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 CAUSE
Means the 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.