![Insurance
Insurance is defined as a contract, which is called a policy, in which an individual
or organisation receives financial protection and reimbursement of damages from
the insurer or the insurance company. At a very basic level, it is some form of
protection from any possible financial losses.
The basic principle of insurance is that an entity will choose to spend small
periodic amounts of money against a possibility of a huge unexpected loss.
Basically, all the policyholder pool their risks together. Any loss that they suffer
will be paid out of their premiums which they pay.
Principles of Insurance
Insurance is actually a form of contract. Hence there are certain principles that are
important to ensure the validity of the contract. Both parties must abide by these
principles.
1] Utmost Good Faith
A contract of insurance must be made based on utmost good faith. It is important
that the insured disclose all relevant facts to the insurance company. Any facts that
would increase his premium amount, or would cause any prudent insurer to
reconsider the policy must be disclosed.
If it is later discovered that some such fact was hidden by the insured, the insurer
will be within his rights to void the insurance policy.
2] Insurable Interest](https://image.slidesharecdn.com/unit-2-230301084939-e177f22b/85/UNIT-2-docx-5-320.jpg)
![This means that the insurer must have some pecuniary interest in the subject
matter of the insurance. This means that the insurer need not necessarily be the
owner of the insured property but he must have some vested interest in it. If the
property is damaged the insurer must suffer from some financial losses.
3] Indemnity
Insurances like fire and marine insurance are contracts of indemnity. Here the
insurer undertakes the responsibility of compensating the insured against any
possible damage or loss that he may or may not suffer. Life insurance is not
a contract of indemnity.
4] Subrogation
This principle says that once the compensation has been paid, the right of
ownership of the property will shift from the insured to the insurer. So the insured
will not be able to make a profit from the damaged property or sell it.
5] Contribution
This principle applies if there are more than one insurers. In such a case, the
insurer can ask the other insurers to contribute their share of the compensation. If
the insured claims full insurance from one insurer he losses his right to claim any
amount from the other insurers.
6] Proximate Cause
This principle states that the property is insured only against the incidents that are
mentioned in the policy. In case the loss is due to more than one such peril, the
one that is most effective in causing the damage is the cause to be considered.](https://image.slidesharecdn.com/unit-2-230301084939-e177f22b/85/UNIT-2-docx-6-320.jpg)
UNIT-2.docx
- 1. UNIT – 2
- 3. Insurance contributes a lot to the general economic growth of the society by provides stability to the functioning of process. The insurance industries develop financial institutions and reduce uncertainties by improving financial resources. 1. Provide safety and security: Insurance provide financial support and reduce uncertainties in business and human life. It provides safety and security against particular event. There is always a fear of sudden loss. Insurance provides a cover against any sudden loss. For example, in case of life insurance financial assistance is provided to the family of the insured on his death. In case of other insurance security is provided against the loss due to fire, marine, accidents etc. 2. Generates financial resources: Insurance generate funds by collecting premium. These funds are invested in government securities and stock. These funds are gainfully employed in industrial development of a country for generating more funds and utilised for the economic development of the country. Employment opportunities are increased by big investments leading to capital formation. 3. Life insurance encourages savings: Insurance does not only protect against risks and uncertainties, but also provides an investment channel too. Life insurance enables systematic savings due to payment of regular premium. Life insurance provides a mode of investment. It develops a habit of saving money by paying premium. The insured get the lump sum amount at the maturity of the contract. Thus life insurance encourages savings.
- 4. 4. Promotes economic growth: Insurance generates significant impact on the economy by mobilizing domestic savings. Insurance turn accumulated capital into productive investments. Insurance enables to mitigate loss, financial stability and promotes trade and commerce activities those results into economic growth and development. Thus, insurance plays a crucial role in sustainable growth of an economy. 5. Medical support: A medical insurance considered essential in managing risk in health. Anyone can be a victim of critical illness unexpectedly. And rising medical expense is of great concern. Medical Insurance is one of the insurance policies that cater for different type of health risks. The insured gets a medical support in case of medical insurance policy. 6. Spreading of risk: Insurance facilitates spreading of risk from the insured to the insurer. The basic principle of insurance is to spread risk among a large number of people. A large number of persons get insurance policies and pay premium to the insurer. Whenever a loss occurs, it is compensated out of funds of the insurer. 7. Source of collecting funds: Large funds are collected by the way of premium. These funds are utilised in the industrial development of a country, which accelerates the economic growth. Employment opportunities are increased by such big investments. Thus, insurance has become an important source of capital formation.
- 5. Insurance Insurance is defined as a contract, which is called a policy, in which an individual or organisation receives financial protection and reimbursement of damages from the insurer or the insurance company. At a very basic level, it is some form of protection from any possible financial losses. The basic principle of insurance is that an entity will choose to spend small periodic amounts of money against a possibility of a huge unexpected loss. Basically, all the policyholder pool their risks together. Any loss that they suffer will be paid out of their premiums which they pay. Principles of Insurance Insurance is actually a form of contract. Hence there are certain principles that are important to ensure the validity of the contract. Both parties must abide by these principles. 1] Utmost Good Faith A contract of insurance must be made based on utmost good faith. It is important that the insured disclose all relevant facts to the insurance company. Any facts that would increase his premium amount, or would cause any prudent insurer to reconsider the policy must be disclosed. If it is later discovered that some such fact was hidden by the insured, the insurer will be within his rights to void the insurance policy. 2] Insurable Interest
- 6. This means that the insurer must have some pecuniary interest in the subject matter of the insurance. This means that the insurer need not necessarily be the owner of the insured property but he must have some vested interest in it. If the property is damaged the insurer must suffer from some financial losses. 3] Indemnity Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes the responsibility of compensating the insured against any possible damage or loss that he may or may not suffer. Life insurance is not a contract of indemnity. 4] Subrogation This principle says that once the compensation has been paid, the right of ownership of the property will shift from the insured to the insurer. So the insured will not be able to make a profit from the damaged property or sell it. 5] Contribution This principle applies if there are more than one insurers. In such a case, the insurer can ask the other insurers to contribute their share of the compensation. If the insured claims full insurance from one insurer he losses his right to claim any amount from the other insurers. 6] Proximate Cause This principle states that the property is insured only against the incidents that are mentioned in the policy. In case the loss is due to more than one such peril, the one that is most effective in causing the damage is the cause to be considered.
- 7. Legal Aspect of Insurance contract An Insurance contract is basically an arrangement in which one party the insurer accepts significant insurance risk from another party the policyholder, to compensate the policyholder if a specific uncertain future event impacts the policyholder. The policyholder enters into an Insurance Contract in order to mitigate its risk of loss. Parties to an insurance agreement must conduct due diligence before putting ink to paper. Few legal aspects of the Insurance contract are mentioned below. The premier lawful component of an insurance contract is to comprehend the limitation under such agreement. This is the point from which most disputes between the parties to the contract emerge. Deciding the extent of the risk which the insurer is committed to making up for is typically subject to legal suits. It is, in this way, frequently lawfully fitting for both sides to concentrate the understanding record appropriately before marking. For example, an insurance contract which does not list specific anticipatory losses which the insured may suffer means that policyholders may have a hard time getting indemnified. So, if the subject-matter for a household insurance contract is only against loss by fire but the house is destroyed by flood, then the insurer is not bound to indemnify the insured at all. The next legal hurdle to consider in insurance contracts is the issue of fraudulent misrepresentation. All contracts including insurance are entered into on the basis of good faith representations. Each party represents that there is no fraudulent fact which is presented knowingly as being the truth. When an insured party under a life insurance contract, for instance, lies to an insurer about material facts such as age or other pre- existing health conditions – which are reasonably expected to be
- 8. disclosed – this may be a legal ground for such insurer to avoid contractual obligations. Another important legal component is what is known as insurable interest. For general insurance, the policyholder must have an “insurable interest” at the time the contract is entered into. This means that there must be some benefit the policyholder stands to lose if the subject matter is lost or destroyed. The last legal hurdle to be crossed in insurance contracts is the settlement of claims. Most insurers take pride in making good their bond that genuine claims will be settled expeditiously. It is not so simple in reality to fulfill this promise taking into cognizance all that has been discussed above in this article. The notorious difficulty in this area is commercial aviation disasters. Airlines are legally bound to ensure aircraft’s, passengers, and cargo. Aviation accident bureaus are normally tasked with investigating airline disasters, which, in truth, takes longer to conduct before the cause of the accident is determined. These sorts of delays are likely to affect prompt payment of claims to affected passengers. It might add up to pie in the sky speculation to assume that all insurance contracts are great. Parties under an insurance plan must guarantee that there is an accord on all focuses in the agreement. Regardless of whether the debate will wind up in the law courts, later on, will mostly rely on upon the situation and wordings of every insurance contract. Evolution of Insurance Business in India The insurance industry is the backbone of country’s Risk Management. The beginning of the Indian insurance industry dates back to the nineteenth century.
- 9. In 1818, Europeans started Oriental Life Insurance Company in Kolkata (Calcutta) to exclusively serve their community. Colonial masters with racial prejudice unfairly characterised the age and premium for Indians. The Indian policy holders paid more premium than European counterparts. Indians desperately wished for Indian insurance companies to set foot in the market. Bombay Mutual Life Assurance Society started in 1870 was the first Indian insurance company to cover the lives of the Indians at normal rates. Triton Insurance Company Ltd in the year 1850 is the first general insurance company. Gradually insurance business fledged into a huge sector boosting the economy of India. Only during the early years of twentieth century new companies started mushrooming in India. In order to regulate these insurance companies, Life Insurance Companies Act and Provident Fund Act were passed in 1912. Evolution of insurance industry has undergone three phases, Pre- Nationalisation, Nationalisation and Privatisation. The Insurance industry was nationalised only after passing Life Insurance Corporation Act of 1956. There were more than two hundred insurance companies of both Indian and European origin. Even after the nationalisation, government Insurance companies were not making profit. Privatisation was a preferable solution for effective distribution and implementation of marketing strategies. With privatisation insurance industry almost changed overnight. Competition forced providers to advertise their products effectively. Once the gates were thrown open to the private players insurance industry improved remarkably. Along with safeguarding lives and property, insurance companies also offered enormous job opportunities. The privatization helped to increase efficiency of insurance business. Many new private companies came up with attractive products. Some of the major private
- 10. players in the Indian market are ICICI Prudential, Bajaj Allainz Life Insurance, Tata AIG life, Kotak Life Insurance, HDFC Standard Life, Reliance Life, ICICI Lombard etc. This millennium marked drastic changes in Insurance administration with the introduction of Computers. The internet has enabled the insurance business to become more accessible and user- friendly. Now you can buy the policy of your choice sitting at home. The greatest benefit buying online is you can compare life insurance policies offered by different companies in a single website. E India Insurance is a combination of internet and insurance revolution in India. Juxtaposing modern day with colonial era, we notice rapid growth prospects of the insurance industry. According to Insurance Regulatory and Development Authority ( IRDA ), Indian insurance industry registered a impressive growth rate of 120% in the year 2008. Economic experts anticipate that Indian domestic insurance would touch US $ 60.5 Billion by 2010. What is Double Insurance? Double insurance is a type of insurance where the same subject matter is insured more than once. In such cases the same subject is insured, but with different insurers. The method of double insurance is considered a legal act. In case of loss the insured can claim from both the insurers and the insurers are liable to pay under their respective policies. 1 .' What is Double Insurance? Double insurance is a type of insurance where the same subject matter is insured more than once. In such cases the same subject is insured, but with different insurers. The method of double
- 11. insurance is considered a legal act. In case of loss the insured can claim from both the insurers and the insurers are liable to pay under their respective policies. 1 .' What is Double Insurance? Double insurance is a type of insurance where the same subject matter is insured more than once. In such cases the same subject is insured, but with different insurers. The method of double insurance is considered a legal act. In case of loss the insured can claim from both the insurers and the insurers are liable to pay under their respective policies. 1 .' REINSURANCE ➢ Reinsurance means insurance for insurance companies. Insurance companies cover the risks for individuals and businesses. ➢ Reinsurance covers the risk of excessive claims due to different reasons for insurance companies. OBJECTIVES OF REINSURANCE • Distribution of risk to ensure the coverage of a claim. • It provides a great level of stability for underwriting in the period of the claim. • The financial obligation out of the capacity of the insurance company is outsources to another company having such capacity. Thus, the ceding company is left with only the financial obligation which it can fulfill. FUNCTIONS OF REINSURANCE Some of the key functions of reinsurance are:
- 12. • It helps the main insurer to grow or multiply in terms of volume of premium. • It protects the main insurer from catastrophe to occur. • It increases the capacity to assume more risks and to issue to more policies. • It provides a great stability to the profits of insurance business. • Distribution of risk to big players. • Assurance of claim settlement from big players. DOUBLE INSURANCE ➢ Double insurance refers to insurance where the same subject matter is insured twice or more than that. ➢ In such scenarios, the same subject is insured but with different insurance companies. The concept of Double insurance is not illegal at all. ➢ Double insurance come to light when a business avail insurance w.r.t the same risk and subject matter from two different insurers. ➢ This write-up will explore different instances where double insurance may occur and the real-life implications for businesses PRINCIPLES OF DOUBLE INSURANCE ➢ The first point on concurrent insurance is that, in principle, a business entity should not be left without an insurance payment. Where there is a presence of double insurance, & a business entity intends to claim w.r.t a loss covered by more than one policy, it will be entitled to claim whichever insurance policy it prefers. ➢ The insurance company that does not dispense cover w.r.t the double insured risk can approach other insurers for the contribution which has rendered similar cover.
- 13. ➢ Therefore, if a business does claim under one insurance policy & not the other, the insurance company that has not paid out probably has to pay a share to the insurer who has paid out. Coinsurance Coinsurance is the amount, generally expressed as a fixed percentage, an insured must pay toward a covered claim after the deductible is satisfied. It is common in health insurance. Some property insurance policies also contain coinsurance provisions. In this case, coinsurance is the amount of coverage that the property owner must purchase for a structure. Coinsurance is common in health insurance and some property insurance policies. In health insurance, coinsurance is the percentage under an insurance plan that the insured person pays toward a covered expense or service, after the policy deductible is satisfied. One of the most common coinsurance breakdowns is the 80/20 split: The insurer pays 80%, the insured 20%. A coinsurance provision is similar to a copayment provision, except copays require the insured to pay a set dollar amount at the time of the service, and coinsurance is a percentage amount of the overall cost. The coinsurance clause in a property insurance policy requires that a home is insured for a percentage of its total cash or replacement value. Over Insurance Over insurance can be defined as the situation where an insured has bought so much coverage that it exceeds the actual cash value (or the replacement cost) of the risk or property insured. Example:
- 14. Your car is insured for R200,000 and is written off in an accident. The assessor comes to the conclusion that the car can be replaced for R160, 000. As a result only R160, 000 is paid out. You have however been paying premiums to cover an amount of R200,000 and those premiums paid on the additional R40, 000 have been paid unnecessarily. Over insurance is a risk to the insurance industry and especially to insurance fraud. The insured who is over insured may be tempted to make a false claim to profit from a loss. Underinsurance Underinsurance refers to an insufficient insurance policy. A good insurance policy won’t prevent any of life’s calamities, but it should make the financial consequences easier to bear. However, underinsurance can leave the enrollee liable for a large financial expense if a serious event occurs. Whether it’s a home damaged by a hurricane or fire, or an insured person experiencing a serious disease or accident, insurance should ideally cover enough of the expense that the policyholder can manage the difference. Main differences between under and over insurance The major differences between under and over insurance can be summarized as follows: Through under insurance you are insured for less than market value whereas with over insured you are insuring for an amount above market value. Your risk with under insurance manifests itself when you claim – and find that less than the insurance claim will be paid as you would have to cover part of the damage yourself.
- 15. With over insurance you are at risk of paying too much in premiums from the moment that the market value of insured property is less than the amount insured.