Risk Management: New Challenges and Opportunities for Insurance Sectors

Risk management: new challenges and opportunities for insurance sectors
Dr. S.Manimaran B.E.,MBA, M.Phil.,Ph.D.,
Head of Department of Management Studies,
Professor and PSNACET.Dindigul.
V.RAMESH. MBA,
Executive engineer.
Neyveli lignite corporation ltd. Neyveli
Risk management
Risk management can be described as like the other management procedures of identification, assessment and prioritization of risk. Actually risk management is very much equal to walking on the rope. As defined in ISO 31000 the effect of uncertainty on objectives whether it positive or negative. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary.
Risk Analysis

Risk analysis is the process of systematically identifying and assessing the potential threats and uncertainties that occur when trying to achieve a certain goal (such as completing a project), and then finding a reasonable strategy for most efficiently controlling these risks. Risk analysis also helps to define preventive measures to reduce the probability of these factors from occurring and identify countermeasures to successfully deal with these constraints when they develop to avert possible negative effects on the competitiveness.

Insurance
The most common tool used in risk management is insurance. Besides the standard health, life, and possibly disability insurance, we have to look at the types of liability and property insurance that may we need. Specialized insurance for particular risks in business can also be necessary. For instance, in an industry a chemical component is used in production process, they need special toxic risk insurance.
A sense of security may be the next basic goal after food, clothing, and Shelter. An individual with economic security is fairly certain that he can satisfy his needs (food, shelter, medical care, and so on) in the present and in the future. Economic risk (which we will refer to simply as risk) is the possibility of losing economic security. Most economic risk derives from variation from the expected outcome

Need for awareness on insurance products Life insurance and general insurance have more products to facilitate the customer needs. According to most of the surveys individual lack the awareness, literacy and skills to adequately assess their needs for financial and social protection and to choose appropriate insurance services. Raising awareness and educating on individuals are challenging priorities for research studies.
Because of trends towards increased responsibility of the individuals for the management of risks and coverage, as well as consequences wrong or inappropriate decisions.
The education process in the insurance sector involves different types of stake holders’ insurance authorities, insurance entities and intermediaries, other insurance providers, distributors, NGOs and customers themselves.

Importance of insurance
Importance of insurance is definitely increasing and expanding. Households should be encouraged and provided with the possibilities to enhance their awareness, responsibility to the coverage of their overall risk exposure as well as their understanding the knowledge of insurance products. Yet little research has been undertaken on this subject. With in a frame work of general financial education insurance subject is being handled. Better understanding of financial products can be given to potential consumers.
Evaluation of risk in new areas of personnel insurance
Increase in perceived and real risk. Emerging catastrophic bond markets shows the rise in risk levels. The range of conventional and new large scale risks seems to have expanded and their frequency has increased. They included risk related to industrial (Bhopal), natural (earthquakes, floods), terrorist attacks, new technologies risks (cyber crimes), Health risk against new diseases.

Enhanced needs and demand for risk coverage: Broad increase in savings interest of population started investing in assets like houses, buying materials like gold, investment in financial markets have to be protected.

The relative complicity and heterogeneity of insurance products develops confusion among the non expert consumers, as they need insurance. Existing products and new age products have to be updated to the present scenario.
Responsibility of the insurance companies to get the feed back from the consumers. Know the difficulties in getting their service. Short term mindset of consumer does not encourage them to get long term coverage.

Various studies will help the sectors to study the consumer’s knowledge about the insurance products. Tools like the number of complaints received from the customers, questionnaires to collect the position of the consumer can be used.

Innovation of Insurance opportunities in capital markets
The capital market risk usually defines the risk involved in the investments. The stark potential of experiencing losses following a fluctuation in security prices is the reason behind the capital market risk. During the global financial turmoil of 2007 and 2008, the stocks were worst affected, even well performing stocks are also beaten up. This is a characteristic feature of capital market. How ever in the time of market fluctuation and turbulence volatile seasons investors losing their hard earned money. Loss occurred to the investors makes the disbelief in capital market and views the market as a gambling spot. Resulting further investment in capital markets by them is stopped. Stock market has to search for another investor. The interest of protecting the investment of the investor is maintained by SEBI and Government of India through its policies, guidelines and certain regulations. Monitoring the markets fraudulent, watching the short selling, bulk Purchase, inside trading, etc….and helps logically to protect the investors by legitimately. Apart from SEBI and government interest some professional system has to emerge for protecting investments. Many researches have to be done to provide an insurance system or scheme to capital market securities. Financial innovation has allowed many types of risk to become more tradable including like credit, interest rate, foreign- exchange risk and equity. Risk transfer and a new system for protecting investments of investors in capital market securities have to be analyzed.
Emerging capital markets needs investments in a continuous mode. Then only corporate of India can adventure into expansions, mergers and acquisitions to proceed their plan for development. Recent turmoil experienced that no IPO issue got success and others likely to issue IPO is delayed. Financial risk transfer and transparency have been dominant themes since the World War II. Insurance risk comes in many varieties and also segmented into broad categories e.g. life, mortgages, car loan, assets against theft, fire, flood, earth quake, corps.
Financial innovation has allowed many type of risk to become tradable including credit, interest rate, foreign exchange risk. The potential market is vast, with total premiums of all the world’s insurers equaling to US$ 4.1 trillion.

Most insurance are asset based securities. Treating the investments of securities in capital market as a product and providing insurance as like other risk class is the idea behind the research.

Increasing trend in insurance linked securities attracted the research concept. CAT bonds were issued against catastrophic risks such as windstorms, (hurricanes, typhoons) and earth quakes. These serve as collateralized protection for extreme event risk at a multi year fixed price. Industry loss warranties, CAT bonds, cat swaps are triggered by specific indexes. The purpose of the research is to extent insurance linked securities concept and providing an insurance coverage at a premium for expected loss. All progress is born of inquiry. Doubts is often better than overconfidence, for it leads to inquiry leads to invention”-Hudson maxim
Any research on this topic will give a better beginning of new innovation to one of the financial market instrument of capital market. Financial institutions, government funds and large retail participants from house hold savings floods the funds to capital market. Further more the inventions to the betterment of the system will bring the trust in the mind of investor. The capital market provides both overnight and long term funds and uses financial instruments with long maturity periods. The following financial instruments are traded in this market are Foreign exchange instruments, Equity instruments, Insurance instruments, Credit market instruments, Derivative instruments. This research deals for the investments in equity stocks.

Insurance and Reinsurance Insurance companies are in the business of assuming risks from individuals or companies. They manage those risks by diversifying over a large number of policies, Perils and geographic regions. A particularly difficult problem is the management of risk from high severity, low probability events (catastrophe risk, or “CAT” risk), such as that posed by major earthquakes or hurricanes. The risk from low severity, high probability events (for example, auto collision or medical insurance) can be diversified by writing a large number of similar policies. Suppose that the insurer charges a premium equal to the expected average annual loss and has a very large number of policies. By the law of large numbers, it can expect to pay out approximately this amount in claims in each year.

Under the CAT bond scenario, investors purchase the bond and exchange a principal payment now for future coupon (interest) and principal payments. These payments are contingent on loss experience or the occurrence of a specified catastrophic event. If the bond is not triggered, the investor receives full coupon and principal payments over the life of the bond. If the bond is triggered, the investor may lose the right to future coupon payments, principal payments or both, depending on the type of bond

Methodology
1. Formulating the research problem and extension of literature survey. Selecting the securities for investigation from NSE India from Nifty stocks in which investment is going to be insured. Collecting data for period ten years from web sites of NSE and several associated agencies for the frequency of peeks and deeps of price movements. Comparing the data with existing technical analysis theories for trigger price calculating. For the same period of time fundamental analysis has to be done for the same stock. Knowing stability and financial performance of the stock then correlating the both analysis and finding the stocks for making model.
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2. Development of working hypothesis& Building model.
After extensive literature survey a model has to be build. Testing for hypotheses for the formula arrived. Development of working by hypotheses is to be state in clear terms. Working hypothesis is intensive assumption made in order to draw out and test its logical or empirical consequences.
Conclusion
The contribution that the research should make an exposure to the insurance companies to concentrate and find possibilities to take the investment made in capital market as product. By two ways this research will benefit the society one is protecting the investment of the investor by which building the trust and make the continuous investment in capital market through that the market may get regular in flow of funds. Another is new business emerged to the insurance companies. References
• Convergence of Insurance and Capital Markets http://www.weforum.org/en/ip/financialservices/Publications/index.htm
• C.R. Kothari research methodology second revised edition, reprint 2009
• Todd L. Williams. “Convergence” in Risk management. August 1999.pp13-14
• “Problems Of Indian Primary Market” http://finance.mapsofworld.com/primary-market/problems-indian.html
• “Insurance linked securities report-2008” www.aon.com/attachments/capitalmarkets.pdf
Fixed income research 1988. “Analyzing insurance-linked securities” www.rms.com/pubications/rkcat.pdf
• Jayanth R.varma. “The Risk Management Lessons from the Global Financial Crisis for Derivative Exchanges” W.P. No.2009-02-06 February 2009
• “Insurance-linked securities—capital treatment and basis risk analysis” www.standardandpoors.com/ratingsdirect
• C.R. Kothari research methodology second revised edition, reprint 2009
• Banks, E. “Alternative risk transfer: integrated risk management through insurance, and the capital markets.” Wiley finance series, 2004
• book - Improving financial education and awareness on insurance and private pensions-OECD
• A Research on Designing an Effective Deposit Insurance Scheme for TRNC with Particular Emphasis on Public Awareness-International Research Journal of Finance and Economics
• Public Awareness of Deposit Insurance Systems- Guidance Paper- BANK FOR INTERNATIONAL SETTLEMENTS CENTRALBAHNPLATZ 2, CH-4002 BASEL, SWITZERLAND
• LIFE INSURANCE AWARENESS IN RURAL INDIA:MICRO INSURANCE LESSONS TO LEARN AND TEACH* Venkata Ramana Rao Insurance Consultant, Mumbai
• Emerging Trends in Banking, Finance and Insurance Industry Prof. Anand M.Agrawal & Krishn A.Goyal (Eds.)
• Banking and Insurance - Law and Practice The Institute of Company Secretaries of India (ICSI)

References: • Banks, E. “Alternative risk transfer: integrated risk management through insurance, and the capital markets.” Wiley finance series, 2004 • book - Improving financial education and awareness on insurance and private pensions-OECD