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so, , , , , QUESTION BANK, , , , @ ad hat is Business Risk?, Business firms operate under changing conditions, Changes cause uncertainty which in, , ns., es turn leads to risks. Business risk means uncertainty of profit and the possibility of loss., For example, there is risk of loss due to fire, flood, earthquake, accident, theft, bad debt,, strikes, lockouts, changes in consumer tastes and fashion, changes in Government poli, cies, etc., y 2, Give any three causes of Business Risks., , Ans. Three causes of Business Risks are:, ‘(@) Natural calamities such as earthquake., , (ii) Manmade factors such as theft., onomic causes such as changes in demand., , _ (iii) Ec, Q. 3 3, Explain the causes of Business Risks., Ans. Business risks arise due to several reasons which may be classified as follows:, , {. Natural factors: Fire, flood, hailstorm, earthquake, draught, snowfall, and other natural, , calamities may cause huge damage to business firms. These factors are beyond the, , control of human beings. |, Human factors: Strikes, lockouts, riots, Be penicment theft and other mammade, , event may cause loss., Economic factors: Changes in demand, depression, reductions i in the prices of com, products, etc. may lead to loss in business. :, factors: These include changes i in Goyernemnt policies, damages due, , a:, , | __petitive, ~*~ 4, Miscellaneous, to pests, rodents, etc., , Q. 4. What are Fundamental Risks? | : a . he, _ Fundamental risks are risks which affect the whole community ora a large section of th e ae, , community. Risks due to natural calamities, war, etc. are e examples. of these rl Ks. we ¥, Q. 5. Explain Speculative Risks. pig a a, Ans. Speculative risks are the risks arising from production decisions of business en. Suc, risks cannot generally be insured. | 2, Q. 6. What are insurable risks? __ | s, Ans. Risks which affect a large number of persons and whose prot babitity of oce, estimated are known as insurable risks. Risks arising from fire, ‘st, of goods, theft, etc. are examples of insurable risks. _ wi ue, Q. 7. Explain the characteristics of insurable risks. . aii soul re, Ans. The characterists of insurable risks are as under; i, 1, The risk must affect a large number of i bi -y larg, rs must be subject to the risk, A large mene \ re, ai fahig 3 contribution from each person. Out of this sf, to the few persons who actually suffer ies mi, insurance, es:, 2, Cause of risk must be accidental., _.___ by accidental events, Rie caused, we, be insured,, , , , , , , , , , , , , , , , , , , , t na . fis, , i |., , ois 3}

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— 484 a ———_— iii eR, 3. The event should be reasonably unexpected. Events which are sure to occur cannot, , be insured, For example, no insurance company will insure a person who is 99 yea,., , le disease., old or who is suffering from a non—curab ‘, 4, It should be possible to calculate the risk of loss. The risks should occur fairly, , regularly so that the likelihood of risks can be estimated oe the help of mathemat_, cal and statistical techniques. Such calculation 1s essentia or deciding the amount, of premium. Death, accident, fire, theft, etc. are the risks which occur regularly. The, likelihood of their occurance can be estimated. |, , The possible loss must not be catastrophic. Insurance 1s a means to indemnify the, few unfortunate who suffer loss due to occurance of a certain event. If all policyholgers suffer loss at the same time, the snsurance company will not be able to meet the, , claims of all of them. Therefore, the possible loss should not be catastrophic., 6. The risk must be consistent with public policy. Risks which are against Society, , cannot be insured. For example, a thief cannot insure stolen goods., , Q. 8. Explain non-insurable risks. it |, ly and whose likelihood of occurrence cannot be estj, Ans. Risks which do not occur regular eee, mated are non-insurable risks. Risks in which the person. seeking insurance has no stake, for insurance are non-insurable risks., , and risks which are not economically feasible 4, , Non-insurable risks may be classified as follows: ak:, 1. Time Risks: Risks which arise due to a considerable time gap between the decision —, , to produce goods and their sale to consumers are time risks. During this time lag, , changes in fashion and tastes of consumers may cause a heavy loss. —, , 2. Place Risks: These risks are caused by difference in the prices of a product at different places. Such risks are high in case of perishable and fragile goods. Devel, of modern means of transport has reduced these risks. — ae , ge, Competition Risks: These refer to loss caused by cut throat competitio, , . . ed L ‘el Uo aae ¥ iy , G, producer reduces the prices of his goods, his competitors might be forced to reduce, , their prices and thereby suffer loss. : a a Ca, , . se . 7 on tit tee Fin we ree, , Q. 9. Give three examples each of insurable risks and non-insurable risks., : “ seit s ei, , io ba, , nm, , , , , , , , , , , , , , , , uw, , Ans. Insurable risks. ee, (i) Fire, (ii) Death, (iii) Theft, Non-insurable risks: re, (’) Changes in Government policies (ii) Competition (iii) Ck, , Q.10. Define the term ‘Insurance’. . ae out} =e, , Ans. Insurance may be defined as a contract of indemnity un¢ e, agrees to indemnify (compensate) the insured to a prede, occurence of the risk insured against. Itisad ‘vie ., to an insurer for a cosideration called remium., loss but only helps in distributing the loss among aoe, , Q.11. What are the fundamental principles which govern all insurance contracts?, , Ans. The fundamental principles of insurance a folloy, , 1. Utmost good faith (uberrima fides),, , trust and confidence. It means that e, , ‘ \y res. ‘tg ret, , : . oa, rsis part lars y, a, , cn op tub, , a, , , , , , , , , , , , , , , , , , disclose all material facts kn¢, the proposer must disclose’, or conceals certain facts, th

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a, , gusiN, it, , Q.12., , ' Ans., , Q.13., , Ans., , ESS RIDIN TV Wawa ye, , oO, , 2. Insurable interest. A person must have interest in the non-occurence of the event, being insured. He should stand in a position that he would benefit from the existence, of the subject matter and would suffer a loss from its destruction or damage. For, example, a person has interest in his life and property. But a person has no interest, in the life or property of a stranger. This principle is based on the logic that no one, should be allowed to make profit out of insurance., Indeminity. Indemnity implies compensation. According to this principle, the insurer, shall compensate the insured in case of a loss against which the policy was issued., The purpose is to place the insured financially in the same position in which he, was before the loss. The logic behind this principle is that the insured should not be, allowed to make a profit from his loss. The principle of indemnity is not applicable, to life insurance. This is because human life can not be valued in terms of money., 4, Subrogaton, This principle is a corollary to the principle of indemnity. According, to the principle of subrogation, the insurer becomes owner of the damaged property, after compensating the insured for loss. For example, a person insures his car for, = 250,000. The car is badly damaged in an accident. The insurance company pays, 2,50,000 to the insured. The damaged car which is worth = 50,000 becomes the, property of the insurance company., s. Contribution. This is also a corollary to the principle of indemnity. According to, the principle of contribution, if a person gets the same property insured with two or, more insurers, all the insurers will contribute to the compensation to be paid to the, insured. The insurance companies will pay in proportion to the sums insured with, them. The share of each company can be calculated as follows: ;, , ~, , Sum insured with insurance compamy, Total sum insured with all the companies, , Suppose, a person insured his house against fire for = 1,00,000 with company A, for vs, = 2,00,000 with company B and for = 3,00,000 with company C. He suffers a loss, of = 60,000. The three companies will contribute ¥ 10,000 = 20,000 and = 30,000,, respectively to the loss. ran, , 6. Causa Proxima. This implies proximate cause. According to this principle, the insurer, shall be liable only if the cause insured is immediate or proximate to the loss. For, example, all the passengers travelling in an aeroplane are insured against death in, the event of a plane crash. If a passenger dies due to heart attack in the plane itself,, the insurance company is not liable to pay compensation. Nod gi, , “Insurance is a contract of indemnity”. Explain. <n, In a contract of insurance the insurer is liable to pay actual amount of loss or the s' 1m, insured whichever is less. The purpose of insurance is to place the insured in the same, position in which he was before the loss. Ol 2or ayy zs, All contracts of insurance except life insurance are contracts of indemnity, In li, ance, the principle of indemnity (compensation) does not apply. This is becau, life can not be valued in terms of money. In life insurance, the sum, payable either on death or on the expiry of the specified period which, the time of payment is uncertain. That is why, life insurance is know, Who has an insurable interest in fire policies, marine policies 2, policies. 1 o0 Chea, , x Amount of loss, , , , , , , , , , , , , , , , , , , , , , , , In case of fire insurance policies the owner of property, the perso, loan on the mortgage of property and the persons who have tem, the property belonging to others (e.g.,: drycleaners, repairm, interest. an

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In marine insurance policies, the owner of the ship has eis interest in the ship and, , freight. The exporter/importer has insurable interest in the cargo. a, , In life ccm naiciey husband and wife have insurable interest in ae other 8 life,, , Employers have interest in the lives of their skilled employees. A creditor as insurable, , interest in the life of his debtor, Partners of a firm have an insurable interest in one, , another’s life., Q.14. What is the main benefit of insurance?, , Ans, The main benefit of insurance is that it spreads the risk of loss over a large number of, people. Therefore, the burden of loss on each is low. The insured person gets a sense of, security due to protection provided by insurance. |, , Q.15. Mention two reasons for the growing importance of insurance., , Ans. Two reasons for the growing importance of insurance are given below:, , (i) Risks are increasing due to expansion of industry and commerce., , (ii) Different types of insurance policies are becoming available to cover different types, of risks. : avs veh re, Q.16. Explain the benefits of insurance to businessmen and the general public., Ans. Benefits to Businessmen: | Sita, ~ 1. Release of funds: In the absence of insurance, businessmen will have to maintain, huge resources to overcome financial crisis caused by mishaps. Insurance avoids the, need for reserves. The funds so released can be used for business purposes.., , 2. Expert service: Insurance companies employ many experts who render valuable, advice to businessmen in different issues. For example, a businessmen obtaining a ©, fire insurance policy will get advice on fire safety measures for his property., , 3. Comprehensive protection: Several types of insurance policies are available for, covering differenct types of risks in business. Fire, burglary, accident, fidelity, riots,, credit, workmen’s compensation, etc. are examples of insurance policies available to, businessmen. — ‘s Tet *, , Benefits to General Public: ,, , 1. Protection: A common man can provide protection to his dependents in the event of, his premature death by taking a life insurance policy., , 2. Savings: Through life insurance, people can save money for old age, children’s marriage, etc., , 3. Finance: Persons having life insurance policies can take loans from banks for building houses etc., , 4. Tax relief: People can save income tax and weal, policies,, , 5. Industrial growth: Funds collected by insurance companies are invested in schemes, of industrial development for the country,, , 6. Public welfare: Life Insurance Corporation of India h, grammes for public welfare e.g., potable water, sewage d, agricultural development, public housing, ete., , Q.17. What is Re-insurance?, , Ans. When an insurance company undertakes more risks than its capacity, it tries to share, the risk with some other insurance company, When one insurance compan insures the, risk with another insurance company, it is called re-insurance, In the pi of | the, insured will claim compensation from the first insurance company which in an will, , insurance company, The re—ins, , , , th tax by obtaining life insurance

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sINESS RISKS AND INSURANCE, sl SKS AND INSUR =, , Qs. What is double insurance ?, , Ans. wae cee means taking more than one insurance policy for the same subjectra ‘ pets may take two or more policies on his life and claim the amount of, _ all the policies. But in case of fire insurance and marine insurance, the insured cannot, , claim more than the amount of loss from all the policies taken together. Under double, Insurance, every insurer is liable to contribute to the sum insured by him., , Q.19. Distinguish between re-insurance and double insurance,, _ Ans. Distinction between Re-insurance and Double Insurance, , Double Insurance, , , , Re-Insurance, , , , , , , To obtain protection in case of, , | To distribute liability for loss., BH SGN pba tue Arie LOR ead, insolvency of an insurer., , , , nS, , , , , , , , , , , | Insurer and the re-insurer. Insurers and the insured., Shas ‘The original insured can claim The insured can claim compensa__ | compensation only. — | tion from all insurers proportiona, , tely.. - iarengtae, Double insurance is not essential under any law., , A, , , , , , , , , , , _ Reinsurance is obligtory insome, , 4. Legal nature —, cases under the law., , . : Q.20. Answer the following statements True or False:, (a) In life insurance, insurable interest must exist at the time of insurance, , (6) In fire insurance insurable interest must exist at the time of insurance and at the time, of loss, , _,... (c) In marine insurance, insurable interest must exist at the time of loss., (d) Re-insurance is also known as double insurance., , bs Ans, True : (a), (b), (c), , , , . False : (d), " Q.21. Fill in the blanks:, me (a) Acreditor has ............. in the life of his debtor. 3, , (b) In life insurance, insurable interest must exist at the time Of .........05, y (c) In marine insurance, insurable interest must exist at the time Of .......005, m= (d) Life insurance .............. a contract of identity., a3 MEN ceseresee is a contract between two insurance companies.