Insurance Principles

Insurance Definition
Insurance Definition

Insurance
• Is an arrangement by which a company undertakes to provide a guarantee of
compensation for specified loss, damage, illness, or death in return for
payment of a specified premium. In short it’s a promise of compensation for
specific potential future losses in exchange for a premium amount.
Basic Concepts
Of Insurance
Basic Concepts Of Insurance

Meaning
of
Risk • Risk Contains a suggestion of loss or danger, and defines “Uncertainty
concerning a potential loss ”

• Financial: Measurable in monetary items Insurable

Risk can be classified • Physical: Like death, illness or injury Insurable

into 3 categories
• Emotional: feelings of grief and sorrow Not Insurable
Basic Concepts Of Insurance

How To Handle • Control The Risk

Risk

• Avoid The Risk

• Transfer The Risk

• Accept The Risk

Basic Concepts Of Insurance

• Insurance Concept is to Provide compensation for the effects of misfortune (loss, damage, illness, death, etc.)

• An insured pays a premium and in return receives claim payment should the insured event occur

Insurance is essentially a risk transfer mechanism removing, for a premium, the potential financial loss from the

individual and placing it upon the insurer

How Does Insurance Work

• works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads
Insurance the risk of a few people over a large group of people exposed to risk of similar type.

• behind insurance is that a group of people exposed to similar risk come together and make
The
contributions towards formation of a pool of funds. In case a person actually suffers a loss
Concept
on account of such risk, he is compensated out of the same pool of funds.

• The pool is made by a group of people sharing common risks and collected by the insurance
Contribution companies in the form of premiums.
How Does Insurance Work

Example 1 Example 2
SUPPOSE SUPPOSE
Houses in a town = 1000 Number of Persons = 5000
Value of 1 House = USD. 40,000 Age and Physical condition = 50 years & Healthy
Houses burning in a year = 5 Number of persons dying in a year = 50
Total annual loss due to fire = USD. 200,000 Economic value of loss suffered by family of each dying person = USD.
Contribution of each house owner = USD. 300 100,000/-
Total annual loss due to deaths = USD. 5,000,000
Contribution per person = USD. 1,200

UNDERLYING ASSUMPTION UNDERLYING ASSUMPTION

All 1000 house owners are exposed to a common risk, i.e. fire All 5000 persons are exposed to common risk, i.e. death

PROCEDURE PROCEDURE
• All owners contribute USD. 300 each as premium to the pool of funds • Everybody contributes USD. 1200 each as premium to the pool of
• Total value of the fund = USD. 300,000 (i.e. 1000 houses * USD. 300) funds
• 5 houses get burnt during the year • Total value of the fund = USD. 6,000,000 (i.e. 5000 persons * USD.
• Insurance company pays USD. 40,000 out of the pool to all 5 house 1,200)
owners whose house got burnt • 50 persons die in a year on an average
• Insurance company pays USD. 100,000 out of the pool to the family
members of all 50 persons dying in a year

EFFECT OF INSURANCE EFFECT OF INSURANCE

Risk of 5 house owners is spread over 1000 house owners in the village, Risk of 50 persons is spread over 5000 people, thus reducing the burden
thus reducing the burden on any one of the owners. on any one person.
Basic Principles
Of Insurance
Insurance Principles

1 2 3 4

Insurable Interest Utmost Good Faith Proximate Cause Indemnity

Insurance Principles

Insurable interest is:

Insurable • The legally recognized relationship to the subject matter that gives a person the right to effect an
Interest
insurance on it. It is important to note that the relationship must be a legal one. A thief in possession
of stolen goods, for example, does not have the right to insure them.

• The intended policy owner will suffer a financial loss if the event insured against occurs

Essential Criteria
• The subject matter can be some person, property, liability or other legal right capable of being insured.
• The person wishing to have insurance must have the legally recognized relationship to the subject
matter so that financial loss may result to him if the insured event happens.

Classification By Function

Insurance of a Person Insurance of a Property Insurance of a Liability

Insurance Principles

Utmost • Insurance is subject to a more stringent duty of good faith, because of involving a high degree of trust
Good Faith in such contract.
• Each party is under the positive duty of revealing all vital information (called material facts), whether
the other party asks for this information or not.
• Utmost good faith arises in common law, Insurers extend the utmost good faith by requiring the
proposer (insured) to declare all material information.

The classic definition of a material fact is “a fact that would influence the judgment of a prudent insurer in
determining whether he will accept the risk, or on what terms he will accept it”.

• If “material facts” must be revealed, whether asked for or not, what this term means becomes of vital
significance.
Insurance Principles

Duty of Disclosure
Utmost
Good Faith • Utmost Good Faith involves a duty of disclosure by the proposer/insured. Technically, the insurer
is under the same duty.
• When will Duty of Disclosure occur in Insurance Policy?
- Applying for the policy / During the policy / Renewing the policy / Altering the policy

Remedies for a Breach in Insurance Policy

• Void Contract
• Reject Claim Payment
• Waive the Breach
• Sue For Damage
Insurance Principles

Proximate Cause is:

Proximate
• The Real Effective cause of loss, Not every cause of loss will be insured
Cause

Types of Peril

• Insured Peril - Covered by the policy and must occur with any claims (ex. Fire under a fire policy)

• Excepted Peril - Removed from cover by a policy exclusion (ex. Death from suicide)

• Uninsured Peril - neither insured nor exclude, it is outside the cover provided by policy (ex. Illness
from accident plan)
Insurance Principles

Indemnity is:
The exact financial compensation for a loss, No More No Less such as Hospitalization, Surgical Benefit,
Indemnity and Motor.

However, Life and Personal Accident Insurance cannot be measured precisely. Thus, full compensation
cannot be given. These insurance just involve Benefits but not Indemnity.

How Indemnity is Given?

• Cash Payment - Pay the indemnity by Cash (e.g. Payment of Out-patient claim)
• Repair - Payment to a repairer (e.g.. Non-total loss motor claims)
• Replacement - Give the insured a replacement item (apply on items which suffer little or no
depreciation)
• Reinstatement - Rebuilding or reconstructing property after damage (e.g. Damage machinery)
Parties In Life Insurance
Parties In Life Insurance

Material Facts and Premium

Policyowner / Payor Insured Insurer

Policy/sum Assured

Beneficiaries
Benefit /Claims
Parties In Life Insurance

Sum Assured Insurer Policy owner

• This is the amount of • The party or the insurance • The person or party who owns
benefit stated in an
company signing and issuing and individual insurance policy.
insurance policy, which is
payable at the death of the the insurance contract that The owner can, during the
insured, or at the maturity agrees to pay a benefit (usually insured’s lifetime, exercise all
of the contract (for
an amount of money) to the rights, privileges and options
permanent life plans only).
Insured when specific losses provided under the Policy, but
occur, but provided that the subject to any Beneficiary’s
insurer receives a specified vested interest or Assignee’s
amount of money, called right.
premium.
Parties In Life Insurance

Insurable
Insured Beneficiary
Interest

• The person whose life is • The beneficiary is /are the • Those people who have an
insured under the policy as person/persons/other parties insurable interest in the life of
agreed. designated by the policy owner the proposed insured include
and specified in the policy to his/her spouse, father, mother,
receive the proceeds after the child, grandparent, grandchild,
insured’s death. brother, and sister, while
others can be business
partners, debtors, etc.
Parties In Life Insurance

Juvenile
Premium
Policy

• A life insurance policy issued • The insurer will be able to pay

on the life of a child but owned the benefit and meet other

by an adult who is usually the obligations under the contract.

child’s parent Each policy owner is paying

an amount in line with the risk
and contracted benefit
involved.