RISK MANAGEMENT

●History of Risk Managament

●Type of insurance company
● Lloyd’s of London
● Insurance agent and Brokers
● Loss adjuster
● Underwriter
 History of Risk Management
Risk Management in its most early days, was assessed mostly by the business owner or
its corporate leaders.

Risk avoidance depended on complete knowledge of one's field of business or

commerce. This asked for immense trust between ownership and management.

The earliest advent of risk management process was developed by insurance agents.
They developed the technique to protect their insurance business from financial ruin by
helping their clients to minimize risks and thus reduce liabilities (payout). Their success
captured the interests and notice of corporate executives looking to diminish their own
business risks.
Risk management began to be studied after World War II

- has long been associated with the use of market insurance to protect

individuals and companies from various losses associated with accidents

(Harrington and Niehaus, 2003).

New forms of pure risk management emerged during the mid - 1950s as
alternatives to market insurance when different types of insurance
coverage became very costly and incomplete. Several business risks were
costly or impossible to insure.
1960s - contingent planning activities were developed
- various risk prevention or self - protection activities and self - insurance
instruments against some losses were put in place.

Protection activities and coverage for work - related illnesses and

accidents also arose at companies during this period.

The concept of risk management in the financial sector was

revolutionized in the 1970s.
Financial risk management became a priority for many companies including:
• banks
• insurers; and
• non financial enterprises exposed to various price fluctuations such as risk
related to :
• interest rates;
• stock market returns;
• exchange rates; and
• the prices of raw materials or commodities
International regulation of risk also began in the 1990s.
Financial institutions developed internal risk management models and
capital calculation formulas to protect themselves from unanticipated
risks and reduce regulatory capital. At the same time, governance of
risk management became essential, integrated risk management were
introduced, and the first risk manager positions were created.
It is important to protect your business against unexpected events such as loss or
damage to your property, legal claims and workplace injuries. Inadequate insurance
coverage and risk management (including planning for disruption) can be a costly
mistake.

Insurance for your business is important to cover you for unexpected events. Without
the appropriate insurance you may be unable to trade or have large out of pocket
expenses, which could result in you having to close your business.
You can tailor non-compulsory insurance options according to the risks associated with
your business activities. Insurance cover can be arranged through an:
•insurance company
•agent acting on behalf of an insurance company
•insurance broker.

Insurance is a contract, represented by a policy, in which an individual or entity receives

financial protection or reimbursement against losses from an insurance company.
Insurer is the company or person who promises to reimburse.
Insured (sometimes called the assured) is the one who receives the
payment, except in the case of life insurance, where payment goes to
the beneficiary named in the life insurance contract.
Premium is the consideration paid by the insured—usually annually or
semiannually—for the insurer’s promise to reimburse.
Insurance can be classified as either private or government
insurance. Private insurance includes life and health insurance and
property and liability insurance. Government insurance includes
social insurance programs and other government insurance plans
An insurance risk is a threat or peril that the insurance company has agreed to insure
against in the policy wordings. These types of risks or perils have the potential to cause
financial loss such as property damage or bodily injury if it were to occur.

Examples of insurance risks include the

• risk of fire,
• earthquake losses, or
• even liability when an insured is found responsible for causing bodily injury, death, or
property damage to 3rd parties.
Because private insurance companies are businesses that want to make a profit, there
are only certain risks — known as insurable risks — that private insurers are willing to
cover. Almost all risks insured by insurance companies are pure risks, which are risks
where there is no possibility of profit.

Insurable risks are risks that insurance companies will cover. These include a wide range
of losses, including those from fire, theft, or lawsuits.
Risk = Possibility of Loss
Insurance = Probability of Loss
Only pure risk are insurable because they involve the chance of loss.
Pure risk - also called absolute risk, is a category of threat that is beyond human
control and has only one possible outcome if it occurs: loss. Pure risk includes such
incidents as natural disasters, fire or untimely death.
Examples:
• unemployment is a pure risk resulting in financial loss when income and benefits are
taken away.
• Poor health runs the risk of large medical bills, and the risk of an unforeseen,
permanent disability could end a person's career and, as a result, dramatically reduce
their income.
• Pure risk to property includes fires, wind damage, flooding and other natural
disasters that cause damage to personal belongings.
 Insurable Types of Risk

Personal risk is any risk that can affect the health or safety of an individual, such as being
injured by an accident or suffering from an illness.

Property risk is any risk that can cause a partial or total loss to property, such as theft, fire,
or so-called "acts of God".

Liability risk is the personal or business risk associated with being found liable to another
because of negligence or willful acts that caused a loss to another's property or person,
such as injuring someone while driving under the influence of alcohol, or because the
insured failed to perform a duty, such as performing contractual obligations.
An act of God describes an event outside of human control or activity. It's usually
a natural disaster, such as a flood or an earthquake. Insurance policies usually
specify which particular acts of God they cover.
Insurance company a financial institution which UNDERWRITES the risk of loss of, or
damage to, personal and business assets (general INSURANCE) and life and limb (life and
accident insurance).

An insurance company operates by pooling risk among a large number of policy holders;
premiums are based on the probability of a particular event occurring and the average
financial loss associated with each. This is done by the company's actuarial staff using
statistical techniques to analyse past claims.
 Types of Insurance Companies
Domestic. This is an insurance
company that is incorporated in
Lloyds of London. This is a business
the state within which it is
underwriting insurance under the
domiciled. This entity is considered
a domestic insurer within that authorization of the English

specific state, and a foreign insurer Parliament. These entities are more
within all other states (though it likely to issue coverage for more
can still be licensed to do business unusual or high risk items, as well
in other states). as the usual types of insurance.
There are many types of insurance companies. It is useful to be aware of the
general types, since the differences can impact the kinds of insurance that a
business chooses to buy. The more common categories of insurance company
include:
Captive insurance company. This is an entity that exists to underwrite the risks of
its parent owner. The concept can also be used to provide insurance for a group of
participating entities. The risk of loss is confined to the captive entity.
Alien. This is an insurance company that is Mutual. The policy holders own this
incorporated under the laws of another type of business, so earnings are
country. It is considered an alien entity from distributed back as dividends. Losses
the perspective of any other country within are not usually charged back to policy
which it does business. holders, based on the terms of their
insurance agreements.

Stock company. This is an entity organized as a corporation, with shareholders. Any

excess earnings of this type of business may be distributed as dividends to the
shareholders.
Lloyd's of London?

Lloyd's of London is a British insurance market where members

operate as syndicates to insure and spread out the risks of different
businesses, organizations, and individuals. The syndicates are
specialized in different types of risks and each syndicate decides which
type of risk to insure. The main purpose of Lloyd's of London is to act
as an intermediary between clients, underwriters, brokers, and
insurance companies.
The word Lloyd's has two meanings:
One is the marketplace where brokers and underwriters meet to do
business.

Lloyd's also means the Corporation of Lloyd's, the company that oversees
the insurance marketplace. The corporation ensures that the syndicates
are financially sound and that the marketplace operates efficiently.
Lloyd's of London is not an insurance company. Rather, it is a marketplace where
insurance buyers and sellers come together.

Lloyd's is now a major hub for buying and selling a variety of coverages, not just
marine insurance.

There are five main groups that make up the Lloyd's of London marketplace.
They are the syndicates, the insurance buyers, the brokers, the managing agents,
and the cover holders.
The Syndicates: The syndicates are
The Insurance Buyers: These are the
the key players at Lloyd's. They are
individuals or corporations buying the
made up of corporations or
insurance. Many times if a traditional
individuals. The syndicates are
insurance provider does not provide
basically the insurance companies
the insurance needed, perhaps for a
that offer a specific type of
particularly risky business, individuals
insurance. More than one syndicate
can find insurance sellers at Lloyd's.
can participate in an insurance
policy, thereby spreading the risk
out among many syndicates.
The Brokers: As with all brokers, the
The Managing Agents: The
brokers at Lloyd's act as go-betweens for
managing agents work for the
the insurance buyers and the syndicates.
syndicates and manage their
The brokers help facilitate and match the
daily operations. They are
appropriate syndicate to the buyer.
responsible for hiring and
Brokers at Lloyds must be approved by
overseeing all essential staff,
the Corporation of Lloyd's to be allowed
such as underwriters and
to do business in the marketplace.
accountants.
The Cover Holders: Cover holders are companies that underwrite the
insurance policies for managing agents. These are outside entities that Lloyd's
contracts to do certain business that isn't done by the brokers. They are given
specific authority to transact certain business in the marketplace. Cover
holders allow Lloyd's of London to operate globally without having to set up
shop in many locations.
 Insurance agent and Brokers
Many small business owners purchase
business insurance policies through an
insurance agent or broker. While
insurance agents and brokers perform
similar functions, there are some
differences between the two.
Agents and brokers act as intermediaries between you (the

insurance buyer) and your insurers. Both have a legal duty to

help you obtain appropriate coverage at a reasonable price.

Each must have a license to distribute the type of insurance

he or she is selling. Each must adhere to the regulations

enforced by your state insurance department.

An agent is a person who acts on
behalf of a person or group. In
the insurance industry, an agent
represents one or more insurers. Agents act as intermediaries, providing
The agent is responsible for potential buyers with information from
distributing the insurer’s the insurance company or companies
products; their insurance that they represent.
policies. They can represent one
or several different insurance
companies.
 A broker will work with their clients to
identify and put together the best
A broker is an insurance possible insurance plan for their specific
expert that legally coverage needs. They have no obligation
represents people or to sell policies from one insurance
businesses that are looking company or another, meaning that they
to buy insurance. can shop around to find the best policies
at the best prices according to their
clients’ needs.
 What Are the Main Differences Between Agents and Brokers?

Insurance Agent Insurance Broker

Client Sells policies direct to Acts as liaison between consumers and
consumers on behalf of insurers, agents, or underwriters, with
insurance companies loyalties to each

Payment Receives sales commission from Receives commission from insurers and
insurers (and sometimes brokerage fees from consumers
contingent commissions)

Scope Works with specific companies Broad access to full insurance marketplace
 Loss Adjuster
The purpose of their role is:
A loss adjuster is an
1. To verify the whole claim:
independent claims specialist
• They will check that the conditions
appointed by the insurer to
of the policy cover the loss
investigate complex claims
• They will evaluate the loss by
that they might have to pay
visiting the relevant site to assess the
out. The loss adjuster’s fees
extent of damage
are paid for by the insurer
To provide guidance on repairs:
• They will get estimates for repairs and assess their costs
• They can also authorise their own contractors to carry out repairs.
This option often costs less as they are linked to the insurance company

2. Provide a full report to the claimant and

insurance company to outline the best
course of action.
Insurance companies employ
Underwriting
Loss Adjusters to maintain an
efficient level of service on Underwriting is a common
complex claims and ensure practice used in the commercial,
that costs are kept to a insurance and investment
minimum. banking industries.
What Is an
Underwriter?

An underwriter is a member of a financial organization. They work

for mortgage, insurance, loan or investment companies. They assess,
evaluate and assume the risk of another party for a fee. Often, you’ll
see this fee in the form of a commission, premium, spread or
interest.
What Does an The underwriter will review the applicant’s
Underwriter Do?
information including age, current health
Using the knowledge they have in
condition and past medical and family
their field, underwriters decides if
history. Using this information and other
a contract is worth the risk. For
factors, an underwriter will enter the data
example, underwriters who work
into underwriting software. The software will
with health insurance companies
evaluate the health risk of determine the premium amount and terms

applicants. they should apply to the policy. Also, this

assessment determines if the policy is too
risky to move forward.
Agents and brokers represent both consumers and insurance
companies, while underwriters work for insurance companies.

An underwriter’s job across all industries is to analyse and

subsequently assume the risk of another party against a fee or deny it.
For example, suppose Raj applies for Next, based on analysis, this
a mortgage loan with XYZ Bank. The underwriting individual first determines
underwriter in XYZ assesses the risk whether the company should accept
Raj carries as a borrower by analysing Raj’s application or not. If approved, a
his credit score, repayment history, borrowing rate justifying findings of
and also the true value of such such evaluation will be set for Raj. The
mortgaged property, and whether it higher the risk, the higher will be the
stands the loan amount. interest rate.