SCHOOL OF MANAGEMENT STUDIES 
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
              UNIT – 1 – INSURANCE MANAGEMENT– SBAA1505 
  
  
                        UNIT1- CONCEPTUAL FRAMEWORK 
  
           Concept - Perils And Risks, Classification Of Risks - Need For Insurance - Nature 
           And Working Of Insurance, Types , Importance - Role Of Insurance - Fundamental 
           Principles  Of  Insurance  -  Differentiation  Insurance  And  Guarantee  -  Insurance 
           And Wager - Disclosure - Moral Hazards. 
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        Definition Peril: Peril is an insurance term for an event that could cause damage to property, 
        items,  or  belongings  insured.  Examples  of  different  perils  in  home  insurance  are  fire,  hail 
        damage, flooding, earthquake, and theft, etc. Home Insurance policies are typically divided into 
        ‘All Peril’ and ‘Named Perils’ insurance policies. These may have different costs and cover 
        different risks. 
  
        Meaning of Risk: 
  
        In simple words risk is danger, peril, hazard, chance of loss, amount covered by insurance, 
        person or object insured. The risk is an event or happening which is not planned but eventually 
        happens with financial consequences resulting in loss. There is saying higher the risk more the 
        profit. 
        3 Types of Risk in Insurance are 
            Financial and Non-Financial Risks, measured in monetary terms. 
            Pure risks are a loss only or at best a break-even situation. 
            Fundamental risks are the risks mostly emanating from nature. 
        It is required to know the complex classification and sub-classification of risk and also an insight 
        into risks that can be insured and which cannot be. 
        We may look into this subject in the following manner: 
                    Financial and Non-Financial Risks. 
  
               1.  Pure and Speculative Risks. 
  
               2.  Fundamental and Particular Risks. 
  
                    In this post, we are going to look into the three classifications of risk. 
  
                    Financial and Non-Financial Risks 
  
  
                    Financial risks are the risks where the outcome of an event (i.e. event giving birth to a loss) can 
                    be measured in monetary terms. The losses can be assessed and a proper money value can be 
                    given to those losses. The common examples are: 
  
                   Material damage to property arising out of an event. We may consider the damage to a ship due 
                    to a cyclone or even sinking of a ship due to the cyclone. Damage to the motor car due to a road 
                    accident which may be of partial or total nature. Damage to stock or machinery etc. 
  
                   Theft of a property which may be a motorcycle, motor car, machinery, items of household use or 
                    even cash. 
  
                   Loss of profit of a business due to fire damages the material property. 
  
  
                   Personal injuries due to the industrial, road or other accidents resulting in medical costs, Court 
                    awards, etc. 
  
                   Death of a breadwinner in a family leading to corresponding financial hardship. 
  
  
                    All such losses, i.e. the outcome of unforeseen untoward events can be measured in monetary 
                    terms. 
                    The losses can be replaced, reinstated or repaired or even a corresponding reasonable financial 
                    support (in case of death) can be thought about. 
  
                    We would call all such financial risks as insurable risks and these are indeed the main subjects of 
                    insurance. 
  
                    Non-Financial risks are the risks the outcome of which cannot be measured in monetary terms. 
  
                    There may be a wrong choice or a wrong decision giving rise to possible discomfort or disliking 
                    or embarrassment but not being capable of valuation in money terms. 
  
                    Examples can be: 
  
                   Choice of a car, its brand, color, etc. 
  
                   Selection of a restaurant menu, 
  
                   Career selection, whether to be a doctor or engineer etc. 
  
                   Choice of bride/bridegroom, 
  
                   Choice of publicity etc. 
  
                    Since the outcome cannot be valued in terms of money, we shall call these non-financial risks as 
                    uninsurable.