Insurance as a Tool of Risk Management

Hindu philosophy gives the axiomatic truth of the nature of insurance “Yat bhavathi tat nasyathi’ which means whatever is created will be destroyed. Risk is therefore inevitable in life. Business is a course of life, so in life and business there are variety of risks. The aim of all insurance is to protect the owner from a variety of risks which he anticipates by shifting the loss suffered by a sole individual to a professional risk- bearer in consideration for a small amount of premium. The nature of insurance depends on the nature of the risk sought to be protected. The chief varieties of an insurance contract are life, fire, marine and in modern times new varieties have been added from time to time like liability insurance and third party risk. Insurance is a method of spreading over a large number of persons as possible financial loss too serious to be conveniently borne by an individual. Thus it serves the social purpose. It is a social device whereby uncertain risks of individuals may be combined in a group and thus made more certain; small periodic contribution by the individuals providing a fund out of which those who suffer losses may be reimbursed.

In modern times, the happening of any event may be insured against a premium directly proportional to the risk involved on its happening. An element of uncertainty must be present in the course of the happening of the event insured against, in some cases, in almost all non- life insurance contracts, the happening of the event is uncertain while in life insurance the event is bound to happen however the time is uncertain. The institution of insurance serves a two- fold purpose, the immediate, short range and proximate purpose is to protect the individual assured from any loss or damage to his life or property by distributing the loss among a variety of persons through a media of professional risk- bearers. The far- sighted purpose is to accelerate economic growth of the nation by mobilizing funds for capital formation and helps in the establishment of a welfare state.

HISTORY OF INSURANCE
The roots of insurance might be traced to Babylonia, where traders were encouraged to assume the risks of caravan trade through loans that were repaid ( with interest) only after the goods had arrived safely- a practice which was given legal force in the Code of Hammurabi ( c. 2100 B.C.) With the growth of towns and trade in Europe, the medieval guilds undertook to protect their members from loss by fire and shipwreck, and to provide decent burial and support in sickness and poverty. By the middle of the 14th century, as evidenced by the earliest known insurance contract. (Genoa, 1347), marine insurance was practically universal among the maritime nations of Europe.

In London, Lloyd’s Coffee House ( 1688) was a place where merchants, shipowners, and underwriters met to transact business. By the end of the 18th century, Llyod’s had progressed into one of the first modern insurance companies. In 1693, the astronomer Edmond Halley constructed the first mortality table, based on the statistical laws of mortality and compound interest. The table corrected in the year 17556 by Joseph Dodson, made it possible to interruption claims. They may also render their services in determining the consideration of liability involving accountants’ negligence and for other professional negligence cases. They may also provide their knowledge in rendering assistance of fidelity insurance disputes and insurance accounting disputes.

STATEMENT OF PROBLEM: The proposed study aims to analyze the meaning of risk, time of commencement of risk in an insurance contract, the different types of risks covered by various types of insurance, its benefits and the role of the life insurance corporation in managing risks.

NATURE OF INSURANCE CONTRACT
1) Contract of insurance is not a wagering contract. It is sometimes argued that insurance is a gambling activity as there is uncertainty in both the cases and payment in both the cases is made on happening of some event. It is not so, there is a difference. The contract of insurance is a legal contract enforceable at law, whereas wagering contract is illegal and cannot be enforced at law. An insurance contract is a contract of utmost good faith but this element is missing in wagering contract. Insurance contract has an element of insurable interest but this is absent in a wagering contract. Insurable interest is the interest of such a nature that the possessor would be financially insured by the occurrence of the event insured against. There has to be a subject matter to insure in an insurance contract.

Absence of insurable interest renders the contract a nullity. In case of insurance contract, risk of loss or damages is existing whereas in case of wagering contracts, the risk is created by both the parties. 2) Principle of indemnity: All insurance contracts except the life insurance contract are contracts of indemnity. The principle means that the insurer undertakes to indemnify the insured against the loss suffered by the insured peril. It means to make good the loss and to place the insured as far as possible in the same financial position in which he was before the happening of the insured peril. This principle helps to keep the premium at a low level and helps in avoiding an anti- social act. MEANING OF RISK:

A contract of insurance is a contract under which the insurer undertakes to protect the insured from a specified loss it occurs. The insured is afraid of loss which is called the risk of loss and the insurer undertakes to indemnify him from the apprehended loss it occurs for a consideration called the premium. The insurer calculates the premium according to the probability, nature and extent of risk from which the insured desires to be protected. The risk of loss is co – extensive with the value of the insurable interest the insured has. The insurer fixes the premium according to the nature, quantity, quality and probability of the risk desired to be covered by the policy. The determination of dimensions of risk covered by the contract is important to both the parties. Risk remains the risk till the happening of the contingency. Once the contingency happens it becomes a definite loss and against this loss the insurer seeks to indemnify the assured. SCOPE OF RISK

The insurer indemnifies the insured only against the loss caused during the period insured, for which the direct and proximate cause is the peril insured against. In The Wilson Son’s and Co v. Xantho the scope of the risk is described as: It is open to the parties by agreement to extend or limit the liability of the insurer in respect of the operation of the risk. In the absence of such an agreement: 1) The risk includes a) the loss caused, i.e, risk brought about by the negligence not only of the insured but even by his servants or strangers, and b) risk brought about willfully or maliciously by the insured’s servants or strangers, but 2) The risk does not include a) loss caused by the willful misconduct of the insured or caused with the convenience whether it amounts to a crime or not, b) loss due to ordinary wear and tear and c) inherent vice of the subject matter insured as in d) and e) the risk is such that it must happen and the risk in insurances is that which may happen and not which must happen.

In the case of Vikram GreenTech Ltd v. New India Assurance Co. Ltd , where the appellant had insured his poly- houses in a floriculture project. The proposal form clearly mentioned that only six poly houses were to be insured. The insured claimed losses for houses 7, 8A as well as 8B which were not expressly mentioned in the proposal form. The Supreme Court opined that an insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms and by itself. In a contract of insurance, there is requirement of uberimma fides i.e. good faith on the part of the insured. Except that, in other respects, there is no difference between a contract of insurance and any other contract. The four essentials of a contract of insurance are,

(i) the definition of the risk,
(ii) the duration of the risk,
(iii) the premium and,
(iv) the amount of insurance. Since upon issuance of insurance policy, the insurer undertakes to indemnify the loss suffered by the insured on account of risks covered by the insurance policy, its terms have to be strictly construed to determine the extent of liability of the insurer. The endeavour of the court must always be to interpret the words in which the contract is expressed by the parties. The court while construing the terms of policy is not expected to venture into extra liberalism that may result in re-writing the contract or substituting the terms which were not intended by the parties. The insured cannot claim anything more than what is covered by the insurance policy. The National Claim as well as the Supreme Court rejected the claim of the insured.

TYPES OF RISKS COVERED BY INSURANCE
PURE RISKS: A pure risk offers no prospect of gain. It offers only the possibility of loss, or at best the preservation of status quo. Examples of pure risk are fire, flood, accident, death, etc. These are the kinds of risk which normally are the subject of insurance. Pure risks are handled as operational and safety issues by professionals and finance personnel have to address the risks arising out of failure of above operational and safety measures. Such risks cannot be against public policy. Together they need to ensure that the organization is able to withstand any risks or failure of systems and can continue its operations without much struggle. The Risk Management and Insurance Planning is required for any organization to review their risk management strategies and to opt for risk transfer measures like availing insurance cover etc. SPECULATIVE RISKS: also known as entrepreneurial risks, these offer the possibility of gain or of loss. Trading risks fall within this category. Generally such risks are not insurable. Provision against the possibilities of loss with this type of risk is usually made by commercial transactions or by specific management decisions, such as diversifying business activities. TYPES OF RISKS COVERED BY DIFFERENT TYPES OF INSURANCE

Life Insurance: provides a monetary benefit to a deceased’s family or other designated beneficiary, and may specifically provide for income to an insured person’s family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment, or an annuity. Marine insurance covers different types of risk during the sea voyage. The insured can select the different types of risk, which may arise during the voyage and insurance company will only liable to compensate the mentioned or selected risk. The following types of perils and risk are generally covered under marine insurance 1) Perils of sea: Perils of sea means unknown or extra ordinary accident such as collision with sea risk or other another ship, accident, in lack of pre-knowledge, sea wind, etc. which may damage the ship.

The insurance company is liable to compensate the mentioned perils of sea but ordinary gale, waves, wear and tear and not included. 2) Perils of fire: Fire perils are related to loss or damage due to fire on account of coal, electricity, water used for extinguishing fire, lightening, explosion, etc. Insurance company covers damage only if the fire occurs accidentally. 3) Jettison: It means purposely throwing away the cargo or part of ship into the sea to make the ship lighter. If this act is done for the safety of the ship then insurance company will compensate the loss but if this act is done with out any reason then insurance company will not liable to compensate the loss. 4) Barratry: When a wrongful act willingly committed by the crew is known as barratry. Such as theft, setting fire on ship, fraudulent sale of cargo, etc. The insurance compensate is labile to indemnify the loss against the barratry risk. 5) War risk: Enemy country may damage the ship, capture the ship during the war time. Insurance company compensates the loss against war risk. 6) Land risk: Insurance company also covers the land risk and include “warehouse to warehouse” clause. It compensates the damage or loss through risk while transporting goods from one ware house to another. MOTOR INSURANCE

It is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the insured’s vehicle itself. Motor insurance is extended over cars, commercial vehicles, caravans and trailers, as well as motorcycles. FIRE INSURANCE

Fire: Destruction or damage to the property insured by its own fermentation, natural heating or spontaneous combustion or its undergoing any heating or drying process cannot be treated as damage due to fire. For e.g., paints or chemicals in a factory undergoing heat treatment and consequently damaged by fire is not covered. Further, burning of property insured by order of any Public Authority is excluded from the scope of cover. Lightening: Lightning may result in fire damage or other types of damage, such as a roof broken by a falling chimney struck by lightning or cracks in a building due to a lightning strike. Both fire and other types of damages caused by lightning are covered by the policy.

Explosion/ Implosion: Explosion is defined as a sudden, violent burst with a loud report. An explosion is caused inside a vessel when the pressure within the vessel exceeds the atmospheric pressure acting externally on its surface. Implosion means bursting inward or collapse. This takes place when the external pressure exceeds the internal pressure. This policy, however, does not cover destruction or damage caused to the boilers (other than domestic boilers), economisers or other vessels in which steam is generated and machinery or apparatus subject to centrifugal force by its own explosion/ implosion. These risks can be covered in a Boiler & Pressure Plant Insurance Policy, which is specially designed to handle these risks. Aircraft Damage: The loss or damage to the property (by fire or otherwise) directly caused by aircraft and other aerial devices and/ or articles dropped there from is covered. However, destruction or damage resulting from pressure waves caused by aircraft travelling at supersonic speed is excluded from the scope of the policy. Any loss caused by riot, terrorism, etc:

Any loss or physical damage to the property insured directly caused by such activity or by the action of any lawful authorities in suppressing such disturbance or minimising its consequences is covered. Further the wilful act of any striker or locked out worker, in connection with a strike or a lock out, or the action of any lawful authority in suppressing such act, resulting in visible physical damage by external means, is also covered. Malicious act would mean an act with malicious intent but excluding omission of any kind by any person, resulting in visible physical damage to the insured property, whether or not the act is committed in the course of disturbance of public peace or not. Burglary, housebreaking, theft or larceny does not constitute a malicious act for the purpose of this cover.

Total or partial cessation of work or the retarding or interruption or cessation of any process or operations; or, permanent dispossession resulting from confiscation, commandeering, requisition or destruction by order of the Government or any lawfully constituted authority; or permanent or temporary dispossession of any building or plant or unit or machinery resulting from the unlawful occupation by any person of the same or prevention of access to the same, are not covered. Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation: Storm, Cyclone, Typhoon, Tempest, Tornado and Hurricane are all various types of violent natural disturbances that are accompanied by thunder or strong winds or heavy rainfall. Flood or Inundation occurs when the water rises to an abnormal level. Flood or inundation should not only be understood in the common sense of the terms, i.e., flood in river or lakes, but also accumulation of water due to choked drains would be deemed to be flood. These risks are not exhaustive. ELEMENTS OF RISK

Risk depends upon various elements of the event insured against in its happening sooner or later. These circumstances must be disclosed by the insured and the insurers generally calculate the premium with reference to these elements: In life insurance, the risk depends upon:

i) Habits in life or mode of living,
ii) Health
iii) Occupation
iv) Environment
v) Position and status in life,
vi) Character,
vii) Heredity,
viii) Previous illness, and
ix) Opportunities for exposure to special dangers.
In property (includes motor as well as fire) insurance the risk depends upon: i) The nature of the property like movable or immovable property, perishable or otherwise, ii) Character and constitution,

iii) Area,
iv) Situation and locality,
v) Exposure to outside dangers,
vi) Inherent defect,
vii) Use and habits of the assured,
viii) The title to the property.
In marine insurance the risk depends upon:
i) Voyage and its nature,
ii) The route of the voyage,
iii) The winds and the storms in the locality,
iv) The danger of war, capture and seizure,
v) Pirates,
vi) Mutiny of the crew,
vii) Insurrection of natives and dangerous coasts.

Commencement of risk: On the part of the insurer the risk commences when the insurer accepts the proposal and the proposer deposits the first premium. In case the insurer gives acceptance conditionally, the original proposer has to comply with those conditions first then it becomes the clear acceptance by the insurer. These conditions may be relating to payment of premiums or extra premiums or to comply with certain statutory requirement. Mere collection of amount of premium does not signify that the proposal is accepted. Some formalities also have to be completed before the payment becomes acceptable. In LIC of India v. Raja Vasireddy Komalavalli Kamba, contract of insurance was to be concluded only when the party to whom an offer has been made has accepted it unconditionally and communicated its acceptance to the person making the offer. Silence does not result in a binding contract.

CIRCUMSTANCES AFFECTING THE RISK
There are certain material facts which must be disclosed by the insured as it affects the risk to be undertaken by the Insurance company. In case of life insurance the age of the assured, his health, habits, etc have to be considered while fixing the premium amount. The Insurance Act, 1938 in Section 45 says that, Nothing in this section shall prevent the insurer from calling for proof of age at any time if he is entitled to do so, and no policy shall be deemed to be called in question merely because the terms of the policy are adjusted on subsequent proof that the age of the life insured was incorrectly stated in the proposal. The habits of life, past and present which tend to shorten life must be disclosed like use of opium, tobacco or alcohol. Questions about past illness are to be treated differently with that of the present state of health. The latter are matters of opinion. Consultations done in early childhood cannot be regarded as material facts. Information regarding the occupation is essential to understand the nature of the risk. If it is a dangerous occupation like a soldier, sailor, pilot or a workman in an ammunition factory, the insurers charge a higher rate of premium. UTMOST GOOD FAITH PRINCIPLE

The insurance contract is a contract ubberrima fide and therefore if the assured has not disclosed all the material facts, the insurance company can avoid the contract. It is a practice of insurance companies to insert a clause in the policies and proposal forms to declare that all the answers stated in the proposal form shall form the basis and part of the terms of the contract in the policy. By such a declaration, the insurance company has a right to avoid the policy with a slight variation in disclosure of material facts. This rule was mitigated by Section 45 of the Life Insurance Act. It laid down that No policy can be challenged after two years from the date of policy on the ground that any statement made in the proposal or in any report of the medical officer or any document is false or inaccurate unless it is material to disclose and it was fraudulently made and the policy holder knows at the time that it was false or he suppressed the fact which was material to disclose. In Mithoolal v. Life Insurance Corporation, the respondent challenged the policy after two years of issue as the assured had fraudently suppressed facts. It was held that the latter was not liable. In Suresh, P.V v. Insurance Ombudsman and another

MATERIAL FACTS:
The complaint was filed by the petitioner as the ombudsman had rejected the claim of his deceased wife under the Life Insurance Policy. The petitioner’s wife took an insurance Policy for 50,000 from Life Insurance Corporation of India. She died on account of cervical cancer. Before her death, she paid 10 quarterly premium due on her policy. On the death of the life assured, the petitioner’ claim for the insurance amount as per the policy, was repudiated by the LIC on the ground that the life assured had lied about not being admitted to any hospital or nursing home for general check-up, observation, treatment or operation and was not suffering from any disease. The insured had undergone treatment at a hospital for Rheumatoid Arthritis three years before the policy commenced. The Corporation alleged suppression of material facts. Cancer was detected only after the policy was taken and it was the proximate cause of death. The Corporation under Section 45 of the Insurance Act, 1938 has to prove that ISSUES RAISED

i) Whether there was non-disclosure is of a material fact? (ii) Whether there was fraudulent suppression made by the policy holder? (iii) Whether the policy holder knew at the time of making the contract that the information given by the assured was false or that she has suppressed facts which it were material to disclose? iv) Whether the repudiation of claim by Life Insurance Corporation was valid under Section 45 of the Insurance Act, 1938? ANALYSIS

The Kerala High Court referred to Mithoolal Nayak v. Life Insurance Corporation of India as well as Life Insurance Corporation v. Asha Goel case. The High Court held that it is not sufficient to prove that the statements were false. The Corporation has to prove that the false statements made by the petitioner’s wife were fraudulently made by her and that she must have been aware at the time of making the statement that the same were false and there was in fact suppression of material fact. She was an illiterate woman and she suppressed the fact of having rheumatoid arthritis inadvertently and not fraudulently. JUDGMENT: Finally the court held that the repudiation of the claim of the petitioner was illegal and unsustainable.

RISK MANAGEMENT
Basic steps in risk management are:
a) Identifying risk:
b) Quantifying risk:
c) Recommendations
d) Monitoring results.
Risk management ensures that an organization identifies and understands the risks to which it is exposed. Risk management also guarantees that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss occurs. A risk management plan includes strategies and techniques for recognizing and confronting these threats. Good risk management doesn’t have to be expensive or time consuming; it may be as uncomplicated as answering these three questions: 1. What can go wrong?

2. What will we do, both to prevent the harm from occurring and in response to the harm or loss? 3. If something happens, how will we pay for it? Insurance is just a part of a total risk- management programme. While risk management and insurance are closely related, insurance alone is not risk management. Risk management is far broader and includes the concepts of avoiding, preventing, and minimizing loss. In addition, risk management addresses methods other than insurance for transferring the financial consequences of losses that do occur. Risk Assessment: Insurance requires the assessment of risks so that they can be recognized and priced. Risk Pricing: Insurance puts a monetary value on risks. Insurance can help restore the wellbeing of a policy holder after a shock. Also, if well designed, insurance can create incentives for policy holders to reduce risky behavior. Risk management provides a clear and structured approach to identifying risks. Having a clear understanding of all risks allows an organization to measure and prioritize them and take the appropriate actions to reduce losses. BENEFITS OF RISK MANAGEMENT:

Risk management has other benefits for an organization, including: * Saving resources: Time, assets, income, property and people are all valuable resources that can be saved if fewer claims occur. * Protecting the reputation and public image of the organization. * Preventing or reducing legal liability and increasing the stability of operations. * Protecting people from harm.

* Protecting the environment.
* Enhancing the ability to prepare for various circumstances.
* Reducing liabilities.
* Assisting in clearly defining insurance needs.

An effective risk management practice does not eliminate risks. However, having an effective and operational risk management practice shows an insurer that his organization is committed to loss reduction or prevention. It makes his organization a better risk to insure. ROLE OF INSURANCE IN RISK MANAGEMENT

Insurance is a valuable risk-financing tool. Few organizations have the reserves or funds necessary to take on the risk themselves and pay the total costs following a loss. Purchasing insurance, however, is not risk management. A thorough and thoughtful risk management plan is the commitment to prevent harm. Risk management also addresses many risks that are not insurable, including brand integrity, potential loss of tax-exempt status for volunteer groups, public goodwill and continuing donor support. The Courts in various judgments have opined that the staff of insurance companies should give prompt and effective service to the people and effectively manage the affairs of the life insurance companies. The cases are as follows: In the landmark case of Life Insurance Corporation of India v. Asha Goel, the Supreme Court observed that “The Corporation has grown in size and at present it is one of the largest public sector financial undertakings. The policy-holders and the public at large look forward to prompt and efficient service from the Corporation.

Therefore the authorities in-charge of management of the affairs of the Corporation should bear in mind that its credibility and reputation depend on its prompt and efficient service. Therefore, the approach of the Corporation in the matter of repudiation of a policy admittedly issued by it should be one of extreme care and caution. It should not be dealt with in a mechanical and routine manner.” In the case of Life Insurance Corporation v. Anuradha, the court observed that Life Insurance Corporation is a social welfare institution and it should think of devising a policy available in insurgency afflicted regions which would take care of the assured and his family members in such areas.

In short the Supreme Court hinted that the terms and conditions of the insurance policies in the insurgency affected areas should be suited in accordance with the requirements of the people in such areas. In United India Assurance Co. Ltd v. Hasan Sultan Nadaf, the National Commission did not approve the practice of the insurance companies to make lame excuses in order to defeat the genuine claim of the insured. In this case the claim of the insured was rejected on the ground that the owner of the shed of the factory had no insurable interest in it. This practice was held to be untenable and a lame excuse to improperly reject the claim. The policy should have been issued after inspecting the shed and if the factum of insurable interest was not verified then it meant that the insurance company was reckless, atrocious and behaved in a way that was detrimental to the interest of the consumer. CONCLUSION

Risk is a burden not only to the individual but to the society as well. There exists several techniques for managing of risk of which insurance is the most practical method for handling risks. Insurance however does not always fully compensate the insured for losses suffered. This may be the result of limitation of the liability accepted by the insurer, poor management of instance by the insured leading to gaps in cover or uninsurable losses. Insurance thus reduces the fears of future risk to the individual insured and by capital formation it helps the growth of the industry, accelerates production, lubricates the machinery of production and distribution and improves the economy of the nation. It mobilizes the resources, accelerates and stabilizes growth and helps in the establishment of a welfare state. After opening up of the insurance sector, Insurance Regulatory and Development Corporation, has monitored the operations of the insurance companies. It tries to protect the interests of the consumers and helps in the financial soundness of the insurance industry.

The insurance sector plays a vital role in the process of economic development of any country. It acts as mobiliser of savings, as financial intermediary, as promoter of investment activities, as stabilizer of financial markets and as a risk manager. Insurance services lead to efficient and productive allocation of capital resources, facilitate growth of trade and commerce, substitute for governments social security programmes, and assist individuals and firms in efficient management of risks. Post 9/11 attack the CEO’s of major companies in the world have realized the need for adequate insurance in all perceptible areas affecting their company. It can be safely be assumed that the insurance market has tremendously improved after globalization. It will certainly increase insurance penetration and all professionals as well as public at large should exploit the opportunities offered by this sector.

BIBLIOGRAPHY

* Murthy & Dr Sharma, “Modern Law of Insurance”, fourth edition. Lexis Nexis Wadhwa Nagpur. (2009) * Srinivasan M N, Principles of Insurance Law, Wadhwa & Company Nagpur. ( 2006) * Verma, Upadhyay, Srivastava, “Risk Management in Banking and Insurance” Deep and Deep Publications. ( 2007) * Ratanlal and Dhirajlal.( 2004) “Law of Insurance” Lexis Nexis: Butterworths, Wadhwa, Nagpur. WEB RESOURCES

http://www.manupatra.com/
http://www.indiankanoon.org/doc/559952/
http://www.ibc.ca/en/Business_insurance/risk_management/