Frauds in Insurance Essay

Frauds in Insurance Essay.

“Rising frauds lead to greater operational threat.”

Insurance is one of the tools for risk management that aims at reducing the risk on the day-to-day life of individuals, organisation and society. At the same time, it should also be appreciated that insurance cannot be utilised as a risk free tool for all types of situations. Insurance provides risk management solutions to many situations that fall within the competence of human judgement and managerial skills.

Insurance is very important in today’s world there are number risk which people face in their day-to-day life.

The different types of insurance are life insurance, health insurance, automobile insurance, and property insurance. These are the most common types of insurance. Other types of insurance include terrorism insurance, key man insurance etc.

As there are number of advantages in taking an insurance policy, it is also associated with many risks. There are number of frauds taking place in the insurance sector. People have to be very cautious while taking an insurance policy.

Insurance is a federal subject in India. It is a subject matter of solicitation. The legislations that deal with insurance business in India are Insurance Act, 1938 and Insurance Regulatory & Development Authority Act (IRDA), 1999.

The hypothesis is that THIS PROJECT SCANS THE RISKY NATURE OF INSURANCE WITH REFERENCE TO VARIOUS TYPES OF TRANSACTIONS AND THEIR VULNERABILITY TO FRAUD.

CONCEPT OF INSURANCE

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. There are number of frauds taking place in the insurance industry. Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer. Insurance fraud poses a very significant problem, and governments and other organizations are making efforts to deter such activities.

On the one hand, human life is subject to various risks—risk of death or disability due to natural or accidental causes. Humans are also prone to diseases, the treatment of which may involve huge expenditure. On the other hand, property owned by man is exposed to various hazards, natural and man-made. It is important for all to understand the various products that life and general insurance companies offer before they make a choice as to the product they want to buy. As per regulations, insurers have to give the various features of the products at the point of sale. The insured should also go through the various terms and conditions of the products and understand what they have bought and met their insurance needs.

They ought to understand the claim procedures so that they know what to do in the event of a loss. The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

HISTORY OF INSURANCE

Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent to the country’s GDP. Insurance is a federal subject in India and Insurance industry in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts.

The origin of life insurance in India can be traced back to 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for English Widows. In those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were considered riskier for coverage. The Bombay Mutual Life Insurance Society that started its business in 1870 was the first company to charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation formally began with the passing of Life Insurance Companies Act and the Provident Fund Act.

By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that provided strict State Control over insurance business.

Insurance sector in India grew at a faster pace after independence. In 1956, Government of India brought together 245 Indian and foreign insurers and provident societies under one nationalised monopoly corporation and formed Life Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 crore.

The (non-life) insurance business/general insurance remained with the private sector till 1972. There were 107 private companies involved in the business of general operations and their operations were restricted to organised trade and industry in large cities. The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from January 1, 1973. The 107 private insurance companies were amalgamated and grouped into four companies: National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company.

These were subsidiaries of the General Insurance Company (GIC). The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin’s company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments.

Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners’ organization. In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional federal charter (OFC)) for insurance similar to that which oversees state banks and national banks. In 1993, the first step towards insurance sector reforms was initiated with the formation of Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra. The committee was formed to evaluate the Indian insurance industry and recommend its future direction with the objective of complementing the reforms initiated in the financial sector.

Key Recommendations of Malhotra Committee:
Structure
* Government stake in the insurance Companies to be brought down to 50%. * Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. * All the insurance companies should be given greater freedom to operate.

Competition
* Private Companies with a minimum paid up capital of Rs.1billion should be allowed to enter the industry. * No Company should deal in both Life and General Insurance through a single Entity. * Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. * Postal Life Insurance should be allowed to operate in the rural market. * Only one State Level Life Insurance Company should be allowed to operate in each state.

Regulatory Body
* The Insurance Act should be changed.
* An Insurance Regulatory body should be set up.
* Controller of Insurance should be made independent.

Investments
* Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. * GIC and its subsidiaries are not to hold more than 5% in any company.

Customer Service
* LIC should pay interest on delays in payments beyond 30 days * Insurance companies must be encouraged to set up unit linked pension plans. * Computerisation of operations and updating of technology to be carried out in the insurance industry. Malhotra Committee also proposed setting up an independent regulatory body – The Insurance Regulatory and Development Authority (IRDA) to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives.

Insurance sector in India was liberalized in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. IRDA consists of a Chairman and some permanent as well as part time members. The regulations, however, are enacted under the guidance of a statutory advisory committee Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode.

Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. There is a 26 percent equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percent. The opening up of the insurance sector has led to rapid growth of the sector. Presently, there are 16 life insurance companies and 15 non-life insurance companies in the market. The potential for growth of insurance industry in India is immense as nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be well below international standards.

TYPES OF INSURANCE

Insurance provides compensation to a person for an anticipated loss to his life, business or an asset. Insurance is broadly classified into two parts covering different types of risks: 1. Long-term (Life Insurance)

2. General Insurance (Non-life Insurance)
Long-term Insurance

Long term insurance is so called because it is meant for a long-term period which may stretch to several years or whole life-time of the insured. Long-term insurance covers all life insurance policies. Insurance against risk to one’s life is covered under ordinary life assurance. Ordinary life assurance can be further classified into following types:

Types of Ordinary Life Assurance| Meaning|

1. Whole Life Assurance| In whole life assurance, insurance company collects premium from the insured for whole life or till the time of his retirement and pays claim to the family of the insured only after his death.| 2. Endowment Assurance| In case of endowment assurance, the term of policy is defined for a specified period say 15, 20, 25 or 30 years. The insurance company pays the claim to the family of assured in an event of his death within the policy’s term or in an event of the assured surviving the policy’s term.| 3. Assurances for Children| i).Child’s Deferred Assurance: Under this policy, claim by insurance company is paid on the option date which is calculated to coincide with the child’s eighteenth or twenty first birthdays. In case the parent survives till option date, policy may either be continued or payment may be claimed on the same date.

However, if the parent dies before the option date, the policy remains continued until the option date without any need for payment of premiums. If the child dies before the option date, the parent receives back all premiums paid to the insurance company.| | ii). School fee policy: School fee policy can be availed by effecting an endowment policy, on the life of the parent with the sum assured, payable in instalments over the schooling period.| 4. Term Assurance| The basic feature of term assurance plans is that they provide death risk-cover. Term assurance policies are only for a limited time, claim for which is paid to the family of the assured only when he dies.

In case the assured survives the term of policy, no claim is paid to the assured.| 5. Annuities| Annuities are just opposite to life insurance. A person entering into an annuity contract agrees to pay a specified sum of capital (lump sum or by instalments) to the insurer. The insurer in return promises to pay the insured a series of payments until insured’s death. Generally, life annuity is opted by a person having surplus wealth and wants to use this money after his retirement. There are two types of annuities, namely:

Immediate Annuity: In an immediate annuity, the insured pays a lump sum amount (known as purchase price) and in return the insurer promises to pay him in instalments a specified sum on a monthly/quarterly/half-yearly/yearly basis. Deferred Annuity: A deferred annuity can be purchased by paying a single premium or by way of instalments. The insured starts receiving annuity payment after a lapse of a selected period (also known as Deferment period).| 6. Money Back Policy| Money back policy is a policy opted by people who want periodical payments. A money back policy is generally issued for a particular period, and the sum assured is paid through periodical payments to the insured, spread over this time period. In case of death of the insured within the term of the policy, full sum assured along with bonus accruing on it is payable by the insurance company to the nominee of the deceased.|

General Insurance

Also known as non-life insurance, general insurance is normally meant for a short-term period of twelve months or less. Recently, longer-term insurance agreements have made an entry into the business of general insurance but their term does not exceed five years. General insurance can be classified as follows:

Fire Insurance| Fire insurance provides protection against damage to property caused by accidents due to fire, lightening or explosion, whereby the explosion is caused by boilers not being used for industrial purposes. Fire insurance also includes damage caused due to other perils like storm tempest or flood; burst pipes; earthquake; aircraft; riot, civil commotion; malicious damage; explosion; impact.| Marine Insurance| Marine insurance basically covers three risk areas, namely, hull, cargo and freight. The risks which these areas are exposed to are collectively known as “Perils of the Sea”. These perils include theft, fire, collision etc.| | Marine Cargo: Marine cargo policy provides protection to the goods loaded on a ship against all perils between the departure and arrival warehouse.

Therefore, marine cargo covers carriage of goods by sea as well as transportation of goods by land.| | Marine Hull: Marine hull policy provides protection against damage to ship caused due to the perils of the sea. Marine hull policy covers three-fourth of the liability of the hull owner (ship-owner) against loss due to collisions at sea. The remaining 1/4th of the liability is looked after by associations formed by ship-owners for the purpose (P and I clubs).| Miscellaneous| As per the Insurance Act, all types of general insurance other than fire and marine insurance are covered under miscellaneous insurance. Some of the examples of general insurance are motor insurance, theft insurance, health insurance, personal accident insurance, money insurance, engineering insurance etc.| I

MPORTANCE OF STUDYING FRAUD

Definition of fraud

Fraud is defined as “any behaviour by which one person intends to gain a dishonest advantage over another”. In other words, fraud is an act or omission which is intended to cause wrongful gain to one person and wrongful loss to the other, either by way of concealment of facts or otherwise.

Definition of fraud u/s 17 of Indian Contract Act

Fraud means and includes any of the following acts committed by a party to a contract, or with his connivance or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

(i) the suggestion, as a fact of that which is not true or by one who does not believe it to be true; (ii) the active concealment of a fact by one having knowledge or belief of the fact; (iii) A promise made without any intention of promising it; (iv) Any other fact fitted to deceive; and

(v) Any such act or omission as the law specially declares to be fraudulent.

The importance of studying insurance fraud cannot be over-emphasized. Once the types of fraud are determined & detected, & the modus operandi is discovered, insurers can take measures to reduce instances of fraud. These measures include, warning insured about fraud & implementing more stringent security measures for verification of identity. Knowing the various types of frauds as well as an in-depth study of the most frauds that have taken place till now is imperative if we are to reduce the incidence of these crimes to a minimum.

WHAT IS INSURANCE FRAUD?

Fraud occurs when someone knowingly lies to obtain some benefit or advantage to which they are not otherwise entitled or someone knowingly denies some benefit that is due and to which someone is entitled. Depending on the specific issues involved, an alleged wrongful act may be handled as an administrative action by the Department or the Fraud Division may handle it as a criminal matter. Insurance fraud is any act committed with the intent to fraudulently obtain payment from an insurer. Insurance fraud has existed ever since the beginning of insurance as a commercial enterprise. Fraudulent claims account for a significant portion of all claims received by insurers, and cost billions of dollars annually. Types of insurance fraud are very diverse, and occur in all areas of insurance. Insurance crimes also range in severity, from slightly exaggerating claims to deliberately causing accidents or damage.

Fraudulent activities also affect the lives of innocent people, both directly through accidental or purposeful injury or damage, and indirectly as these crimes cause insurance premiums to be higher. Insurance fraud poses a very significant problem, and governments and other organizations are making efforts to deter such activities. Insurance fraud is perceived as a victimless crime, but the estimated losses from this crime exceed $100 Billion every year. Ten percent of all types of insurance claims property & casualty, health, life, workers’ compensation) are suspected to be fraudulent. According to the Insurance Research Council, 30% of all bodily injury Arizona appears to be fraudulent or contain injury exaggeration.

In Phoenix, that figures goes up to 36%. The losses from fraudulent auto insurance claims in Arizona cost policyholders an estimated average of $167 to $200 in higher annual premiums. Insurance fraud impacts the public by causing us all to pay higher insurance premiums. In addition, businesses may pass along their increased insurance costs to their customers in the form of higher prices. All of this translates to more money out of YOUR pocket!

CAUSES OF INSURANCE FRAUD

The “chief motive in all insurance crimes is financial profit.” Insurance contracts provide both the insured and the insurer with opportunities for exploitation. One reason that this opportunity arises is in the case of over-insurance, when the amount insured is greater than the actual value of the property insured.

This condition can be very difficult to avoid, especially since an insurance provider might sometimes encourage it in order to obtain greater profits. This allows fraudsters to make profits by destroying their property because the payment they receive from their insurers is of greater value than the property they destroy.

Insurance companies are also susceptible to fraud because false insurance claims can be made to appear like ordinary claims. This allows fraudsters to file claims for damages that never occurred, and so obtain payment with little or no initial cost. The most common form of insurance fraud is inflating of loss.

Frauds in Insurance Essay

Manzana Insurance Case Essay

Manzana Insurance Case Essay.

Introduction

This study is designed to determine why the Fruitvale branch of Manzana Insurance is performing so poorly for Property Insurance. Golden Gates, a competitor of Manzana, numbers are estimated to outperform Manzana Fruitvale branch as well. There are several problems that are leading to the poor performance at this branch. This past quarter turnaround time increased again reaching 6 days, where Golden Gate is sitting at 2 days. Also the system is running very close to efficiency, which can cause a problem down the road with changes we recommend.

A big problem with what is going on has to deal with the RUNs and RAINs being of higher priority than the RERUNs for the senior underwriters. The senior underwriters are simply accepting the RUNs and RAINs first because those are more profitable for them, but this is hurting the company as our renewal loss rate hit an all-time high at 47%. Something must be done about these problems if we are going to compete with Golden Gate in this territory and below are these problems in more detail along with recommendations on how we feel these problems can be resolved.

Findings

TAT

The calculation of TAT was made by multiplying the number of each type of request at each desk by a standard completion time (SCT). The 95% SCT is the time during which 95% of the requests should be taken care of. The company assumes that the variability of the processing time has the normal distribution, which has the characteristic that with a mean of processing time (µ), and a deviation (?), 95% of the requests should be finished within (µ+2?) approximately. In this way the variability has been considered in the calculation of 95% SCT, so as in the TAT. But this method of calculating variability is not a good metric to measure. The right way to measure is using the queuing system to calculate the total time each request will take during the process.

We assume that arrivals appear to be perfectly random, with no discernible pattern of peaking, and interarrival times follow the exponential distribution, so CVa=1. Taking the distribution department for example, we will have calculations of waiting time and total time below: 1-Distribution| mean| standard deviation| CVa| CVp2| waiting time| total time| 95% SCT| RUNs| 68.5| 30.7| 1| 0.200860994| 107.3457966| 175.8457966| 128.1| RAPs| 50| 24.9| 1| 0.248004| 81.43061499| 131.430615| 107.8| RAINs| 43.5| 9.2| 1| 0.044729819| 59.30550122| 102.8055012| 68.1| RERUNs| 28| 6.2| 1| 0.049030612| 38.33080377| 66.33080377| 43.2| See Appendix 5 for more detailed total time calculation.

We can see TAT calculated by the 95% SCT is not consistent with the actual total time. This is not an accurate way to determine what the real TAT time is.

RERUNs Problem

Apparently, the RERUNs should be considered the most important form of business that Manzana conducts. These are customers who have been loyal for at least one year, and are looking to continue to do business with the company. In Essence RERUNs are new policy holders who are looking to extend their policy. The increasing number of late renewals leads to the loss of the renewal requests which represents a significant loss of business and an overall reduction in the number of policies in force. It is factually incorrect though the RUNs are an important factor for the company they are not the most profitable. The revenue generated per new policy is greater than the revenue generated from the RERUNs, $6,720 and $6,210 respectively, but there is not nearly as many new policies issued per year as there is renewals.

Through the first two quarters of 1991 there were 624 RUNs processed compared to 2,081 renewals processed, this makes up 44% of the total business done by the company. They are however more profitable to the senior underwriters who receive $150 for each new policy written and nothing for the renewals. This leads the underwriters to put a high priority on the RUNs even if they were received after the RERUNs. The company also does not pay as much commission to the agents for RERUNs as they do for RUNs. They pay 25% for new policies and 7% for renewals.

Because the RERUNs can change each year they are not released to the DC’s until the last day before the renewal date. This is a problem because the system is not acting as a true FIFO system, instead the RAINS and RUNS are processed first while the RERUNs are put on the back burner. This practice causing many of these policies to expire before they are renewed (44% late renewals in the current quarter). Agents who do not receive a new quote on or before the expiration date commonly recommend a different company to their clients resulting in renewal losses by Manzana, which eats away a major part of the company’s revenue.

Recommendations

There are several problems with the current system at Fruitvale, Firstly the system is running dangerously close to the efficiency this first and foremost needs to be addressed in the DC department as well as the underwriters department. There are several ways to remedy this issue; one way would be to add staff through hiring new people to these departments, this would add unwanted overhead to the company though it would remedy the capacity issue, shown in Appendix 1 that how much capacity improved and Appendix 4 represents how much time in queue reduced by hiring one unit of each process. Another solution would be to update the rating and policy writing department both can be done using automation this would free up some of the current staff to be retrained and reassigned to the two inefficient departments. This would create more efficiency in both covering any variability that arises as well as increasing capacity.

This would cost upfront money in system updates and training, but in the long run it would make the system run more smoothly. Another issue that must be addressed id the fact that the RUNs and RAINs are getting priority over the RERUNs which is much more profitable then both. This is due to the fact that it is more profitable for the senior underwriters to process the RUNs and RAINs first because there is a bonus associated with the new policies issued. This causes the RERUNs to get backed up leading to renewal losses which equal lost profits. This incentive program needs to be re-evaluated to determine if it is what’s best for the company. The FIFO system that is supposed to be company policy is not being followed especially in the Underwriting department.

This needs to change and be strictly followed this will allow the company to be able to process the RERUNs more effectively. This raises another issue which is when to release the RERUNs to the DC’s so they can get quotes to the agents on or before the expiration date. Appendix 3 shows the revenues and profits, comparing the company’s FIFO system and general FIFO system. The current system releases the RERUNs the day before the expiration date, this leads to renewal losses due to quotes given past the expiration date. Instead of releasing the RERUNs the day before the expiration date they should be released 3 days before this date.

Though this will result in a less accurate policy, it will help cope with any variability. If any changes happen with the quote between the release date and the expiration date a RAIN can be issued to amend the policy. Another issue that needs to be addressed is the utilization of the underwriting teams within the different territories. Currently the utilization in territories one and two is 90.6% and 80.4% respectively and 69.4% in territory three which leads to more idle time in territory three and very little room for variability in territories one and two. It is recommended that the underwriting teams work unilaterally through the territories, this would increase the turnaround times in the department and improve the efficiency in territories one and two.

The company will be sacrificing the personal relationships with the agents, but it will reduce the renewal losses and give the company a better chance at the new policies because the turnaround times will be reduced. The last issue that needs to be addressed is the current system of measuring TAT time, because the current system is outdated and inaccurate. It has already been shown that the flow rate needs to be determined by the bottleneck resource which is the DC’s.

Manzana Insurance Case Essay

Insurance Plays A Big Role In Risk Mana Essay

Insurance Plays A Big Role In Risk Mana Essay.

Insurance plays a big role in risk management for a personal financial plan. Outline an insurance plan for various stages of life. Specifically address the following required elements:

1) Explain risk management and its importance.
2) Identify types of risk and how you can manage them.
3) Determine appropriate insurance coverage by investigating options for property and vehicle. – talked about our own vehicle insurance.
4) Determine appropriate insurance coverage by investing options for life, health and disability. – talked about your own policy
Term (like rental insurance )or permanent life insurance.

Permanent is kind an investment.
5) Explain tax implications of insurance (i.e. life insurance proceeds, healthcare reimbursement, flexible spending accounts, and disability premiums/proceeds). –
6) Explain insurance needs short-term, intermediate-term, and long-term based on the development of your personal financial plan.

Insurance Plays A Big Role In Risk Mana Essay

“The richest man in Babylon” Essay

“The richest man in Babylon” Essay.

INTRODUCTION

The book report is about a book named _The Richest Man In Babylon. The Richest Man In Babylon,_ written by George Samuel Clason, is a book about management of personal finance through a collection of parables set in ancient Babylon. The stories are laid out like Aesop’s fables: each story has a concrete point or two that becomes apparent from reading and digesting the message. These points are basic tenets of how to get ahead financially in any time, not just in Babylonian times or in the 1920s.

In Babylon there is a man who is wealthier than all and there is another poor man deeply interested in how he has achieved such status so he begins to make daily visits to his house on the hill, bringing others along, to learn the lessons that created such wealth. The wealthy man is open to share his keys to success and the others intently listens as he tells stories and experiences in his life that get across the most fundamental techniques of personal money management, savings and investment.

What the wealthy man shares to the public is collected in different stories. The most popular stories are _Seven Cures for a Lean Purse_ and _The Five Laws of God_. These two stories provide practical points for managing personal finance by seven methods and five laws.

The lessons which the poor man had learned and applied to his life were remarkable, and this slave had managed to turn his life around by applying the principles and lessons he had learned. He had documented everything he had learned and his progress on clay tablets, which were later found in the 1930’s by archaeologists and professors at a university. These professors had then learned of these principles and applied them to their own lives, to also become wealthy and financially abundant.

REVIEW

Feature of the book

This book touches on the fundamentals of personal finance and reminds us of the simplicity and discipline that have proven successful for thousands of years. Clason takes a creative, yet simple story-telling approach to teach the reader the basics and the foundation of how to conservatively build wealth over time and become financially successful.

In comparison with similar books

In fact, many popular finance books such as _The Wealthy Barber_ or _The Automatic Millionaire_ are based on principles from this famous book. In fact, in the _Millionaire Mind Intensive_ they talk about allocating your money in a similar way that George Clason mentions here. Either way, it’s good to hear these methods again and again to remind ourselves of these age-old principles. We may know something intellectually, but practicing it is a whole different story.

Impressive methods of wealth management

What impresses me the most is the story of _Seven Cures for a Lean Purse._ The tale _Seven Cures for a Lean Purse_ relates a story about Arkad, the titular richest man in Babylon. He is requested by the king to teach a class to anyone who wishes to attend on the methods he used to build his wealth. He divides this class across seven days, with each day focusing on a particular method for saving money.

Here are the seven methods in the tale: 1. Start thy purse to fattening; 2. Control thy expenditure; 3. Make thy gold multiply; 4. Guard thy treasures from loss; 5. Make of thy dwelling a profitable investment; 6. Insure a future income; 7. Increase thy ability to earn

Below are the methods that impressed me a lot

Start thy purse to fattening—-Pay Ourselves First

The book recommends that we pay ourselves 10% of all that we earn. We cannot accumulate wealth if we do not save what we earned. We can do that by paying ourselves first and foremost before we spend any of the money we have earned. It is the same as the U.S. government. It takes taxes on our wages before we can get to it. The U.S. government (IRS) knows this law well.

Guard they treasures from loss—-Insurance protects our wealth

Insurance helps safeguard our wealth by absorbing potential loss and mitigating our financial situation. There are many kinds of insurance we can buy and we should do our research on which one and how much we need. A renter’s insurance or a homeowner’s insurance helps protect our homes. Another kind of insurance is long-term insurance which become suitable to help us as we grow older and help protect us from medical expenses and long-term care.

We should all consider buying insurance now in case we need it if something happens. This is a proactive approach and one we should take and not forget. The idea is that we will never have to use the insurance but in case something does happen we are protected financially from the loss it would have caused.

Increase thy ability to earn—-Invest in ourselves

The best way we can increase our earning is by investing in ourselves. We can do that by continually learning and striving to develop ourselves. We are now in a very exciting time: the Information Age where knowledge is literally within our fingertips thanks to the Internet. I really love the OpenCourseware idea where many schools including Ivy Leagues post their whole class courses for free. It’s a great way to learn on our own.

There are many things we can learn on our own and should strive to make ourselves well-rounded. Whether we learn to eat healthier, enhance our current work skills, or learn to make more money, we must take the initiative to invest in ourselves. When we become smarter and wiser, our ability to earn more also increases.

Make of they dwelling a profitable investment—-Our home is our biggest expense

I know that many think their homes are an investment but the truth is it really is not. It is an expense and a very high expense at that and one we must manage carefully. We should learn to manage the largest expense smartly. Many of us have decided to take on a huge mortgage to buy our home and after the real estate bust many were left with homes that lost their value and in many cases were underwater. I believe the lesson we can learn from that was that we needed to ‘live below our means’ and buy or rent a home we can comfortably afford.

More discipline to achieve wealth accumulation

Many people followed the strategies in this book to become wealthy in real life. Take warren Buffett as an example. He has been saving money since he could walk and to this day he controls expenses more stringently than the great majority of the middle class, yet he is worth some $60 billion. And we should all know that he has followed the last three methods of _Seven Cures for a Lean Purse_. That’s what keeps him from investing in so many of the things that lead to ruin.

However, most people around are still overspending despite historical successful examples of wealth accumulation. Even those who make half a million or a million a year still manage to let their expenses run wild and don’t possess the discipline to save. Almost everyone around is in the same rat race-Make money so as to spend more money so you need to make more money. We need more discipline to put ourselves forward to good spending habits and wealth management strategies.

Typical discipline includes: making personal balance sheet and monitor change in monthly amount; communicating with friends around about wealth management methods and encourage each other to develop good spending habits.

CONCLUSION

_The Richest Man In Babylon_ provides readers with enlightening ideas to manage personal wealth. The author uses creative story-telling approach to indicate management strategies. The story of _Seven Cures for a Lean Purse_ educates us to 7 methods to accumulate our wealth, which is practical and feasible in our life.

At first glace it’s easy to discredit these as simple common sense. But the thing we should all be aware of at this point is that common sense is not common practice. As I reread through some of these key points, I realized that wealthy men, which are minority of the world, have great practice in wealth accumulation.

However, the majority of the society has not developed good habits in accumulating wealth. It is important to take action from now to form the habits and get rid of extravagant behavior. If you have your discipline of what actions accumulate wealth, then behavior of the crowd will not distract you from your own road to achievement.

“The richest man in Babylon” Essay

Five Social Insurances and One Housing Fund Essay

Five Social Insurances and One Housing Fund Essay.

According to figure 1, it showed that the pay ratio of Shanghai enterprise was higher than Beijing and Guangzhou while the ratio for individuals were the same. The reason of the high ratio fee is to protect the worker’s income, so that the workers would not need to pay half of their income for insurance payment. Therefore, the living standards for the workers would keep in average.

In this few years, the development of other cities in China was being fast and the insurance package was attractive to workers.

So there was a competitive existed between Shanghai and the developing cities. The Shanghai enterprise wanted to retain their workers to stay in Shanghai for work and keep the quality and quantity of the business. Therefore, the standard for the percentage pay of enterprise would be higher than others. Once a worker reach the retire age, the worker will be entitled to receive the insurance premium. This policy would be one of the methods to attract and retain the local worker to work.

On the other hand, as the housing provident fund was not a legal payment in the Labor Act. So the percentage for both enterprise and individuals in Shanghai was the same, 7% each. In the view of HR, the cost for the enterprise would be lower and the intense pressure would be less. And for the individual, they would save the money to buy a property.

Lastly, Shanghai has done a good job in the “5 insurance and housing fund” than other cities like Guangzhou. Although the enterprise need pay more than other cities, the workers would take the greatest benefits and be more loyal to the company.

CHAPTER 3: IMPACTS ON EMPLOYER

The social insurance system has implemented for several years, it is time to review its impacts on local enterprises in Shanghai, China.

The most seriously the system imposed a heavy burden on operating cost of business. According to the Social Insurance Policy, enterprises should make a contribution to each of these types of social security on behalf of their employees. Employees are also required to make contribution to some of them. “A Taiwaness enterprise in Shanghai reported the Law has increased its labour cost on insurance participation by 50 percent”, which is mainly due to the extension of insurance coverage that leads to the rise in premium payment and related expenses. ” In 2010, urban pension, medical, unemployment, occupational injury and maternity insurance altogether recorded a person-time of 1.108 billion, 84 million more than that of 2009. The total income and expenditure of the National Social Insurance Fund reached RMB1.86 trillion and RMB1.48 trillion, increased by15.7% and 20.4% respectively when compared with those of 2009.” 2

Professor Wang Yanzhong, Director, Labour and Socail Security Research Centre Chinese Academy of Social Science, “Prospects and Impacts of Social Insurance Law Implementation”, Road to China, Spring 2011

A significant part of the increased expenses came from the upsurge of enterprises’ expenses which lowered competitiveness of enterprises as most of the capital resource would constitute the main part of the payment system. Also, there were rise in the labour cost of enterprises, especially in those labour-intensive ones, and thus employers may force to lay off workers or cut wages in order to keep the company alive.

However, in the long term, the expansion in social insurance coverage would establish a more standardized and stable employment environment, which is important in maintaining employers’ trust in their enterprises and reinforcing their sense of responsibility and cohesion.

CHAPTER 4: IMPACTS ON EMPLOYEE

For the impact of employee, In order to safeguard the legitimate rights and interests of employees and building a harmonious society , the government not only vigorously promotes the social security work and expanding the coverage of the ” five insurance” in China. This policy is large extend to gain the recognition and support by the all sectors of the community . Some socially responsible company also believes that the implementation of this policy will be benefit to employees for future and so many companies actively to purchase of ” five insurance ” for their employees .

The implementation of social insurance for employees with long-term benefits , such as when an employee reaches retirement age , he or she can receive monthly pension until his death ; under the social security . If women employees pay maternity insurance can obtain limits reimbursement of expenses including prenatal examination and surgical expenses . Beside, under the employment, employees can earn 2 to 3 monthly compensation through unemployment insurance, it can effectively to solve and protection of employees living expenses during periods of unemployment . Employee also can extract the housing provident funds for housing – related expenditure purposes .

However, due to some local government in the development the standard payment of “five insurance” that requires enterprise according to the average wage to pay, rather than the actual amount of wage subject to each industry. Since the majority of employees’ wages is less than the average wage , if the government accordance with average wage as a payment standard, the result is employer would deduct a large sum of money in the employees their wage, eventually employees wage they earn is less.

In addition, due to the policy and standard of purchases social insurance is diversity by different province in china, when foreign employees return to home town from local, Employees need require the Ministry of Labor to end of the social security relationship before they can get back the balance on the personal account. Thus, it would lead to employees on future retirement not be protected ; On the other hand , the company pay for employees social security fees cannot bring the benefit to employees ,the result that would reduce the enthusiasm of enterprises to participate in social insurance

An ol d-age insurance can be interrupt ed. If the employees pay more, he will get more pensions. However, the q uality of life cannot be guaranteed after retirement . Many employees think that social security has been considered and it is so comprehensive . Therefore they are no need to have other financial

In fact, the pension formula is quite complex, but generally can be calculated as follows: 20% of the average wages of individual accounts a total of 120. Obviously, the social security pensions cannot guarantee the quality of life after retirement. Therefore, the HR of the company can choose to commercial insurance for pension supplement and provide it to the employees.

For example, it can include the health protection and accident protection. Also, if the pension plan of the commercial insurance is expired, the employees will get some money as a pension supplement. Those insurance are suitable for young people such as some recently married, capital investment is not enough. Therefore, it will help to attract and retain the people to join the company.

Moreover, the Health insurance is more important because i f it is interrupted for more than three months, it will lose effectiveness . There are many requirement of using the health insurance such as many restrictions about use in other p rovince . It is difficult to move and use in other province.

Finally, not all medical practices have access to insurance, such as: plastic surgery, increased myopia correction and other medical expenses. Therefore the HR can design to buy some inpatient medical allowance to the employees . Those politics can help to provide the security, attract, retain and motivate to the employees.

Five Social Insurances and One Housing Fund Essay

A report into the collapse of HIH insurance Essay

A report into the collapse of HIH insurance Essay.

1. Introduction.

On March 15 March 2001 Australia’s second largest insurer, HIH collapsed with debts in excess of A$5billion. This report intends to discuss some of HIH’s business objectives and creative accounting practices that may have attributed to the collapse of the company.

1.1 History.

HIH began operating in Australia in 1968 under the name C.E. Heath plc, an English based insurance company whose Australian operations specialised in the underwriting of workers compensation. 1968 was also the year that Ray Williams (future CEO of HIH) and good friend Michael Payne set up MW Payne Liability Agencies, a small insurance company based in Melbourne that offered workers compensation and public liability insurance (Main 2003).

In 1974 the two companies merged and undertook the name C.E. Heath Underwriting and Insurance (Australia) Propriety Limited. The company led by Ray Williams was listed on the ASX as C.E. Heath International in 1992 and in 1995 C.E. Heath plc sold its remaining share of the company to Winterthur Swiss Insurance Co in a deal that also involved the acquisition of local insurer CIC (Main 2003).

It was at this time that the company became known as Heath International Holdings or HIH.

HIH was comprised of over 250 companies at the time of liquidation (Main 2003), including HIH Casualty and General Insurance Limited, FAI General Insurance Company Limited (FAI), CIC Insurance Limited (CIC) and World Marine and General Insurances Limited (WMG). They provided many types of insurance in Australia, the USA, and the UK including general insurance underwriting, the operation of insurance underwriting agencies and investment funds management, while specialist areas of business included general insurance, workers’ compensation, public liability and professional indemnity insurance, and property and commercial insurance (Kehl n.d.).

1.2 Stakeholders.

In an organisation such as HIH, diverse business interests give rise to a myriad of stakeholders. In his report to the HIH royal commission Justice Neville Owen (2003) defines stakeholders as ‘those who have a stake in the company’s success.’ Owen (2003) proceeds too identify HIH’s stakeholders as policyholders, general creditors, employees, shareholders, the public and the regulators. To elaborate further Bazely, Hancock, Berry & Jarvis (2001) place stakeholders into two categories; internal stakeholders who consist of directors and managers, and external stakeholders who consist of lenders, suppliers, customers, employees, the government and the general public. At the most basic level all stakeholders require information regarding an enterprise for the purpose of planning, controlling and decision support (Bazely et al. 2001). (See table 1).

1.3 Environment.

The Insurance industry operates in a cyclical business environment both in Australia and overseas. At the time of HIH’s collapse in 2001 the Australian general insurance industry had been in a depression for several years, caused by a combination of low interest rates, unfortunate claims experiences, and disappointing returns on investments (Owen 2003). The situation was described succinctly in an industry report by JP Morgan/Deloitte released in (1997) that stated ‘the harsh local conditions are best depicted by a horror story’. As a result of these conditions competition became stiff while at the same time the traditional boundaries between banking and insurance were disappearing, what’s more, advances in technology were accounting for big changes across the financial services sector (Owen 2003).

2. Analysis.

The aggressive takeover of competitors such as FAI and entry into the U.S and U.K markets are examples of HIH’s business objectives, which according to Williams (2003) were based on ‘international growth and diversification’. In his report to the royal commission, Justice Owen (2003) questions the legitimacy of the company’s business objectives stating that ‘there was little, if any analysis of the future strategy of the company’. In addition, Owen (2003) claims that any strategy that HIH had appears to have existed in the mind of Ray Williams and that his perspective was never clearly expressed to the board. The problem that arises from the absence of a well understood strategy is that the board does not understand and appreciate risks (Owen 2003). The failure of operations in the United Kingdom and the United States and the acquisition of FAI provide ample evidence of this.

2.1 U.K.

In staying true to his objectives of ‘international growth and diversification’ (Williams 2003) saw the U.K market as an opportunity for HIH to broaden its’ international base (McDougall 2002). This resulted in HIH setting up its’ U.K business in 1993 offering public liability and professional indemnity insurance (Cagan 2001). Operations in the first year proved to be a success and resulted in the expansion of operations during 1997 into areas of business in which the companies underwriters had little experience or expertise (Howard 2003). Furthermore Justice Owen (2003) notably points out that the UK operations had failed to establish suitable underwriting guidelines and controls.

This combined with the lack of underwriting experience was a formula for financial disaster. In hindsight this has proven to be true as the report on the royal commission has estimated that losses in the United Kingdom may reach A$1.7 billion. The majority of these losses can be attributed too the ‘under-writing of whole account excess-of-loss marine reinsurance and film financing,’ while other substantial losses can be attributed too the ‘provision of personal accident cover to members of the Taiwanese military and of motor vehicle physical damage cover-without terrorism exclusions-to an Israeli insurer.’ (Owen 2003).

2.2 U.S.A.

In 1997, in scenes reminiscent to those in the U.K back in 1993, HIH announced that they had re-purchased their former U.S workers compensation business CareAmerica. In a statement to shareholders Ray Williams described the conditions in the U.S market as favorable and that there was a great foundation in place for future growth (Main 2003). What he did not reveal was that U.S insurance companies did not discount their liabilities the same way that Australian insurers did, which would result in excess reserves that HIH could use to manipulate their own accounts (Main 2003).

No more than two years later Ray Williams was singing a different tune, announcing in the 1998-99 annual report that HIH would be downsizing its U.S operations due to deterioration of the U.S workers compensation market.

In 1999 the real extent of the problem was beginning to unfold. The US industry regulator told HIH’s director of international operations George Sturesteps that they believed HIH America to be under-reserved by as much as $US57 million. Reserves are essentially an allocation of after-tax profits that are set aside on the balance sheet for future insurance claims (Owen 2003). This estimate was on top of HIH’s own internal estimate that the shortfall was about $US40 million (The Mercury 2002). In an attempt to find out the true state of reserves as of March 2000, HIH hired Milliman & Robertson to conduct a full report. The report tabled by M&R found a $US55 million shortfall. These numbers were much higher than HIH’s management had anticipated so they sacked M&R and hired Towers Perrin Tillinghast to conduct a report using a different methodology. The result revealed a gap closer to $US56 million (Main 2003).

The timing of this news could not have been worse for HIH as they were about to announce their June 2000 results. Somewhere along the line though, it appears that the $US56 million shortfall had failed to be mentioned. In his statement to the royal commission Mr. Sturesteps said he did not tell the auditors or his fellow board members about the reports because ‘Mr. Williams knew’ and he did not pass the information on to the companies auditors because ‘that was not his responsibility’ (Main 2003, p.83).

2.3 FAI.

On September 23, 1998, in a move that in hindsight ‘was the straw that broke the camels back’ HIH announced its takeover bid of FAI insurance with the intention of becoming Australia’s largest listed general insurer. FAI was a direct competitor of HIH and the takeover was part of HIH’s diversification and expansion strategy into the Australian market (Williams 2003). Furthermore CEO Ray Williams had identified five major benefits that HIH would achieve from the merger including: putting HIH up another level in the insurance industry; achieving substantial savings; making HIH the biggest gross premium earner in Australian general insurance; taking HIH into the direct car and home insurance market; and making HIH the biggest professional indemnity insurer in Hong Kong (Main 2003).

HIH proceeded with the takeover of FAI based on their assessment of publicly available information. (Owen 2003). A request put forward to FAI at the time for further information was denied by Rodney Adler given that FAI were negotiating with other potential buyers. Adler (2003) rightly claimed that his company did not wish its competitors to gain access to ‘sensitive commercial details’.

What was not apparent from the public information was the excessive under reserving of FAI’s long-tail business. (Owen 2003). FAI would have made a loss of around $50 million if it was not for two reinsurance deals done with General Cologne that where done as the books were closing on June 30 1998. Reinsurance essentially involves a larger insurer helping a smaller insurer to pay out policies during a rough period. The smaller insurer then pays back the money by way of a premium in the following years (Main 2003). In normal circumstances a loan is normally accounted for as a liability. Through creative accounting policies FAI’s accountants were able to take the $57 million in reinsurance policies and book it as revenue.

Main (2003) makes note that ‘some of the best auditors in Australia, and no doubt in other countries, have been talked into accepting such measures as legitimate’. These comments came under attack from federal treasurer Peter Costello (2002) who was astonished to discover that the auditors were aware of these entries and accepted them because the Australian Accounting Standards allowed it. The two reinsurance deals enabled Rodney Adler to later announce that FAI had made an $8.6 million profit in 1998, a turnaround of almost $20 million (Main 2003).

2.4 HIH accounts.

Justice Owen (2003) comments on the importance of the accounting process stating that ‘accounts are prepared so that those with an interest in the financial affairs and condition of the entity–whether that interest be proprietorial, regulatory or transactional–are truly and fairly informed as to the entity’s financial state’.

Richard White SC, Counsel for the royal commission brings attention to two entries that were of major significance in the 2000 financial statements of HIH that may have been made complex deliberately ‘in order to befuddle the reader and disguise the true substance of the transactions’ (White 2003).

The first issue concerns the writing off of any lack of value relating to the acquisition of FAI as a positive addition to the goodwill account in the balance sheet. This resulted in over A$400 million being booked on the asset side of the balance sheet from the acquisition that had cost HIH A$300 million.

Bazely et al. (2001, p.568) define goodwill as ‘the future benefits from unidentifiable assets’. Wayne Martin QC, in the royal commission elaborates further on the concept stating ‘a company can only carry goodwill in its balance sheet if it is very confident of earning that money back in the future’ (Main 2003, p.181). When asked by Wayne Martin QC in the royal commission about how HIH would earn the money back, Williams (2003) stated that ‘it was an issue that concerned the financial department’ and he furthermore pointed out that the auditors had signed off on the entry.

The second issue was the decision to enter into two reinsurance contracts during 1999 in what appears to be an attempt to lift the companies operating profits for the year. The deals were similar to those seen at FAI one year earlier in the sense that a larger insurance company, in this case Hannover Re, was to lend HIH close to A$400 million in reinsurance (Main 2003). As a result of the reinsurance contracts HIH was able to lift its profits for 1999 from A$10 million to A$102 million and for 2000 were able to turn a A$45 million loss into an A$61.9 million profit.

List of references.

Cagan, P 2001, HIH, a case study, viewed 28 Aug, 2003, < http://www.erisk.com/LearningCenter/CaseStudies/ref_case_hih.asp#STORY

Charlton, P 2003, Failing to understand the business:[1 Edition], The Courier Mail, [online], p.67, available:
http://proquest.umi.com/pqdweb?index=10&did=000000396263921&SrchMode=1&sid=2&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1064896239&clientId=20906 [1 Sept, 2003]

Howard, L 2003, HIH debacle: A litany of ineptitude, National Underwriter [online], Vol 107, (28), p.21, available: http://proquest.umi.com/pqdweb?index=3&did=000000374511191&SrchMode=1&sid=2&Fmt=4&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1064895446&clientId=20906 [29 Aug, 2003]

Main, A 2003, Other peoples money, Harper Collins, Sydney.

McDougall, B 2002, HIH’s UK shemozzle:[1 Edition] Herald Sun, [online], p28, available: http://80proquest.umi.com.ezproxy.usc.edu.au:2048/pqdweb?index=13&did=000000398333121&SrchMode=1&sid=4&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1065158074&clientId=20906 [29 Aug, 2003]

Meigs, Meigs, Bettner & Whittington 1996, Accounting: The basis for business decision, McGraw-Hill, U.S.A.

Williams, R 2002, I may be a fool but I never lied: [1 Edition] The Australian [online], p.4, available:

http://80proquest.umi.com.ezproxy.usc.edu.au:2048/pqdweb?index=13&did=000000394897251&SrchMode=1&sid=7&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1065144753&clientId=20906 [25 Aug, 2003]

Owen, Justice N 2003, HIH Royal Commission, viewed 1 Sept, 2003, http://www.hihroyalcom.gov.au/

Tasker, B 2002, HIH `inflated’ earnings – Deception alleged on complex contracts:[1 Edition] The Courier Mail, [online], p.27, available: http://80-proquest.umi.com.ezproxy.usc.edu.au:2048/pqdweb?index=12&did=000000397114211&SrchMode=1&sid=8&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=106

A report into the collapse of HIH insurance Essay