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Posts Tagged ‘premium’

Risk Appetite of Insurance Companies – Eat, Drive and Accepts Risk Carefully

In Uncategorized on March 18, 2013 at 10:51 am

Risk Appetite in context of Insurance companies is the amount of risk the insurance company is willing to take to get an optimum risk return balance in their investment portfolio. It is obvious that large companies can accept large risk, small can accept small so what’s difficult, why companies are not able to take the optimum risk according to their capacity. How it works?

Insurance companies accept the risk of individuals/corporate and makes different portfolio of risk eg: fire, marine, motor etc. The Premium for portfolio of risk is invested into the chosen set of risky assets.

Good Risk Appetite statement reflects upon the company’s decision making to take in controlled and orderly manner which will produce profit.  Good Risk appetite statement linked to good strategy can save companies from crisis. Do check your appetite before taking decisions as you take in case of eating food also – overeating makes you fat (In case of insurance companies makes your portfolio risk, provide losses), malnourishment makes you weak (in case of insurance companies, less business makes your survival difficult in the market).

Same applies when we buy a car, when we buy a Maruti 800 small car, it’s really risky to drive it at the speed of 140 km/hr; while if you buy Mercedes Benz, it is average risk to drive at same speed on a reasonable safe road due to built-in safety feature.

“Eat, drive and accepts risk carefully according to your appetite”.Image

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What are the factors which affect the buyer to take loan?

In Banking, Finance on June 22, 2012 at 12:56 am

This is the third blog in the series – do read earlier ones Understanding Types of Loan and How Banks Categorized Whom to Give Loan .

In this blog, I will talk about the factors which affect the buyer while he is about to take the loan.

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The first and foremost step in taking a loan is to understand the purpose of loan e.g.: home loan or student loan.  Then think about most suitable loan for the purpose for example should we take home loan by making payment through credit card – it will look most unsuitable method as home loan is long term loan and credit card payment is made after a very short period of time. Then the loan should be according to your income level eg: how much you are in actual capacity to pay monthly for such loans. It should be rather the amount which you are in position to pay with very comfort every month. Then you need to make it adjusted with your future planning eg: repayment in 6 months or 6 years. The next important step would be to take decision on fee and interest you would like to pay under the loan (eg:  Personal loans have high fee and interest rates than home loan). In the last, you need to take information from many banks or financial institution to get the best interest rates and fees. The bank policies for repayment and other conditions also need to be considered.

In short, the major factors which affect the borrower’s decision are purpose of loan, type of loan which is suitable according to purpose of loan, repayment time period of the loan, actual capacity to pay the loan according to income level, adjusted loan according to future planning, fee and interest rates offered by the different banks.

Insurance Defined

In Finance, Insurance, Legal on May 3, 2012 at 8:05 am

Insurance is a form of risk management primarily used to hedge against the risk of contingent loss. Insurance is a contract between two parties where in exchange of premium, the risk is transferred from one party to another party.

Insurance classical definition

Insurance is an agreement where, for a stipulated payment called the premium, one party (the insurer) agrees to pay to the other a defined amount upon the occurrence of a specific loss.  The party who pays the amount to the party on occurrence of specified loss is called Insurer. The party who pays a stipulated payment is called Insured. A defined amount which insured pay to Insurer is called Premium.

Financial definition of Insurance

Insurance is the financial mechanism by which cost of unexpected loss is redistributed. Here, loss expenses transferred to insurance pool and loss is redistributed to the members of pool.

We see losses at many stages in our day to day life whether it is corporate or individual. Losses may be of high or low severity, may affect single or group of persons. It may involve single region or multiple region and even countries. Sometimes losses are too low which can be ignored but on the other hand, it can be so severe that it can eat up whole life saving of a person.

For example:

Let’s take an example of Fire insurance pool where losses are redistributed among masses.

In the Mumbai Trombay area, many oil refining and petroleum units have high risk of fire. They transfer their fire risk by paying Rs 50,000 in fire pool. In total 50 units agreed and pool reached to the (Rs 2500, 000). Fire broke out in one of the unit of Trombay area and it affected the one adjoining unit also which resulted loss of Rs 2500,000. Now loss expense of 2 units can be paid from fire insurance pool. If no insurance pool existed, the unfortunate victims will loose 2500,000. Here loss expense incurred by two units will be redistributed among 50 corporates.

Legal definition

Insurance definition under Indian law: “Insurance is legal contract where one party agrees to pay another party an agreed amount to compensate its unfortunate losses.” Here ‘amount’ is called premium and contract is called policy.