PRINCIPLES OF INSURANCE

What is Insurance???
Insurance in broad terms may be described as a
method of sharing financial losses of few from a
common fund who are equally exposed to the same
loss.
Insurance is a contract whereby, in return for the
payment of premium by the insured, the insurers pay
the financial losses suffered by the insured as a result
of the occurrence of unforeseen events.
EXAMPLE
Say 1000 motor cars valued @ 300000/- are
observed over a period of five years. On an average
say per year two are total loss by accident. Then the
total annual loss would be Rs.600000. If the loss is
to shared by all the thousand owners then they
have to contribute Rs.600/-
The loss experience will be established by taking
the past experience, geographical area in which the
vehicles are used and density of traffic.
Risk
 The term Risk is used to describe all the accidental
happenings which produce a monetary loss. For e.g.: A
factory catching fire, a ship sinking etc.

In insurance jargon they term RISK as an uncertainty

regarding loss or what is termed as a FORTUITOUS risk.
An example of impossibility can be quoted say the
9/11 incident where insurance companies were
washed out.

Hyderabadis never in their dreams thought of

taking cover for flood. When the encroached
drains could not contain rains for 2 days, the
resultant floods had washed away score of vehicles,
property etc.,

So, Risk is inherent in human existence. Human

life and material possessions are constantly
exposed to loss or damage due to the
mechanizations of fortuitous circumstances
MATHEMETICAL VALUE OF RISK
L/V x 100 where
 L= total losses reported
 V=refers to the total values
 the product of the above analysis is called
 Law of averages or the doctrine of probability.
 So premium rates depend upon past loss
experience by systematically classifying the risks.
Which are homogenous in characters
 Example:- Motor vehicle.
SCOPE OF INSURANCE:
 General Insurance is divided into three categories:

 FIRE,
 MARINE
 &
 MISCELLANEOUS
FIRE INSURANCE
 FIRE INSURANCE BUSINESS:
 Loss due to FIRE, LIGHTINING, EXPLOSION,
IMPLOSION,, RIOTS & STRIKES, IMPACT BY RAIL,
AIRCRAFT DAMAGE, EARTH QUAKE, FLOOD,
STORM, TEMPEST, TORNADO, TYPHOON,
CYCLONES & LAND SLIDE.
MARINE INSURANCE BUSINESS:
This is the oldest branch of Insurance comprising
HULL & CARGO.

Hull Insurance deals the Loss associated with floating

crafts, Cargo insurance provides cover in respect of
loss or damage to goods during transit by rail, road, sea
or air.
MISCELLENOUS INSURANCE BUSINESS:
Mainly includes the motor business, accident, aviation
, engineering and guarantee insurances
CONTRACT OF INSURANCE
In between the insured and insurer
INSURED:- Party effecting insurance,
(Individual, Company, Firm,
Corporate body etc., with
legal status)

INSURER:- Party granting the protection

under an insurance policy.

Policy:- Is the evidence of contract

Insurance contracts are governed by Indian
contract act 1872 which states that to be
legally valid following elements should be in
order.

A. Offer and acceptance

B. Consideration

C. Absence of Fraud

D. Capacity of the parties

E. Legality of the contract

INSURABLE INTREST
This means you can only insure something, if they
benefit from its existence and will suffer if it ceases to
exist. For example you can insure your own bicycle ,
but not your friend’s bicycle.
In the same way you can take out Assurance on your
wife’s life, but not that of your neighbour.
When insurable interest must exist:

 For Fire or Miscellaneous policy the insurable

interest must exist at the time of taking the policy
and at the time of the loss.

 For Marine policy an insurable interest need

not exist at the time of policy taking.
Utmost Good Faith
 The greatest degree of good faith by law, is expected from the proposer,
that is the main reason why good faith in case of Insurance contracts
becomes UTMOST good faith.

 It is the duty of the proposer to disclose all material facts not only
already known but also extends to material facts which he ought to
know.

 Examples of material facts:

 FIRE: Construction of building, type of occupancy, nature of good

stored etc.

 MARINE: method of packing, inherent vice etc.

It is assumed by the Insurance company that the
facts you disclose on a Proposal Form are accurate.
However, if the loss occurs they will check the
facts and if inaccurate details have been given they
will not compensate you.
Failure by the insured to reveal certain details to
the insurance company that affect the risk may
make the insurance invalid. For example that the
house is made of wood rather than concrete.
For example for vehicle insurance if you said you
were 25 and were in fact only 18. When you had an
accident they would ask for your birth certificate
and you would get no compensation.
Indemnity.
Can be defined as “ compensation for loss or injury
sustained” or “ to make good the loss or damage”
The principle of Indemnity states that under the
policy of insurance, the insured has to be placed after
the loss in the same financial position in which he was
immediately before the loss.
EXAMPLES
If you have a four year old bicycle and it is stolen,
the insurance company will only give you the
current value of the bicycle not the cost of the
bicycle when it was new.
It your vehicle is in an accident and damaged
beyond repair, but the wreck is worth something
for example the engine could be sold the insurance
company will take this into consideration when
giving the compensation.
With life assurance one may be financially better
of, but it is only to compensate you for the loss
suffered.
Under insurance: Property insurances are
generally subject to the condition of average, and if
there has been under insurance, only that portion
of the loss is payable.
 Ex.value of property : Rs.20000
 Sum insured : Rs.15000
 Loss assessed : Rs.10000
 Amount payable will then be:
 15000 x 10000 = 7500
 20000
 The insured is then considered as his own
insurer for the difference of the liability.
EXCESS OR FRANCHISE
In some policies an EXCESS or FRACHISE is
incorporated, which means that a certain
circumstances a part of the loss may have to be borne
by the insured.

SALVAGE
Property which is saved from loss or damage and still
has some commercial value is called salvage.
Subrogation
Subrogation means the insurance company has
the legal right to claim compensation from any other
party that caused the accident.
For example vehicle A hits B, which as a result hits C.
C will claim of B’s insurance company, but that
insurance company has the right to claim from A’s
insurance company, as it was A that really caused the
damage to C.
Contribution
An insured may have taken many policies on the
same subject matter. The principal of contribution
would lead to a situation in which the insured
would be able to recover his loss from any one
insurer, who then will have to effect proportionate
recoveries from other insurers concerned.
Normally the insurers seek to control additional
insurances at the proposal stage itself.

The principal of contribution does not apply to

personal accident policies.
Average Clause
If an item is underinsured and the insured risk occurs then
the insured will only get a proportion of the damage that
occurs.
For example a house worth €400,000, is insured for
€300,000 and a fire occurs in the kitchen causing €100,000
damage. As the house is only insured for ¾ of its value. The
insured will only get ¾ of the damage. That is €75, 000.
The average clause applies, when a partial loss occurs and
the risk is underinsured.
PROXIMATE
Means theCAUSE
DIRECT, DOMINANT or effective cause of
which the loss is the natural consequence. It is the
cause which is most closely connected with the loss,
not necessarily in time but in efficiency.
Compensation will only be paid, if the risk that is
covered in the policy occurs,
For example, if the insurance policy states that the
house is covered for fire and theft and it is totally or
partially destroyed by a flood no compensation will be
paid.
Example:
An insured sustained an accident while hunting.
Due to shock and weakness, he was unable to walk
and whilst lying on wet ground, he contracted cold
which developed into pneumonia causing death
ultimately.

The proximate cause was considered to be the

accident and not the pneumonia, the disease,
which was only a remote cause. The claim was
payable under personal accident policy.
Making a claim
Normal procedure is a phone call to the insurance
company giving policy number and details of the
claim.
The insurance company will then issue a claims
form. This form needs to be completed accurately
and will normally have to include quotations for
the repairs to the damage done.
If the claim is substantial the insurance company
will send out an Assessor to decide on the amount
of the compensation.
Compensation
Cash. This is the most popular method.
Replacement
Repair
Reinstatement.
Selling insurance
Broker. Sells for more than one company and in in
general aims to get the best deal for his client.
Difficulty of some companies paying greater
commission and the may choose those companies
Agent. Just sells for one company.
How the insurance industry helps the
country:
Offers peace of mind. For example people can leave
their homes and people build factories etc.
Creates a lot of jobs.
Insurance companies own a lot of property in our
cities and towns. As they invest their finances in these
so that they can sell them if they receive a lot of
claims.