insurance assignment

Topics: Insurance, Investment, Economics Pages: 5 (1347 words) Published: April 20, 2014
Q.State and explain the difference between insurance and hedging Insurance is generally an action taken to offset the impact of a negative event. Taking out insurance is a bet that something bad may happen and that protection against it is needed. Hedging is a type of insurance. However, hedging is a markedly different method of insurance from home, auto and flood insurance. Hedging refers to any series of actions taken to offset the potential risk of losses on a financial investment. Medical, home, auto and flood insurance policies promise to recompense any loss in full or part in exchange for a small monthly fee. Insurance means protection against any tragedy. Most people do insurance to themselves and their family. The main purpose of taking insurance is to recover in case any disaster happens. Insurance does not increase your financial status, however it is a service charge taken by insurance companies to give you protection against any kind of mis-happening. Insurance can be of short term or long term; in either case people have to pay some amount to the insurance companies for a limited time. The amount, which is paid by people to insurance companies, is called premium and decided as per the scheme taken. Hedging is a risk management strategy used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. Hedging employs various techniques but, basically, involves taking equal and opposite positions in two different markets (such as cash and futures markets). Hedging is used also in protecting one's capital against effects of inflation through investing in high-yield financial instruments (bonds, notes, shares), real estate, or precious metals.

Q.discuss the challenges faced by insurance companies in Kenya

1. Solvency
Companies that offered whole and term life insurance began offering "market-sensitive" products in an effort to expand product portfolios, according to Price Waterhouse Coopers. This gave policyholders competitive returns and gave insurance companies an edge in the financial service market. Consequently, reserve calculations are subjective, more complex and the investment portfolios require more attention in order to manage them so returns and cash flow align with future liabilities. Market sensitive products that involve long- and short-term investments for companies that sell life insurance are seeing low returns. As a result, insurance companies need to look at other avenues to ensure solvency and increase retention efforts.

2. Reducing Costs
Cost cutting efforts can have devastating consequences to insurance companies, but is an issue they face in an effort gain capital. Insurance companies, as they determine which costs to cut, must look at forces behind costs. This helps them ensure a cut in one area does not increase the cost in another, which can make an insurance company less competitive. For example, cutting employee benefits reduces employee retention, or cuts in staff can lead to long turn-around times. Financial Web states that as insurance company costs increase, their capital decreases. Additionally, insurance companies face difficulties when it comes to creating improvement plans that reduce costs when the plans lack a basis in resources, priorities, dependencies and the integration of the human element, such as training, communication and performance management.

3. Social Media
Insurance industry is one of its kind where historically, the trust and relationship between the customers and the company representatives (agents or brokers) have played a critical role in doing business. But now the world is changing, information is easily available for the customers through various technology mediums like internet; customers can reach out to their computers, tablets or mobile phones to get information on various products and premiums. Though...
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