Risk and insurance management

Risk and Insurance Management MBA Second Year (Financial Management) School of Distance Education Bharathiar University, Coimbatore - 641 046 Author: B Murali Krishna, Pavan Kumar Copyright © 2008, Bharathiar University All Rights Reserved Produced and Printed by EXCEL BOOKS PRIVATE LIMITED A-45, Naraina, Phase-I, New Delhi-110028 for SCHOOL OF DISTANCE EDUCATION Bharathiar University Coimbatore-641046 CONTENTS Page No UNIT I Lesson Risk Lesson Risk Management 23 UNIT II Lesson Risk Management by Individuals 43 Lesson Corporate Risk Management 55 UNIT III Lesson Growth & Development of Indian Insurance Industry 65 Lesson Types of Life Insurance 77 UNIT IV Lesson Fire Insurance Lesson Marine Insurance 91 101 UNIT V Lesson Motor Insurance 113 Lesson 10 Aviation Insurance 130 Model Question Paper 149 RISK AND INSURANCE MANAGEMENT SYLLABUS UNIT I Introduction to risk management: The Concept of Risk – Risk Vs Uncertainty – types of Risks: Market Risk, Credit Risk, Operational Risk, interest risk, business risk, systematic risk - Classifying pure risks – methods of handling pure risks – risk management process – Risk financing techniques – Risk management objectives – Risk Management Information System (RMIS) – Risk Control UNIT II Risk Management by Individuals: Factors effecting individual demands for insurance – Risk Management by Corporations: Corporate Risk Management Process – Types of Risk Managing firms UNIT III Growth & Development of Indian Insurance Industry – Regulations of Insurance Business and The Emerging Scenario – Introduction to Life & General Insurance – Life Insurance: Features of Life Insurance – Essentials of Life Insurance Contract – Kinds of Insurance Policies – Premium determination – Life Policy Conditions UNIT IV Fire Insurance: Fire Insurance Contracts – Fire Insurance Coverage – Policies for stocks – Rate Fixation in Fire Insurance – Settlement of Claims Marine Insurance: Marine Insurance Contract – Types of Marine Insurance – Marine Cargo Losses and Frauds – Settlement of claims UNIT V Miscellaneous Insurance: Motor Insurance – Employer’s Liability Insurance – Personal Accident and sickness Insurance – Aviation Insurance – Burglary Insurance – Fidelity Guarantee Insurance – Engineering Insurance – Cattle Insurance – Crop Insurance Risk UNIT I Risk and Insurance Management Risk LESSON RISK CONTENTS 1.0 Aims and Objectives 1.1 Introduction: Historical Background 1.2 Meaning and Definitions of Risk 1.3 Risk vs Uncertainty 1.4 Operational Risk 1.5 Interest Rate Risk 1.6 Credit Risk 1.7 Business Risk 1.8 1.7.1 Systematic Risk 1.7.2 Unsystematic Risk Pure Risk 1.8.1 1.9 1.10 Types of Pure Risks Methods of Handling Risk 1.9.1 Avoidance 1.9.2 Loss Control 1.9.3 Retention 1.9.4 Non Insurance Transfers 1.9.5 Insurance Risk Management Process 1.10.1 Steps in Risk Management Process 1.11 Potential Risk Treatments 1.11.1 Risk Avoidance 1.11.2 Risk Reduction 1.11.3 Risk Retention 1.11.4 Risk Transfer 1.12 Risk Management Plan 1.12.1 Creation 1.12.2 Implementation 1.12.3 Review and Evaluation of the Plan 1.13 Let us Sum up 1.14 Lesson End Activity 1.15 Keywords 1.16 Questions for Discussion 1.17 Suggested Readings Risk and Insurance Management 1.0 AIMS AND OBJECTIVES After studying this lesson, you should be able to: z Know the concept of risk z Study the various types of risk z Know the methods of handling risk z Know the process of risk management 1.1 INTRODUCTION: HISTORICAL BACKGROUND Scenario analysis matured during Cold War confrontations between major powers, notably the U.S and the USSR It became widespread in insurance circles in the 1970s when major oil tanker disasters forced a more comprehensive foresight The scientific approach to risk entered finance in the 1980s when financial derivatives proliferated It reached general professions in the 1990s when the power of personal computing allowed for widespread data collection and numbers crunching Governments are apparently only now learning to use sophisticated risk methods, most obviously to set standards for environmental regulation, e.g "pathway analysis" as practiced by the United States Environmental Protection Agency 1.2 MEANING AND DEFINITIONS OF RISK Risk is a concept that denotes a potential negative impact to some characteristic of value that may arise from a future event Exposure to the consequences of uncertainty constitutes a risk In everyday usage, risk is often used synonymously with the probability of a known loss Risk communication and risk perception are essential factors for all human decision making There are many definitions of risk that vary by specific application and situational context Risk is described both qualitatively and quantitatively Qualitatively, risk is proportional to both the expected losses which may be caused by an event and to the probability of this event Greater loss and greater event likelihood result in a greater overall risk Frequently in the subject matter literature, risk is defined in pseudo-formal forms where the components of the definition are vague and ill-defined, for example, risk is considered as an indicator of threat, or depends on threats, vulnerability, impact and uncertainty In engineering, the definition of risk is: Measuring engineering risk is often difficult, especially in potentially dangerous industries such as nuclear energy Often, the probability of a negative event is estimated by using the frequency of past similar events or by event-tree methods, but probabilities for rare failures may be difficult to estimate if an event tree cannot be formulated Methods to calculate the cost of the loss of human life vary depending on the purpose of the calculation Specific methods include what people are willing to pay to insure against death, and radiological release (e.g., GBq of radio-iodine) There are many formal methods used to assess or to "measure" risk, considered as one of the critical indicators important for human decision making Financial risk is often defined as the unexpected variability or volatility of returns and thus includes both potential worse-than-expected as well as better-than-expected returns References to negative risk below should be read as applying to positive impacts or opportunity (e.g., for "loss" read "loss or gain") unless the context precludes In statistics, risk is often mapped to the probability of some event which is seen as undesirable Usually, the probability of that event and some assessment of its expected harm must be combined into a believable scenario (an outcome), which combines the set of risk, regret and reward probabilities into an expected value for that outcome Thus, in statistical decision theory, the risk function of an estimator δ(x) for a parameter θ, calculated from some observables x, is defined as the expectation value of the loss function L, In information security, a risk is defined as a function of three variables: z The probability that there is a threat z The probability that there are any vulnerabilities z The potential impact If any of these variables approaches zero, the overall risk approaches zero The management of actuarial risk is called risk management 1.3 RISK VS UNCERTAINTY In his seminar work Risk, Uncertainty, and Profit, Frank Knight (1921) established the distinction between risk and uncertainty “ Uncertainty must be taken in a sense radically distinct from the familiar notion of Risk, from which it has never been properly separated The term "risk," as loosely used in everyday speech and in economic discussion, really covers two things which, functionally at least, in their causal relations to the phenomena of economic organization, are categorically different The essential fact is that "risk" means in some cases a quantity susceptible of measurement, while at other times it is something distinctly not of this character; and there are far-reaching and crucial differences in the bearings of the phenomenon depending on which of the two is really present and operating It will appear that a measurable uncertainty, or "risk" proper, as we shall use the term, is so far different from an unmeasurable one that it is not in effect an uncertainty at all We accordingly restrict the term "uncertainty" to cases of the non-quantitive type.” A solution to this ambiguity is proposed in "How to Measure Anything: Finding the Value of Intangibles in Business" by Doug Hubbard Uncertainty: The lack of complete certainty, that is, the existence of more than one possibility The "true" outcome/state/result/value is not known Measurement of Uncertainty: A set of probabilities assigned to a set of possibilities Example: "There is a 60% chance this market will double in five years" 1.4 OPERATIONAL RISK The risks are evaluated using fault free/event free techniques Where these risks are low, they are normally considered to be "Broadly Acceptable" A higher level of risk (typically up to 10 to 100 times what is considered Broadly Acceptable) has to be justified against the costs of reducing it further and the possible benefits that make it tolerable—these risks are described as "Tolerable if ALARP" Risks beyond this level are classified as "Intolerable" The level of risk deemed Broadly Acceptable has been considered by regulatory bodies in various countries—an early attempt by UK government regulator and academic F R Farmer used the example of hill-walking and similar activities which Risk 10 Risk and Insurance Management have definable risks that people appear to find acceptable This resulted in the socalled Farmer Curve of acceptable probability of an event versus its consequence The technique as a whole is usually referred to as Probabilistic Risk Assessment (PRA) (or Probabilistic Safety Assessment, PSA) The quantifiable likelihood of loss or less-than-expected returns, for example: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk, event risk 1.5 INTEREST RATE RISK The possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates This risk can be reduced by diversifying the durations of the fixed-income investments that are held at a given time Prepayment risk Definition: The possibility that homeowners will pay off their mortgage loans early, such as when interest rates fall and they decide to refinance It is the variation in the single period rates of return caused by the fluctuations in the market interest rate Most commonly interest rate risk affects the price of bonds, debentures and stocks The fluctuations in the interest rates are caused by the changes in the government monetary policy and the changes that occur in the interest rates of treasury bills and the government bonds, the bonds issued by the government and quasi government are considered to be risk free If higher interest rates are offered, investor would like to switch his investments from private sector bonds to public sector bonds If the government to tide over the deficit in the budget floats a new loan of a higher rate of interest, there would be a definite shift in the funds from low yielding bonds to the high yielding bonds and from stocks to bonds If stock market is in depressed condition, investors would like to shift their money to the bond market to have an assured rate of return The rise or fall in the interest rate affects the cost of borrowing When the call money market rate changes, it affects the badla rate too Most of the stock traders trade in the stock market with the borrowed funds The increase in the cost of margin affects the profitability of the traders This would dampen the spirit of the speculative traders who use the borrowed funds The fall in the demand for securities would lead to a fall in the value of stock index Interest rates not only affect the security traders but also the corporate bodies who carry their business with borrowed funds The cost of borrowing would increase and a heavy outflow of profit would take place in the form of interest of the capital borrowed This would lead to a reduction in earnings per share and a consequent fall in the price of share Check Your Progress 1 Define business risk ………………………………………………………………………… ………………………………………………………………………… What you mean by credit risk? ………………………………………………………………………… ………………………………………………………………………… Both the Aircraft and General Liability policies usually includes the "war and allied perils" exposure by way of a "write back" and will probably provide for such things as search and rescue expenses, first aid and other humanitarian expenses and also defence costs 10.5 BURGLARY INSURANCE Burglary Insurance policy covers property contained in business premises, stocks owned, or for which insured is responsible or held in trust and/or commission It also covers cash, valuables, securities kept in a locked safe or cash box in locked steel cupboard on specific request This Burglary Insurance covers loss or damage caused by: z Burglary and Theft (i.e theft following upon an actual forcible and violent entry of and/or exit from the premises) z Robbery In respect of contents of offices, warehouses, shops, etc and cash in safe or strong room and also damage caused to the premises 10.5.1 Extensions It is possible to extend the policy to include loss of the insured property to cover burglary as a result of riot & strike risks It is possible to extend the cover to include theft and larceny not accompanied by violent ingress or exit The extension does not cover losses detected during routine stock taking/checking 10.5.2 Additional Benefits Costs for changing locks and cost for repair of damage caused to the insured premises after an insured event up to 10 % of the total sum insured This extension is available regardless of whether the Insured is a tenant responsible for such repairs or owner of the premises Loss minimisation expenses up to 10 % of the total sum insured Expenses towards restoring paper files, plans, records and drawings, data and installation costs for computer programs up to Rs 10000 Expenses towards clearance of debris and movement and protection up to 10 % of the loss subject to a maximum of Rs 10,000 Loss or damage to the properties of the employees of the Insured up to Rs 5,000 10.5.3 Exclusions The Policy does not cover loss or damage arising from z War and warlike operation, Riot & strike, civil commotion, Terrorist activities conclusion of nature and/or Consequential loss by use of the keys to the safe unless obtained by force or threat z Any inmate or member of the Insured's household or his business staff or any other person lawfully in the premises z Ionizing radiation or contamination by radioactivity z Nuclear weapons material 135 Aviation Insurance 136 Risk and Insurance Management The details furnished above not constitute the entire terms and conditions For more details on the policy, please visit our office nearest to you Our executives will be pleased to furnish further details Burglary Insurance (Business premises) This insurance policy is suitable for every individual who is exposed to the risk of burglary or is liable for goods held in trust/ commission What can be Insured Risks covered Compensation Offered Exclusions What can be Insured This insurance policy provides protection to the insured party's assets and property, such as: z Property contained in business premises, stocks owned or held in trust or commission z Premises z Cash, valuables, securities (locked in a safe or cash box or strong cupboard) Risks covered This insurance policy covers all contingencies arising out of actual loss/damage to the insured property caused by burglary/housebreaking as well damages caused to the premises by the burglars during burglary or attempts at burglary Compensation Offered This insurance policy will pay for any contingencies arising out of actual loss/ damage to the insured property caused by burglary/housebreaking, subject to the Capital Sum Insured If the sum insured proves inadequate, then the policy pays only a proportionate amount Exclusions z The insurance policy will never pay for any loss or damage z To goods in trust/commission, jewellery, curios, title deeds and books of business unless specifically insured z Owing to shoplifting acts involving the insured, his family or his employee z Recoverable under Fire insurance or Plate Glass insurance policies z Due to war or nuclear perils, riots or strikes, allied perils z By abstraction from a safe using a key or a duplicate, unless it was obtained using violent threats z Fluctuating stocks can be covered under a "Declaration Policy" while bulk of stock or heavy items can be covered on a "First Loss Basis" This policy is offered by: z National Insurance Company Ltd (NIC) z The Oriental Insurance Company Ltd (OIC) z United India Insurance Company Ltd (UIIC) z The New India Assurance Company Ltd (NIAC) Bajaj-Allianz's Burglary Insurance policy covers property contained in business premises, stocks owned, or for which insured is responsible or held in trust and/or commission It also covers cash, valuables, securities kept in a locked safe or cash box in locked steel cupboard on specific request Check Your Progress 1 Define burglary insurance ………………………………………………………………………… ………………………………………………………………………… What you understand by general liabilities? ………………………………………………………………………… ………………………………………………………………………… 10.6 ENGINEER’S INSURANCE: CATERS THE NEED Do you own an engineering company? Well! These types of companies are exposed to various kinds of risks, in accordance to their trade Therefore, it is important to cover the risks of engineering businesses adequately This is primarily because of the fact that the lack of sufficient cover will always give you a feeling of uncertainty Usually, engineering risks are more complex than standard commercial risks, and therefore, it is better to communicate with an insurer who caters to engineering industry A business entity may find so many insurers who maintain a team of dedicated and qualified insurance specialists, holding years of experience in the engineering sector By dealing directly with the customers, these insurers ensure that the insurance premiums should be low, without compromising on the insurance cover One can find different kinds of engineering insurance, tailored to match the individual preferences Some insurance covers include the assets, earnings and legal liabilities of a business entity Some policies are meant to protect the liabilities against the risks caused due to public and product liability, business interruption and day-to-day operating cost such as trade contents, machinery, plant and stock In addition, a business entity can ask for more coverage on the basis of its needs & requirements 10.6.1 Different Kinds of Engineering Risks Engineers Insurance includes different kinds of engineering risks Let us know about them in short: Contractor's All Risk (CAR): It includes protection against buildings and civil engineering projects Damages caused against the destruction of the work in progress also come into this liability Erection All Risk Insurance (EAR): This protection coverage includes damages caused to machinery, equipment or apparatus during the process of installation or erection Electronic Equipment Insurance: This coverage protects all types of electronic equipment such as computers, radiation equipment and communication equipment and many more others 137 Aviation Insurance 138 Risk and Insurance Management Machinery Breakdown: This insurance cover protects a business entity from any kind of unforeseen and sudden loss or damage to machinery, mechanical equipment and apparatus due to external and internal causes If you really want to take engineering insurance, it is always better to check the insurance offer carefully Following is the list of products under Engineering Insurance, which are governed by the tariff prescribed by the Tariff Advisory Committee Erection all risks (EAR) insurance EAR insurance provides a very wide and comprehensive insurance cover to the client in respect of any sort of contingency from the moment the material is unloaded at the site of the project and continues during storage, physical erection commissioning, testing and maintenance (if covered) Since the duration of the cover can be as long as 36 months or even more, care must be taken while negotiating the proposal as well as assessing the moral hazard of the client Scope of cover This is a comprehensive insurance cover that is available to the client in respect of any sort of contingency from the moment the materials are unloaded on the site of the project / works and continuous during storage, physical erection and till the test run is over which covers all physical losses or damage as under: z Fire, lightning, theft & burglary z Impact from falling objects, collision, failure of changes or tackles z Failure of safety devices, leakage of electricity, insulation failure, short circuit, explosion z Carelessness, negligence, fault in erection, strike & riots z Storm, tempest, flood, landslide, rockslide, earthquake Extension of cover While the standard policy include all Acts of God perils, it has to be noted that the earthquake peril is covered at an appropriate additional premium as per the erection tariff Extension of basic cover to provide for extension of the policy period itself can be given at additional premium per erection tariff Dismantling cover in case of already erected second hand plant can be given at an appropriate additional premium as per tariff Additional premium are also chargeable for the removal of debris, contractor’s plant and equipment, third party liability, if they are to be included in the sum insured Contractor’s all risks (CAR) Although a CAR policy may be taken by the principal or by the contractor, but usually, under the terms of the agreement between the contractor and the principal, it is obligatory on part of the contractor to effect a CAR insurance in their joint names before the commencement of the project The sum insured under the policy must not be less than the full value of the contract works at the completion of contract inclusive of all materials, wages, freight, custom duties, construction cost and material or items supplied by the principal Type of projects The CAR insurance policies generally issued for all types of Civil Engineering projects like dwellings, office building, commercial building, go downs and warehouses, hospitals, schools, silos, steel structure, roads, water supply lines, construction work, etc Extension of cover While the standard policy includes all Acts of God perils, it has to be noted that the earthquake peril is covered at an appropriate additional premium as per the erection tariff Extension of basic cover to provide for extension of the policy period itself can be given at additional premium per erection tariff Dismantling cover in case of already erected second hand plant can be given at an appropriate additional premium as per tariff Additional premium are also chargeable for the removal of debris, contractor’s plant and equipment, third party liability, if they are to be included in the sum insured Material damage section The Scope of insurance is virtually the same as that of EAR insurance Under this section the insurer agreed to indemnify for any loss or damage to the insured property by any cause other than those specifically given under the exclusions The various exclusions under the CAR policy z General exclusions (applicable to Section I and Section II) z Exclusions applicable to Section II - Third Party liability z Exclusions applicable to Section I - Material Damage are exactly the same as under EAR Policy Machinery breakdown (MB) Machinery Breakdown insurance was developed to grant industry effective insurance cover for expensive plant, machinery and mechanical equipment This insurance is important for everyone who operates the machines This policy should support our property insurance and hence this insurance must not be granted on a stand - alone basis Subject matter insured All types of machinery, plant, mechanical equipment and apparatus may be covered under MBD insurance, such as for example power generating units, power distributing plant as well as production machinery and auxiliary equipment, etc Scope of cover By its nature, Machinery Breakdown Insurance is an “accident” insurance on machinery Thus, It covers unforeseen and sudden physical loss of or damage to the insured items Faulty design faults at workshop or in erection, defects in casting and material Faulty operations, failure of safety system / lubrication system / control system, lack of skill, negligence Extension available under this policy z Third party liability z Expediting costs z Additional customs duty 139 Aviation Insurance 140 Risk and Insurance Management Claim procedure The policy condition clearly lays down the procedure to be followed by an insured in the event of damage to the insured machinery It would be desirable to obtain a claim from duly completed and signed and to check that both the item and the risk involved are insured under the policy It is also essential at the outset to check whether there is any machinery Loss of Profits insurance in force covering the damaged machinery If so, immediate action is necessary for minimizing the loss under the Machinery Breakdown policy A qualified engineer surveyor is generally deputed to assess the loss who will then scrutinize claims estimates, determine the cause of the accident and certify that the charges claimed for repairs are reasonable An up - to - date copy of the policy should be made available to the Independent Surveyor, if engaged in the initial stage so that he is fully acquainted with the terms, conditions and excess under the policy 10.6.2 Loss Settlement Procedure Partial loss basis In cases where the damage can be repaired, the basis of indemnification is the cost of restoration to working order based on the customary daily rates of wages together with normal freight and erection costs and other duties Customs duties and dues, if any have been included in the sum insured In such cases of repairable damage, no deduction is made for wear and tear, depreciation, etc For parts with limited life, depreciation factor has to be taken into consideration Total loss basis If the cost of the repair as mentioned above equals or exceeds the actual value of the machinery insured immediately before the occurrence of the damage the settlement shall be made on Total Loss Basis Under total loss basis, the basis of indemnification is the market value of the item immediately before the accident plus the cost of removing the damaged machinery less the value of the salvage Any extra charges incurred towards repairs, such as Express Delivery, Overtime and holiday rates and wages, are payable only if special provision for these items has been made in the Policy in consideration of which an additional premium is charged All costs of alterations, additions, improvements and overhauls carried out on the occasion of a repair are to be borne by the insured The Cost of provisional repairs will be borne by the insure if such repairs constitute part of the final repairs and not increase total repair expenses The insurer will make payments only after being satisfied by production of the necessary bills and documents, that the repairs have been effected or replacement have taken place as the case may be Position after a claim The insured is not entitled to abandon any property to the insured whether taken possession of by the insurer or not From the day of the loss the sum insured for the remainder period of insurance is reduced by the amount of compensation To prevent under insurance during the remaining period of insurance the sum insured must be reinstated The premium will be calculated pro - rata from the day the repaired item is again put to work up to the date of expiry of the policy 10.6.3 Boiler and pressure plant (BPP) This policy covers explosion of boilers and pressure plants but does not cover rupture of tubes inside the boilers Both these perils can be covered under MB policy and hence we should wherever possible include this in our MB portfolio since it would practically mean granting extra cover within the scope of tariff provisions Types of explosions It can be broadly classified under two categories for the purpose of insurance cover Chemical Explosions: It is a matter of common knowledge that gun powder, similar explosive compound could cause explosion under the influence of mechanical or thermal shocks Highly inflammable fluids and dusts can cause explosions if their concentration in the atmosphere exceeds the explosive limits From the insurance concept, these explosions are considered as very rapid form of combustion Physical Explosions: In respect of pressure vessels handling inert fluids such as steam, explosion can occur due to variation in fluid pressure The variation being only in physical form and there no chemical reaction or changes responsible for such explosions as such these are classified as Physical Explosions Scope of cover The policy covers pressure vessels both fired & unfired against the risk of explosion and collapse and indemnified the insured against: z Damage to the boilers & / or other pressure plant z Damage to surrounding property of the insured or the property held by the insured in trust for which he is responsible z Death or bodily injury to any person z Damage to property not belonging to the insured or held in trust or on commission for which he is responsible Exceptions of policy z Loss or damage raising from fire and allied perils which can be covered separately z Damage by chemical explosion except in recovery boilers and waste heat boiler z Contractual liability, manufacturer’s supplier’s liability z Loss arising from an existing defect z War group of perils, social group of perils z Nuclear perils z Loss due to gross negligence z Failure of individual tubes Warranties Under the BPP insurance, the following warranties will be incorporated during the currency of the policy: The Boilers and Pressure Plants described in the schedule are annually inspected by inspectors appointed by the Government except where there is no statutory requirement for Government inspection; the inspections are to be carried out by independent competent persons 141 Aviation Insurance 142 Risk and Insurance Management The Boilers and pressure plant described in the schedule shall only be operated by attendants holding a valid certificate of competency issued under the appropriate Boiler Act The insured shall be in possession of the unqualified permission in writing of the competent inspecting authority to operate the said boilers and pressure plant If the maximum pressure of load upon safety valve immediately prior to any explosion or collapse was in excess of that stipulated by the said authority the insured shall not be entitled to any compensation or indemnity under this policy in respect of such explosion or collapse Other extensions available under this policy Steam Pipes: The portion of the steam pipe up to the safety valve alone is deemed to form integral part with boiler The remaining portions of the steam pipes can be included under this extension Expediting Costs: Expenses towards overtime, night work, work on public holidays, express freight can be included under this extension The same will be indemnified after a loss provided these expenses are incurred following a loss due to an insured peril under this policy Air Freight: Expenses towards air - lifting parts of the boiler following a loss can be included under this extension Policy Period: This policy is issued on annual basis Claim procedure In the event of a loss, the insured should comply with the following: z Immediately notify the insurer giving an indication as to the nature and extent of loss z Take all reasonable loss minimization steps z Preserve the salvage z Furnish all information and documentary evidence as required by the insurer z The insured may proceed with the repair of any minor damage not exceeding Rs.2500/- z Claim form duly completed and signed should be sent to the insurer Generally, claims are for substantial amounts and require great care during investigation and negotiations It is necessary to investigate the cause of the damage and ascertain whether the claim falls under the policy definition of 'Explosion' or 'Collapse' The certificate issued by the Government Inspector of Boiler must be checked to ensure that the accident occurred within its validity period and that all its terms and conditions have been complied with It is preferable to have assessments of Boiler Explosion claims carried out by qualified engineer surveyor who can determine the exact cause of the loss and arrive at a fair assessment as to the quantum of claim payable 10.6.4 Contractor’s Plant & Machinery (CPM) Whilst it is possible to have the Contractor’s plant and machinery covered under an EAR or CAR policy at specific project sites, CPM policy has been designed to provide a cover on an annual basis to a contractor who may be using his plant and machinery at different projects during the course of the year The cover under a CPM policy is not limited to a specific project site and is operative at all sites wherever the plant and machinery is in use and even while the same is lying at the contractor’s own premises We therefore have to ensure that all the sites where the insured items are being used are mentioned on the face of the policy Scope available under CPM policy The Contractor's plant and machinery insurance comes under the policies available under the Project Insurance and like the EAR / CAR Policy offers a comprehensive cover as given below: z Fire, lightning, external explosion, earthquake, flood, inundation, subsidence, landslide and rockslide z Storm, tempest, hurricane, typhoon and tornado z Burglary, theft, riot and strike and malicious damage z Accidental damage while at work due to faulty man - handling, dropping or falling, collapse, collision and impact Exclusions The insurer will not indemnify in respect of loss or damage given below: z Excess as stated in the policy schedule, which has to be borne by the insured in any one occurrence If more than one item is lost or damaged in one the occurrence insured has to bear the highest single excess applicable to such items z Loss or damage due to electrical or mechanical breakdown, failure breakage or derangement freezing of coolant or other fluid, defective lubrication or lack of oil or coolant, but if as a consequence of such breakdown or derangement an accident occurs causing external damage, such consequential damage will be identifiable z Loss of or damage to replaceable parts and attachments such as bits, drills, knives or other cutting edges, saw blades, dies, moulds, patterns, pulverizing and crushing surfaces, screens and sieves, ropes, belts, chains, elevator, and conveyor bands, batteries, tyres, connecting wires and cables, flexible pipes, joining and packing material z Loss or damage due to explosion of any boiler or pressure vessel subject to internal steam or fluid pressure or of any internal combustion engine z Loss of or damage to vehicles designed and licensed for general road use unless these vehicles are exclusively used on construction sites z Loss or damage to the hull and machinery of water borne vessels z Loss or damage while in transit from one location to another location z Loss or damage due to wear and tear corrosion, rust etc z Loss occurring while an insured item is undergoing any test z Loss to any plant or machinery working underground z Losses arising out of war and war like perils and due to nuclear radiation or radio active contamination z Damage due to faults or defects existing at the time of commencement of the policy with the knowledge of the insured z Any willful act or gross negligence of the insured resulting in a loss z Loss for which the supplier or the manufacturer is responsible z Loss discovered only at the time of taking the inventory or during routine servicing z Loss to plant and machinery mounted or operated on a floating vessel / barge 143 Aviation Insurance 144 Risk and Insurance Management Claim procedure Claims under this policy may arise due to many causes, e.g fire, riot, flood, storm, earthquake, theft, accidental damage to contractors plant and machinery Proper claims forms should be used when processing the claims The insurer is not liable for additional cost incurred for alteration or improvement carried out at the time of repairs Insurers generally insist upon immediate notification of any claim for this class of insurance in order that the cause and circumstances of the loss may be ascertained and repair / replacement costs checked All theft claims require careful investigation conjunction with the local police authority Losses discovered only at the time of taking inventory are not covered under this policy Salvage materials should be disposed off, preferably on 'as is where is' basis at best available prices and this will minimize the loss to a certain extent 10.6.5 Electronic Equipment Insurance (EEI) The Electronic Equipments such as computers, Micro - processors, Word - processors, Tele - communication equipments Machine meant for medical use and other misc Equipments like films, television studio equipments can be covered under this policy The scope of this policy is ALL RISK Scope of cover This insurance indemnifies the insured against any physical loss or damage due to following perils: z Location Perils z Fire, lighting, explosion, flood, storm, etc z Break Down z Any electrical / mechanical breakdown z Faults z Faulty design, faulty materials, faults in manufacturing / assembly erection z Effect of Moisture z Damage due to moisture and humidity z Carelessness z Damage due to faulty / careless / negligent operation by employees z Riot & Strike z Riot & strike damage and malicious damage z Burglary z Loss or damage due to theft or burglary / house breaking Subject matter insured This policy is recommended for the following instruments: z Electronic data processing equipment comprising central processor with flexible programmability z Peripheral equipments such as readers, printers, tape or card punchers or sorters z Tapes, and discs z Auxiliary equipment such as air conditioning, heating and power conversion or main power control plant z Electronic office equipments, material testing and research equipment z Electro medical installations z Telecommunication equipment, etc z Computerized numerical control system used in connection with production machinery Insured parties The insured can be either the owner or the hirer of the electronic equipment The insurance protects, on the basis of the insurance conditions The Owner As operator against material damage, for which the manufacturer is not responsible under a guarantee The Hirer Against material damage for which, he is responsible either legally or through a leasing agreement General exclusions Inherent vice Wear & tear, loss due to defects known to the insured at the time of commencement of the policy Manufacturers responsibility: z The loss/damage for which the suppliers are responsible under guarantee z Willful Act z Due to any willful act or willful negligence of the insured or his representatives z Cessation z Cessation of work whether total or partial z Expected Perils z War, invasion and the like, nuclear reaction / radiation, loss or damage due to interruption caused by the failure of any gas, water or electricity service or supply z Functional Failure z Maintenance costs z Hired Equipments z For the equipment hired for which the owner is responsible Check Your Progress Fill up the blanks: is purchased by agricultural producers covers property contained in business premises, stocks owned, or for which insured is responsible or held in trust and/or commission it covers the broad perils of drought, flood, insects, disease, etc All theft claims require careful conjunction with the local police authority 145 Aviation Insurance 146 Risk and Insurance Management 10.7 CROP INSURANCE Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance 10.7.1 Crop-yield Insurance There are two main classes of crop-yield insurance: Crop-hail insurance It is generally available from private insurers (in countries with private sectors) because hail is a narrow peril that occurs in a limited place and its accumulated losses tend not to overwhelm the capital reserves of private insurers The earliest crop-hail programs were begun by farmers cooperatives in France and Germany in the 1820s Multi-peril crop insurance (MPCI) It covers the broad perils of drought, flood, insects, disease, etc., which may affect many insureds at the same time and present the insurer with excessive losses To make this class of insurance, the perils are often bundled together in a single policy, called a multi-peril crop insurance (MPCI) policy MPCI coverage is usually offered by a government insurer and premiums are usually partially subsidized by the government The earliest MPCI program was first implemented by the Federal Crop Insurance Corporation (FCIC), an agency of the U.S Department of Agriculture, in 1938 The FCIC program has been managed by the Risk Management Agency (RMA), also a U.S Department of Agriculture agency, since 1996 10.7.2 Crop-revenue Insurance It is a combination of crop-yield insurance and price insurance For example, RMA establishes crop-revenue insurance guarantees on corn by multiplying each farmer's corn-yield guarantee, which is based on the farmer's own production history, times the harvest-time futures price discovered at a commodity exchange before the policy is sold and the crop planted There is a single guarantee for a certain number of dollars The policy pays an indemnity if the combination of the actual yield and the cash settlement price in the futures market is less than the guarantee Crop-revenue insurance covers the decline in price that occurs during the crop's growing season It does not cover declines that may occur from one growing season to another That would be called "price support," and would raise a series of complex agricultural-policy and international-trade issues 10.7.3 Specialty Crops "A farmer or grower may desire to grow a crop associated with a particular defined attribute that potentially qualifies for a premium over similar commodity crops, agricultural products, or derivatives thereof The particular attribute may be associated with the genetic composition of the crop, certain management practices of the grower, or both However, many standard crop insurance policies not differentiate between commodity crops and crops associated with particular attributes Accordingly, farmers have a need for crop insurance to cover the risk of growing crops associated with particular attributes." 147 Aviation Insurance 10.8 LET US SUM UP Aviation Insurance was first introduced in the early years of the 20th Century It is not known who wrote the very first aviation insurance policy though there is evidence those early aviators did purchase limited amounts of coverage Crop insurance is purchased by agricultural producers, including farmers, ranchers, and others to protect themselves against either the loss of their crops due to natural disasters, such as hail, drought, and floods, or the loss of revenue due to declines in the prices of agricultural commodities The two general categories of crop insurance are called crop-yield insurance and crop-revenue insurance Burglary Insurance policy covers property contained in business premises, stocks owned, or for which insured is responsible or held in trust and/or commission It also covers cash, valuables, securities kept in a locked safe or cash box in locked steel cupboard on specific request 10.9 LESSON END ACTIVITY What else, according to you, should be covered under insurance policies? Give suggestions and discuss in your group 10.10 KEYWORDS Burglary Insurance: Covers property contained in business premises, stocks owned, or for which insured is responsible or held in trust Crop insurance: Protects agricultural producers, including farmers, against either the loss of their crops due to natural disasters, or the loss of revenue due to decline in the prices of agricultural commodities 10.11 QUESTIONS FOR DISCUSSIONS What is Aviation Insurance explain? What are the benefits of Burglary insurance? Briefly explain about the crop insurance Check your Progress: Model Answers CYP 1 Burglary insurance policy covers property contained in business premises, stocks owned, or for which insurance is responsible or held in trust or commission Every airline insures its passengers normally in a single liability policy In many countries there are requirements laid down imposing minimum limits of liability Many airlines cover their Airline General Third Party Liability, within their main liability programme CYP Crop insurance Burglary Insurance policy Multi-peril crop insurance (MPCI) Investigation 148 Risk and Insurance Management 10.12 SUGGESTED READINGS Dr P.K Gupta, Insurance and Risk Management, 1st edition, Himalaya Publishing House Dr P.K Gupta, Fundamental of Insurance, 1st edition, Himalaya Publishing House C Gopala Krishnan, Insurance Principles & Practice, Sterling Publishers Pvt Ltd., New Delhi George G.R Lucas, Ralph H Wherry, Insurance, Principles and Coverage, U.S.A Prof K.S N Murthy and K.V.S Sarma, Modern Law of Insurance in India, N.M Tripathi Pvt Ltd., Mumbai P.S Palande, R.S Shah, M L Lunawat, Insurance in India, Sage Publications, New Delhi MODEL QUESTION PAPER MBA Second Year Sub: Risk and Insurance Management Time: hours Total Marks: 100 Direction: There are total eight questions, each carrying 20 marks You have to attempt any five questions What are the benefits of Burglary insurance? Briefly explain about the crop insurance What are the different types of risk? Distinguish between Risk and Uncertainty What are the different types of fire policies? Define the concept of fire policies and what are their characteristics? What are the various types of marine insurance coverage? Describe about special marine insurance policies 149 Model Question Paper ... Aviation Insurance – Burglary Insurance – Fidelity Guarantee Insurance – Engineering Insurance – Cattle Insurance – Crop Insurance 5 Risk UNIT I Risk and Insurance Management Risk LESSON RISK CONTENTS... country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, ... Risk Management 2.5 Areas of Risk Management 2.5.1 Enterprise Risk Management 2.6 Risk Management Activities as Applied to Project Management 2.7 Risk Management and Business Continuity 2.8 Risk