FIN - 201

Indian Financial System

 Learning outcomes
• To understand the basic concept of insurance

• To study and analyze the function of insurance

Latest News
 Link of news
• https://www.financialexpress.com/money/
insurance/give-priority-to-risk-prevention-
over-insurance-claim-settlement-irdai-
chairman/2182690/
 Introduction
• Insurance is defined as a contract, which
is called a policy, in which an individual or
organisation receives financial protection
and reimbursement of damages from the
insurer or the insurance company.
• At a very basic level, it is some form of
protection from any possible financial
losses.
• The basic principle of insurance is that an
entity will choose to spend small periodic
amounts of money against a possibility of
a huge unexpected loss.

• Basically, all the policyholder pool their

risks together.
• Any loss that they suffer will be paid out of
their premiums which they pay.
 Insurance Contracts
• An insurance contract is a document
representing the agreement between an
insurance company and the insured.

• Central to any insurance contract is

the insuring agreement, which specifies
the risks that are covered, the limits of the
policy, and the term of the policy.
• Additionally, all insurance contracts specify:
• conditions, which are requirements of the insured, such
as paying the premium or reporting a loss;
• limitations, which specify the limits of the policy, such
as the maximum amount that the insurance company will
pay;
• exclusions, which specify what is not covered by the
contract.
 Valid contract
• valid contract, including insurance
contracts:
– offer and acceptance,
– consideration,
– competent parties, and
– legal purpose.
 Significance of Insurance
• Provide safety and security:
• Generates financial resources:
• Life insurance encourages savings:
• Promotes economic growth:
• Medical support:
• Spreading of risk:
• Source of collecting funds:
 Peril and Hazard
• The words "peril' and "hazard" may seem
virtually synonymous but they mean very
different things in the insurance industry.
• A peril is a potential event or factor that can
cause a loss, such as the possibility of a fire that
could engulf a house.

• A hazard is a factor or activity that may cause or

exacerbate a loss, such as a can of gasoline left
outside the house door or a failure to regularly
have the brakes of a car checked.
• For example:
• A roof covered with snow can be a
physical hazard. If the amount of snow is
so great that the roof ultimately collapses,
then the snow is the peril.
• A fire breaks out in an office building,
which causes the sprinkler system to activate.
This causes considerable water damage. Even
though the fire caused the problem, the
water damage itself is the peril.

• A burglar breaks into a restaurant safe and

steals a great deal of money. In this case, the
act of theft is the peril.
• https://www.youtube.com/watch?v=yHb9jP
uMMAg
• The insurance industry commonly divides
hazards into three categories: physical,
moral, and morale.
– Physical Hazards
– Moral Hazards
– Morale Hazards
 physical hazard
• A physical hazard increases the likelihood of a
loss occurring due to inadequacies in the
condition, structure or operation of an insured or
insured property.
• For example, a roof covered with heavy snow
might be considered a physical hazard when it
comes to homeowner’s insurance. At the same
time, a health insurance policy might consider
an insured’s heart condition to be a physical
hazard.
 Legal Hazards
• A legal hazard meanwhile, increases the
likelihood and severity of a loss due to a
condition imposed by the legal process
that forces an insurer to cover a risk that it
would otherwise deem uninsurable
• . For example, the American legal system
motivates many people to bring litigation
suits in order to realize the potentially
lucrative profits in doing so. Anything that
might prompt a lawsuit involving an insurer
can be considered a legal hazard.
 Moral Hazards
• A moral hazard, as the name might suggest,
results from fraudulent acts committed by an
insured.

• Examples of moral hazards include filing false

insurance claims or misrepresenting oneself on
a life insurance application in order to obtain
coverage or more favorable coverage terms.
 Morale Hazards
• Not to be confused with moral hazards, a morale
hazard results from a lack of reasonable care
put forth by an insured.

• For example, consider an insured whose wallet

is stolen from his car because the doors were
left unlocked. This would be a morale hazard, as
the insured did not take the necessary care to
prevent his valuables from being stolen.
Moral Hazards versus Morale
Hazards
• The difference between a moral hazard
and a morale hazard is the intent.

– A moral hazard arises out an individual’s

deliberate intent to deceive.

– A morale hazard, on the other hand, results

from unintentional carelessness or laziness.
Principle of Insurable Interest
The compensation must not be less than or more than the amount
of loss occurred due to damage.
 Principle of Subrogation
• When the insured is compensated for the losses due to
damage to his insured property, then the ownership
right of such property shifts to the insurer.

• This principle is applicable only when the damaged

property has any value after the event causing the
damage.

• The insurer can benefit out of subrogation rights only to

the extent of the amount he has paid to the insured as
compensation.
Principle of Loss Minimization
• Insured must always try his level best to minimize
the loss of his insured property, in case of uncertain
events like a fire outbreak or blast, etc.
• The insured must take all possible measures and
necessary steps to control and reduce the losses in
such a scenario.
• The insured must not neglect and behave
irresponsibly during such events just because the
property is insured. Hence it is a responsibility of the
insured to protect his insured property and avoid
further losses.
 Mutual Funds

Wants to be rich in short span of time then

answer
 Important questions and learning
outcome
• Do you have net income?
• What is net income?
• What do you do with your net income?
• If investing, then where and why?
• How much returns you are getting?
• Is that sufficient?
• Best investment option in the market?
• How investment market works?
Current news

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 Meaning and Types of Mutual
Funds
• https://www.reliancemutual.com/
• https://www.reliancemutual.com/our-
products/by-asset-class/equity-funds
• https://www.reliancemutual.com/our-
products/by-asset-class/debt-funds
• https://www.reliancemutual.com/our-
products/by-asset-class/gold-funds
• https://www.reliancemutual.com/our-
products/by-asset-class/liquid-funds
 Cont...
• A MF is a financial intermediary that pools the savings of
investors for collective investment in a diversified portfolio of
securities.
• Benefits:
1. Professional management
2. Portfolio diversification
3. Reduction in transaction cost
4. Liquidity
5. Convenience
6. Flexibility
7. Transparency
8. Stability in stock market
9. Equity research
10.Protection of investors interest.
 MF schemes
• Open-ended : Where investors can
redeem and buy new units all throughout
the year as per their convenience at NAV
related prices

• Closed-ended : These are open for

subscription only for a specified time
period and have fixed corpus.
 Test yourself
1. Mutual fund means
a.Diversification of net income
b.Portfolio management
c. Liquidity
d.All of the above
2. Mutual funds schemes are
a.Only open ended
b.Only closed ended
c. Both
d.None
End of Lecture