Chapter 01 - Concepts & Principles of Insurance

8/6/2019 Chapter 01 - Concepts & Principles of Insurance

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CONCEPTSCONCEPTS

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PRINCIPLESPRINCIPLES

OFOFINSURANCEINSURANCE

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In financial sense

It is a social device in which

o a group of individuals (insured)

o transfer risk to another party (insurer)

o in order to combine loss experienced,which

permits statistical prediction of losses

and provides for payment of losses from

funds contributed (premium) by all

members who transferred risk

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In legal sense

It is a contract by whicho one party (Insurer)

o in consideration of price paid to him

o proportionate to risk provides security to

the other party (Insured) that

he shall not suffer loss, damage orprejudice by the happening of certainspecified events.

Insurance is meant to protect insuredagainst uncertain events which maycausedisadvantage to him

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Insurance - combination of three

elements

1. Insurance as a Transfer System -

transferring of risks from Insured to IC

which is financially sound and has capacityand willingness to take risks.

o A Loss exposure can give rise to three

types of losses, namely:

a) Property loss (including net income loss),

b) Liability loss, and

c) Human and personnel loss.

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2. Insurance as a Business - insurance primarily

attempts to meet its costs and expenses frompremium that it earns and also make a reasonable

margin of profit for its own sustainability.

o Other benefits to society as a whole such as:

a) Payments for the costs of covered losses

b) Reduction of the insureds financial uncertain

c) Efficient use of resources

d) Support for credit

e) Satisfaction of legal requirementsf) Satisfaction of business requirements

g) Source of investment funds for infrastructure

development

h) Reduction of social burden 5Dr. S N Ghosh


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3. Insurance as a Contract - an insurance

policy is a legally enforceable contract. The

contract is between IC and the Insured.

o An insurance contract must meet these

four requirements:

i. Offer and acceptance

ii. Considerationiii. Capacity

iv. Legal purpose

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Transfer of risk from one person (Insured)to another (Insurer)

Sharing (Pooling) of losses on some

equitable basis such that

o fortuitous (random) losses will be

indemnified (paid)

Reduction in tension and fear

Credit multiplication Avenue for investment

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Principle ofUberrimae Fides(Utmost GoodFaith)

A positive duty voluntarily to disclose,accurately and fully, all facts material to therisk being proposed, whether requested ornot.

Non-disclosure of any fact may beunintentional on the part of the insured.

such a contract is voidable at the insurers option

and it can refuse any compensation.

Any concealment of material facts is

considered intentional.

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Principle of Indemnity On the happening of insured event for which

insurance policy is taken up insured shouldbe replenished the amount of loss

Insured should not derive any unwarrantedbenefit from a loss

Made in following ways

o Cash payment

o Repairo Replacement

o Reinstatement

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Principle of Subrogation

Restitution of rights of an assured in favourof Insurer against third party for anydamages caused by him in place of assuredafter Insurer has indemnified him for the loss

Objectives of the principle:i. Prevents insured from profiting from damage.

ii. Enforces rule of law that guilty is brought to

book and made to pay for the loss.iii. Helps Insurer to partially or fully recover

amount paid for loss.

iv. Helps to lower insurance rates.

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Principle of Contribution

It means indemnity provided for lossoccurring on asset, which is insured withseveral insurers has to be shared pro rata

Corollary of doctrine of Indemnity and henceis applicable in case of GI.

Requisites

o Insured asset/Person (in case ofhospitalization insurance) must becommon to all policies

o Risk insured against must be common toall policies

o All policies must be in force during theoccurrence of loss

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Principle of Proximate Cause Literally means nearest cause or direct

cause. Immediate cause of mishap, which

resulted in the loss.

While determining proximate causesequence of events according to their time of

occurrence is irrelevant.

Many court judgments act as precedents in

arriving at decisions while makingsettlements.

The insurance company is liable to indemnify

only against the insured perils. 12Dr. S N Ghosh


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Underwriting - assumption of liability; formalacceptance of a risk by IC for a price

(Premium)

Objectives

o Large volume of premium incomesufficient to maintain and enlarge ICs

operations and achieve a better spread of

risk portfolio;

o Earning a reasonable amount of profits;

o More spread across the profile and

geography

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Proposal Form (application for insurance) -

insurance proposal to be in writing; can not beoral

Cover Notes - an evidence of insurance; atemporary and limited agreement, sent prior to

completion or preparation of final policydocument, or pending some information; or whenproposal is under consideration

The Slip - document mentioning all the essentialinformation needed for assessing risk proposed

Certificate of Insurance - generally printed,dated, signed, numbered; brief details of insured,situation of property, sum insured and period ofinsurance.

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LIFE GENERAL(NON-LIFE)

PURE TERM FIRE MARINE MOTOR

ENGINEERING

AVIATION AGRICULTURAL

CONSEQUENTIAL (LOSS)

FIRE

LIABILITY

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THE INSURANCE ACT, 1938

Important provisions

o Registration; ; Accounts and audit;Investments; Limitation on management

expenses; Prohibition of Rebates; Powers ofInvestigation by CG

GENERAL INSURANCE BUSINESSNATIONALIZATION ACT, 1972

To provide need-based, low cost insurancecovers to rural population, crop insurance

scheme, social security benefits; benefits of

insurance available to the masses16Dr. S N Ghosh


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INSURANCE REGULATORY AND

DEVELOPEMNT AUTHORITY (IRDA) After opening up of insurance sector, IRDA

is Regulator for monitoring of operations of

ICs. HO in Hyderabad

o Focus on three areas -

i. Protection of interest of consumers

ii. Ensure financial soundness of insurance

industryiii. Pave way to help a healthy growth of

insurance market

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The Motor Vehicles Act, 1939

Marine Insurance Act, 1963 The Merchant Shipping Act, 1958 The Bill of Lading Act, 1856 The Indian Ports (Major Ports) Act, 1963

Indian Railways Act, 1989 The Carriers Act, 1865 The Indian Post Office Act, 1898 The Carriage by Air Act, 1972 Multi-modal Transportation Act, 1993 Public Liability Insurance Act, 1991 The Indian Stamp Act, 1899 FEMA 1999 The Consumer Protection Act, 1986

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Buyers - general public, traders, corporates,

clubs, hospitals, schools, etc.INTERMEDIARIES

Agents - governed by IRDA (Licensing ofInsurance Agents) Regulations, 2000.

Qualifications and disqualification prescribedo Testing & Certification -to pass stipulated

examination after undergoing training programof 50 (75 hours for composite) at accreditedinstitutions (online / off-line).

Corporate Agents professionals e.g.ICAI,ICSI, ICWA, MBA, Actuarial Society ofIndia, CAIIB

Brokers19Dr. S N Ghosh


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Development Officers (DO)

in Public Sector Insurers; an internalarrangement in organizing marketing force ofIC. Link between branch manager and Agent

Some of the main functions

o Disseminating information, Soliciting,negotiating, procuring, or effectuating an

insurance contract or renewal

o Inspecting risk, Setting a rate,

Investigating or assessing claimDirect Sales

DSA - sales activity procured by staff of ICitself

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Documents

Chapter 01 - Concepts & Principles of Insurance