Skip to content

CMA Final · Risk Management in Banking and Insurance

Managing Risk in Insurance Business for CMA Final

Managing risk in insurance business means identifying the risks an insurer carries, selecting and pricing them, collecting premium before cover starts, transferring excess risk through reinsurance, controlling claims and investments, and keeping governance sound. In the exam, you link each risk to the right control and the right provision of the Insurance Act, 1938.

What this chapter covers

This chapter looks at risk from the insurer's side. A bank lends money and carries credit risk. An insurer takes on the risk of other people's losses and carries underwriting risk. You study what kinds of risk an insurer faces, how it chooses which risks to accept, how it protects its cash position, how it passes on part of the risk, and how it controls claims, investments and its own management.

The chapter mixes management ideas with a few exact legal rules from the Insurance Act, 1938. The ideas, such as risk selection, retention and claims control, are tested through cases. The legal rules, such as Section 64VB on premium in advance and Section 32A on common officers, are tested as direct facts and as small scenarios.

It connects to the rest of Paper 20B in two ways. The risk identification and transfer methods match the general risk framework you study for banks. The investment and solvency side links to the asset-liability and regulatory parts of the paper. Treat this chapter as the insurance application of the paper's core risk ideas.

This chapter is worth the effort because it suits both parts of the paper. The Section 64VB and Section 32A rules give you clean, factual objective questions that you can get right with a short revision. The underwriting, reinsurance and claims topics give you material for case scenario MCQs and for descriptive answers where you must apply a concept to a given insurer. Few chapters give you both a fixed-rule scoring area and an application area, so a solid grip here protects marks in Section A and in the written questions.

Managing Risk in Insurance Business: topics in the order to study them

  1. 1Nature and Types of Insurance RiskStart here because every later topic is a control for one of these risks, so you need the vocabulary first.
  2. 2Underwriting Risk and Risk SelectionThis is the first line of defence: the insurer decides which risks to accept and at what price.
  3. 3Premium in Advance: Section 64VBIt follows underwriting because it sets when the accepted risk can actually start, and it is a fixed rule you can learn exactly.
  4. 4Reinsurance and Risk TransferOnce risk is accepted and paid for, you learn how the insurer passes on the part it does not want to keep.
  5. 5Claims and Investment Risk ManagementThis covers what happens after cover starts: paying claims fairly and investing the premium pool safely.
  6. 6Governance: Section 32A Officers and ManagementFinish with governance, since it is a short legal topic and ties the controls together at the level of management.

How to prepare Managing Risk in Insurance Business

Split your time between understanding and exact legal wording. The concepts need worked thinking, while the sections need accurate recall.

  1. Read the six topics once in the given order and write a one-line definition of each risk type an insurer faces.
  2. For underwriting, list the factors an underwriter checks and practise saying what the insurer does with a good, average and poor risk.
  3. Learn Section 64VB sub-section by sub-section: the general rule, the date risk may be assumed, refunds, and the agent's 24-hour deposit duty.
  4. For reinsurance, make a simple note of why an insurer keeps some risk and passes on the rest, and match each use to a situation.
  5. Write short notes on claims control and investment risk, and tie each to a loss it prevents.
  6. Learn Section 32A in plain words, including the exception the Authority can allow for amalgamation or transfer.
  7. Finish with case-style practice: read a short insurer scenario, name the risk, and state the control or the section that applies.

Common mistakes in Managing Risk in Insurance Business

  • Saying the insurer can start cover on promise of payment alone.

    Fix: State the full rule: premium received, guaranteed as prescribed, or deposit made in advance as prescribed.

  • Mixing up when risk starts for premium sent by post.

    Fix: Remember that for a money order or a cheque sent by post, risk may be assumed on the date it is booked or posted.

  • Letting an agent deduct commission before depositing premium.

    Fix: Write that the premium must be deposited in full without deduction of commission within twenty-four hours, excluding bank and postal holidays.

  • Applying Section 32A to all insurers or to every officer overlap.

    Fix: Limit it to an officer of an insurer carrying on life insurance business, and name the three restricted roles: another life insurer, a banking company, an investment company.

  • Treating underwriting, reinsurance and claims control as the same thing.

    Fix: Tie each to its stage: underwriting before cover, reinsurance to share risk after acceptance, claims control when a loss is reported.

  • Giving theory without applying it to the insurer in the case.

    Fix: Name the specific risk in the scenario first, then state the control and the rule that answers it.

Last-day revision: Managing Risk in Insurance Business

  • Insurance risk includes underwriting risk, claims risk, investment risk and operational risk.
  • Underwriting means selecting risks and pricing them to match the risk taken.
  • Section 64VB: an insurer cannot assume risk until the premium is received, guaranteed as prescribed, or a prescribed deposit is made in advance.
  • Under Section 64VB, where premium can be ascertained in advance, risk may be assumed not earlier than the date premium is paid in cash or by cheque.
  • If premium is sent by postal money order or cheque by post, risk may be assumed on the booking or posting date.
  • Refunds of premium must be paid directly to the insured by crossed or order cheque or postal money order, never credited to the agent's account.
  • An agent must deposit the collected premium in full, without deducting commission, within twenty-four hours, excluding bank and postal holidays.
  • The Central Government may, by rules, relax Section 64VB(1) for particular categories of policies.
  • Reinsurance lets an insurer pass part of its risk to another insurer and keep a manageable share.
  • Section 32A: an officer of a life insurer cannot also be a managing director or officer of another life insurer, a banking company or an investment company.
  • Under Section 32A, the Authority may allow the overlap only to amalgamate the two life insurers or transfer one's business to the other.
  • Section 14 requires a record of policies and a record of claims, which can be kept in electronic form as regulations allow.

Managing Risk in Insurance Business practice questions

Managing Risk in Insurance Business in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Managing Risk in Insurance Business: frequently asked questions

Is Managing Risk in Insurance Business part of Paper 20B?

Yes. It is a chapter in Paper 20B, Risk Management in Banking and Insurance, which is one of the three electives in Group IV. You choose the elective at the time of enrolment for the Final Course.

Which sections of the Insurance Act, 1938 should I learn for this chapter?

Learn Section 64VB on premium in advance and Section 32A on common officers well. Also know Section 14 on records of policies and claims, Section 35 on amalgamation and transfer, and the basic idea behind Section 64V on valuing assets and liabilities.

Can an insurer ever assume risk before premium is received?

Section 64VB allows it if the premium is guaranteed to be paid in the prescribed manner and time, or if a prescribed deposit is made in advance. The Central Government can also relax the requirement for particular categories of policies by rules.

How should I prepare this chapter for the MCQ section?

Learn the exact conditions of Section 64VB and Section 32A, since options often change one small detail. For case-based MCQs, practise identifying the risk type and the matching control from a short scenario.