they
cannot claim insurance for their dissatisfaction. These risks are personal and usually not
insurable.
o Particular Risk : Particular risk refers to a type of risk that arises due to the actions or
decisions of an individual or a specific group. This kind of risk affects only a limited number
of people and does not have a widespread impact on society as a whole. It is usually
personal or local in nature and results from identifiable causes such as negligence, accidents,
or intentional acts. For example, a car accident is considered a particular risk because it
affects only the individuals involved in the accident and not the entire community. Such risks
are generally insurable, and insurance companies offer various policies like motor insurance,
fire insurance, or theft insurance to provide financial protection against them.
o Fundamental Risk : Fundamental risk refers to a type of risk that affects a large number of
people or an entire community. These risks arise from events that are beyond human
control and are not caused by the actions of any particular individual or group. Such events
usually result in widespread loss and suffering. For example, an earthquake is a fundamental
risk because it can impact a large area and cause damage to many people at the same time.
Although these risks are uncontrollable, insurance companies do offer policies to cover such
events, like natural disaster insurance or catastrophe insurance.
o Dynamic risk arises from changes in the business or market environment. These risks are
uncertain and can affect many businesses at once. For example, the launch of a new product
that changes customer preferences is a dynamic risk. These risks are harder to predict and
often not easily insurable.

MODES OF HANDLING RISK

Risk handling refers to the techniques or modes used to manage, minimize, or transfer the impact of
uncertain future events. In insurance and business, the following modes are commonly adopted to deal
with risks:

1. Risk Avoidance: This mode involves avoiding any activity that may expose a person or organization to
risk. For example, not driving a scooter to avoid accidents or avoiding the use of electrical appliances to
prevent electric shocks. Although simple, this method is not always practical in business, as risk is inherent
to all business activities.

2. Risk Reduction: This involves taking preventive steps to minimize the severity or frequency of risk. For
instance, installing fire-fighting equipment, fencing dangerous machines, or declaring “No Smoking” zones
in hazardous areas. These measures reduce the likelihood of loss.

3. Risk Retention: Here, the risk is accepted and the loss is borne by the individual or organization. A
contingency fund may be created for this purpose. This is suitable for non-transferable or minor risks and
is mostly used by large businesses with sufficient financial capacity.

4. Risk Transfer: This is the most popular mode in insurance. The risk is transferred to another party,
typically an insurance company, by purchasing a policy. It may also involve outsourcing risky operations to
third parties.

5. Combination Method: This mode involves the simultaneous use of two or more risk-handling
techniques. For example, combining loss prevention measures with insurance coverage. It allows flexible
and effective management of risk in complex situations.

6. Hedging: Risk can be handled effectively by this method. This method is usually followed by business
enterprises to reduce the incidence of risks. For this purpose the business people enter into hedging
transactions. This method is just reverse to trading transactions.

Illustration : ‘X’, a cement dealer agreed with ‘Y’ to sell 100 bags of cement at the rate of Rs. 100 per bag after
6 months. The market price of cement on the date of the agreement was Rs. 90 per bag. In this case ‘X’ has
the option to buy the cement at the date of the agreement and deliver them to ‘Y’ after six months. But this
option creates him problem of storage for six months as well as blocking of money for six months. Instead of
this ‘X’ may prefer to enter into an agreement with a producer of cement on this date seeking delivery of the
cement on the same date after six months. This way ‘X’ will be safe against the fluctuations of price in cement,
in future.

7. Research Mode : Business enterprises are faced with various kinds of risks and some of them can be
handled effectively by undertaking research. If a company wants to introduce a new product in the market it
may prefer to undertake test marketing first. If the findings of test marketing favours the introduction of the
product, the company can release the product for sale in the market. If the finding of test marketing suggests
improvement in the proposed product, before releasing it in the market the company will make improvement
in the product first according to the needs of the market. This way the company can avoid risks of financial
loss and image loss of early release of the new product in the market.

Why insurer requires pure risk only?

Insures requires pure risk only because pure risks involve the possibility of loss but no possibility of gain. This
makes them predictable and measurable, allowing insurers to calculate premiums using statistical methods.
Since insurance is designed to provide compensation for unavoidable and accidental losses, speculative risks,
which involve the possibility of gain, fall outside the scope of insurable interest. Covering only pure risks helps
insurers maintain financial stability, avoid moral hazard, and uphold the principle of indemnity by ensuring
compensation is provided only for actual losses.

Are all risks insurable?

No, all risks are not insurable. Only those risks that meet certain essential criteria are considered insurable. For
a risk to be insurable, it must be definite, measurable, financially assessable, accidental in nature, and not
against public policy. It must also involve a large number of similar exposure units so that the insurer can apply
the law of large numbers to predict loss.

There are two broad categories:

1. Insurable Risks – These include pure risks like fire, theft, accident, or death, where only loss or no loss is
possible, and the amount of loss can be calculated.

2. Non-Insurable Risks – These include speculative risks such as gambling or investment loss, non-financial
risks like emotional loss, or unpredictable risks like war or nuclear attacks.

Hence, while insurance plays a crucial role in risk management, it cannot cover all types of risks—only those
that are measurable, accidental, and financially compensable.

Features of insurable risk

For a risk to be insurable, it must possess certain essential features. These features help insured to evaluate,
cover, and manage the risk effectively. The key features are:

1. Uncertainty of Loss: The risk must involve uncertainty. It should relate to a future event that may or
may not occur, or the time of occurrence must be uncertain.

2. Definite and Measurable: The risk must result in a definite loss that is measurable in monetary terms.
The amount of loss should be capable of estimation.

3. Accidental and Unintentional: The event must happen by chance. Insurance does not cover intentional
or deliberate acts that cause loss.

4. Large Number of Exposure Units: There must be a sufficiently large number of similar exposure units to
enable the insurer to predict losses based on the law of large numbers.

5. Economic Hardship: The loss should be serious enough to cause economic hardship to the insured.

6. Insurable Interest: The insured must have a financial interest in the subject matter of insurance.
Without insurable interest, the contract is void.
7. Non-Catastrophic: The risk should not be catastrophic in nature (e.g., war, nuclear events) as these may
cause loss to a very large number of insureds at the same time and are difficult to manage by insurers.

Nomination as a Pillar of Insurance

Nomination is pillar of insurance that provides a structured mechanism for the distribution of policy
benefits in the event of the policyholder’s death. It refers to the act by which a life insurance policyholder
authorizes a person, known as a nominee, to receive the policy proceeds upon the policyholder’s death.
This ensures that the financial benefits reach the intended individual(s) without unnecessary legal
complications. Nomination can be made at the inception of the policy or later during its tenure. As per
Section 39 of the Insurance Act, 1938, the policyholder can nominate one or more persons, and even
allocate specific percentage shares to each nominee, provided the total equals 100%. Nomination is
effective only in the case of a death claim and can be altered at any time before the policy’s maturity. The
process of nomination requires the communication of the nominee’s details—such as name, age,
relationship, and address—to the insurer either by incorporating it in the policy text or through an
endorsement. Nomination adds certainty and legal clarity to the disbursal of policy funds, protecting the
interests of the insured’s dependents. Although nomination is commonly used in life insurance, it is not
applicable to most non-life insurance policies, as they are contracts of indemnity and pay the insured for
actual losses. Thus, nomination acts as an essential safeguard in life insurance, reinforcing the protective
purpose of insurance as a financial security tool for dependents.

DIFFERENCE BETWEEN PURE RISK AND SPECULATIVE RISK

BASIS PURE RISK SPECULATIVE RISK
1. MEANING Pure risk involves only possibility Speculative risk involves a
Of loss or no loss and never gain. possibility of loss or no loss or
gain.

2. NATURE It is uncontrollable and usually It is voluntary and results from

Beyond human control. conscious business or investment
Decisions.
3. INSURABILITY Pure risk are insurable because Speculative risk are not insurable d
It can be easily measured and due to uncertainty and
Predicted. unpredictable
4. EXAMPLES Death, accident, fire, natural Gambling, investing in stock
Calamities. market ,starting a business .
5. PURPOSE Protection against unforeseen Aims to make profit only,
Losses. despite the risk of loss.
6. RELEVANCE Basis of all insurance contracts Not accepted for insurance as
Like life, health, fire ,etc. they involve the possibility of
profit.

DIFFERENCE BETWEEN NOMINATION AND ASSINGMENT

BASIS NOMINATION ASSINGMENT
1. MEANING Nomination the process of Assignment involves the
appointing person to receive transfer of ownership and
policy benefits upon the rights of the insurance
policyholder death .The nominee policy to another person,
does not have any ownership which can apply to both life
of the policy ,and the and non-life policies. It is
nomination can be changed more formal, often requiring
anytime. written documentation, and
cannot usually be undone once
completed unless the terms
allow.
 2. PURPOSE To designate beneficiary who To transfer the rights,
will receive the policy proceeds title,and interest in the policy to
upon the death of the another party, which may
policyholder. include transferring the
ownership or the benefits.
3. EFFECT ON POLICY Nominee does not become the The assingnee becomes the new
OWNERSHIP owner of the policy ,only Owner of the policy and
Receive the benefits after the assumes all rights associated
Policyholder death. with the policy, including
receiving benefits.
4. PROCESS It can be done by the filling in It involves a formal document
the nominee details in the where the policyholder signs
proposal form or policy over the ownership of the policy to a
document. It can be alter at any any
to another person.
time.

5. APPLICABLITY Only applicable to life insurance Applicable in both life and

Policies, and it applies upon the non-life insurance policies .
death of the policyholder.
6. REVOCABLITY It can be changed at any time by It is generally irrevocable, unless
the policyholder. specified otherwise.
7. IMPACT ON BENEFICIARY The nominee receives the The assingnees receives all the
benefits as per the policyholder’s rights and benefits associated with
wish after death but does not the policy, including control
have ownership rights over its terms and payouts.

Effect of War Upon Insurance Policies

War has a significant impact on insurance contracts as it introduces widespread uncertainty and massive
potential losses. In general, most insurance policies exclude losses caused directly or indirectly by war or
war-like operations. This is because such events are catastrophic, unpredictable, and can lead to large-
scale destruction that insurers cannot reasonably estimate or manage.

In life insurance, if the policyholder dies due to war, the claim is usually paid unless a war exclusion clause
is specifically mentioned in the policy. Some life policies issued to members of the armed forces may
include specific exclusions or additional premium loading to cover war-related risks.

In general or non-life insurance, such as fire, marine, and property insurance, war risks are generally
excluded unless specifically covered by a separate endorsement or by paying additional premium. For
example, marine policies often have war risk clauses, and special war risk insurance may be taken for
cargo and ships in high-risk areas.

In conclusion, war is considered an uninsurable or partially insurable risk under most policies unless
explicitly covered. It is treated as a special category due to its scale, unpredictability, and the potential for
enormous financial loss.

MUTUAL INSURANCE COMPANY

Mutual insurance company is to provide its members with insurance coverage at or near cost.
When a mutual insurance company has profits, those profits are distributed to members via
a dividend payment or a reduction in premiums.

Mutual insurance companies are not traded on stock exchanges, therefore their investment
strategy avoids the pressure of having to reach short-term profit targets and can operate as best
suited to its members with the goal of long-term benefits. As a result, they invest in safer, low-yield
assets. However, because they are not publicly traded, it can be more difficult for policyholders to
determine how financially solvent a mutual insurance company is, or how it calculates dividends it
sends back to its members.
Large companies can form a mutual insurance company as a form of self-insurance, either by
combining divisions with separate budgets or by teaming up with other similar companies. For
example, a group of physicians may decide that they can get better insurance coverage and lower
premiums by pooling funds to cover their similar risk types.

DURATION UNDER INSURANCE

The duration of an insurance contract refers to the period during which the insurance coverage
remains in force and the insurer is liable for the insured risk.

Policy Period:

1. Specified Duration: The policy document mentions the start and end date of coverage. This
period can range from a few days to several years depending on the nature of the insurance.

2. Annual Policies: General insurance policies like motor and health insurance are commonly issued
for one year and are renewable thereafter.

3. Long-Term Policies: Life insurance policies usually have longer durations and may cover the
lifetime of the insured person.

Renewal of Policy:

1. Automatic Renewal: Some policies renew automatically at the end of the term on payment of the
renewal premium.

2. Optional Renewal: In other cases, the insurer may offer an option to renew. Renewal terms and
premiums may vary depending on the insured’s claims history or change in risk.

COMMENCEMENT of RISK

The commencement of risk in insurance refers to the point at which the insurer becomes legally
liable to cover losses under the policy. Generally, the risk begins when the first premium is paid and
accepted by the insurer. If the premium is submitted along with the proposal form, the risk is
deemed to start from the date of acceptance of the proposal by the insurance company.

The policy document serves as legal proof and outlines the terms and conditions, including the start
and end dates of insurance coverage. Unless otherwise agreed, the insurer is only responsible for
losses that occur during the policy period.

This principle was clarified in Kelly v. Norwich Union Insurance Co., where the court held that only
those perils which actually occur during the policy period are covered. Even if the damage
continues into the insured period, the insurer will not be liable if the peril itself happened before
the policy came into effect. This case illustrates the importance of identifying when exactly the
insured peril occurs.

It is also important to note that there is no fixed legal rule about when risk must commence. It is a
matter of agreement between the insurer and the insured, and depends on the terms of the policy
or preliminary contract. Each case must be examined based on its specific contractual terms.

FEATURES OF INDIAN CONTRACT ACT 1938

The Insurance Act, 1938 is a comprehensive legislation that governs the regulation, supervision,
and development of the insurance sector in India. It applies to all types of insurance businesses,
including life, fire, marine, and general insurance. The Act was introduced to safeguard the
interests of policyholders and ensure the sound functioning of insurance companies.
 1. Scope of the Act

The Act applies to all insurers operating in India, including Indian and foreign companies,
cooperative societies, and mutual offices. Section 2(c) prohibits the carrying on of insurance
business by any person unless such person is a public company, a cooperative society, or a body
corporate incorporated outside India, subject to certain exemptions granted by the Central
Government.

2. Capital Requirements

The Act sets minimum capital requirements for insurance businesses. A paid-up equity capital of
₹100 crores is required for life and general insurance, and ₹200 crores for reinsurance businesses.
Insurers operating before the IRDA Act, 1999 must comply with these requirements within a
prescribed time.

3. Mandatory Deposits

Section 7 requires insurers to deposit a fixed percentage of their gross premium with the Reserve
Bank of India in cash or approved securities. This ensures financial stability and prevents
speculative or undercapitalized insurance ventures.

4. Registration of Insurers

Section 3 mandates that no person can begin or continue insurance business without a certificate
of registration from the regulatory authority. Registration requires submission of necessary
documents, payment of fees, and satisfaction of conditions related to financial health,
management, and public interest.

5. Submission of Returns

Section 15 of the Act mandates insurers to submit audited accounts, balance sheets, actuarial
reports, and abstracts to the Authority within stipulated timeframes. Additional documents must
also be submitted for foreign insurers operating in India.

6. Regulation of Commissions and Rebates

Sections 40 and 41 restrict the payment of commission to insurance agents and prohibit rebates on
premiums or commissions except as allowed under published policies. This prevents unhealthy
competition and protects consumer interests.

7. Licensing of Insurance Agents

Section 42 lays down qualifications, disqualifications, and licensing procedures for insurance
agents. Licenses are issued for three years and are renewable. Disqualifications include criminal
convictions, mental incapacity, and violation of conduct rules.

8. Investment of Funds

Sections 27 and 27-A prescribe rules for investment of insurance funds. Insurers are required to
invest a minimum percentage of their controlled funds in Government and approved securities to
ensure liquidity and security of policyholder funds.

9. Prohibition of Loans

The Act prohibits insurers from granting loans to directors, managers, and other specified persons
except on life policies within surrender value. Loans to subsidiaries are permitted with reporting
requirements.
10. Investigation and Supervision

Section 33 empowers the Authority to investigate the affairs of insurers. It may appoint
investigating officers, auditors, or actuaries. The costs of investigation are recoverable as arrears of
land revenue and take priority over other debts.

11. Powers of the Authority

The Authority has wide-ranging powers to regulate, inspect, and supervise the functioning of
insurers. It can cancel registration, issue directions, approve investments, and enforce penalties for
violations.

Conclusion

The Insurance Act, 1938 serves as a foundational statute that ensures transparency, accountability,
and financial discipline in the insurance sector. It protects policyholders, fosters orderly growth of
the industry, and supports regulatory oversight through well-defined legal provisions. Over time,
the Act has been amended to accommodate the changing dynamics of the insurance business in
India.