PRINCIPLES OF INSURANCE

INSURANCE

Insurance is a means of protection from financial loss. It is a form of risk management, primarily
used to hedge against the risk of a contingent or uncertain loss.

An entity which provides insurance is known as an insurer, insurance company, insurance carrier
or underwriter. A person or entity who buys insurance is known as an insured or as a
policyholder. The insurance transaction involves the insured assuming a guaranteed and known
relatively small loss in the form of payment to the insurer in exchange for the insurer's promise
to compensate the insured in the event of a covered loss. The loss may or may not be financial,
but it must be reducible to financial terms, and usually involves something in which the insured
has an insurable interest established by ownership, possession, or pre-existing relationship.

The insured receives a contract, called the insurance policy, which details the conditions and
circumstances under which the insurer will compensate the insured. The amount of money
charged by the insurer to the policyholder for the coverage set forth in the insurance policy is
called the premium. If the insured experiences a loss which is potentially covered by the
insurance policy, the insured submits a claim to the insurer for processing by a claims adjuster.
The insurer may hedge its own risk by taking out reinsurance, whereby another insurance
company agrees to carry some of the risk, especially if the primary insurer deems the risk too
large for it to carry.
 PRINCILPES OF INSURANCE

1. NATURE OF CONTRACT

Nature of contract is a fundamental principle of insurance contract. An insurance contract comes

into existence when one party makes an offer or proposal of a contract and the other party
accepts the proposal.

A contract should be simple to be a valid contract. The person entering into a contract should
enter with his free consent.

2. PRINCILE OF UTMOST GOOD FAITH:

Under this insurance contract both the parties should have faith over each other. As a client it is
the duty of the insured to disclose all the facts to the insurance company. Any fraud or
misrepresentation of facts can result into cancellation of the contract.

3. PRINCIPLE OF INSURABLE INTEREST:

Under this principle of insurance, the insured must have interest in the subject matter of the
insurance. Absence of insurance makes the contract null and void. If there is no insurable
interest, an insurance company will not issue a policy.

An insurable interest must exist at the time of the purchase of the insurance. For example, a
creditor has an insurable interest in the life of a debtor, A person is considered to have an
unlimited interest in the life of their spouse etc.

4. PRINCIPLE OF INDEMNITY:
Indemnity means security or compensation against loss or damage. The principle of indemnity is
such principle of insurance stating that an insured may not be compensated by the insurance
company in an amount exceeding the insured’s economic loss.

In type of insurance the insured would be compensation with the amount equivalent to the actual
loss and not the amount exceeding the loss.
This is a regulatory principal. This principle is observed more strictly in property insurance than
in life insurance.

The purpose of this principle is to set back the insured to the same financial position that existed
before the loss or damage occurred.

5. PRINCIPLE OF SUBROGATION:
The principle of subrogation enables the insured to claim the amount from the third party
responsible for the loss. It allows the insurer to pursue legal methods to recover the amount of
loss, For example, if you get injured in a road accident, due to reckless driving of a third party,
the insurance company will compensate your loss and will also sue the third party to recover the
money paid as claim.

6. DOUBLE INSURANCE:
Double insurance denotes insurance of same subject matter with two different companies or with
the same company under two different policies. Insurance is possible in case of indemnity
contract like fire, marine and property insurance.

Double insurance policy is adopted where the financial position of the insurer is doubtful. The
insured cannot recover more than the actual loss and cannot claim the whole amount from both
the insurers.

7. PRINCIPLE OF PROXIMATE CAUSE:

Proximate cause literally means the ‘nearest cause’ or ‘direct cause’. This principle is applicable
when the loss is the result of two or more causes. The proximate cause means; the most dominant
and most effective cause of loss is considered. This principle is applicable when there are series
of causes of damage or loss.
LIFE INSURANCE

Life insurance is a contract between an insurer and a policyholder in which the insurer
guarantees payment of a death benefit to named beneficiaries upon the death of the insured.
The insurance company promises a death benefit in consideration of the payment of premium by
the insured. This is often calculated with a free asset ratio.

HOW LIFE INSURANCE WORKS

There are three major components of a life insurance policy.

1. Death benefit is the amount of money the insurance company guarantees to the beneficiaries
identified in the policy upon the death of the insured. The insured will choose their desired death
benefit amount based on estimated future needs of surviving heirs. The insurance company will
determine whether there is an insurable interest and if the insured qualifies for the coverage
based on the company's underwriting requirements.

2. Premium payments are set using actuarially based statistics. The insurer will determine the
cost of insurance (COI), or the amount required to cover mortality costs, administrative fees, and
other policy maintenance fees. Other factors that influence the premium are the insured’s age,
medical history, occupational hazards, and personal risk propensity. The insurer will remain
obligated to pay the death benefit if premiums are submitted as required. With term policies, the
premium amount includes the cost of insurance (COI). For permanent or universal policies, the
premium amount consists of the COI and a cash value amount.

3. Cash value of permanent or universal life insurance is a component that serves two purposes.
It is a savings account, which can be used by the policyholder, during the life of the insured, with
cash accumulated on a tax-deferred basis. Some policies may have restrictions on withdrawals
depending on the use of the money withdrawn. The second purpose of the cash value is to offset
the rising cost or to provide insurance as the insured ages.
TYPES OF LIFE INSURANCE

PRINCIPLES OF LIFE INSURANCE

1. PRINCIPLE OF CONTRIBUTION
This principle is relevant when the insured holds multiple policies for insuring the
same thing. It states that the policyholder can raise a claim that equates to the loss from
a single or multiple insurers. If an insurer makes a payout that is equal to the full claim
amount, then he can recover a part of the payment from the remaining insurers. This is
not relevant to life insurance, as each insurer will have to pay the sum assured to the
beneficiary at the time of the death of the insured.
2. PRINCIPLE OF MITIGATION OF LOSS
 This principle indicates that the person who suffered the loss should take action to
minimize the loss, such as the action of taking diligent care to minimize injury. Hence,
this is applicable to life insurance.
3. PRINCIPLE OF CAUSE PROXIMA OR NEAREST CAUSE
This indicates that when a loss is due to multiple causes, the nearest one is considered
to decide the insurer’s liability to the insured. This principle is applicable to life
insurance.

DOUBLE INSURANCE:
Double insurance denotes insurance of the same subject
matter with two different companies or with the same company under
two different policies. Insurance is possible in case of indemnity contract
like fire, marine and property insurance.
Double insurance policy is adopted where the financial
position of the insurer is doubtful. The insured cannot recover more then
the actual loss and cannot claim the whole amount from both the
insurers.

TRANSFER OF RISK:
The transfer of risk is essential to life insurance. You do not
retain the risk of death in your life insurance policy. Instead, this risk is
spread out among all policyholders that the insurer does business with.
All customers of the insurance company contribute money to the general
account. This money is invested, and then claims are paid out when an
individual from the group dies.

PERFECTED SAVINGS:
 Jesus Huerta desoto describe life insurance as a perfected
savings. You purchase a death benefit for your family‘s future.
However, the contract actually matures at a predetermined insurance,
this is most obvious. A whole life insurance policy, for example,
matures at age 100. If you die prior to this age, the insurer pays the
money to your family. But, the policy builds a cash reserve during your
lifetime. If you live to age 100, the cash reserve equals the death benefit
and the insurer pays out the death benefit to you.

TERM OF AGREEMENT:
Both the parties is the insurer and the insured must be in
agreement for what they are contracting for the specific period of policy.

CAPACITY CONDITION ON CONTRACT:

People under the age of 18 year i.e Minors are restricted by
the family law Reform Act 1969. Because of certain restrictions, the
contract cannot be enforced against them.
Hence, many insurer will not issue a policy someone under
the age of 18.