Insurance
1. Mention the principles of insurance and explain any five principles of
insurance.
Ans: There are eight main principles upon which insurance is based:
1. Principle of Utmost Good Faith
2. Principle of Insurable Interest
3. Principle of Indemnity
4. Principle of Actuary
5. Principle of Legality
6. Principle of Contribution
7. Principle of Subrogation
8. Principle of Causa Proxima
Principle of Utmost Good Faith
This principle requires both the insurer and the insured to be completely
honest and disclose all material facts. The insured must provide full and
accurate information about the subject matter of insurance (such as health,
lifestyle, history of claims) so the insurer can properly assess the risk.
Failure to do so can void the contract.
Principle of Insurable Interest
The insured must have a financial or legal interest in the subject matter of
insurance. This means the loss or damage must directly affect them. For
instance, you can insure your own house, but not your neighbor's, because
you don't suffer a financial loss if your neighbor’s house is damaged.
Principle of Indemnity
Insurance should only compensate for actual loss — not allow the insured
to profit. The goal is to restore the insured to the same financial position
they were in before the loss. For example, if your car worth $10,000 is
damaged beyond repair, you will receive that amount, not more.
Principle of Contribution
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If the insured has multiple insurance policies covering the same risk, and a
loss occurs, the insured can’t claim the full amount from all insurers. Each
insurer pays a proportionate share of the loss.
Principle of Subrogation
Once the insurer has paid for a loss, it assumes the legal right to recover
that amount from any third party who may have caused the damage. For
example, if someone else damages your car and your insurer pays for it, the
insurer can then recover that money from the responsible party.
2. What is meant by Rating of insurance? Write down the performences of
Rate Making Entities.
Rating of insurance refers to the process of determining the premium rate that
an insurance company charges for coverage. It involves assessing various
factors like the probability of a loss, expected claim costs, administrative
expenses, and profit margin. Insurance is the business of taking on risk, so
pricing (rating) must be done carefully to ensure the insurer can cover future
claims while remaining profitable and competitive.
Rating is different from pricing tangible goods because insurers don’t know the
exact cost in advance — they must estimate it based on statistics and risk
analysi
(a) Developing new forms of insurance to meet the changing needs of
consumers.
(b) Determining the reserves needed to meet the future obligations.
(c) Analyzing the expenses and earnings and providing database for
distribution of surpluses.
(d) Conducting research studies on claims experiences, projecting future
claims and earnings.
(e) Communicating with the company officials, agents, policyholders, and
regulatory authorities about company policies and practices.
3. What is meant by Fire Insurance? How does insurer settle the insurance
claims of insured.
Ans:
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Fire insurance is a type of property insurance that provides financial protection
against loss or damage caused by fire. It covers the insured property such as
buildings, machinery, furniture, stock, and goods held in trust. The purpose is
to ensure that the insured does not suffer a financial loss due to fire-related
incidents.
Key features include:
Personal in nature: It compensates for the loss of interest in the property,
not the property itself.
Cause of fire is immaterial: As long as it's not due to fraud or willful action,
the insurer pays regardless of how the fire started.
Indivisibility: It generally covers the full loss, not partial parts unless
specified.
The process of settling fire insurance claims involves several steps:
Notice of Loss : The insured must promptly inform the insurer about the loss
and provide details of the incident.
The following steps are generally followed when the fire insurance claim is
processed:
1. Verification
The insurer checks that:
The policy is active.
The reported item is covered.
The loss is caused by an insured peril.
2. Allotment of Claim Number
A claim number is assigned and recorded in the claim register along
with an estimated loss amount.
3. Issuance of Claim Form
The insurer sends a claim form to the insured, which must be
completed and submitted.
4. Appointment of Surveyor
A licensed surveyor is appointed to:
Inspect the site.
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Investigate the cause.
Assess the damage and validate the claim.
5. Preliminary Report
The surveyor submits a short initial report to the insurer.
6. Final Report
A detailed report is submitted after the full investigation, including the
exact loss amount.
7. Adjustment
The insurer adjusts the claim, deducting any outstanding premiums or
conditions as per the policy.
8. Payment of Claim
After receiving all required documents and a discharge voucher from
the insured, the insurer pays the claim amount and updates their
records.
4. Discuss the features/ nature of Marine Insurance. What principles are
applicable to Marine Insurance? - Explain.
Ans:
Marine insurance is a type of insurance that provides financial protection
against loss or damage to ships, cargo, and freight during transit by sea, air,
land, or inland waterways. It covers risks related to marine adventure such as
accidents, theft, piracy, or natural disasters.
Key features of marine insurance include:
1. Coverage for Physical Loss or Damage
It protects goods or cargo from risks like accidents, fire, theft, and
natural disasters during transit.
2. Various Modes of Transport
Though originally for sea transport, it now includes air, rail, and road
transport.
3. Customizable Policies
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Policies can be tailored to meet specific business needs, routes, and
risk levels.
4. Worldwide Coverage
Provides protection for international shipments across borders and
different countries.
5. All-Risk vs. Named Perils
"All-risk" policies cover all risks unless excluded; "named perils" cover
only those specifically listed.
6. Valuation Methods
Cargo value can be based on invoice, market value, or cost plus freight.
7. Open and Specific Policies
Open policies cover multiple shipments over time, while specific
policies cover one-time shipments.
Principles Applicable to Marine Insurance
Several key insurance principles apply specifically to marine insurance:
1. Principle of Utmost Good Faith
Both parties must disclose all material facts. The insured must inform
the insurer of any relevant risks before the contract is made.
2. Principle of Insurable Interest
The insured must have a financial interest in the subject matter. It must
exist at the time of loss, even if not at the time of contract.
3. Principle of Indemnity
The insurer compensates for the actual loss only, based on the agreed
terms (especially in valued policies).
4. Principle of Subrogation
After compensation, the insurer gains the right to recover the loss from
any third party responsible.
5. Principle of Contribution
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If the same cargo is insured with multiple insurers, each will share the
loss proportionately.
6. Principle of Warranties
The insured promises to comply with certain conditions (e.g., proper
packaging, sailing routes). Breach of warranty may void the policy.
5. Write short notes
i) Property and Liability Insurance; ii) Principles are applicable to Fire
Insurance
Property and Liability Insurance
Property Insurance provides financial protection to individuals or businesses
against damage or loss of physical property due to risks like fire, theft, natural
disasters, or accidents. It covers:
Personal Property (e.g., cars, homes)
Commercial Property (e.g., buildings, stock, machinery)
Liability Insurance protects the insured against legal liabilities for damages
caused to others’ property or persons. It covers:
Legal costs
Compensation for bodily injury or property damage
Third-party claims arising from negligence or accidents
These insurances are essential for safeguarding assets and managing legal
risks.
ii) Principles Applicable to Fire Insurance
1. Utmost Good Faith
The insured must honestly disclose all material facts (e.g., nature of
property, previous losses) when purchasing the policy.
2. Insurable Interest
The insured must have a financial stake in the property at the time of
purchase and at the time of loss.
3. Indemnity
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The insurer compensates only for the actual loss, based on market or
reinstatement value, without any profit to the insured.
4. Subrogation
After paying the claim, the insurer gains the legal right to recover the
loss from third parties responsible for the damage.
5. Contribution
If multiple insurers cover the same property, each pays a proportionate
share of the claim.
These principles ensure fair conduct, accurate compensation, and prevention
of fraud in fire insurance contracts.
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