MF0018 Insurance and Risk Management

ASSIGNMENT Name ROLL NO DRIVE SEMESTER LC CODE SUBJECT CODE SUBJECT NAME

ASHOK KUMAR ROY 1408012974 SPRING 2016 4 3306 MF0018 INSURANCE AND RISK MANAGEMENT

Q.1. Explain price risk and its types. Explain Risk management methods. Answer: Price risk: Price risk represents the uncertainty about the magnitude of cash flows because of the probable changes in the input and output prices. Output price risk stands for the risk of changes in the prices which an organization may ask for its goods and services. Input price risk means the risk of changes in the prices which a company has to pay for materials, labour and other inputs in the production process. In strategic management, the analysis of price risk related to the sale and production of the prevailing and future products and services plays a significant role. There are three basic types of price risk: • commodity price risk • exchange rate risk and • interest rate risk Commodity price risk is born of the fluctuations in the prices of commodities, like copper, coal, oil, gas and electricity. These constitute the inputs for some companies and outputs for others. With economic globalization, output and input prices for various organizations are being influenced by the foreign exchange rate fluctuations. The input and output prices can also fluctuate because of the changes in interest rates. For instance, increases in interest rates might change a company’s revenues by affecting both the credit terms and the speed with which customers make payments for the products bought on credit. Further, fluctuations in interest rates also affect the organization’s cost of borrowing funds for financing its operations. The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making refers to risk management in business. Risk management methods: These methods are not mutually exclusive and may be largely categorized as: 

Loss control

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Loss financing

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Internal risk reduction

Usually, loss control and internal risk reduction include the decisions to invest (or forgo investing) resources to cut down the expected losses. These are theoretically similar to other investment decisions, such as a company’s decision to purchase a new plant or an individual deciding to buy a computer. Loss financing decisions are the decisions concerned about the manner of paying for the losses if they do occur.

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Loss control

The activities which decrease the expected cost of losses by lowering the occurrence of losses and/or their extent are referred as loss control. Sometimes loss control is also termed as risk control. Usually, the actions basically affecting the frequency of losses are referred as loss prevention methods. Actions primarily influencing the severity of losses that do occur are often called loss reduction methods. An example of loss prevention would be routine inspection of aircraft for mechanical problems. These inspections help reduce the frequency of crashes; they have little impact on the magnitude of losses for crashes that occur. An example of loss reduction is the installation of heat- or smoke-activated sprinkler systems that are designed to minimize fire damage in the event of a fire. Many types of loss control influence both the frequency and severity of losses and cannot be readily classified as either loss prevention or loss reduction. Viewed from another perspective, there are two general approaches to loss control: 

reduction of the risky activity level, and

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Increasing precautions against loss for the activities undertaken.

First, exposure to loss can be reduced by reducing the level of risky activities, for example, by cutting back the production of risky products or shifting attention to less risky product lines. Limiting the level of risky activity primarily affects the frequency of losses. The main cost of this strategy is that it forgoes any benefits of the risky activity that would have been achieved apart from the risk involved. In the limit, exposure to losses can be completely eliminated by reducing the level of activity to zero; that is, by not engaging in the activity at all. This strategy is called risk avoidance. As a specific example of limiting the level of risky activity, consider a trucking firm that hauls toxic chemicals that might harm people or the environment in the case of an accident and thereby produce claims for damages. This firm could reduce the frequency of liability claims by cutting back on the number of shipments that it hauls. Alternatively, it could avoid the risk completely by not hauling toxic chemicals and instead hauling non-toxic substances (such as clothing or cholesterol and cheese). An example from personal risk management would be a person who flies less frequently to reduce the probability of dying in a plane crash. This risk

could be completely avoided by never flying. Of course, alternative transportation methods might be much riskier (e.g., driving down Agra from New Delhi the day before a festival, along with many long-haul trucks, including those transporting heavy machines). The second major approach to loss control is to increase the amount of precautions (level of care) for a given level of risky activity. The goal here is to make the activity safer and thus reduce the frequency and/or severity of losses. Thorough testing for safety and installation of safety equipment are the examples of increased precautions. The trucking firm in the above example could give its drivers extensive training in safety, limit the number of hours driven by a driver in a day, and reinforce containers to reduce the likelihood of leakage. Increased precautions usually involve direct expenditures or other costs (e.g., the increased time and attention required to drive an automobile more safely).

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Loss financing

Methods applied to obtain funds for paying for or offsetting losses that occur are termed as loss financing (sometimes called risk financing). There are four broad methods of financing losses: (1) Retention, (2) Insurance, (3) Hedging, and (4) Other contractual risk transfers. These approaches are not mutually exclusive; that is, they are often used in combination. With retention, a business or individual retains the obligation to pay for a part or the entire loss incurred. For example, a trucking company might decide to retain the risk that cash flows will drop due to oil price increases. When coupled with a formal plan to fund losses for medium-to-large businesses, retention is generally called self-insurance. Firms can pay retained losses using either internal or external funds. Internal funds include cash flows from ongoing activities and investments in liquid assets that are dedicated to financing losses. External sources of funds include borrowing and issuing new stock, but these approaches may be very expensive following large losses. Note that these approaches still involve retention even though they employ external sources of funds. For example, the firm must pay back any funds borrowed to finance losses. When new stock is issued, the firm must share future profits with new stockholders. The second major method of financing losses is the purchase of insurance contracts. As you most likely already know, the typical insurance contract requires the insurer

to provide funds to pay for the specified losses (thus financing these losses) in exchange for receiving a premium from the purchaser at the inception of the contract. Insurance contracts reduce risk for the buyer by transferring some of the risk of loss to the insurer. Insurers in turn reduce risk through diversification. For example, they sell large numbers of contracts that provide coverage for a variety of different losses. The third broad method of loss financing is hedging. As noted above, financial derivatives, such as forwards, futures, options and swaps, are used extensively to manage various types of risk, most notably price risk. These contracts can be used to hedge risk; that is, they may be used to offset losses that can occur from changes in interest rates, commodity prices, foreign exchange rates and the like. Some derivatives have begun to be used in the management of pure risk, and it is possible that their use in pure risk management will expand in the future. Individuals and small businesses do relatively little hedging with derivatives. At this point, it is useful to illustrate hedging with a very simple example. Firms that use oil in the production process are subject to loss from unexpected increases in oil prices; oil producers are subject to loss from unexpected decreases in oil prices. Both types of firms can hedge their risk by entering into a forward contract that requires the oil producer to provide the oil user with a specified amount of oil on a specified future delivery date at a predetermined price (known as the forward price), regardless of the market price of oil on that date. Because the forward price is agreed upon when the contract is written, the oil user and the oil producer both reduce their price risk. The fourth major method of loss financing is to use one or more of a variety of other contractual risk transfers that allow businesses to transfer risk to another party. Like insurance contracts and derivatives, the use of these contracts also is pervasive in risk management. Internal risk reduction In addition to loss financing methods that allow businesses and individuals to reduce risk by transferring it to another entity, businesses can reduce risk internally. There are two major forms of internal risk reduction: (i) Diversification, and (ii) Investment in information. Regarding the first of these, firms can reduce risk internally by diversifying their activities (i.e., not putting all of their eggs in one basket). Individuals also routinely diversify risk by investing their savings in many different stocks. The ability of shareholders to reduce risk through portfolio diversification is an important factor affecting insurance and hedging decisions of firms. The second major method of reducing risk internally is to invest in information to obtain superior forecasts of expected losses. Investing in information can produce

more accurate estimates or forecasts of future cash flows, thus reducing variability of cash flows around the predicted value. Examples include: 

Estimates of the frequency and severity of losses from pure risk

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Marketing research on the potential demand for different products to reduce output price risk

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Forecasting future commodity prices or interest rates

One way that insurance companies reduce risk is by specializing in the analysis of data to obtain accurate forecasts of losses. Medium-to-large businesses often find it advantageous to reduce pure risk in this manner as well. Given the large demand for accurate forecasts of key variables that affect business value and determine the price of contracts that can be used to reduce risk (such as insurance and derivatives), many firms specialize in providing information and forecasts to other firms and parties. Q2. An organization is a legal entity which is created to do some activity of some purpose. There are elements of a life insurance organization. Explain the elements of life insurance organization. Answer: An ‘organization’ is a legal entity which is created to do some activity or to achieve some purpose. It is created under some law, which gives it a status and identity. Because of the identity, the organization is considered to be a person in law. Therefore, it can enter into contracts, be sued in courts, accumulate property and wealth, and do business, in the same manner as any individual can do. The way activities are grouped lead to the formation of offices, departments and sections Responsibilities (for results) have to be clarified and authorities (to take decisions and utilize resources) have to be defined. When all these are clarified, there will be people holding various positions, with designations, occupying places in offices and with clear authority and responsibilities. Important activities The important activities in a life insurance company are: 

Procuring applications or proposals from prospective buyers of life insurance.

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Scrutinizing and making decisions on the proposals for insurance. This is called underwriting.

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Issuing the policy document, incorporating the terms and conditions of the insurance cover.

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Keeping track of the performance of the insurance contract by either party, like payment of premium or payment of benefits.

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Attending to the various requirements that may arise during the term of the contract like nominations, assignment, alteration of terms, surrenders and payment of claims.

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Other supporting activities like advertising, investment of funds, maintenance of accounts, management of personnel, processing of data, compliance with regulations and laws.

Internal organization Within an insurance office, the following departments are likely to exist. These may be located in the branch office (as in the LIC now) or in the Divisional / Head offices (as in the LIC earlier and new companies now). These departments are to be identified by the activities being carried out, although they may be called by different names. 

Business development or agency or marketing concerned with the development of agency force, market development and business growth.

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New business, which would receive, scrutinize and take underwriting decisions on the new proposals for insurance and also issue the policy.

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Policy-holders servicing which would be concerned with administration of the policy, monitoring premium payments, lapses and revivals, attending to alterations, nominations, assignments, surrenders, loans and claims.

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Accounts to handle the financial flows.

The following departments are likely to be centralized in the Head Offices, as they require specialized skills and also because they impact the whole organization. 

Actuarial, studying the experience, doing valuations, declaring bonuses, monitoring the adequacy of premiums, setting underwriting standards, studying mortality rates, etc.

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Investments of funds, studying the opportunities for maximizing returns.

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Advertisement, publicity and public relations.

Departments like personnel, HRD, training, purchases (of stationery and office equipment), administration for office upkeep, etc., will be found in all offices, sometimes catering to that office alone or sometimes catering to the entire organization. The distribution system Life insurance is not compulsory under law. General insurance is frequently purchased due to compulsions under the law (Motor Vehicles Act) or from the financiers demanding insurance as collateral security. In the case of life insurance, the compulsion is negligible. There is often a tendency of deferring the decision. Death as a practical possibility is either ignored or not considered imminent. The requirements of today take priority over the requirements of tomorrow. Even if not

absolutely essential, the requirements of today seem to be more compelling. Life insurance has to be secured when in the best of health. Otherwise, the insurer will refuse to grant the insurance cover. Agents are necessary for selling life insurance due to the following reasons: 

Insurance is an idea that has to be explained and its usefulness has to be clarified personally.

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Each prospective buyer has special needs and requires specialized solutions.

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Personalized guidance can be given only when there is a live interaction with the agent.

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Significant amount of money is to be set aside immediately and regularly for a long term in future, for a benefit, which is vague and far away.

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The insurer has to assess the risk involved in every proposal for insurance, for which the necessary information would include details on personal life styles, habits, family, etc. The agent, who gets to meet the proposer closely, is in a position to provide some of this valuable information.

Functions of the agent The major function of the agent is to solicit and acquire life insurance business for the insurer, which has appointed him as an agent. While proposing a person for insurance, the agent has to assess his needs and his paying capacity, make all reasonable enquiries about the health and habits of the life to be insured and get proof of his age to be admitted at the commencement of the policy. If medical examination is required, the agent has to arrange for the same. After the proposal becomes a policy, the agent has to ensure continuance of the policy by the means of timely payment of renewal premiums, get nomination or assignment effected and help in prompt settlement of claims. Agents of the LIC are not authorized to collect premiums other than the first premium along with the proposal. If a policyholder pays premium to agent, the LIC does not accept any liability for the same. The premium is treated as paid only when it is paid into the office. However, in practice agents do collect premiums from policyholders to ensure promptness in payment. Some agents may also pay the premium first, and then collect the same from the policyholder. When he does so, he is functioning as the agent of the policyholder. The insurer will not accept any liability for these actions of the agents. Q.3. Explain the doctrine of indemnity, doctrine of subrogation and warranties and its types and classification. Answer: Doctrine of Indemnity: One of the basic tenets of insurance, that the insured should not profit from a loss or damage but should be returned (as near as possible) to the same financial position that existed before the loss or damage occurred. In other words, the insured cannot recover more than his or her actual

loss from the insurer. There are, however, certain exceptions to this rule, such as personal accident and life insurance policies where the policy amount is paid on occurrence of accident or death and the question of profit does not arise. Some marine insurance policies also constitute an exception because the settlement of a total loss is based on a sum agreed upon at the time the insurance policy was written. Doctrine of subrogation: The doctrine of subrogation refers to the right of the insurer to stand in the place of the insured, after settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved. If the insured is in a position to recover the loss in full or in part from a third party due to whose negligence the loss may have been precipitated, his right of recovery is subrogated to the insurer on settlement of the claim. The insurers, therefore, recover the claim from the third party. The right of subrogation may be exercised by the insurer before payment of loss. ESSENTIALS OF DOCTRINE OF SUBROGATION 1. Corollary to the principle of indemnity: The doctrine of subrogation is the supplementary principle of indemnity. The latter doctrine says that only the actual value of the loss of the property is compensated, so the former follows that if the damaged property has any value left, or any right against a third party the insurer can subrogate the left property or right of the property because in the insured is allowed to retain, he shall have realized more than the actual loss, which is contrary to principle of indemnity. 2. Subrogation is the Substitution: The insurer, according to this principle, becomes entitled to all the rights of insured subject matter after payment because he has paid the actual loss of the property. He is substituted in place of other persons who act on the right and claim of the property insured. 3. Subrogation only up to the amount of payment: The insurer is subrogated all the rights, claims, remedies and securities of the damaged insured property after indemnification, but he is entitled to get these benefits only to the extent of his payment. The insurer is thus, subrogated to the alternative rights and remedies of the insured, only up to amount of his payment to the insured. In the same way if the insured is compensated for his loss from another party after he has been indemnified by his insurer he is liable to part with the compensation up to the extent that insurer is entitled to. In one USA case is was made clear “If the insurer having paid the claim to the insured, recovers from the defaulting third party in excess of the amount paid under the policy, he has to pay this excess to the insured through he may charge the insured his share of reasonable expenses incurred in collecting.” 4. The Subrogation may be applied before payment: If the assured got certain compensation from third party before being fully indemnified by insurer, the insurer can pay only the balance of the loss.

5. Personal insurance: The doctrine of subrogation does not apply to personal insurance because the doctrine of indemnity is not applicable to such insurance. The insurers have no right of action against the third party in respect of the damages. For example, if an insured dies due to negligence of a third party his dependent has right to recover the amount of the loss from the third party along with insurance policy amount. No amount of the policy would be subrogated by the insurer. Warranty and its types: In contract law, a warranty has various meanings but generally means a guarantee or promise which provides assurance by one party to the other party that specific facts or conditions are true or will happen. This factual guarantee may be enforced regardless of materiality which allows for a legal remedy if that promise is not true or followed. Although a warranty is in its simplest form an element of a contract, some warranties run with a product so that a manufacturer makes the warranty to a consumer with which the manufacturer has no direct contractual relationship. A warranty may be express or implied, depending on whether the warranty is explicitly provided (typically written) and the jurisdiction. Warranties may also state that a particular fact is true at one point in time or that the fact will be continue into the future (a "promissory" or continuing warranty). Express Warranties An express warranty can take several different forms, whether spoken or written, and is basically a guarantee that the product will meet a certain level of quality and reliability. If the product fails in this regard, the manufacturer will fix or replace the product for no additional charge. Many such warranties are printed on a product's packaging or made available as an option. A verbal express warranty may be as simple as a car dealer telling a customer, "I guarantee that this engine will last another 100,000 miles." If the car fails to live up to this claim, the buyer may take it up with the seller (although proving the existence of a verbal warranty is very difficult). Other warranties may be expressed in writing but do not necessarily look like traditional warranties. For example, a light bulb manufacturer prints the words "lasts 15,000 hours" on its packaging. The words "guaranteed" or "warranty" do not appear, but this claim nevertheless is an express warranty. Implied Warranties Most consumer purchases are covered by an implied warranty of merchantability, which means it is guaranteed to work as claimed. For instance, a vacuum cleaner that does not create enough suction to clean an average floor is in breach of the implied warranty of merchantability. Federal law defines "merchantable" by the following criteria: They must conform to the standards of the trade as applicable to the contract for sale.

They must be fit for the purposes such goods are ordinarily used, even if the buyer ordered them for use otherwise. They must be uniform as to quality and quantity, within tolerances of the contract for sale. They must be packaged and labeled per the contract for sale. They must meet the specifications on the package labels, even if not so specified by the contract for sale. Even used goods are covered, although some states allow retailers of either used or new goods to invalidate the implied warranty by stating "sold as is." Products guaranteed for a different purpose than what the manufacturer explicitly intended come with an implied warranty of fitness. For example, if a shoe salesperson sells you a pair of high heels for running -- assuming you've made it clear that you want shoes for running -- then your purchase is covered under an implied warranty of fitness. Q.4. Give short notes on: a. Evidence and claim notice b. Subrogation c. Salvage Answer: Evidence To admit a claim, appropriate evidence related to the policy is needed. In marine insurance the policy is generally issued on mutual understanding and good faith of both the parties. However, at the time of claim, the insurer should satisfy itself about the information furnished by the insured. The value of subject matter, nature of the subject matter, warranties, insurable interest, etc., are some of the matters to be considered at the time when the claim arises. For these purposes, the production of certain documents becomes necessary. Notice of claim In the event of the occurrence of the insured contingency, the insured has to serve a prompt notice of claim. The notice receipt or the endorsement of the course of action undertaken by the insured does not imply the acknowledgement of liability of the loss. The notice for damage should be given before the survey by the insurer’s representative. After performing the survey, the survey report signed by him is availed. The compliance with the rules of notice is necessary to enforce the right of recovery of the loss by the insured. After the notice, the insured must take delivery of the damaged goods at once or otherwise deal with the damage because the insurer is not responsible for further and continued depreciation of the interest damaged. In case of any theft or pilferage, the insured must give notice to the

insurer within 10 days from the date on which the risk expired. In case of marine insurance, if the ship owner is also liable for any loss or damage, he or his agent is also entitled to a written notice. The notice is generally given at the time of taking delivery of goods. But if loss could not be determined or detected before such delivery, the notice is to reach the ship owner or his representative within 3 days of the delivery. The notice is an important factor in the matter of claim.

Subrogation Where the insurer pays for the complete loss, either of the whole, or in the case of goods, of any apportion able fraction, of the insured subject-matter, he hereafter becomes entitled to take over the interest of the assured in whatever might remain of the subject matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject matter. Subject to the foregoing provisions where the insurer pays for a fractional loss, he acquires no title to the subject matter insured, or such fraction of it as might remain. However, he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified. The right of subrogation ensures that the assured should not make a profit out of the contract. Salvage The salvage is the remuneration or reward payable according to maritime laws to salvors who voluntarily and independently of contract render services to maritime property at sea. Salvage charges insured in preventing a loss by perils insured against might be recovered as a loss by those perils. The salvage awarded to salvors is apportioned over the values saved. This charge is not recoverable from marine underwriters. For instance, we have the International Salvage Union (ISU). Its member salvors provide necessary services to the maritime and insurance communities at the world level. Salvors operate in the areas of marine casualty response, wreck removal, pollution defense, towage, cargo recovery and many other related activities. The salvage law and salvage principles have evolved over the centuries. The basic concept is that the salvor is encouraged by the prospect of a suitable salvage award to arbitrate in a casualty or crisis situation for salving the ship, property and, specifically, saving life and pollution prevention. The salvor’s right to a reward is based on natural equity. It enables the salvor to become a party in the benefit provided to ship owner, the ship and the cargo. Q.5. Explain the marketing mix (7 P’s) for insurance companies. Answer: Marketing for insurance companies implies marketing insurance services with the objective to create a customer base and make profit by the means of customer satisfaction. This emphasizes on forming an appropriate marketing mix for insurance business for the insurance organization to sustain in the industry. The marketing mix is a conglomeration of marketing activities managed by an organization in order to meet the requirements of its targeted market to the

greatest extent. Since the insurance business deals in selling services, the marketing mix is essential for this sector. The marketing mix is inclusive of the combinations of the 7 P’s of marketing, i.e., product, place, price, people, promotion, process and physical attraction. The 7 P’s mentioned above can be utilized for the marketing of insurance products as follows: 1. Product A product signifies what is produced. If goods are produced, it implies a tangible product and when services are produced or generated, it implies intangible service product. A product is what a seller has to sell as well as what a buyer has to purchase. Hence, an insurance firm sells services, thus making services as their product. When an individual or an organization purchases an insurance policy from an insurance organization, in addition to the promised policy benefits, he pays a price for the agent’s help and advice, the reputation of the insurance firm and the claims and compensation facilities. The policyholders naturally look for a reasonable return for their investment and the insurance firms have their objective in maximizing their profit margins. Hence, while freezing on the product-mix or product portfolio, the associated services or the plans ought to be such that they motivate individuals in buying the product. 2. Pricing Aiming at the target market or prospects, the process of formulating the pricing policy becomes really important. For instance, in a developing country such as India, where the prospects’ disposable income level is low, the pricing decisions also influence the conversion of possible policyholders into policyholders instead. These strategies might be high pricing or low pricing aimed at maintaining the standard of the policyholders. Insurance pricing takes place in the shape of premium rates. 3. Place This element of the marketing mix is associated with two essential aspects: • To manage the insurance personnel • To locate a branch The management of insurance personnel and agents is significant considering the maintenance of the rules associated with offering the services. It bridges the gap between services promised and services offered to the end user. 4. Promotion The success of insurance services is dependent on the kind of promotional measures undertaken. India is a country featured by high rate of illiteracy and the rural economy dominates the national economy. It is important to incorporate personal as well as impersonal promotional techniques. The rural career agents and agents play a significant role in promoting insurance business. Due attention must be directed towards the selection of the promotional mechanisms for rural career

agents and agents and even for the branch managers and front-line staff. They should also be properly trained to trigger impulse buying. 5. People Understanding the psychology of a customer allows one to design suitable products. To compete successfully in the service industry involves a high level of interaction among people. It is essential to efficiently utilize this resource to ensure customer satisfaction. Development, training and sustainable relationships with intermediaries are the primary areas to be considered. Employees training, using IT for procedural efficiency, both at the staff as well as the agent level are the significant areas to focus on. 6. Process The insurance industry ought to be characterized by a customer-friendly process. The accuracy and speed of payment are of high significance. The method of processing ought to be simple and convenient to customers. Installment schemes need to be appropriately organized to cater to the ever-increasing customer demands. 7. Physical distribution Distribution is a primary success determinant with regard to all insurance firms. At present, the nationalized insurers operate on a wide domain in the country. Constructing a distribution network is quite expensive and time-consuming exercise. Insurers’ willingness to cash on India’s massive population and cater to a large number of customers will necessitate new alliances and distribution avenues. Q.6. Explain the benefit of reinsurance. Elaborate on the application of reinsurance. Answer: • Reinsurance is the insurance that is purchased by an insurance company (the ‘ceding company’ or ‘cedant’ or ‘cedent’ under the arrangement) from one or more insurance companies (the ‘reinsurer’) as a means of risk management, i.e., for reducing the risks associated with underwritten policies by spreading risks across different institutions. It is also known as ‘insurance for insurers’ or ‘stop-loss insurance’. Application of reinsurance: (i) Life assurance: Life reassurance, as is commonly referred to, can be arranged on ‘original terms’ and on ‘risk premium’ basis. Both the above basis of reassurance may be used for the various types of reinsurance described earlier. In the former, the reassurer(s) divide the total premium and sum insured in a given proportion, with the ceding life office following all the terms and conditions of the direct office’s policy. The reassurer would pay reinsurance and profit commission to the ceding office as in the case of reinsurances in general insurance business. (ii) Risk premium basis: After the first one or two years of a policy being in existence, the life office will be able to start building a reserve fund against a

potential death claim. The risk which has to be reassured is the mortality risk above the level of retention, which is technically known as ‘death strain’. In the first year or two of the policy, the reassurance sum insured will be the full difference between the retention and the sum insured. As the reserve accumulates, it will eventually exceed the retention and then only the difference be-tween the reserve and the sum insured needs to be reassured. The reassurance cover will eventually reduce to nil, while the rate of premium to be applied to it will be the risk rate for the assured life’s age each year. This rate will therefore increase. Initially the premium will rise each year since the risk (difference between direct sum insured and the retention) will be reducing while the mortality rate will increase, as the life assured grows older. As the reserve funds build up beyond the retention level, the rate of increase in the reserve will be greater than the increase in the mortality rate. The overall effect is that the premium will rise in the early stages of the reassurance and reduce in the later stages. (iii) Reassurance pools: Reassurance pools are known to exist for all those insured with a history of diabetes or coronary heart disease. Similar pools, on the general insurance side, are known for difficult risks like atomic risks, etc.