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Insurance: Introduction, Definition, Classification of InsuranceLifetoand Non-Life, Click edit Master subtitle style Principle of Insurable Interest, Principle of Subrogation, Principle of Utmost Good 3/8/13 Faith

Business Risk

A risk is any danger that may cause a financial loss. Examples include; Fire, accident, damage to property, burglary, theft, death, bad debts, poor or bad management, floods, earth quakes, etc. There are two types of risks namely; Insurable risks and NonInsurable risks.
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Insurable Risks

The are risks that;

can easily be frequency of estimated

assessed and whose occurrence can be

can have premiums fairly calculated have past statistical records can be accepted for coverage by the insurance company

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Examples of insurable risks include; fire, theft, death, claims from third parties, damage to property, burglary, bad debts, etc

Non-Insurable Risks

These are risks that;

can

not be easily assessed and their frequency of occurrence can not be estimated premium can not be fairly calculated not have any past statistical record of occurrence not be accepted to be covered by the insurance company

whose do

can

Examples of Non Insurable risks include: Bad Management, Illegal acts such as theft, losses 3/8/13 due to change of fashion, natural calamities

Risk in your life

Risk of early death(life insurance) Risk of out living income(Pension plans) ones

Risk of illness and health problems to oneself and family(Health Insurance) Risk of accident(Accident Insurance) Risk of loss or damage Property(Property Insurance) of

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Risk from Liability (liability insurance)

How to Eliminate Risk?

Avoid it- You can take care of yourself, avoid high risk occupations, eat well and exercise. Reduce it- some risks by adding fire extinguishers, burglars alarm, adding airbags or getting regular medical checkups. Assume it- You can retain the risk through self insurance. If the costs 3/8/13 are not too high you can assume

Introduction

Insurance is a social device to reduce or eliminate risks of loss to life and property. It is a provision which a prudent man makes against inevitable contingencies, loss or misfortune. Insurance-Governed byInsurance Act -1938, Now By IRDA Act-1999(head ofice3/8/13 Hyderabad, Focus on 3 areas-

What is Insurance?

Insurance is a legal contract between you and an insurance firm whereby the firm agrees for a premium (fee) to pay you compensation for certain kinds of losses or events i.e. Death, sickness, compensation for accidents, loss of ability to work, legal expenses etc. Purpose-To transfer the risk of certain types of losses or events from yourself to another institution 3/8/13

Insurance is the protection granted to an individual, institution or indeed the traders against financial losses that may be caused by of the occurrence of risks It is based on probabilities the risks may or may not occur

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How Insurance Operates?

Insurance operates on the basic rule of Pooling Of Risks. Pooling of risks is:

when many insured persons pay premium to the insurance company, thereby creating a pool (piling up/collection) of funds, from which the company pays out compensation to those who suffer losses.

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How Insurance Operates?..contd...

Insurance is successful with the collection of more premiums but the occurrence of fewer risks The lucky ones (the fortunate), who do not receive anything, pay for the unfortunate.

The insured persons/institutions must not all suffer a loss at the same time, as there cannot be enough funds in the pool to pay every 3/8/13 one

What happens without Insurance (Life, Health, Liability)

If you live - nothing changes If you die, get sick or get sued without insurance

Your spouse May have to work Your children may not achieve important goals You may not be able to take care of your family

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Should you insure against all losses

No. Some losses are not as critical as others. Insure against the critical or serious losses.

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Definitions
Views expressed by different experts can be classified into 3 categories of definitions

General or Social Definitions Functional/Economic/Business Definitions Contractual/ Legal Definitions

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General/ Social Definition

-Given by social scientists-they consider insurance as a device to protection against risks.

Sir William Bevridgesthe collective bearing of risks is insurance. Boon and Kurtz, Insurance is a substitution of a small known loss(the insurance premium) for a 3/8/13 large unknown loss which may or

Functional/Economic/Busine ss Definitions
-It includes business oriented definitionssince insurance is a device providing financial compensation against risk or misfortune

D.S. Hansell , Insurance may be defined as a social device providing financial compensation for the effects of misfortune, the payments being made from the accumulated contributions of all parties in the scheme. 3/8/13

Contractual/ Legal Definitions

-It considers insurance as a contract to indemnity the losses on happening of certain contingency in future.

Reigel and Miller- In its legal aspect it is a contract, the insurer agreeing to make good any financial loss the insured may suffer within the scope of the contract.
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Nature/Characteristics of Insurance

Sharing of risks-share the burden of risk Cooperative device- Distributing a certain risk over a group of persons who are exposed to it. Evaluation of risk- for ascertaining the insurance premium, forms a basis of insurance contract.

Payment on happening of specified event-insurance co. Is bound to make payment 3/8/13

Large number of insured persons-success depends on this only. Keeping the premium at minimum. Insurance is not a gamblinggambling-illegal-gain to 1 and loss to other. Insurance-valid contract to indemnity against losses. Insurance is not charity- charitywithout consideration. Insurance-with future consideration 3/8/13

Characteristics of Insurance..contd...

Characteristics of Insurance..contd....

Spreading of risks-among large no. Of people. Transfer of Risk- from insured to insurer A contract-legal and valid-where insurer promises to compensate the insured. Based upon certain principalsutmost good faith, insurable interest, contribution, indemnity, causa 3/8/13 proxima, subrogation etc.

Common Terminologies Used In Insurance

v

Insured: One who is covered by an Insurance Company. Party or individual who seeks protection-against a specified risk-insurance policy holder.(assured) Insurer: Insurance company providing the insurance cover. Who promised to pay on happening of any contingencies.(assuror) Beneficiary- person to whom the policy proceeds will be paid in case of death or other happening.

Policy-derived from Italian word polizzameans receipt. A written contract of 3/8/13 insurance b/w insurer and insured, containing
v

Common Terminologies..Contd...
v

Premium: Non-refundable small amount of money contributed to the Insurance Company in return for insurance cover.(paid to insurer by insured) Third Party: One who is affected, but not part of the insurance contract. Insured sum- policy money-face maximum liability of insurer value-

Peril- an event that causes personal or property loss, by fire, explosion, premature death, sickness. Hazards- condition that may creates or increase the chances of loss from a given peril. (physical hazard,eg-defective wiring or Moral

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Functions of Insurance

Primary functionsProvide protection-against future risk Collective bearing of risk Evaluation of risk Spreading risk Secondary functions-

a.

b. c. d. .

a.

Prevention of losses 3/8/13

Types/Classification of Insurance Life Insurance(Assurance)

Non-life Insurance General Insurance Marine Insurance(cover the loss or damage of vessels, and of cargo in transit,) Fire Insurance Personal accident Insurance Vehicle Insurance
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a.

b. c. d. v.

Miscellaneous Insurance

Types/Classification of Insurance Life Insurance

Non-Life Insurance Property(against fire, theft, marine) Home Insurance Business Insurance Commercial Insurance Liability Insurance(against damage by third party)

a. b. c. v.

a. Motor Insurance
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Life Insurance

It is a contract between the insured person and the company that is providing the insurance. It offers a way to replace the loss of income that occurs when the insured person dies, usually the person who is the majority income provider of the family. If the death of the insured occurs 3/8/13 while the contract is in force, the

Types of Life Insurance

Temporary (Term) This provides coverage for a limited period of time for a specified premium.

-After that period, the insured can either drop the policy or pay premiums to continue the coverage. The death benefit would be paid by the insurance company if the insured died during the term of the policy, while no benefit is paid if the insured 3/8/13 dies after the last day of the term of

Non Life Insurance

Also known as General Insurance, is a form of insurance mainly concerned with protecting the policyholder from loss or damage caused by specific risks. Categorized depending on the need level.

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Benefits of Life Insurance

Provides Mortgage protection

Continuity of income Protection against disabilities Childrens education Marriage expenditure Retirement fund
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Tax relief

Requirements of an Insurance Contract

Offer and acceptance Consideration Competent parties Legal Purpose

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Requirements of an Insurance Contract..contd

Offer and Acceptance: Applicant for insurance makes the offer and the company accepts or rejects the offer

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Requirements of an Insurance Contract..contd

Consideration is the value that each party gives to the other

For Insured: Payment of first premium plus an agreement to abide by the conditions specified in the policy

For insurer: Promise to do certain things as specified in the contract. For e.g.: paying for a loss from the insured peril

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Requirements of an Insurance Contract..contd

Competent Parties

Each party must be legally competent/ must have legal capacity to enter into a contract Most adults are legally competent to enter into the insurance contracts but there are some exceptions like Insane persons, minors etc. Also, insurer must be licensed to sell insurance in that country

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Requirements of an Insurance Contract..contd

Legal Purpose

An insurance contract that encourages something illegal or immoral is contrary to the public interest and can not be enforced For e.g. policy can not cover seizure of the drugs by the police

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Significance of Insurance
v

Uses to an Individual Insurance provides safety-against loss security and

Insurance affords peace of mindprovides security against fire, accident, damage, death Insurance eliminates dependencydeath, property, goods, accident Life insurance encourages saving-

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Significance of Insurance..contd... Life insurance provides profitable

investment- regular saving, capital formation, return of capital along with additions. Special exemption from income tax, wealth tax, gift tax, excise duty

Life insurance fulfils the needs of a person-family needs(death), old age heeds (if surviving more than earning period)

Re-adjustment needs(unemployment, 3/8/13 disability)

Significance of Insurance..contd... Uses to Business

Uncertainty of business losses is reduced Business efficiency is increased with insurance Key man indemnification-key mancapital, expertise, experience, energy, ability to control, goodwillmost valuable asset-absence

Enhancement of credit-can obtain loan by pledging the policy as 3/8/13

Significance of Insurance..contd... Uses of Society

Wealth of the society is protectedhuman wealth, financial security against old age, death, damage, destruction.

Economic growth of the countryprovides strong mind, protection against loss of property and adequate capital to produce more wealth. Agriculture-protection against losses of cattle, machine, 3/8/13 tools and crop. Agriculture-factory-

Limitations of Insurance

All the risks cannot be insured. Insurable interest (financial interest) on the subject matter Impossibility of measurement of real loss Not possible to insure the risk covered by a single individual or a small group Higher premium rates
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Moral hazards

Principles of Insurance

These are rules or guidelines in insurance which must be strictly adhered to. The nonadherence to these principles can render ones insurance contract being declared null and void. Main principles of insurance are:

Principle of Cooperation Principle of Probability Principle of insurable interest Principle of utmost good faith (Uberrima Fides) of warranties

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1.Principle of Cooperation device Insurance is a voluntary

share risks

to

Based on cooperative principle, one for all, and all for one. Common fund is created, by a large group, on happening of loss to a member, he is compensated from the fund. This way, contribution made by one for all, and the contribution of all are 3/8/13 used for compensating any one of

2.Principle of Probability

This principle is important determinant of insurance premium. Premium is the value of insurance and an important factor of insurance cost. The rate of premium depends on the quantum of risk and probability of risk. It is necessary for the insurer to ascertain the probability of 3/8/13 happenings that had happened in the

It states that: Only the legal owner of the property has the right to insure a property or life, as he/she stands to personally experience a financial risk, if a risk occurs.(means assured must have an actual interest in the subject matter) The importance of the I/I-it prevents people who are not legal owners from deliberately destroying the insured items in order to claim compensation and thus make profit 3/8/13 of the loss. out

3.Principle of Insurable Interest

Principle of Insurable Interest

If an insured wishes to enforce a contract of insurance before the Courts he must have an insurable interest in the subject matter of the insurance, which is to say that he stands to benefit from its preservation and will suffer from its loss.
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Principle of Insurable Interest Presence of Insurable interest

Life Insurance-only at the time when the policy is taken. Fire Insurance-Insurable interest must be present at both the times when the policy is taken and also at the time of happening of loss. Marine and all other insurance- must be present at the time of happening the loss insured against.

1.

2.

3.

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Importance/need Interest

Principle of Insurable Interest

of

Insurable

Basis of legality of insuranceotherwise insurance contract is void. Basis of indemnity-The loss suffered by an insured can be ascertained only by observing the principle of I/I Prevention of Speculation-otherwise insurance business becomes a speculative activity. Security to the property and life of

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4.Principle of Utmost Good Faith or Oberrimae Fidei

(Uberrima Fides)It states that: Both the parties(Insurer and insured) must tell the truth without leaving out any material facts relating to the insurance contract.

It must be applied at the time of filling details on the proposal form, as the Insurance Company uses this information to assess the risk, decide whether to accept the risk or not and be able to fix a fair premium. 3/8/13

Principle of Utmost Good Faith duty to disclose As a client it is your

all material facts to the risk being covered. A material fact is a fact which would influence the mind of a prudent underwriter in deciding whether to accept a risk for insurance and on what terms. The duty to disclose operates at the time of inception, at renewal and at any point mid term. 3/8/13

Principle of Utmost Good Faith

The proposal form therefore acts as a basis for insurance cover. Furthermore, principle of utmost good faith entails that the Insurance Company must honour all its promises reflected in the policy. Where either the Insurer or the Insured fails to follow the principle of utmost good faith, the insurance 3/8/13 contract is declared null and void.

Principle of Utmost Good Faith In Life insurance-age, health,

disease, habits, family history, nature of business or profession. In Fire Insurance- structure of assets, nature of goods, condition of godown, activities of the firm In Marine Insurance-size of the ship, nature of cargo, packaging of cargo. In Accident Insurance- condition of vehicle, details of any young 3/8/13 driver,etc.

Principle of Utmost Good Faith

Representations

Statements made by the applicant for insurance For e.g. If you apply for life insurance, you may be asked questions concerning your age, weight, height, occupation, state of health, family history etc. Your answers to these questions are the 3/8/13 representations

5.Principle of Warranties

The assured undertakes that some particular thing shall or shall not be done or that some conditions shall be fulfilled. A warranty implied. may be express or

Express-condition which is set forth in the policy Implied-essential condition implied by the law, though not written insurance-no goods of

3/8/13 Eg-Fire

6.Principle of Indemnity

applied to all, except life Insurance Under the indemnity contract, the insurer undertakes to indemnify the insured against loss suffered by the insured. Indemnity means make good the loss To "indemnify" means to be reinstated to the position that one was in, to the extent possible, prior 3/8/13 to the happening of a specified event

Principle of Indemnity
In the event of a claim the insured must:

Prove that the event occurred Prove that a monetary loss has occurred Transfer any rights which he/she may have for recovery from another source to the Insurer, if he/she has been fully indemnified.
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Amount of Indemnity

Principle of Indemnity

= Policy amount * Actual loss Market value of the subject matter on the date of loss
v v

Methods of Indemnity Cash payment Replacement- at policy time, insurer gets discount Repairing- vehicle

v v

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This rule states that: Should the insured item be damaged beyond repair, once the insured is compensated in full, the remains of the damaged item would now belong to the insurance company. For example, if Mr. As car (which was comprehensively insured) is damaged beyond repair, the Insurance can decide to buy him another car, and thereafter assume ownership of the 3/8/13 damaged one.

7. Principle of Subrogation

Principle of Subrogation

Subrogation is the substitution of one person in place of another in relation to a claim, its rights and remedies. On payment of claim of the insured, the insurer steps into the shoes of the insured, to claim the damages/loss caused to the property by third party.(eg-car accident with third party)
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Principle of Subrogation

Subrogation is a feature principle of indemnity and

of

the

therefore only applies to contracts of indemnity so that it does not apply to life assurance. It is intended to prevent an insured recovering more than the indemnity he receives under his insurance (where that represents the full amount of his loss) and enables his insurer to recover or reduce its loss

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This one insure the same item with more than one insurance company, the concerned insurers would each equally contribute towards the required sum of compensation. This ensures equal distribution of losses b/w different insurers. Formula for Contribution= calculation of

8. Principle Of Contribution rule states that: should

3/8/13 Sum assured with individual insurer *

Principle Of Contribution..Contd...

For example, Mr. X decides to insure his factory against fire with A, B and C Insurance company for 30 lakh. If the risk occurs and he needs 30 lakh to be brought back to the original position, the three Insurance Companies will each contribute 10 lakh towards his compensation.

This is to ensure that he is brought 3/8/13 back to his former position without

suffer a financial loss, he/she can only be compensated if the risk insured against is the nearest or immediate cause of the loss, and if it is not deliberately caused by any one. For example, if Mr. M insures his car against theft, but an accident occurs, there would be no compensation. Eg-Goods insured for fire and not 3/8/13 rain.

9. Principle of Causa Proxima/ Proximate cause It states that: Should the insured

It places duty on the part insured to make every effort steps to minimize the loss event of some mishap to the property.

10. Principle of Mitigation of Loss

of the and all in the insured

If he fails to act in such a manner, the insurer can avoid the claim of the insured, on the ground of negligence on the part of the insured.
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Procedure Involved In Taking Out Insurance Cover

The Proposer may approach the Insurance Broker or the Insurance Company directly. He/She then obtains a Proposal Form from either the Broker or Insurance Company. The Proposer completes the Proposal Form in utmost good in faith, giving full, accurate and detailed 3/8/13 information about the property and

Procedure Involved In taking Out Insurance Cover Cont.

Where important information relating to the item being insured is not disclosed on the proposal form, the contract is nullified. The Insurance Company then assesses the risk and fixes the correct or fair premium to be paid. When the Proposer pays the premium, a Cover Note is issued as temporal cover while the full policy is 3/8/13 being prepared.

Procedure Involved In Making A Claim

Inform the police about loss immediately it occurs. Notify the Insurance Company of the loss as soon as it happens, as early notification allows the company to carry out necessary investigations. Complete a claim form, giving full details of the loss suffered. Insurance Company employees called Assessors inspect the damage, 3/8/13 assess and determine the amount of

Procedure Involved In Making A Claim Cont.

Claims are carefully examined to ensure that the risk insured against was the proximate cause of the loss and that the claim is genuine and without breaching the insurance contract. The Claimant signs an Agreement Of Loss Form to bind him/her to accept the amount of compensation arrived at. 3/8/13

Procedure Involved In Making A Claim Cont.

The Insurance Company settles the claim by paying the claimant the money in compensation. If for example, another item is bought to replace the damaged one, the wreckage is subrogated by the Insurance company.

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