Principles of insurance

Alternatives to buying commercial insurance

Captive insurance company: Any pure insurance company which is wholly owned by another non-insurance organization with the main purpose of insuring the risk of the parent. Captive insurance companies may be defined as limited purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. Risk sharing pools: Any joint underwriting operation of insurance or reinsurance in which the participants assume a predetermined and fixed interest in all business written. Pools are often independently managed by professionals with expertise in the classes of business undertaken, and the members share in the premiums, losses, expenses, and profits. #

CONTINUED
Self insurance: As an alternative to purchasing insurance in the market, or as an adjunct to it where the first layer or a proportion of a claim is not insured in the commercial market, some public bodies and large concerns set aside funds to meet insurable losses. As the risk is retained within the organization, there is no market transaction of buying insurance cover. Insurability: A risk which meets most of the following requisites: (1) The loss insured against must be capable of being defined. (2) It must be accidental. (3) It must be large enough to cause a hardship to the insured. (4) It must belong to a homogeneous group of risks large # enough to make losses predictable.

CONTINUED
(5) It must not be subject to the same loss at the same time as a large number of other risks. (6) The insurance company must be able to determine a reasonable cost for the insurance. (7) The insurance company must be able to calculate the chance of loss. In other words, to be insurable, there must be a large number of persons available for insurance with a similar potential for loss (the law of large numbers), Loss must be definite, Loss must be accidental in nature (unexpected and beyond control of the insured), Loss must be large enough to cause a financial burden, The cost of insurance must be affordable and the Loss must be calculable and a monetary amount must be determined for the loss.
#

The insurance transaction

Insurance is a contract. One party namely the insurer , contracts with another the policyholder to perform a particular service.

The risk The insured the insurer

The insured policyholder is the person or company entering into the insurance contract and the insurer is the insurance company which has contracted with the insured to provide cover for the risk insured against. The insured knows the nature of the risk. The insured has to describe the risk to the insurer. The proposer will look for acceptable protection. Price.

SELF ANALYSIS
INSURANC E INSUREd
The insured knows the nature of the risk.
The insured has to describe the risk to the insurer.
The proposer will look for acceptable protection.

INSUREr
Risk by the proposer will be told No trust on info provided

Level of cover prepared to take

Price

Price

PRINCIPLES OF INSURANCE

 Insurance business is conducted on certain fundamental principles which are applicable to all types of life, fire, marine and miscellaneous insurance contracts PRINCIPLE OF INSURANCE Principle of co-operation Principle of probability Principle of insurable interest Principle of utmost good faith Principle of warranties Principle of indemnity Principle of subrogation Principle of contribution Principle of causa proxima Principle of mitigation of loss #

1. PRINCIPLE OF CO-OPERATION
It is a voluntary device to share the risks and uncertainties collectively. Insurance is based on the ideology of common interest and welfare. Co-operation is based on the co-operative principle one for all, and all for one In insurance common fund is created by the contributions of a large number of people. On happening loss to a member of the fund he is compensated from the fund. This way the contribution made by one for all and the contribution of all are used for compensating any one of the. In ancient times people used to create funds to indemnify each other on happening of any calamity. This is an evidence that # tahe foundation of insurance was based on co-operation.

2. Principle of probability
This principle is the important determinant of insurance premium. Insurance is a contract to bear the risk against consideration, that is premium. The rate of premium depends on the quantum of risk and probability of risk. The rate of premium will be more where the quantum of risk and its probability are more. Probability throws light on the uncertain events. It is a mathematical assumption that there will bee probability of happenings which had happened in the past. It is necessary for the insurer to ascertain the probability of happenings that had happened in the past. Methods of ascertaining the probability of any future event : Analysis of past data and application of statistical method. The principle of probability is applied in calculating mortality tables by the insurer.

3. UTMOST GOOD FAITH:

In all General Insurance contracts we know that a property or interest or liability or life is offered for insurance and the insured has to take decisions on the acceptance of the proposal. If he decides to accept the proposal a premium commensurate with the risk has to be charged. To enable him to take necessary decision in this regard, the insurer must have certain facts about the risk offered. These facts influence the judgment of the insurer in deciding about the acceptance or otherwise of the risk and the rate of premium to be charged, if accepted. Such facts are known as material facts. #

Characteristics of the principle utmost good faith

It is an obligation to the parties to insurance contract to make a full and true disclosure of material fact. The obligation to make full and true disclosure applies to all types of insurance. The duty to disclose continues upto the conclusions of the contract. It covers any material alteration in the character of the risk which may take place between proposal and acceptance. Concealment of material fact or misrepresentation may affect the validity of the contract. However in the case of the innocent misrepresentation, the premium is returnable on the avoidance of the policy. #

4. INSURABLE INTEREST
Insurable interest means the legal right to insure. Insurable Interest is a must and only then the insurance contract is enforceable at law. This principle differentiates a contract of insurance from wager. Lack of insurable interest renders the contract null and void. For Insurable Interest to exist there must be Property, Rights, Interest, Life or Liability; this must be insured and the Insured should have a legally recognizable relationship thereto. The Insured should be benefited by the safety of the property or is prejudiced by its loss. Insurable Interest may arise in the following manner: 1. Ownership: Absolute ownership entitles the owner to insure the property. This is the commonest method whereby Insurable Interest arises. 2. Partial Interest is also insurable e.g. a mortgagee. A creditor can also insure the life of his debtor but only to the extent#of his loan.

CONTINUED
3. Administrators and executors i.e. officials appointed by a court of law to take care of a property may also insure the property. 4. Relationship does not automatically constitute insurable interest. The only relationship recognized by law for this purpose is the one between a husband and wife. 5. An employer can insure his employee under a Personal Accident Policy as he has insurable interest in them.

Requirement of insurable interest

There must be insurable interest in the following types of insurance contracts: In property insurance, like house property, furniture's, goods, etc. In fire insurance, the insurable interest may arise from, 1. Ownership, or joint ownership on property 2. Agents acting on behalf of the principle 3. Administrators, executors, and trustees against the property entrusted to them 4. Husband and wife both have mutual insurable interest on each others property In life insurance insurable interest exist between: 1. Husband and wife 2. A son or daughter in the life of father or mother who supports # him or her

CONTINUED
4. 5. 6. 7. 8. Partners of a partnership firm in the lives of co-partners Employers and employees during the course of employment Surety and the principle debtor to the extent of debt Landlord and tenants to the extent of rent Shareholders and company towards the lives of the other shareholders or a company in the lives of its shareholders towards the lives of the other shareholders or a company in the lives of its shareholders. In marine insurance , the following persons may have insurable interest: Owner of the ship in his ship and cargo Crew of the ship to the extent of wages and salaries Owners of cargo in their cargo # Owners of warehouse or any other bailee to protect the goods

1. 2. 3. 4.

Presence of insurable interest

The presence of insurable interest differs in different types of insurance contracts as follows: 1. LIFE INSURANCE: Insurable interest must be present in the insured at the time when the policy is taken. It may or may not be necessarily present at the time of claim. In the case where the policy is assigned insurable interest may not be present. 2. FIRE INSURANCE: In fire insurance the insurable interest must be present at both the times when the policy is taken and also at the time of happening the event to claim the loss of the insurer. 3. MARINE AND ALL OTHER MISCELLANEOUS TYPES OF INSURANCE: In all these insurance contracts the insurable interest must be present at the time of happening the loss insured against. It is not necessarily be present at # the time of happening the loss insured against. It is not necessarily

5. Principle of warranties
According to section 35 of the Marine Insurance Act A warranty is an undertaking by the assured that some condition shall be fulfilled, or that a certain thing shall be or shall not be done. A warranty may be express or implied. A express warranty is a condition which is set fourth in the policy or attached there. An implied warranty is an essential condition implied by law, though not written in the policy. Strict compliance with these warranties is absolutely necessary. Example of express warranties: In fire insurance no goods of dangerous nature of to maintain proper electrical fittings as required under government requirement. In marine insurance, the proper packing of cargo, packing in a # professional way and shipping the cargo in first category, steamer

6. PRINCIPLE OF INDEMNITY
INDEMNITY: To place insured after a loss in the same financial position as far as possible as he occupied before the loss. There should not be a profit made by insured out of a loss. (Would not apply for life and personal lines of insurance business) This principle is specially applied to fire, marine, burglary or any other policy of indemnity. A contract of insurance, however, ceases to be contract of indemnity if the insurer promises to pay a fixed sum on the happening of the event insured against whether the assured has suffered any loss or not. This is in conformity with the basic concept of insurance, whereby an insurer is required to compensate the unfortunate people for the loss sustained, but does not allow a person to # earn profit from misfortune.

Importance of indemnity principle

This principle provides social security. The insured will take care of their properly. Even the national property can be secured. The principle indemnifies the insured against the loss of property, and at the same prevents damages to the properly purposely to enjoy the benefit. The principle emphasizes to keep the rate of premium at the lowest. The principle restricts over or under insurance since the policy sum is limited to the actual value of the subject matter. This principle maintains the legality of insurance otherwise the contracts of insurance would have been speculative and illegal.
#

7. Contribution
An insured may have several insurances on the same subject matter. If he recovers his loss under all these insurances, he will obviously make a profit out of loss. This will be an infringement of the principle of indemnity. Common Law has, therefore, evolved the doctrine of contribution whereby the insured is prevented from recovering more than his loss, despite his having several insurances on the subject-matter. This principle is applicable in all types of insurance contracts, except life insurance. Where an insurer gets the subject matter insured with more than one insurer and in case of loss/damage to the insured property all of them shall be called upon to contribute towards the claim in proportion to the sum assured with each. This principle ensures equitable distribution of losses between different insurers. #

Conditions attached with this principle

The insured must be same individual.
All the policies must cover the same perils The accepted risk against the subject matter should also be the same for all the policies. All the polices must be in operation at the time of loss. The insurable interest also be the same for all. The policy should be legally enforceable. This principle is operative indemnity insurance only. This principle is also applicable in double insurance and reinsurance. This contribution will be in proportion to total liability. #

8. SUBROGATION
Subrogation: The principle of indemnity seeks to prevent the insured from making profit out of loss. However, it may so happen that that the insured may recover his loss under his policy and he may also have rights against third parties. If, after the insurance claim is settled, the insured is allowed to enforce his rights against third parties and to retain whatever damages he receives from them, he will certainly make a profit and the principle of indemnity will be infringed. Common Law has therefore, evolved the doctrine of subrogation as corollary to the principle of indemnity. Subrogation may be defined as the transfer of rights and remedies of the insured to the insurers who have indemnified the insured in respect of the loss. The Common Law right of subrogation is implied an all contracts on indemnity, as it arises only after payment of loss. #

CONTINUED.
Subrogation is the substitution of one person in place of another in relation to a claim, its rights, remedies or securities. This principle is applicable to both fire and marine insurance. Having satisfied the claim of the assured the insurer stands in his place and subrogated to all the rights of the insured. On payment of claims of the insured, the insurer steps into the shoes of the insured to claim the damages/ loss caused to the property by the third party.

9. PROXIMATE CAUSE
Proximate cause: Generally, the claims are payable under insurance policies if they arise out of events which are proximately caused by the insured perils. In other words, the proximate cause of the event has to be peril covered by the policy, so as to constitute a valid claim. Proximate cause has been defined as "the active, efficient cause that sets in motion a train of events which brings about a result without the intervention. In order to make the insurer liable for loss, such loss must have been proximately caused by the peril insured against. The question which is the causea proxima of a loss can only arise where there has been succession of causes. The proximate cause is the nearest cause. #

Fire, marine insurance and its proximate cause.

In fire insurance the insurer is liable to indemnity for the following losses: 1. Falling of the walls of the building due to fire in the building. 2. Felling of the building by the fire brigade or throwing furniture from the building in a bid to control the fire. 3. The loss due to sprinkling of water for putting out the fire. In marine insurance the insurer is liable to indemnity for the following losses. 1. Where the loss is caused is insurance peril irrespective of the negligence of captain of the ship or of the crew. 2. Where the proximate cause was exceeding time limit and as a result of any insured peril. 3. Where the loss was due to breakage, depreciation, pilferage or # bad smell or failure of any machinery.

10. Principle of mitigation of loss

The principle of mitigation of loss places a duty on the part of insured to make very effort, and to take all such steps, as a man of ordinary prudence to mitigate or minimize the loss in the event of some mishap to the insured properly. Less severe or less painful Filing to which insurer can avoid the claim of the insured on the ground of negligence on the part of the insured.
#