INDIAN FINANCIAL SYSTEM

BANKING AND INSURANCE

CHAPTER 1 INDIAN FINANCIAL SYSTEM
1. Define Financial System.
A: It is complex closely connected network of financial institutions, agents, markets , services,
instruments, procedures and practices adopted in various transactions in the economy.
2) Name the components of the financial system of any country.
A: The financial system of any country consists of
a) Specialized and Non- specialized financial institutions ( Banking and Non-Banking
financial Institution )
b) Organized and Unorganized financial markets.
c) Financial Instruments and services which facilitate transfer of funds.
3) Mention the functions of the Financial System.
A: The functions of the Financial System are i) Provision of liquidity ii) Mobilization of
Savings.
4) Define Financial markets?
A: Financial Markets are those that facilitate buying and selling of financial transactions and
services.
5) Define Financial Assets?

A: A Financial Asset is one which is used for the production or consumption or further creation
of Assets.
6) What are Intermediaries and Non-Intermediaries?

A: Intermediaries are those who act between the savers and investors, they lend money as well
as mobilize savings. Acceptance of deposits from the public for the purpose of lending or
investments is the main area of activity.
Non-Intermediaries do the loan business but their resources are not directly obtained by the
savers.

7) Name the state owned insurance corporations of India.

A: The Two state owned insurance corporations of India are Life Insurance Corporations of
India ( LIC) and the General Insurance corporations of India ( GIC).
8) Define ICICI.
A: INDUSTRIAL CREDIT and INVESTMENT CORPORATION OF INDIA.

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9) What is a money market?
A: Money market refers to the market where money and highly liquid marketable securities are
bought and sold having a maturity period of one or less than one year.
10) Who are the participants of the T-bill market.
A: the Reserve Bank of India, Mutual funds, financial institutions, primary dealers, satellite
dealers, provident funds, corporates, foreign banks, and foreign institutional investors are all
participants in the treasury bill market.
11) What is a call money market.
A: Call money market refers to the market for short term funds ranging from overnight funds
to funds for a maximum tenor of 14 days.
12) Name a money market instrument, which enables collateralized short term borrowing
and lending through sale/purchase operations in debt instruments.
A: Repo
13) What instruments are contained in the capital market.
A: Capital Market comprises of equity, Debt, foreign exchange and derivatives markets,
including future markets in commodities.
14) What is a primary market?
A: The primary market is that part of the capital markets that deals with the issuance of new
securities.
15) What is Book building process?
A: It is a mechanism where, during the period for which the IPO is open, bids are collected
from investors at various prices, which are above or equal to the floor price.
16) Define a stock exchange.
A: Stock Exchange means anybody of individuals, whether incorporated or not, constituted for
the purpose of regulating or controlling the business of Buying, selling or dealing in securities.
17) Define DEMATERIALISATION.
A: Denmaterialisation ( Demat in short term ) signifies conversion of a share certificate from
its physical form to electronic form for the same number of holding which is credited to your
demat account which you open with a depository participant ( DP).
18) What are the benefits of having a demat account?
A: No stamp Duty for transfer of securities in the electronic form. In case of transfer of
physical shares, stamp duty of 0.5 percent is payable on the market value of shares being
transferred.

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19) Who are the depositories?
A: Depositories are those who are licensed by the securities and exchange board of India
(SEBI) to undertake depository functions i.e. holding and handling of securities in electronic
form.
20) Name the two depositories in India.
A: The national Securities depository Ltd ( NSDL ) and Central depository services India Ltd (
CDSL )
21) Mention the difference between term deposit and certificate of Deposit ( CDs)
A: Certificates of Deposits differ from the term deposit as they have the facility for transfer and
multiple ownerships before maturity. Certificate of Deposits rates are usually higher than the
term deposit rates, due to the low transactions costs.
22) Define Treasury Bills.
A: These are promissory notes of 90 days duration issued by the government for raising short
term funds.
23) Define Hundis.
A: They are the chief credit instruments used in the indigenous sector of the Indian Money
market. They are inland bills of exchange drawn in regional languages.
24) What are short term government bonds.
A: They are bonds issued by the Government for periods of 5 years.
25) Expand
a) NIM: New Issue Market i.e. Primary market.
b) IDBI: Industrial Development Bank of India.
c) IFCI: Industrial Finance Corporation of India.
d) SIDBI: Small Industries Development Bank of India.
e) IDFC: Infrastructure development Finance Company Limited.
f) IIBI: Industrial Investment Bank of India.
g) NABARD: National Bank for Agriculture and Rural Development.
h) EXIM: Export Import Bank of India.
i) SFC: State Financial Corporations.
j) SIDC: State Industrial Development Corporation.
k) ECGC: Export Credit Guarantee corporation of India.
l) DICGS: Deposit insurance and Credit Guarantee Corporation.
m) UTI: Unit Trust of India.
n) ICICI: Industrial Credit and Investment Corporations of India.
o) GIC: General Insurance Corporation of india.

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p) LIC: Life Insurance Corporations of India.
q) CRISIL: Credit Rating Information Services of India Ltd.
r) OTCEI: Over the Counter Exchange of India.
s) SHCI: Stock holding Corporation of India
26) Distinguish between money market and capital market:
Money market Capital market

Its a place where short term of fund Its a place where long term & medium
transfer takes place. term of fund transfer takes place.

It deals with small amount. It arranges large amount of funds.

It gets a high rate of interest. It gets a low rate of interest.

It has a limited & selected market. It will be distributed widely.

The instruments include bills of exchange, Deals with shares, debentures and
treasury bills, commercial papers (CP), bonds.
certificate of deposit (CD).

They do not have secondary markets. Generally have secondary markets.

Transactions can take place even without Requires authorized dealers who
brokers. conducts the transactions.

27) What is listing of securities? What are its advantages and disadvantages?

A: A security is said to be listed when its name is added to the list of securities in which
trading on a particular exchange is permitted is known as listing of securities.
Advantages:
a. Management perspective:-
I. Distinct advertising value
II. In broadening and diversifying shareholding
III. Encourage institutional investors to be interested in the shares
IV. Comp. gains national importance and wide spread recognition
V. Saves the cost of raising new capital.
b. Share holders perspective:
I. It provides liquidity to their holdings
II. A mere verbal order to a stock broker will help in buying and selling
security
III. Transactions are transparent, so clear prices are known.
IV. Added collateral value, as bank prefers listed security against the
loan.
V. Advantageous in case of income tax, wealth tax.
Disadvantages :-
I. Once the shares are listed the companies subjected for various regulatory
measures of stock exchange and SEBI

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II. Listed companies must submit and disclose vital information to the stick
exchanges
III. The company has to send notices of annual general meetings, annual reports
etc., to large number of shareholders, resulting in unnecessary expenditure.
IV. The company has to spend heavily in the process of placing the securities
with the public.
28) Differentiate between Primary market and Secondary Market.

A:
SL.No Primary Market Secondary market
1 It is a Direct Market It is a Indirect Market
2 The Primary market is that part of the The Secondary market also known as the
capital markets that deals with the aftermarket, is the financial market where
issuance of new securities. previously issued securities.
3 It is a Sub - type of Organized Markets It is a Sub type of Unorganized Market.
4 Method of issuing securities are: It is the financial market where previously
1) IPO issued securities and financial instruments
2) Rights issue such as stock, bonds, options, and futures
3) Preferential Issue. are bought and sold.
5 It is also called as New Issue Market ( It is also called as AfterMarket.
NIM)
Money market and capital market explanation, its types, functions can also be explained.

29) Distinguish between money market and capital market.

A:
MONEY MARKET CAPITAL MARKET
a) It arranges small amount of funds. a) It arranges large amount of funds.
b) It makes funds available for working b) It makes funds available for fixed capital.
capital.
c) Short term funds only. c) Long term funds.
d) Rate of Interest in money market is d) Rate of Interest in capital market is
generally high. generally high.
e) It contains instruments in secondary e) It does not contain secondary market.
market.

30) Explain the features of T-bill.

A: Treasury Bills are short term instruments issued by the reserve bank on behalf of the
government to tide over short term liquidity shortfalls.
The Features of T- Bill are as follows:
1) They are negotiable securities.
2) They are highly liquid as they are of shorter tenure and there is a possibility of an
interbank repos on them.
3) There is absence of default risk.
4) They have an assured yield, low transactions cost, and are eligible for inclusion in
the securities for SLR purpose.
5) They are not issued in scrip form. The purchases and sales are affected through the
subsidiary general ledger ( SGL) account. T-Bills are issued in the form of SGL

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entries in the books of Reserve Bank of India to hold the securities on behalf of the
holder. The SGL holdings can be transferred by issuing a SGL transfer from.
6) Recently T-Bills are also being issued frequently under the market stabilization
scheme ( MSS).

31) Discuss the Components of Indian Financial System.

A:

Components/ Constituents of Indian Financial system:

The following are the four main components of Indian Financial system

1.Financial institutions
2. Financial Markets
3. Financial Instruments/Assets/Securities
4. Financial Services.

Explain any 3 above types..

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29) Describe the Secondary Market in India .

A:
Financial markets

Organized Unorganized

Primary Secondary

Capital market Money Market

Equity Market Debt Market Derivatives

Market

The secondary Market also known as the AFTERMARKET, is the financial market where
previously issued securities and financial instruments such as stock, bonds, options, and
futures are bought and sold.
The term secondary market is also used to refer to the market for any used goods or assets,
or an alternative use for an existing product or asset where the customer base is the second
market.
On the basis of credit requirements for short term and long term purposes financial
markets can be divided into two types:
1) Money market.
2) Capital Market.
1) Money Market:
Money market deal in the Short term claims ( with a period of maturity of one year or
less ). Money market does not refer to any particular place or office where money is
bought or sold.
Instruments of money market are : Trade Bills, treasury Bills, Short term government
Bonds, Hundis.
2) Capital Market:
The term capital market refers to the market for long term funds as well as short
term funds.
Components of capital market are ; New issue market, Stock market, Financial
Institutions, mutual funds, venture capital Companies.

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INDIAN FINANCIAL SYSTEM

30 ) Explain the various types of financial Intermediaries.

A: Financial intermediaries:
They are those who act between the savers and investors. They lend money as well as
mobilize savings. Acceptance of deposits from the public for the purpose of lending or
investment is the main area activity. All Banking institutions are intermediaries.
Distribution of insurance products:
Traditionally, the life insurers have been solely dependent on the agency distribution force.
The general insurance business has depended totally on the development officers. In the
emerging scenario, there will be three players as follows:
1) the Buyers
2) The Carriers or the Policy issuers.
3) The Distributor.
Traditional channel of distribution:
1) Agents.
2) Brokers.
New Distribution channels:
1) Direct Marketing.
2) Corporate Agents.
3) Independent Financial Advisors.
4) Telemarketing.
5) Website Marketing.
6) Retail Chains.
7) Internet Marketing
8) Bancassurance.

The various insurance intermediaries are:

1) Agents.
2) Brokers.
3) Surveyors and Loss Assessors
4) Third Party Administrators.
5) Corporate Agents.

31) What are the objectives and functions of Stock Exchange?

A: Stock exchange means anybody of individuals, whether incorporated or not, constituted for
the purpose of regulating or controlling the business of buying, selling or dealing securities.
Objectives:
1) To create efficient securities market.
2) To regulate Stock market practices.
3) To ensure fair dealing and Protection to investors.
4) To improve the working of Stock exchange.
5) To control the undesirable speculative practices.
Functions:
1) Act as clearing house of business information.
2) Extend liquidity to securities.
3) Facilitate marketability and transparency of securities.
4) Allow companies to float their shares on the market.
5) Ensure wider ownership of securities.
6) Enable investors to evaluate the net worth of their holding.
7) Provide capital to profitable sectors.
8) Ensure safety and fair dealings to all.

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9) Motivate well reputed companies to retain their shares in A group to improve
performance.
Etc

31) Explain the classification of Financial Assets.

A: Financial assets are classified into 2 types:
Marketable asset
Non-Marketable asset.

Marketable Asset:
Marketable asset are those which can be transferred from one person to another without any
hindrance.
Ex: Shares of Listed Companies, Government securities, Bonds, Mutual funds , Debentures.

Non - Marketable Asset:

Marketable asset are those which cannot be transferred from one person to another without any
hindrance.
Ex: Bank deposit, Provident Funds, Pension Funds, National Savings Certificate, Insurance
policies.

32) Write a note on IDBI, IFCI, SFC, UTI , ICICI.

A: IDBI was established in July 1964 under IDBI Act as a wholly owned subsidiary of the
RBI. IDBI was latter taken over by the government of India which in the year 1995 de-invested its
shares with the government holding is around 72% and the rest is with the public.

Role of IDBI are:

1) Planning, Promoting and developing industries thereby filling the gaps in the industrial
development.
2) Providing Technical and Managing assistance for the promotion or expansion of industry.
3) Undertakes marketing research and surveys to Facilitate the development of the industry.

Functions of IDBI:
1. Direct assistance
2. Indirect assistance
3. Promotional assistance.

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INDIAN FINANCIAL SYSTEM
Chapter 2
COMMERCIAL BANKS
1. Define a Bank.
A: A Bank is a financial institution where an individual can deposit money. Banks provide a
system for easily transferring money from one person or business to another.

2. Mention the Two Broad Functions of RBI.

A: The functions of the RBI can be classifies as the
i) Monetary function
ii) ii) Non-Monetary function.

3. Why is RBI called Bankers Bank and the lender of the last resort.
A: The RBI is responsible to control the volume of reserves of all commercial, co-operative and
regional rural banks. In times of needs the banks can borrow funds from the RBI and hence it is
called the lender of the last resort.

4. How are Commercial banks classified?

A: Commercial Banks operating in India may be classified into Public Sector, Private Sector
and the Indian or Foreign Banks depending upon the ownership, Management and control.

5. How do we classify the Indian commercial banks. Briefly Explain.

A: The Indian Banking System consists of Two parts.
i) Un Organized Sector ii) Organized sector

6. What are scheduled commercial banks.

A: Scheduled Banks in India constitute those banks which have been included in the Second
Schedule of reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid down wide section 42(6)(a) of the Act.

7. What are unsecured loans.

A: Unsecured loans are monetary loans that are not secured against the borrowers assets (i.e.,
No Collateral is involved).

8. What are secured loans.

A: A Secured loan is a loan in which the borrower pledges some assets ( ex a car or any
property) as collateral (i.e., Security) for the loan.

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9. What is NPAs?
A: NPAs means Non-Performance Assets.

10. Define e-banking?

A: E-Banking refers to the use of technology which allows customers to perform banking
transactions electronically without visiting a brick and mortar institution.

11. Mention the sources of funds of commercial banks.

A: The sources of funds of Commercial Banks are:
i) Cash in hand
ii) Money at call and short notice.
ii) Bills discounted
iv) Investments
v) Loans and advances.

12. Mention the objectives, Functions of RBI.

A: The functions of RBI can be classified as the
1) Monetary function
2) Non-Monetary function
1) Monetary functions: Among the Monetary functions the important being
a) Currency issuing authority.
b) Bankers bank and lender of the last resort.
c) Banker to the government.
d) Custodian of the foreign exchange reserves.
e) Control of credit.
2) Non-Monetary Functions: The RBI also performs functions like
a) Collection and publication of data.
b) Regulatory and Supervisory function.
c) Development and promotion functions.

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13. Explain the terms i) Liquidity ii) Profitability of a Commercial Banks.

A: Principle of liquidity: the first and most important consideration that a bank should bear in
mind is the principle of liquidity. Liquidity should be the primary consideration of a bank because it
is only by maintaining a high degree of liquidity in its assets, a bank will be able to meet the
withdrawals of its depositors and will be able to secure the confidence of the depositing public and
run the business smoothly. Liquidity means the ability of a bank to produce cash on demand. It is
the capacity of a bank to satisfy promptly the depositors demands for cash.

Principle of profitability: the third important consideration that a bank should bear in mind is
profitability or return on the funds invested. A commercial bank is a business institution. So it must
earn sufficient profits to meet its expenses and to pay a good dividend to its shareholders. The
profits of a bank arise from its assets and so the profits will be greater if the yields from the assets
are higher. Therefore, a bank should invest a part of its funds on assets which yield high returns.

14. What are Commercial Banks? Explain their features.

A: Commercial banks are the banks which accept deposits from the public and lend them mainly to
commerce for shorter period. As they finance mainly commerce so they are called as commercial
banks.
They are also called as Deposit Banks, The system of accepting deposits from the public and
lending them for shorter period is called Deposit Banking and such banks are called Deposit Bank.

Commercial Banks Types

1. Scheduled
1.1 SBI(Public Sector & Private Sector)
1.2 Associate Banks.
1.3 RRBs
1.4 Nationalized Banks.
1.5 Private Banks.
1.6 Foreign banks.
2. Non-Scheduled Banks.

15. Discuss the various sources of funds of a commercial banks.

A: Share capital: A share capital is a sources of fund created by a joint stock company, a share
capital is a important feature in commercial bank. Commercial banks are mostly organized on
the basis of joint stock company. A commercial bank raises its capital by issuing of shares to
the public.
In order to invest a share capital from a joint stock company, which raises its capital by issuing
share or shares.
Shares can be issued in different forms
1) Issued capital 2) Called up capital 3) uncalled up capital 4) subscribe capital 5) paid up
capital 6) reserve capital
Reserve fund or other reserve

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Accumulation of profits occurred during a period are referred as a reserve fund. The reserve
fund or other reserves can be accumulated from deposits namely
FD, RD, SB , Current or Demand deposit. Or
Cash in hand
Money at call and short notice
Bills discounted
Investments
Loans and advances

16. Explain the various Sources of funds.

A: Share capital: A share capital is a sources of fund created by a joint stock company, a share
capital is a important feature in commercial bank. Commercial banks are mostly organized on
the basis of joint stock company. A commercial bank raises its capital by issuing of shares to
the public.

In order to invest a share capital from a joint stock company, which raises its capital by issuing
share or shares.

Shares can be issued in different forms

issued capital, called up capital,uncalled up capital, subscribe capital, paid up capital, reserve
capital

Reserve fund or other reserve

Accumulation of profits occurred during a period are referred as a reserve fund. The reserve
fund or other reserves can be accumulated from deposits namely
FD, RD, SB ,Current or demand deposit.
Or
Cash in hand
Money at call and short notice
Bills discounted
Investements

17. State the functions of Commercial banks.

A: Commercial banks are the banks which accept deposits from the public and lend them mainly to
commerce for shorter period. As they finance mainly commerce so they are called as commercial
banks.
They are also called as Deposit Banks, The system of accepting deposits from the public and
lending them for shorter period is called Deposit Banking and such banks are called Deposit Bank.
Commercial banking refers to the system of banking which is concerned with the acceptance of
deposits from the public repayable on demand or after the expiry of shorter period and granting of
mainly short term credit to trade, commerce and industry through its wide network of branches
throughout the country.
The main characteristics of commercial banks are;
Commercial banks connecting links or middleman between the depositing public and the borrowing
public
Commercial banks are dealers in debts or financial obligations.

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INDIAN FINANCIAL SYSTEM
Commercial banks have become very important because they are creators of money.
Commercial bank is a service industry rendering a variety of services to the depositors and the
general public.
Functions of commercial banks are
1. Principal, primary , basic or Fundamental functions
2. Subsidiary, Secondary, Supplementary or Ancillary functions.
Primary functions:
The principle functions of commercial banks are;
1. Receiving of deposits
2. Lending of funds
3. Investments of funds on securities
4. Creation of money
Receiving of funds- commercial banks receive funds from public from various accounts. The main
types of Deposit Accounts are
1. Current Accounts- It is a type of commercial bank account. They are opened by commercial
industry and trading concerns through public interest. A current account transaction occurs
for larger amount of funds.
The public or the customers does not earn interest it is a mere payment process or a convenience for
making payments through cheques.
2. Savings Account- It is a type of commercial bank account mainly opened by middle man
and low profile people/ customers who wish to save a part of their current income for the
future needs and earn the interest on the deposited amount.
3. Fixed Deposit- this type of commercial bank account is opened by the middleman or a small
public who doesnt want to invest their money in a risky condition in such a case a public or
a depositor can deposit a set of money in a fixed deposit to earn steady income.
4. Recurring Deposit- It is a type of savings account. The depositor deposits money for a
regular basis. I.e. a depositor deposits a fixed sum of money in every month for an agreed
period by the banker. The depositor can get back the deposited amount after the specified
period with an accumulated interest.
Lending of funds This constitutes the important means of business for a commercial bank.
Bank lends funds to public by way of;
1. Loan- A loan is a financial agreement under which the advances are granted by a bank to a
borrower in terms of a separate account called as a loan account.
2. Over draft- it is a mere contract/ agreement by a banker and a deposit of current account to
draw more than the amount deposited in their account in term credited up to an agreed limit.
3. Cash/ Credit- it is a type of financial agreement under which a borrower is allowed to
withdraw an advance money through a separate account called as cash/ credit account
4. Discounting of bills- It is a type of financial agreement under which a banker takes the bills
of exchange maturing within a period of sixty or ninety days.
Investments of funds on securities- It is the important function of commercial bank while investing
the funds on securities. The commercial bank is required to have a sound commercial principle.
Creation of money- A commercial bank is a mere creator of money , but the purpose of a creation
of money the banker manufactures a set of funds.
Subsidiary or Secondary functions- the subsidiary functions can be classified into two types
1. Agency Services-the services provided or rendered by a banker as an agent to his customers.
A banker will keep the instructions rendered to a customer are noted down in a
separate book called as a standard book or institution.
Some of the agency services provided by commercial banks are
a. Making payments behalf of customers
b. Sale and purchase of securities on behalf of customers
c. Bankers can give advice to customers regarding stocks exchange
2. Miscellaneous / general utility services

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Services rendered by a bank to the general public are called miscellaneous services.
They are-
a. Safe custody of valuable things
b. Dealing in foreign exchange business
c. Issuing of travelers letters of credit, circular notes and travelers cheques
d. Acting as referee collecting information about other business man for customers
e. Collection of statistical data

19 What are Commercial Banks? Explain the types of commercial Banks.

A: Commercial banks are the banks which accept deposits from the public and lend them mainly to
commerce for shorter period. As they finance mainly commerce so they are called as commercial banks.
They are also called as Deposit Banks, The system of accepting deposits from the public and lending them
for shorter period is called Deposit Banking and such banks are called Deposit Bank.

Commercial Banks Types

Scheduled
1.1 SBI(Public Sector & Private Sector)
1.2 Associate Banks.
1.3 RRBs
1.4 Nationalized Banks.
1.5 Private Banks.
1.6 Foreign banks.
Non-Scheduled Banks.

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Chapter 3
The Concept or Risk & Insurance
1. Define Pure Risk.
A: Pure risk exists when there is a chance of loss but no chance of gain.
2. What are Diversifiable Risks.
A: Are those risks which affect nearly all humans at the same time. A risk Diversifiable if it is
possible to reduce risk through pooling or risk sharing agreements.
3. What is Insurable Interest.
A: Insurable interest means one must stand to suffer a measurable loss ( In Currency) if the
insured against event occurs.
4. What is principle of Indemnity?
A: This means that if the insured suffers a loss against which the policy has been made he shall
be fully indemnified only to the extent of loss.
5. What is the Principle of Causa Proxima?
A: The Cause of loss made be Direct and an insured are in order to claim for Compensation.
6. Define Insurance.
A: Insurance in Finance term can be defined as a contract actual agreement b/w two parties the
insurer and the insured. Under the agreement, the insurer agrees to reimburse loss in return for
the insureds premium payment.
7. What is Underwriting process.
A: The Underwriting process determines which applicants are eligible for instance coverage.
An insurer normally rejects some applicants and accept others. The criteria to accept an
insurance may by using strict underwriting policy and stringent rules to determine eligibility.
8. What is Endowment insurance.
A: Serves as an effective means to accumulate a specific sum of money over a period of time.
9. Define Liability insurance.
A: Protects against liability claims and lawsuits involving:
Bodily injuries to others.
Property damage to others
Personal injuries to others.

10. What is fire insurance

A: Fire insurance is a contract of indemnity wherein the insurer undertakes to indemnity the
insured against financial loss or damage to property caused directly as a result of fire any time
during an agreed period of time.

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11. Define Health insurance.
A: Health insurance or health cover is defined in the registration of Indian insurance
companies regulations 2000, as the effecting of contracts which in-patient or out-patient on an
indemnity, reimbursement, services prepaid, hospital or other plans basis including assured
benefits and long term care.
12. What is Hull All Risks.
A: The Hull All Risks policy usually pertains to chances of physical loss or damage to the
aircraft.

13. Differentiate between pure and speculative risks.

A: Pure risk exists when there is a chance of loss but no chance of gain. (Personal, property,
liabilities---types).
Speculative risk exists when there is a chance of gain as well as a chance of loss.

14. Describe the concept of Insurable Risk.

A: Insurable risks, which have been identified and measured, can be either be retained or
transferred. There are two circumstances by which one retains risk: one is voluntary and the
other involuntary. Voluntary risk retention is most often selected as an alternative to insurance.
Involuntary retention concerns risks for which there is no or an extremely limited transfer
alternative available.
Insurance is basically a risk control device. The purchase of insurance reduces the expected cost
of losses. Risk reduction contributes for increased expected cash flows to the firm. The main
advantage of purchasing insurance is that the firm must pay the loading on the insurance
premium, which decreases expected cash flows.

15. What are the characteristics of insurance Industry.

A: Two important issues of the insurance industry are
1) Costs and benefits of insurance.
2) The Characteristics of insured risks.
1) Benefits and costs of insurance: Insurance like most institutions, presents society with
both benefits and costs.
Indemnification: The direct advantage of insurance is indemnified for unexpected loss
organizations suffering loss are restored or at least moved closer to their economic position. The
advantage to these organizations is obvious. Society also gains because resources are restored to
production, tax revenues are increased and other possible costs are reduced.
Reduction of Uncertainty: prior to the purchases of insurance, the potential bears the
risk associated with possible uninsured damage or exposure to liability.
Funds for investment:
Loss control
Aid to small Business:
Costs:
Operating Expenses:
Moral hazard
The Benefit Trade off:

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16. Write a short note on the benefits of Insurance.
A: Indemnification: The direct advantage of insurance is indemnified for unexpected loss
organizations suffering loss are restored or at least moved closer to their economic position. The
advantage to these organizations is obvious. Society also gains because resources are restored to
production, tax revenues are increased and other possible costs are reduced.
Reduction of Uncertainty: prior to the purchases of insurance, the potential bears the risk
associated with possible uninsured damage or exposure to liability.
Funds for investment:
Loss control
Aid to small Business:
Costs:
Operating Expenses:
Moral hazard
The Benefit Trade off:

17. Give two examples of health insurance.

A: Third Party administrators(TPA) are distributors/intermediaries of the insurance products
in the health insurance sector. They facilitate the smooth operation of the health cover by acting
as a link between the insurance companies and their clients and hospitals. The IRDA has set up
the minimum capital of Rs 1 Cr for TPAs. The IRDAs has also prescribed a qualified doctor as
one of the corporate doctors to obtain the license. They enable cashless payment of claims to the
insured wherein they settle claims with hospital instead of insurers.

18. Describe the various types of Risks.

A: Any five points, Explanation and Diagram
1. Financial and Non-financial Risk:
2. Individual and group:
3. Pure and Speculative risk
4. Static and Dynamic Risk
5. Quantifiable and Non-Quantifiable Risk.
6. Insurable Risks and non-Insurable Risks
7. Risk due to Failure of Others.

19. Describe the various types of General insurance.

A: General Insurance or non-Life insurance policies, including automobile and homeowners
policies, provides payments depending on the loss from a particular financial event.
Types:
1) Insurance of property:
everyone possesses material value in the form of tangible assets. Assets can be in the form
of a landed estate, or vehicle, share holdings or plain old paper money.
i. Property Insurance:
It provides protection against most risks to property, such as fire, theft and some
weather damage. This includes specialized forms of insurance such as fire insurance,
flood insurance, earthquake insurance, home insurance or bolier insurance.
i. Auto insurance or car insurance or vehicle or motor insurance:
This is insurance purchased for cars, trucks, and other vehicles. Its primary use is to
provide protection against losses incurred as a result of traffic accidents and against
liability that could be incurred in an accident.
ii. Earthquake insurance:
It is a form of property insurance that pays the policyholder in the event of an
earthquake that causes damage to the property.
iii. Flood insurance:

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As with flood insurance or insurance on damage from a hurricane of other large-scale
disasters, insurance companies must be careful when assigning this type of insurance,
because an earthquake strong enough to destroy one home will probably destroy dozens of
homes in the same area.
iv. Home insurance:
Home insurance also called as Hazard insurance or home owners insurance is the type of
property insurance that covers private homes. It is an insurance policy that ones home, its
contents, loss of its use or loss of other personal possessions of the homeowner, as well as
liability insurance for accidents that may requires that at least one of the named insureds
occupies the home.
v. Indemnity Insurance or Title insurance:
Title insurance in the united States is indemnity insurance against financial loss
defects in title to real property and from the invalidity or unenforceability of mortgage liens.
Title insurance is principally a product developed and sold in the United States as a result of
the comparative deficiency of the US land records laws.
vi. Pet insurance:
Pet insurance pays the veterinary costs if ones pet becomes ill or is injured in an accident.
Some policies will also pay out when the pet dies, or if its lost or stolen.

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Chapter 4
Essentials of Insurance Contract, Underwriter & Reinsurance
1. What are the four requirements for an insurance Contract.

A: The Four requirements are:

1. offer and acceptance
2. Consideration.
3. Legal Capacity.
4. Purpose not contrary to public interest.
2. What is the Principle of Utmost Good faith.
A: All material information regarding the details of the insurance should be disclosed by both
the parties, the insurer and the insured. The duty of full disclosure rests more heavily
3. What is the Principle of Indemnity?
A: According to the principle of Indemnity, the insured must not collect more than the actual
loss in the event of the damage caused by the insured.
4. What is Principle of Subrogation?
A: According to the principle of Subrogation, one who has indemnified anothers loss is
entitled to recover from any liable third parties who are responsible.
5. Define Risk.
A: Risks that directly affect the individuals capability to earn income.
6. What is Risk Appraisal.
A: Risk appraisal is a simple concept used by life insurance companies to access a fair
premium cost for people who purchase their products.
7. What are the Objectives of Investment Policy.
A: The insurers have an obligation to invest with them the combined objectives of liquidity.
Maximization of yield and safety.

8. Define Underwriting
A: Underwriting is the insurance function that is responsible for assessing and classifying the
degree of risk a proposed insured or group and making a decision concerning coverage of
risks.
9. Define Underwriter.
A: The Person responsible for evaluation and acceptance/rejection of risks and computation of
premium in an insurance company is called an underwriter.

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10. Mention the two principles of Underwriting.
A: The two main principles of Underwriting are:
1. Adverse selection or Unfavorable selection.
2. Consistency or persistency.
11. What are Underwriting Methods.
A: There are various methods of rate determination some of them are:
1. Judgement rating
2. Manual rating.
12. Who are Liability Underwriters.
A: Liability insurance underwriters must understand the liability risks affecting commercial
businesses, professionals or individuals.
13. What are Reinsurance.
A: Reinsurance is a transaction in which one insurer agrees for a premium, to indemnify
another insurer against all or part of the loss that insurer may sustain under the policy of
insurance.
14. What are the objectives of Reinsurance.
A: The Following are four reasons for going for reinsurance
1. To limit liability on specific risks.
2. To stabilize loss experience
3. To protect against catastrophes
4. To increase capacity

15. What is treaty reinsurance.

A: This method is defined to cover an entire category of risk or line of business in advance.
16. What are Facultative reinsurance.
A: In a Facultative contract relationship, the reinsurer retains the faculty or power to either
accept or reject each individual risk offered to it by the insurer.

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Chapter 5
Growth & Development of Insurance
20. What are the four Subsidiaries of insurance Corporation of India (GIC)
A: The four Subsidiaries of LIC are:
1. Oriental Insurance Company Limited.
2. New India Assurance Company Limited
3. National Insurance Company Limited and
4. United India Insurance Company Limited

21. What is the main purpose of the Malhotra Committee.

A: The Purpose of Malhotra Committee is to propose the structure of the insurance industry
and also to evaluate its strengths, weakness.
22. What are the various Insurance Intermediaries.
A: The various insurance intermediaries from the consumers and marketers perspective are:
1) Agents.
2) Brokers.
3) Surveyors and Loss Assessors.
4) Third party Administrators.
5) Corporate agents.
23. Who are Third Party administrators(TPA)
A: are distributors/intermediaries of the insurance products in the health insurance sector.
24. Define IRDA.
A: The Insurance Regulatory and development Authority.
25. What is the composition of the authority under IRDA Act.
A: The Authority is a ten member team consisting of
i. A Chairman
ii. Five whole-time members.
iii. Four part-time Members.

26. What is objective of the INSURANCE ACT, 1938.

A: The Insurance act, 1938 was the first legislation governing all forms of insurance to provide
strict state control insurance business.

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27. What is data Warehousing.
A: Data warehousing technology is based on integrating a number of information systems into
a one stop shopping database to achieve vision of making company national in scope, but
regional in focus.
28. What are Cat Models.
A: Catastrophic models use data from the recent spate of natural disasters that helps develop
more predictions of insurers property exposures in future diasters.

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