Insurance Dundamental in English                                       Fix mục lụcWd8042                                   1
Insurance Dundamental in English                                                                                          ...
Insurance Dundamental in English                                                                                          ...
Insurance Dundamental in English                                                                                          ...
Insurance Dundamental in English                                                                                  Fix mục ...
Insurance Dundamental in English                                                                         Fix mục lụcWd8042...
Insurance Dundamental in English                                                                              Fix mục lụcW...
Insurance Dundamental in English                                                                                Fix mục lụ...
Insurance Dundamental in English                                                                                 Fix mục l...
Insurance Dundamental in English                                                                             Fix mục lụcWd...
Insurance Dundamental in English                                                                            Fix mục lụcWd8...
Insurance Dundamental in English                                                                              Fix mục lụcW...
Insurance Dundamental in English                                                                             Fix mục lụcWd...
Insurance Dundamental in English                                                                            Fix mục lụcWd8...
Insurance Dundamental in English                                                                              Fix mục lụcW...
Insurance Dundamental in English                                                                               Fix mục lục...
Insurance Dundamental in English                                                                              Fix mục lụcW...
Insurance Dundamental in English                                                                             Fix mục lụcWd...
Insurance Dundamental in English                                                                       Fix mục lụcWd8042Th...
Insurance Dundamental in English                                                                             Fix mục lụcWd...
Insurance Dundamental in English                                                                              Fix mục lụcW...
Insurance Dundamental in English                                                                                    Fix mụ...
Insurance Dundamental in English                                                                          Fix mục lụcWd804...
Insurance Dundamental in English                                                                         Fix mục lụcWd8042...
Insurance Dundamental in English                                                                                  Fix mục ...
Insurance Dundamental in English                                                                           Fix mục lụcWd80...
Insurance Dundamental in English                                                                         Fix mục lụcWd8042...
Insurance Dundamental in English                                                                             Fix mục lụcWd...
Insurance Dundamental in English                                                                              Fix mục lụcW...
Insurance Dundamental in English                                                                                  Fix mục ...
Insurance Dundamental in English                                                                       Fix mục lụcWd8042In...
Insurance Dundamental in English                                                                               Fix mục lục...
Insurance Dundamental in English                                                                                  Fix mục ...
Insurance Dundamental in English                                                                                     Fix m...
Insurance Dundamental in English                                                                          Fix mục lụcWd804...
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  1. 1. Insurance Dundamental in English Fix mục lụcWd8042 1
  2. 2. Insurance Dundamental in English Fix mục lụcWd8042CHAPTER 1.........................................................................................................................................3OVERVIEW OF INSURANCE...........................................................................................................3 1.1 Risks and insurance..................................................................................................................3 1.1.1 Concept of risk...................................................................................................................3 1.1.2 Concept of Risk Management ..........................................................................................6 1.1.3 Concept of Insurance.........................................................................................................8 1.1.4 Insurance Contracts.........................................................................................................11 1.2 Principles of insurance............................................................................................................13 1.2.1 Insurable interest (quyền lợi có thể được BH).................................................................13 1.2.2 Utmost Good Faith (trung thực tin tưởng tuyệt đối) .....................................................15 1.2.3 Principle of Indemnity......................................................................................................16 1.2.4 Subrogation......................................................................................................................17 1.2.5 Contribution / Double insurance......................................................................................18 1.2.6 Proximate cause...............................................................................................................19 1.3 Insurance market......................................................................................................................21 1.3.1 The buyers of insurance .................................................................................................21 1.3.2 The intermediaries............................................................................................................21 1.3.3 The sellers .......................................................................................................................24 1.3.4 Other insurance related professions and bodies...............................................................27CHAPTER 2.......................................................................................................................................29GENERAL INSURANCE..................................................................................................................29 2.1 Overview of general insurance................................................................................................29 2.2 Commercial general insurance.................................................................................................30 2.2.1 Marine Insurance and Oil & Gas Insurance....................................................................30 2.2.1.1 Marine Insurance.....................................................................................................30 2.2.1.2 Oil & Gas Insurance ................................................................................................34 2.2.2 Non - marine General Insurance......................................................................................35 2.2.2.1 Property Insurance/fire insurance.............................................................................35 2.2.2.2 Business interruption Insurance ..............................................................................38 2.2.2.3 Motor Vehicle Insurance..........................................................................................38 2.2.2.4 Construction and Erection Insurance........................................................................40 2.2.2.5 Liability Insurance....................................................................................................42 2.2.2.6 Aviation Insurance....................................................................................................44 2.3 Personal general insurance.......................................................................................................46 2.3.1 Personal accident insurance.............................................................................................46 2.3.2 Medical and health insurance .........................................................................................47 2.3.3 Workers compensation insurance....................................................................................47 2.3.4 Consumer credit insurance...............................................................................................49CHAPTER 3.......................................................................................................................................50LIFE INSURANCE............................................................................................................................50 3.1 Overview..................................................................................................................................50 3.2. Term/Temporary Term Insurance...........................................................................................51 3.2.1 Concept............................................................................................................................51 3.2.2 Annual renewable term....................................................................................................51 3.2.3 Level Term Life Insurance..............................................................................................52 1
  3. 3. Insurance Dundamental in English Fix mục lụcWd8042 3.3 Permanent life insurance .........................................................................................................52 3.3.1 Concept............................................................................................................................52 3.3.2 Whole life insurance........................................................................................................53 3.3.3 Universal life insurance...................................................................................................55 3.3.4 Variable universal life insurance......................................................................................56 3.4 Endowment Insurance and Pure endowment..........................................................................58 3.4.1 Endowment Insurance....................................................................................................58 3.4.2 Pure endowment.............................................................................................................60 3.5 Income stream products.........................................................................................................60 3.6 Group life insurance policies..................................................................................................62CHAPTER 4.......................................................................................................................................64REINSURANCE................................................................................................................................64 4.1 Overview..................................................................................................................................64 4.1.1 The Concept.....................................................................................................................64 4.1.2 Functions of Reinsurance.................................................................................................64 4.2 Methods of reinsurance............................................................................................................67 4.2.1 Facultative Reinsurance ..................................................................................................67 4.2.2 Treaty Reinsurance ..........................................................................................................68 4.2.3 Facultative/ Obligatory Treaty ........................................................................................69 4.3 Types of Reinsurance...............................................................................................................70 4.3.1 Proportional Reinsurance.................................................................................................70 4.3.1.1 Quota Share .............................................................................................................70 4.3.1.2 Surplus Reinsurance.................................................................................................71 4.3.2 Non – Proportional Reinsurance......................................................................................73 4.3.2.1 Excess of Loss reinsurance.......................................................................................73 4.3.2.2 Stop Loss .................................................................................................................75 4.4 Non - Traditional Reinsurance.................................................................................................75 4.4.1 The Concept.....................................................................................................................76 4.4.2 Types of Financial Reinsurance Contract........................................................................77CHAPTER 5.......................................................................................................................................79Finance and Accounting in insurance.................................................................................................79 5.1 Implementing the IASs/IFRS in the insurance industry ........................................................80 5.1.1 Overview..........................................................................................................................80 5.1.2 Financial statements of insurance companies in accordance with IAS/IFRS..................86 5.1.2.1 Financial Statements – Key Points...........................................................................86 5.1.2.2 Financial statements in accordance with the IAS / IFRS........................................88 5.2 Assessing Financial Strength of insurance companies............................................................90 5.2.1 Financial strength ratings methodologies of rating agencies...........................................91 5.2.2 Capital adequacy and solvency of insurance companies.................................................94 5.2.3 Ratios used in assessing insurance company’s financial condition.................................96 5.2.3 Roles of Actuaries, independent Auditors, internal audit and internal control in the financial management ..............................................................................................................99CHAPTER 6.....................................................................................................................................102LEGAL ASPECTS of INSURANCE...............................................................................................102 6.1 Overview ...............................................................................................................................102 6.2 Legal aspects of insurance contract.......................................................................................102 6.2.1 Concept of insurance contract........................................................................................102 6.2.2 Essentials of a Valid Insurance Contract .....................................................................103 6.2.3 Content of an insurance contract....................................................................................104 6.2.4 Entering into contracts of insurance .............................................................................105 6.2.5 Cancellation of insurance contract.................................................................................109 6.3 Insurance Regulation and supervision...................................................................................110 2
  4. 4. Insurance Dundamental in English Fix mục lụcWd8042 6.3.1 Objectives of Insurance Regulation and supervision..................................................110 6.3.2 Prudential supervision of insurance company solvency................................................112 6.3.2.1 Supervision based on solvency margin requirement .............................................112 6.3.2.2 Supervision based on Risk Based Capital system..................................................114 6.3.3 Globalisation of the regulatory framework....................................................................117 6.3.3.1 Introduction of the IAIS........................................................................................117 6.3.3.2 The Insurance core principles and methodology (October 2003, modified 7 March 2007)...................................................................................................................................119 CHAPTER 1 OVERVIEW OF INSURANCE1.1 Risks and insurance1.1.1 Concept of risk- Definition of riskIn general, risk is defined as:“The probability of something happening that will have an adverse (xấu) impact(ảnh hưởng) uponpeople, plant, equipment, financials, property or the environment and the severity (mức độ) of theimpact.”Basically, the concept of risk has three elements: - The perception (khả năng) that something could happen - The likelihood (khả năng xảy ra) of something happening - The consequences (hậu quả) if it happensRisk implies (ám chỉ) some form of uncertainty about an outcome (hậu quả) in a given situation andthe outcome is not favorable.In the insurance area, as a basic insurance term, risk may be definned as “the chance of somethinghappening that may have an unfavorable financial impact upon subject matter of insurance (đốitượng của BH)”. However, the term “Risk” is also used in various senses (ý nghĩa), notably: - The subject matter of insurance; - Uncertainty as to the outcome of an event; - Probability (khả năng) of loss; 3
  5. 5. Insurance Dundamental in English Fix mục lụcWd8042 - The peril (sự đe dọa) insured against; - Danger; - A particular (cá nhân) unfavorable outcome such as fire damage or a broken armThe term “risk” can be used as a noun as in the above examples or as a verb in which the usualmeaning is to “take a chance” on something. For example a mountain climber risks a broken armand even risks death if he were to fall.- Types of risksRisk takes many forms, normally being classified into two main types being: ▪ Speculative (or Dynamic) Risk and Pure (or Static) Risk (rr đầu cơ và rr thuần túy)Speculative (dynamic) risk is a situation in which either gain (lợi ích) or loss is possible. Examplesof speculative risks are betting on a horse race, investing in stocks/, bonds and real estate. In thesesituations, both gains and losses are possible. In the daily conduct (quản lý) of its affairs (sự việc),every business establishment faces (đối mặt) decisions that entail (dẫn đến) elements of risk. Thedecision to venture (mạo hiemr) into a new market, borrow additional capital, etc., carry risksinherent (cố hữu) to the business. The outcome of such speculative risk is either beneficial( sinhlợi) (profitable) or loss.In contrast to speculative risk, a pure risks involves possibility of loss only or at best (may mắn lắm)a “no gain” situation. The only outcome of pure risks are adverse (có hại) (in a loss situation) orneutral (khong hại không lợi) (with no loss), never beneficial. A pure risk does not include thepossibility of gain.Examples of pure risks are premature death, occupational disability, catastrophic medical expenses,damage to property and the loss ability to generate revenue from the asset which has been lost ordamaged.It is important to distinguish between pure and speculative risks for three reasons: - First, through the use of general insurance policies, insurance companies generally insure only pure risks. Speculative risks are not considered insurable, with some exceptions (loại trừ). - Second, the “law of large numbers” can be applied more easily to pure risks than to speculative risks. The law of large numbers is important in insurance because it enables (cho phép) insurers to predict loss figures in advance. - Finally, society as a whole benefits from speculative risk even though a losses sometimes occurs, but is only harmed by pure risk. This is to say, society would not benefit when 4
  6. 6. Insurance Dundamental in English Fix mục lụcWd8042 pure risks such as earthquakes occur but benefits from speculative risks taken by entrepreneurs since jobs and wealth are created by them in the process. ▪ Particular (riêng biệt) risk and Fundamental (cơ bản) riskParticular risks are risks that affect only a single or relatively (tương đối) few individuals, not theentire communnity. Examples of particular risks are burglary, theft, auto accident and dwellingfires. In contrast to particular risks, fundamental risks affect the entire economy or large numbers ofpeople or groups within the community. Examples of fundamental risks are high inflation,unemployment, war and natural disasters such as earthquakes, hurricanes and floods, etc.The distinction (sự khác biệt) between a fundamental and a particular risk is important, sincegovernment assistance (sự giúp đỡ) may be necessary in order to insure fundamental risks. Socialinsurance, government insurance programs, and government guarantees and subsidies are used tomeet certain fundamental risks which are not insurable by private insurance companies. ▪ Financial risk and Non - financial riskA financial risk is the situation in which the outcome must be capable of measurement in monetaryterms. Example of financial risk: damage to the hull and machinery of a vessel. The financial valueof the risk is the cost of repairing or replacing the different portions of the vesselIn contrast to financial risk, non - financial risk is the situation in which the outcome is notmeasurable in monetary terms. Examples of non financial risks are choosing a spouse or decidingwhether to leave one’s hometown to live. Each of the above situations will involve a degree ofuncertainty or risk and the result may be satisfactory or disappointing.It is important to distinguish between a financial risk and a non - financial risk. For a risk to beinsurable, the outcome must be capable of measurement in monetary terms. Non financial risks arenot insurable. ▪ Insurable and Non-Insurable RisksFor a risk to be insurable it must meets certain conditions as follows: - There must be an insurable interest in the object or person being insured. - There must be a large number of similar risks being insured. - Any losses occurring must be accidental - It must be possible to calculate the risk of a loss occurring.Further, for an efficient (hiệu quả) insurance system to exist, an insurable risk must meets the idealcriteria (tiêu chuẩn) as follows: - The insurer must be able to charge a premium high enough to cover not only claims (khiếu nại, bồi thường) expenses, but also to cover the insurers expenses. 5
  7. 7. Insurance Dundamental in English Fix mục lụcWd8042 - The nature of the loss must be definite (xác định) and financially measurable. That is, there should not be room for argument as to whether or not payment is due, nor as to what amount the payment should be. (không nên để sơ hở cho việc trả hay không trả, và cũng không nên phải bàn bạc về lượng phải trả) - The loss should be random in nature.Also, risks that are not measurable, can not be rated properly. The insurer will need to charge aconservatively (thận trọng) high premium in order to mitigate (giảm nhẹ) the risk of paying toolarge a claim. The premium will thus be higher than ideal (suy nghĩ), and inefficient. (không hiệuquả)1.1.2 Concept of Risk ManagementRisk Management involves the understanding and identification of a broad spectrum (áp dụng rộngrãi) of risks faced by individuals and businesses together with the ability to make decisions withrespect (chi tiết) to methods to avoid, reduce and control risk to the extent possible and to thenmake decisions with respect to determining the most efficient (có hiệu quả) way to treat theremaining risk which includes firstly to determine the amount of risk that the organization has theability to absorb financially and then to plan for either insurance or other contractual transfer of theremaining risk. “Risk” includes the full range of unfavorable outcomes that may result from a chainof events involving hazards and perils all leading to any one of the many possible unfavorableoutcomes. Individual risks can be studied and analyzed with the purpose to reduce its probabilityand its effect. With respect to all individual risks there are chains of events that can lead to the riskoccurrence. It is important to understand these “chains” so that risk can be most appropriatelyunderstood and managed.All risk chains include hazards and perils. It is important to understand the distinction among“hazard”, “peril” and “risk” as many people are confused by these terms but in fact the succinctmeaning of each is very different. “Hazards” are states or conditions that increase the possibility ofa “peril” from happening. A “peril” is an risk event possibility that may lead to any particularunfavorable final outcome. If a peril is incurred the risk of a particular negative outcome isincreased. For example a wet floor is a “hazard” that may lead to the peril of a “fall” which maylead to the ultimate risk of a “broken arm”. A wet floor does not always lead to a fall and a fall doesnot always lead to a broken arm however where hazards exist then perils are more likely to occurand where perils occur then particular ultimate risk (a type of loss event) such as the risk of abroken arm in this case is increased. Thus by understanding this “chain” it is possible to manage orcontrol the hazard and to make perils that occur less likely to occur which in turn will decrease thechance of suffering the ultimate particular risk (in this case is a broken arm). Poor housekeeping is 6
  8. 8. Insurance Dundamental in English Fix mục lụcWd8042an example of a hazard that may lead to the peril of fire. Fire may lead to complete destruction of abuilding. However by ensuring good housekeeping the peril of fire is reduced. But if the peril offire is incurred then if there is a proper loss reduction system in place such as a sprinkler systemthen the severity of the loss by fire will likely be decreased or minimised.The process of risk management is a systematic plan to identify risks, evaluate the risks and todecide ultimately how to treat the risk. Risk should be identified by formal methods such as riskquestionnaires which ask basic information about the risk such as size of risk, amount of value atrisk, type of structure, previous claim information etc. In addition physical inspection can be madeby a risk assessor who can look at housekeeping, maintenance logs, physical condition ofequipment especially boilers etc. Lastly review of the operations process should be made to identifywhere any specific problems could occur in the event of an interruption. Once risk is adequatelyidentified the process of determining appropriate treatment begins.People, organizations and society usually try to avoid risk but where not avoidable, then best tomanage it. There are 5 major methods of handling risk: avoidance, loss control, retention,noninsurance transfers, and insurance.- AvoidanceAvoidance involves not participating in certain activities that involve risk. For examples, the risk ofa loss of investing in the stock market can be avoided by not buying but the fact remains that not allrisks can be avoided, and even where they can be avoided, it is often not desirable. Avoiding riskmay be avoiding certain pleasures of life, or the potential profits that result from taking risks. Thosewho minimize risks by avoiding activities are usually bored with their life and dont make muchmoney. Where avoidance is not possible or desirable, loss control is the next best thing.- ControlLoss control works by both loss prevention, which involves reducing the probability of risk such askeeping a manufacturing facility clean and orderly, or loss reduction, which minimizes the lossshould the loss occur such as the use of a sprinkler system.Losses can be prevented by identifying the factors that increase the likelihood of a loss, then eithereliminating the factor or minimizing its effect. Most businesses actively control risk because it is acost-effective way to prevent losses from accidents and damage to property, and generally becomesmore effective the longer the business has been operating.- Retention ▪ Active retention (Risk assumption) 7
  9. 9. Insurance Dundamental in English Fix mục lụcWd8042Risk retention, as active retention or risk assumption, is handling the unavoidable or unavoided riskinternally, either because insurance cannot be purchased for the risk, because it costs too much, orbecause it is much more cost-effective. Usually, retained risks occur with greater frequency, buthave a low severity. An insurance deductible is a common example of risk retention to save money,since a deductible is a limited risk that can save money on insurance premiums for larger risks. ▪ Passive risk retentionPassive risk retention is retaining risk where the risk is unknown or improperly understood.- Transfer ▪ Non-insurance transfers of riskRisk can also be managed by noninsurance transfers of risk. The 3 major forms of noninsurance risktransfer is by contract, hedging, and, for business risks, by incorporating. A common way totransfer risk by contract is by purchasing the warranty extension that many retailers sell for theitems that they sell. The warranty itself transfers the risk of manufacturing defects from the buyer tothe manufacturer. Transfers of risk through contract is often accomplished or prevented by a hold-harmless clause and other forms of indemnity agreements which may limit liability for the party towhich the clause applies.Hedging is a method of reducing portfolio risk and some business risks involving futuretransactions. A Stockholders can reduce his risks by buying “put options”. A business can hedge aforeign exchange transaction by purchasing a forward contract that guarantees the exchange rate fora future date. Airlines will typically hedge fuel prices by buying “forward contracts” also known as“futures” to guaranty a maximum price for up to a certain future period.Investors can reduce their liability risk in a business by forming a corporation or a limited liabilitycompany. This prevents the extension of the companys liabilities to its investors. ▪ InsuranceInsurance is one major method that most people, businesses, and other organizations can use totransfer certain risks. By using the law of large numbers, an insurance company can estimate fairlyreliably the amount of loss for a given number of customers within a specific time. An insurancecompany can pay for losses because it pools and invests the premiums of many subscribers(customers) to pay the few who will have significant losses.1.1.3 Concept of InsuranceGenerally, insurance is the means whereby the losses of a few are transferred to many. Insuranceworks on the basic principle of risk-sharing. While community grain pools have probably existed 8
  10. 10. Insurance Dundamental in English Fix mục lụcWd8042for thousands of years, modern organized risk sharing began in the coffee houses of London a fewhundred years ago where ship owners would meet and agree to share losses with each other. A greatadvantage of insurance is that it spreads the risk of a few people over a large group of peopleexposed to risk of similar type.Insurance provides financial protection against a loss arising out of happening of an uncertain event.A person can avail this protection by paying a fee known as premium (or contribution) to aninsurance company. A pool is created through contributions (premiums) made by persons seekingto protect themselves from common risk. Premium is collected by insurance companies which alsoact as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paidout of this pool.In a legal respect, insurance is defined as: “a contract between two parties whereby one party(insurer) agrees to undertake the risk of another (insured) in exchange for “consideration” knownas premium and promises to pay a fixed sum of money to the other party on the happening of anuncertain event or after the expiry of a certain period in case of life insurance or to indemnify otherparties on the happening of an uncertain event in case of general insurance”.- Benefits of insuranceInsurance brings many benefits to individuals and to society as a whole. ▪ Provides financial stabilityWith insurance, even when losses occur, peoples have the assurance that their assets can be restoredafter suffering losses. So, however unfortunate events such as these may be, their finances will notbe drained, and they and their family’s financial stability will not be undermined. They will be ableto keep their present lifestyle and their future plans. With respect to commercial business operationsinsurance allows for normal operations of the business to continue to function normally after losseshave occurred. ▪ Provides peace of mind and Stimulates business enterpriseBy knowing that insurance exists to meet the financial consequences of certain risks provides peaceof mind for an individual. Anxiety is also reduced when insured persons knows that insurance isavailable to indemnify them when loss occurs.The indemnity function of insurance also relieves businesses from the worry of anxiety they mayhave about how they would meet the cost of risk. In the case of businesses, this is a positivestimulus to their activities and allows them to get on with their own business in the knowledge thatthey are financially protected against many forms of risk. 9
  11. 11. Insurance Dundamental in English Fix mục lụcWd8042 Business people will be more inclined to risk their money by building factories, making goods,sailing ships, flying planes, etc, with the knowledge that they will not lose everything should theyfall victim to risk. This is an extremely important benefit which insurance brings – not only to theindividual insuring but to the whole country – as stimulating businesses makes for a healthyeconomy and allows for additional employment.The need for businesses to retain large sums of money to pay for potential losses largely disappears.This helps the business cash flow and financial planning as money does not need to be kept inreserve for losses which may occur. Instead, there is known cost – the premium. The availability ofinsurance, therefore stimulates enterprises as it makes it easier for existing businesses to invest andexpand.. ▪ Encourages loss control Insurance also can help in actually reducing losses. Insurers have an interest in reducing thefrequency and severity of losses, and insurance companies have a great deal of experience in risksof all kinds and, over many years, they have found ways in which certain risks can be reduced.They employ surveyors who go out and look at premises which people may want to insure. Theycan, from that experience, often suggest ways in which the likelihood of some risk occurring maybe reduced. They might see some hazard which could injure employees, or a host of other problems.The advice and the recommendations they make on behalf of insurance companies reduces thelikelihood of many of the losses from ever occurring. An example would be for a surveyor to pointout that flammable liquids must be stored in proper containers and only in proper locations. Youwould expect that the last place that a flammable storage container should be stored is in a stairwell.Correct? Remember this the next time you see motorcycles being stored in the stairwell of aresidential building! In fact there is a flammable liquids storage container in every motorcycle andso keeping motorcycles at the bottom of a stairwell is extremely dangerous not only because itblocks exit from the building but that because in a fire situation the gasoline containers in themotorcycles will explode creating heat and smoke in the stairwell. Insurance companies will helpthe insured facilities identify these risks and make recommendations to reduce or even eliminatecertain aspects of risk. ▪ Encourages investment One further benefit derived from the transaction of insurance is the use to which the insurancecompany puts the money it holds in the common pool. Insurers have, at their disposal, large sums ofmoney. This arises from the fact that there is the gap between the receipt of a premium and the 10
  12. 12. Insurance Dundamental in English Fix mục lụcWd8042payment of a claims. The insurer can invest this money in a wide range of investments which all gotowards aiding government, industry, commerce and consequently the whole of society. ▪ Enhance provision of credit facilitiesBankers and other financial institutions require the security of insurance in financing properties andoverseas trade. In this case, insurance enhances borrower’s credit because it helps to guaranty thevalue of the borrower’s collateral, or gives greater assurance that the loan will be repaid.We could go on with the benefits of insurance, but those listed above are enough to show that theinsurance industry has a major importance to the society. In the act of creating the common pool,security and peace of mind are provided, the likelihood or severity of losses may even be reduced,vast funds of money are invested for the prosperity of the economy, the country is relieved fromwhat it may look upon as a financial burden to compensate the victims of loss and, finally, societygains large amounts of money from the payment of premiums from overseas. Insurance companiescontribute to the efficiency of the economy.1.1.4 Insurance ContractsThis section is intended to provide an overview of the structure of the insurance contract. But first itis noted that Insurance contracts are normally governed by the common law of contracts namelythat any contract whether the subject of insurance or any other matter require certain elements tobecome enforceable. Section 6 will provide additional detail however simply said, the law ofcontracts require that there be a “meeting of the minds” between “competent parties” with respect tolegal subject matter which is to say that the parties entering the contractual agreement besufficiently competent to understand the terms of the contract, that there must be “consideration”,that the subject of the contract be of a “legal nature” nature etc. With respect to “competent” parties,each side must normally be of a legal age to enter contracts and be sane of mind to becomeenforceable. Thus a contract entered into by an adult and a child or between a sane person and onewho is insane is not enforceable except in certain rare circumstances. Each side must agree toexchange something of value as “consideration”. A simple unilateral promise to give someonemoney or anything else is not enforceable in the absence of the agreement of the other person toprovide something of value in return. Regarding the legality of the subject matter a contract to buyand sell illegal drugs would not be enforceable. Insurance contracts are again just like any anothercontract however as previously noted there is a special duty to make each side aware of materialinformation so that there is indeed a proper understanding or “meeting of the minds” before thecontract is undertaken. 11
  13. 13. Insurance Dundamental in English Fix mục lụcWd8042Insurance contracts have three main sections being the “declarations page”, the main body of thepolicy, and a set of extensions. The following describes these sections of the insurance contract in abit more detail.- The declarations page (bản kê khai thông tin)The declarations page which can also be known as a “cover schedule” includes basic summaryinformation including the type of insurance, name and addresses of the insurer and the insured, thesubject matter and the location of the risk, the jurisdiction (thẩm quyền) of the risk, the effectiveperiod of the insurance, and a policy number.- Policy wording (HĐBH tóm tắt)The policy wording is the full set of contractual wordings which normally include a printed set ofcommon wordings used by the insurer on all risks of a similar nature together with the wordings ofany particular extensions or other modifications to the main wordings. The wordings are normallyprepared by the insurer or broker with the insurer’s final agreement. This distinction is importantsince the courts normally provide that any vagaries in the contract will be viewed in favor of theparty which did not prepare the wording.▪ The “Insuring Agreement”, general wording, conditions and exclusions (điều khoản chung)The main wording normally starts with a short sentence called the insurance agreement. Thisprovides for the main essence of the insurance contract. Nearly everything else in the contract ismodifying the main insurance agreement . For example the insuring agreement found in anIndustrial All Risk property policy will typically state something like, “In consideration of thepayment of premium this policy covers all risks of loss or damage”. All the remaining wordingprovides the framework of the risk by explaining that which is required to effect the coverage, thatwhich is required to keep the coverage in place etc. The policy will then specify certain conditionswhich must be met such as proper maintenance of equipment, the perils which are excluded, thetype of property which is excluded etc.▪ Extensions and Modifications (điều khoản bổ sung)Some of the perils (mối đe dọa) or types of property that are excluded under the basic policy may becovered or “bought back” by way of an “extension”. There may be other modifications to theoriginal wording which restrict (hạn chế) the coverage being provided under the basic form. Forexample the main policy form may exclude losses occurring as a result of the risk of “faultydesign”. This particular exclusion is commonly “bought back” which is to say for some additional 12
  14. 14. Insurance Dundamental in English Fix mục lụcWd8042premium the insurer will agree to cancel the exclusion. Other modifications may be made on anindividual basis. For example the insurer may be aware that a fire sprinkler system is inoperable.The insurer may put some restrictions to the coverage amount while the sprinkler system isinoperable.A proper review of any insurance contact begins with a review of the insuring agreement, then areview of the assets items subject to insurance to be sure that they are covered by the policy, then areview of the perils covered or not covered, then lastly and assuming the property is found to be thesubject of the policy and that the peril causing the loss is also covered or not excluded then a reviewof the policy conditions is made to ensure that all conditions have been met. If there is a loss forexample there is a sequence of items to review in order to determine whether the loss is covered ornot. The sequence shown above would be typical of that done by loss adjusters to determinewhether the coverage is applicable. Once there is a determination that coverage is applicable thenthe adjuster will determine the quantum of the loss and settle the claim.1.2 Principles of insuranceInsurance is based on certain principles which form the foundation of an insurance policy... Thebasic and general principles of insurance are: - Insurable Interest - Utmost Good Faith - Indemnity - Subrogation - Contribution - Proximate Cause1.2.1 Insurable interest (quyền lợi có thể được BH)- ConceptInsurable interest is a fundamental principle of insurance. It means that the person wishing to takeout (nhận được) insurance must be legally entitled to insure the article, or the event, or the life. Inother words, the happening of the event insured against, or the death of the life insured must causethe policyholder/insured financial loss. The policyholder/insured must stand to lose financially if aloss occursAn insurable interest in the life of another requires that the continued life of the insured be of realinterest to the insuring party. The connection may be financial (as when a creditor insures the life ofhis debtor ), or it may consist of familial or other ties of affection. 13
  15. 15. Insurance Dundamental in English Fix mục lụcWd8042The principle of insurable interest demonstrates the difference between insurance and a wager orbet.- Purpose of the insurable interest requirement is - To prevent gambling - To reduce moral hazard (giảm rủi ro về đạo đức) - To be able to measure the amount of loss- Existence of insurable interest ▪ Non - life insuranceInsurable interest varies (biến đổi) according to the type of insurance policy. These relationshipsgive rise to (thể hiện tốt) insurable interest: - owner of the property; - vendor and vendee (người bán và người mua); - bailee and bailor (người nhận và người ủy thác); - life estates; - mortgagee and mortgagor (chủ nợ và người cầm cố); - creditor of an insured has an insurable interest in property pledged (vật thế chấp) as security. ▪Life insurance - Each individual has an unlimited insurable interest in his or her own life, and therefore can select anyone (bất cứ ai)as a beneficiary (người thụ hưởng). - Parent and child, husband and wife, brother and sister have an insurable interest in each other because of blood or marriage. - Creditor-debtor relationships give rise to an insurable interest. - Business relationships give rise to an insurable interest.- When must insurable interest exist? ▪ Non - life insuranceInsurable interest has to exist both at the inception (lúc bắt đầu) of the contract and at the time of aloss. For instance (ví dụ), an insured can purchase a homeowners policy because of insurableinterest in a home. Upon (lúc) selling it, the insured no longer has an insurable interest becausethere is no expectation of a monetary loss should the home burn down. 14
  16. 16. Insurance Dundamental in English Fix mục lụcWd8042Note that in certain types of insurances such as marine cargo insurance, the insured’s relationshipwith a thing that supports issuance may exist at the time of loss only, not necessarily at theinception of the contract. ▪ Life insuranceInsurable interest must exist at the inception of the contract, not necessarily at the time of loss. Forexample, because a woman has an insurable interest in the life of her fiancé, she purchases aninsurance policy on his life. Even if the relationship is terminated, as long as she continues to paythe premiums she will be able to collect the death benefit under the policy.1.2.2 Utmost Good Faith (trung thực tin tưởng tuyệt đối)- ConceptOne of the important basic principles of insurance is known as utmost good faith. The duty ofutmost good faith is central to the buying and selling of insurance - both the insured and the insurerare expected to disclose any information, important to the contract. This means that the insurer andthe insured have a duty to deal honestly and openly with each other in the negotiations which leadup to the formation of the contract. This duty continues whilst the contract is in force. If one party isin breach of this duty, the other party usually has the right to avoid the contract entirely.- Duty of Disclosure (trách nhiệm khai báo) ▪ Insured’s Duty of DisclosureThe insured is legally obliged to disclose all information that would influence the insurers decisionto accept the risk. Very often, the insurer has to rely only on the description and details filled in theproposal form. In the absence of a formal verification through third party surveyors, the Insurer hasno way of verifying these details. After an insured peril has operated, the subject matter of theinsurance may very well have gone up in smoke or washed away. It is therefore an impliedcondition or principle of insurance that the insured be required to make a full disclosure of allmaterial particulars within his knowledge about his risk. After taking out an insurance policy, ifthere are any alterations or changes to the business or risk which increases the risk, the insured mustinform the insurer.Normally, a breach of the principle of utmost good faith arises when insured, whether deliberatelyor accidentally, fails to divulge these important facts. There are two kinds of non-disclosure: - Innocent non-disclosure or misrepresentation; - Deliberate non-disclosure - providing incorrect material information intentionally.In the case of an innocent breach that is irrelevant to the risk, the insurer may decide to ignore thebreach as if it had never occurred but if the insurer considers the breach as innocent but significant 15
  17. 17. Insurance Dundamental in English Fix mục lụcWd8042to the risk, it may choose to collect additional premiums to reflect that which would have beencharged if the risk was properly known in the first place. In certain cases of misrepresentation,where the effect may only have been increased premium, it is possible that the insurer may partlypay the a claim on a proportional basis to the premium originally paid vs. the correct premium onthe true risk.In the case of a deliberate material breach, the insurer would be entitled to avoid any payment ofclaims or monies under the Policy. ▪ Insurer’s Duty of DisclosureThe insurer also has a duty of disclosure to the insured. In order to fulfill this duty, the insurer mustalso exercise utmost good faith, notably by : - notifying an insured of a possible entitlement to a premium discount resulting from a good previous insurance history; - only taking on risks which the insurer is registered to accept, i.e. avoid unenforceable contracts; - ensuring that statements made are true since misleading an insured about policy cover is a breach of utmost good faith.In respect of utmost good faith, besides duty of disclosure there are many others duties imposing onthe parties of a insurance contract. These issues will be dealt with in the Chapter 6.1.2.3 Principle of Indemnity- ConceptIndemnity is arguably the most fundamental principle of insurance. The term ‘indemnity’ meansthe protection of or security against damarge or loss. Therefore, when an insurance policy is said tobe a contract of indemnity, it is intended to provide financial compensation for loss which theinsured has suffered and put the insured back in the same position that the insured had enjoyedimmediately before the loss.One of the basic tenets of insurance is that the insured should not profit from a loss or damage butshould be returned (as near as possible) to the same financial position that existed before the loss ordamage occurred. In other words, the insured cannot recover more than his or her actual loss fromthe insurer.- Purpose - To prevent the insured from profiting from a loss 16
  18. 18. Insurance Dundamental in English Fix mục lụcWd8042 - To reduce the “moral hazard” of an insured intentionally creating a loss in order to take advantage of the insurance- Application of indemnityThis principle requires the insurer to pay an amount, not more than the actual loss suffered.This principle plays a critical role in general insurance. Indemnity is easily applied to losses that arequantifiable. There are, however, certain exceptions to this rule, such as personal accident and lifeinsurance policies where the policy amount is paid on occurrence of accident or death and thequestion of profit does not arise. Life insurance and personal accident policy are therefore notcontracts of indemnity. A life insurance contract is a valued policy that pays a stated sum to thebeneficiary upon the insured’s death. Some marine insurance policies also constitute an exceptionbecause the settlement of a total loss is based on a sum agreed upon at the time the insurance policywas written. There are also some exceptions in the case of property insurance where the subject ofthe insurance is a unique property such as a painting or other artwork. In these cases the insurancewill be based on an agreed amount in advance.The aim of the indemnity provision is to provide a claim amount that will help the claimant regainthe lost financial position. In some indemnity contracts, the amount payable by the insurancecompany is subject to the amount of actual loss. Some indemnity contracts also have a provision forthe claim to be paid only if the actual loss exceeds a certain amount.In property insurance, indemnification is based on the actual cash value of the property at the dateand place of loss. There are three main methods to determine actual cash value: - Replacement cost less depreciation - Fair market value is the price a willing buyer would pay a willing seller in a free market - Broad evidence rule means that the determination of actual cash value should include all relevant factors an expert would use to determine the value of the propertyIn liability insurance, the indemnity under a liability insurance policy is the amount of damagesawarded by the court. In actual practice, mosst liability claims do not go to court. They are usuallysettled by negotiation between the insurers and the third - party on the basis of what a court wouldaward if tha the case had come before it.1.2.4 Subrogation- ConceptSubrogation is a legal principle under which an insured party surrenders its rights against a thirdparty to the insurer after claiming and receiving a compensation for an insured loss. 17
  19. 19. Insurance Dundamental in English Fix mục lụcWd8042The principle of subrogation enables the insured to claim the amount from the third partyresponsible for the loss. It allows the insurer to pursue legal methods to recover the amount of loss,which the company has paid the insured via the insurance claim.- Purpose - To prevent the insured from collecting twice for the same loss - To hold the negligent person responsible for the loss - To hold down insurance rates by allowing the insurer to recover the loss from the responsible party- Application of subrogationThe principle of subrogation can operate in two ways. First, the insured may have actuallysucceeded in ‘recovering for the same loss twice’, i.e. collected a claim payment from his insurerand recovered compensation from another source for the same loss. Second, where the insured hasnot received compensation from another source, insurers who have indemnified the insured inrespect of the loss may themselves bring an action against the third – party who is legallyresponsible for it.There are four notable aspects of the principle of subrogation: - The insurer is entitled only to the amount it has paid under the policy - The insured cannot impair the insurer’s subrogation rights - Subrogation does not apply to life insurance and to most individual health insurance contracts - The insurer cannot subrogate against its own insuredsFurther, note that there are some legal requirements of application of subrogation, for example: theinsurer shall not be entitled to exercise rights of subrogation against a member of the household ofthe policyholder or insured, a person being in an equivalent social relationship to the policyholderor insured, or an employee of the policyholder or insured, except when it proves that the loss wascaused by such a person intentionally or recklessly and with knowledge that the loss wouldprobably result.1.2.5 Contribution / Double insurance- ConceptContribution is concerned with the sharing of losses between insurers. It comes ito effect when twoor more insurers may be involved on the same risk. 18
  20. 20. Insurance Dundamental in English Fix mục lụcWd8042This situation arises when the same risk is insured by two overlapping but independent insurancepolicies. It is lawful to obtain double insurance, and the insured can make claim to both insurers inthe event of a loss because both are liable under their respective polices. The insured, however,cannot profit (recover more than the loss suffered) from this arrangement because the insurers arelaw bound only to share the actual loss – the principle of contribution has evolved to ensure that allinsurers who are involved in covering the risk pay an equitable proportion of claim.- Purpose - To prevent the insured from profiting from a loss - To reduce moral hazard- Application of contributionContributions will arise only where the following requirements are satisfied: - two or more policies of indemnity must exit; - the policies must cover a common interest; - the policies must cover a common peril which gives rise to the loss; - the policies must cover a common subject – matter; and - each policy must be liable for the lossContribution applies only to insurance policies which are contracts of indemnity.Double insurance causes practical and legal problems and particularly, where the sums insuredexceed the insurable value in the case of an unvalued policy or the value fixed by the policy in thecase of a valued policy.Note that certain policies have what is known as a non – contribution clause. The effect of thisclause is that the policy would not contribute if there was another insurance in force. However, thecourts do not favour such clauses and in situations where a similar clauses applies to both (or all)policies they are treated as cancelling each other out. This means that each insurer would contributeits ratable proportion.1.2.6 Proximate cause- ConceptProximate cause concerns the real reason for the loss. In the event of a claim the insurers will wantto ascertain if the cause of the loss was an insured peril. Proximate cause is usually defined as “Theactive efficient cause, which sets in motion a chain of events which brings about a result without theintervention of any force started and working actively from a new and independent source”Note two aspects concerning the test of proximate cause. 19
  21. 21. Insurance Dundamental in English Fix mục lụcWd8042 - Foreseeability: It determines if the harm resulting from an action was reasonably able to be predicted. - Direct Causation: The main thrust of direct causation is that there are no intervening causes between an act and the resulting harm. An intervening cause has several requirements - it must: ○ be independent of the original act, ○ be a voluntary human act or an abnormal natural event, and ○ occur at some time between the original act and the harm- Application of Proximate CauseProximate cause is the active, efficient cause of loss or damage. For insurance to apply, theproximate cause must be an insured peril. Establishing that a loss is covered by insurance is usuallystraightforward because the event that gave rise to the loss is also usually quite clear. However,situations will arise from time to time where there is more than one cause of damage, or there is aninitial cause and then a subsequent cause. An example of this would be property damaged causedduring typhoons. Typical homeowners insurance will provide cover for the peril of windstorm butnot flood. Often homes most damaged by typhoons lie along coastal regions. Damage caused bywave action is thus typically not covered. Many people who lost homes during the famoushurricane Katrina lost those homes when surge waters moved in. The insurers denied cover basedon the flood peril exclusion. People then sued their insurers claiming that the homes were firstdestroyed or damaged by wind and demanded compensation.Once the insurer has established the proximate cause of loss, it must ensure determine that the perilwhich gave rise to the loss is covered by the policy. Perils can be classified as follows: - Insured perils - Uninsured or unnamed perils - Excluded perilsThe courts, when considering cases requiring the determination of proximate cause in concurrentcases, have decided the following: - Where an insured peril and an uninsured peril operate concurrently, there is a claim - Where insured peril and excluded peril operate concurrently, there is no claimIn some loss events, the perils follow each other in sequence. The courts, when considering casesrequiring the determination of proximate cause in sequential cases, have decided the following: - Where an uninsured peril is followed by an insured peril, there is a claim as per the example described above in Hurricane Katrina - Where an insured peril is followed by an uninsured peril, there is a claim 20
  22. 22. Insurance Dundamental in English Fix mục lụcWd8042 - Where an insured peril is followed by an excluded peril, there is a claim - Where an excluded peril is followed by an insured peril, there is no claimPractically, in many situations, two perils were involved in the widespread community loss, oneusually covered and one usually excluded. Determining the proximate cause is not always easy.Indeed in the case of Hurricane Katrina, it was difficult to determine the amount of windstormdamage that would have been present prior to the amount of wave action damage in cases where thewave action ultimately obliterated the home leaving no trace.1.3 Insurance marketBasically, in respect of market structure, the insurance market comprises: - Buyers; - sellers; and - intermediaries1.3.1 The buyers of insuranceThe buyers of insurance are known as policy-holders or policy-owners, and they can also be knownas insureds. For the prospective buyers of insurance, they are known as proposers, prospects andapplicants.There are generally three groups of buyers, namely, individuals, commercial enterprises and thegovernment.The insurance types that are purchased by individuals will likely be personal general insurances orlife insurances.Commercial general insurances are generally purchased by business enterprises and thegovernment.1.3.2 The intermediariesAn intermediary is a party who is authorized by a second party, called the “principal”, to bring thatprincipal into a contractual relationship with another, called a “third-party”. The role of anintermediary is to bring buyers and sellers together.Basically, there are two main types of intermediaries in the general insurance sector: - insurance agents; - insurance brokers.- Insurance agents 21
  23. 23. Insurance Dundamental in English Fix mục lụcWd8042Agents arrange insurance policies on behalf of an insurance company. The agent is appointed byinsurer through a written letter of appointment or an agency agreement. The agency agreementsprovide for the specific authority of the agent. The agent has the authority to act for a principal(usually the insurer) with the objective of bringing the principal into legal relationships with otherpersons. As agent for the insurer, the agent’s aim is to represent the insurer in procuring newinsurance customers, and therefore new insurance policies, thereby increasing the insurer’scustomer base and revenue.In some places only individuals can operate as agents. In others, an agent can be a corporation butthe corporation normally has to have individuals who act on its behalf.The agents will also carry out many of the service functions generally performed by the insurer, andthese services will be in the areas of: - assisting customers with the completion of insurance proposals - collection of premiums - assisting customers with general inquiries concerning their insurance covers - assisting customers with their claimsIn the developed insurance markets there are many different types of insurance agents. - Sole agents (also known as “tied” or “captive” agents): these agents are tied to one insurance company and must place all of their insurance business with that company. - First option agents: these agents are sole agents who are able to place some business outside of their principal insurance company. - Multi agents: these agents are able to place insurance business with a number of insurance companies. The services provided by a multi-agent will often be very similar to the services provided by an insurance broker, given that a multi-agent will also represent a number of insurers. - Sub agents: these agents normally work part-time and work with a principal full-time agent, sometimes working to find and/or refer potential clients. They can be paid a fee or a portion of the principal agent’s commission. - Underwriting agencies: underwriting agencies act on behalf of insurance companies providing underwriting management and claims administration.- Insurance BrokersGenerally speaking a “broker” is a professional negotiator who attempts to bring two parties toaccept an agreement by showing the best aspects of any proposal to the respective parties. Forexample the broker will show the most positive aspects of a proposed agreement with respect toparty “A” while doing his or her best to show the most positive aspects of the same agreement with 22
  24. 24. Insurance Dundamental in English Fix mục lụcWd8042respect to party “B” even though the most positive aspects for party “A” may be completelydifferent than for party “B”. Thus brokers are often thought of as being “smooth talkers” and inmany cases this is quite true however despite being skilled in “smooth talking” professional brokersbe they stock brokers, insurance brokers or real estate brokers must always remain honest about theway the agreement is portrayed to each party. Insurance brokers find sources for contracts ofinsurance on behalf of their customers. Insurance brokers can be individuals or organisations whoact principally for the client and not the insurance company.A broking operation is a business of one or more brokers that arranges and manages contracts ofinsurance for clients. Broking operations manage the services they provide to clients, along with theday-to-day running of their business.As agent for the insured (the client), the broker’s aim is to save the client time, money and worry.The broker’s role is to negotiate competitive premiums and the best insurance coverage. They dothis through their knowledge of the various insurance cover benefits and exclusions, as well as thecosts of competing policies in the market. Brokers deal with a range of insurers and have access tomany different policy types.Brokers act in the client’s best interest and provide advice and guidance so that clients can makeinformed decisions about their risk exposures and insurance protection. They also ensure theirclients receive prompt and fair settlement of claims.The broker’s first duty is to that of their principal, the client, for whom they are acting. Brokersgenerally work for insureds but are sometimes hired directly by the insurer.Except as is required under duty of disclosure requirements, brokers are not responsible to theinsurer with whom he/she might place the insurance covers on behalf of its clients but there is anexception to the general rule which exists where a broker is acting under a binder agreement grantedto the broker by the insurer. Brokers may enter into a binding authority with an insurer whereby thebroker is given an authority by the insurer to enter into contracts of insurance on the insurer’sbehalf.In developed insurance markets, the services that can be offered to a broking client have grown toinclude much more than negotiation services and include: - regular meetings with the client for the purpose of updating risk and or claim information - collection of information for underwriting purposes - broking to prospective insurers - policy placement - claims management - providing for mid–term amendments to policies/new policies - claims recording and analysis 23
  25. 25. Insurance Dundamental in English Fix mục lụcWd8042 - self insurance management - handling of losses below deductibles - risk management advice - loss control advice - technical advice (policy coverage/legislation etc). - advice on the most appropriate manner in which to structure the client’s insurance program, - access to a broad range of insurance companies and, therefore a broader range of insurance policies/cover that it markets - advice on the general financial security of insurers who might be considered as underwriters for the various parts of the client’s insurance program - access to insurance markets in other countries, particularly for specialist classes of insurance - and other services the broker may provideAlthough insurance buyers may deal directly with insurers, the vast majority of commercialinsurance business (i.e. insurance bought by companies) is transacted through brokers. Thecomplexity of many commercial risks and the large premiums involved often render a broker’sservices invaluable to the insured.Though agents and brokers handle the majority of business in many insurance markets, it is possibleto buy insurance directly from an insurance company. Buyers are also buying through banks, theInternet, and other alternative distribution channels.1.3.3 The sellers- Direct InsurersThese are insurance companies who exist primarily to provide insurance protection to insurancebuyers without the use of intermediaries. All insurance companies are classified according to themain class of insurance business they underwrite namely “general” or “life” insurance.In the certain insurance markets, some companies write both general and life insurances and theyare called “composite” insurers.- ReinsurersThese are companies who act as insurers to the retail insurance market. They Reinsurers do not dealwith the general public; instead, they liaise with the direct insurers selling into the retail marketdirectly or through reinsurance intermediaries (these issues will be examined in the chapter 4) Notethat I change the word from “direct” to “retail” in these two sentences because of the text is 24
  26. 26. Insurance Dundamental in English Fix mục lụcWd8042discussing the concept of “direct” marketing of insurers without intermediaries in the previoussection. The use of the term “direct” here with respect to reinsurance will confuse the reader.- Protection & Indemnity Clubs (P&I Clubs)These clubs are mutual insurance associations formed by ship-owners to provide them withindemnity against certain losses and liabilities which may arise, and for which cover is nototherwise generally available in the marine insurance market. These include a wide range of ShipOwner’s Liability covers such as Collision Insurance, Crew and Cargo Liabilities and PollutionLiabilities.The Clubs operate on a non-profit making mutual basis. It means that the contributions- "mutualpremium" paid by the membership companies in relation to any one year should be sufficient tomeet all the claims, reinsurance and administrative expenses of the Club for that year. If there is ashortfall because claims are high, the members may pay a pro rata "additional call" (additionalpremium). If there is a surplus, a similar proportional return may be made to the membership, ortransferred to reserve to meet losses on other years.The present P&I Clubs are the remote descendants of the many small hull insurance Clubs that wereformed by British ship-owners in the 18th century. Similar clubs exist with respect to the marinehull market however after the removal in 1824 of the company monopoly in favour of the RoyalExchange and the London Assurance, the hull Clubs became less necessary and went into decline.A few exist today, but their share of the total hull market is not very significant. However, legaldevelopments during the latter half of the 19th Century resulted in a significant increase in shipowners’ liabilities to injured crew, passengers and others third parties, and the first liabilityinsurance Club was founded in 1855.The Clubs started their activities by insuring the 1/4th liability for collisions and liability fordamage to fixed objects which were excluded from the hull cover. This cover was called"protection" insurance. The introduction of statutory liability for loss of life and injury topassengers gave rise to a new liability which was covered by the establishment of "indemnity"mutuals.Legal developments in the late 19th Century resulted in ship-owners facing an exposure to cargoclaims, and in 1874 the Indemnity Clubs started to insure liabilities for loss of or damage to cargo.Fusion of the functions of the "Protection" and "Indemnity" mutual associations gave rise to theProtection & Indemnity Clubs.While all the original P&I Clubs were based in the United Kingdom, Clubs were subsequentlyestablished and today flourish in Scandinavia, in the United States and in Japan. Most of the majorClubs now belong to the International Group for reinsurance and other purposes. Moreover, many 25
  27. 27. Insurance Dundamental in English Fix mục lụcWd8042Clubs originally based in the UK have comparatively recently moved their domiciles (place ofregistration) to in such places as Bermuda and Luxembourg. These unusual insurance associationscreate an essential component of the international insurance markets.- Captive InsurersCaptive insurance companies are established with the specific objective of financing risksemanating from their parent group or groups but they sometimes also insure risks of the groupscustomers as well. The parent and the related companies first purchase insurance coverage fromtheir own captive company, which will then transfer part of the risks to insurance companies whichmay be regular retail or commercial reinsurers.The types of risk that a captive can underwrite for the parent include property damage, public andproducts liability, professional indemnity, employee benefits, employers liability, motor andmedical aid expenses.There are several types of insurance captives, the most common are defined below: - Single Parent Captive: an insurance or reinsurance company formed primarily to insure the risks of its non-insurance parent or affiliates. - Association Captive: a company owned by a trade, industry or service group for the benefit of its members. - Group Captive: a company, jointly owned by a number of companies, created to provide a vehicle to meet a common insurance need. - Agency Captive: a company owned by an insurance agency or brokerage firm so they may reinsure a portion of their clients risks through that company. - Rent-a-Captive: is a company that provides captive facilities to others for a fee.Captives are becoming an increasingly important component of the risk management and riskfinancing strategy of their parents. Many captive insurers make their home "offshore". Bermuda,The Cayman Islands, Luxembourg, Singapore and the British Virgin Islands are a few examples.Several offshore jurisdictions have lower capitalization requirements. Also, offshore captiveinsurers will depending upon location of the domicile have lower tax rates on investment andunderwriting income which reduces expected tax payments relative to domestic captives. There area number of advantages to using captives to provide a better risk management than the conventionalinsurance market. The parent and the related companies can price their risks based on their own lossexperience instead of paying the premium that an insurance company charges. As such, they canavoid paying for operating expenses and profits to a direct insurer and thus keep their insurancecosts low. In addition, captive insurers can tap directly into the reinsurance market without goingthrough the direct insurers. Hence, the parent and the related companies of a captive insurer have 26
  28. 28. Insurance Dundamental in English Fix mục lụcWd8042access to much lower costs of reinsurance. Besides, the premiums paid to the captive company aresometimes deductible as business expenses and as a result, the parent and the related companies paylesser corporate taxes.- Co-operatives/ mutual insurance companiesCo-operatives are business organisations owned by the members who use their services. Themembers of the co-operatives are people, or groups of people, who need and use the services andproducts a co-operatives provides.Mutual insurance is a type of insurance where those protected by the insurance (policyholders) alsohave certain "ownership" rights in the organization. All policyholders of the insurance co-operative/mutual insurance companies are the members and co-owners of the company. The"ownership" rights typically consist of the ability to elect the management of the organization andto participate in a distribution of any net assets or surplus should the organization cease doingbusiness.Recently, some mutual insurance companies have gone through demutualization and become publiccompanies in an effort, among other things, to improve their ability to acquire capital.1.3.4 Other insurance related professions and bodies- ActuariesGenerally, an actuary is a business professional who deals with the financial impact of risk anduncertainty. Actuaries use skills in mathematics, economics, finance, probability and statistics tohelp businesses assess the risk of certain events occurring, and to formulate policies that minimizethe cost of that riskActuaries are essential to the insurance and reinsurance industry, either as staff employees or as consultants. Insurance actuaries can be defined as qualified professionals concerned with the application of probability and statistical theory to problems of insurance, investment, financial management and demography.The classical function of actuaries is to calculate premium rates and reserves for various risks.On the non - life side, this analysis often involves quantifying the probability of a loss event, calledthe frequency, and the size of that loss event, called the severity. Further, the amount of time thatoccurs before the loss event is also important, as the insurer will not have to pay anything until afterthe event has occurred.On the life side, the analysis often involves quantifying how much a potential sum of money or afinancial liability will be worth at different points in the future. Forecasting interest yields andcurrency movements also plays a role in determining future costs, especially on the life insurance 27
  29. 29. Insurance Dundamental in English Fix mục lụcWd8042side. Actuaries also design and maintain insurance related products and systems. They are involvedin financial reporting of companies’ assets and liabilities.- Loss AdjustersLoss Adjusters are independent, professionally qualified persons who provide expert advice andassistance to insurers and sometimes directly to the insureds in the settlement of claims.Insurance loss adjusters are responsible for investigating claims submitted by policy holders as aresult of insured events. They usually become involved in particularly large or complicated claimsand act as an intermediary between insurers and claimants.Loss adjusters check that the terms and conditions of the policy cover each claim by investigatingthe cause of loss or damage. Assuming insurance coverage is found to be applicable to the loss theadjuster will further determine the quantum of the damage in financial terms.A loss adjuster presents a report to the insurers who then agree a suitable settlement with theclaimant. Should either party dispute the findings of the report, negotiations continue until asettlement is reached.If loss adjusters suspect that a claim is fraudulent, they may have to carry out more detailedinvestigations. This may require the involvement of police, private investigators and, possibly,forensic experts.A loss adjuster can act on behalf of an insured but usually, they are appointed by insurers. However,in both of these cases, the adjuster might not be aware of the commercial factors regarding therelationship between the insured and insurer. 28
  30. 30. Insurance Dundamental in English Fix mục lụcWd8042 CHAPTER 2 GENERAL INSURANCE2.1 Overview of general insuranceGenerally, there are two main types of insurance, namely life insurance and non – life (or generalinsurance). General insurance comprises any insurance that is not determined to be life insurance.In the United States general insurance is also called property and casualty insurance. Propertyinsurance provides protection against most risks to assets of the party buying the insurance.Casualty insurance covers losses and liabilities which are a result of unforeseen accidents. Casualtyinsurance is loosely used to describe an area of insurance not particularly or directly concerned withlife insurance, health insurance, or property insurance, it is designed for things like burglary,terrorist attacks, and fraud. It is sometimes equated to liability insurance, and is mainly used todescribe the liability insurance coverage of an individual or organizations for negligent acts oromissions. However, the broad term has also been used to describe property insurance for aviationinsurance, boiler and machinery insurance, “glass” and crime insurance. It may include marineinsurance for shipwrecks or losses at sea or fidelity and surety insurance. It may also includeearthquake, political risk insurance, terrorism insurance, fidelity and surety bonds.Casualty insurance is typically combined with property insurance and often referred to as “propertyand casualty” insurance.In the United Kingdom, there are primarily three areas of general insurance. They are discussedunder the following heads: - Personal lines: General insurance provided along personal lines include automobile (xe ô tô), home, pet and creditor insurance. Note that the overall subject of personal lines includes not only casualty products but various health insurance and life products. - Commercial lines: General insurance products along commercial lines include employers’ liability, public liability, product liability and commercial fleet. - London Market: The London Market provides general insurance for large commercial risks. 29
  31. 31. Insurance Dundamental in English Fix mục lụcWd8042In many developed insurance markets, general insurance is broadly divided into two areas:commercial lines and personal lines. Personal lines insurance differs from commercial linesinsurance in two important respects, namely: - The ways in which insurers prefer to distribute the business, and - The underwriting approach adopted2.2 Commercial general insuranceVarious types of commercial general insurance exist in the insurance markets. This section providesan overview of the most common types of commercial general insurance only.2.2.1 Marine Insurance and Oil & Gas Insurance2.2.1.1 Marine Insurance- OverviewMarine insurance is generally considered to have been the very first type of insurance. A contract ofmarine insurance is legally defined as a contract whereby the insurer agrees to indemnify theinsured against: - losses incidental to the exposure of any ship, goods or other moveable items, earnings or profits to maritime perils - liabilities to third parties which may be incurred by reason of maritime perilsMaritime perils means perils of navigation of the sea. Perils of navigation of the sea is defined asincluding perils of the seas (which in this context refers only to accidents or casualties of the seas,not to the ordinary action of the winds and waves), fire, theft, war and piracy.Perils of the seas do not include every loss that occurs on the sea, but only accidental, unanticipatedlosses occurring through extraordinary action of the elements at sea, as well as mishaps innavigation such as collision with another vessel or running aground. Various other perils such asfire, lightning, or earthquake - are also named in the perils clause. As the insurance needs of ship-owners and cargo shippers became more complex, new clauses were devised to cover additionalperils such as bursting of boilers, breakage of shafts, and accidents in loading and unloading.Eventually, the concept of “all-risks” policy was introduced, which states that any risk of physicalloss is covered unless it is specifically excluded. War, capture, seizure, political or labordisturbances, civil commotion, riot, and similar perils are excluded under basic marine insuranceforms but can be bought back through an endorsement or by a separate policy. 30
  32. 32. Insurance Dundamental in English Fix mục lụcWd8042Beside the terms of risks, it is important to note several clauses describing the specific types oflosses, costs, or expenses in the maritime insurances such as: total loss, particular average, generalaverage ○ Total LossA total loss can be either an actual total loss or a constructive total loss. An actual total loss maytake any of three basic forms: - Physical destruction (e.g. foundering, loss by fire, missing ship). - Loss of specie. This has been defined as cargo which no longer answers the description of the interest insured. - Irretrievable deprivation (e.g. capture).Because the interpretation of constructive total loss by some laws is unacceptable to most insurers,some hull policies usually contain a provision stating that there will be no recovery for aconstructive total loss unless the cost of recovering and repairing the vessel would exceed theagreed value of the vessel. Similarly, cargo policies ordinarily contain a provision stating that therewill be no recovery for a constructive total loss unless the property is reasonably abandoned inexpectation of its becoming an actual total loss without expending more than the value of theproperty. The important concept to grasp for now is that in most marine insurance policies the fullamount of insurance is payable in the event of either an actual or a constructive total loss. ○ Particular AverageIn marine insurance, an “average” is a partial loss of vessel or cargo. A particular average is apartial loss that is to be borne by only a particular interest (such as the vessel alone or one of thevarious cargo interests aboard). In contrast, a general average is a partial loss that must be borneproportionally by all interests in the maritime venture (such as the vessel and all owners of cargoaboard the vessel on a particular voyage).Damaged property can be considered general average only if the property was sacrificed in order tosave the entire venture or was somehow damaged as a result of the sacrifice. If this element islacking, the damage is a particular average. An example of particular average is fire damage to avessel and cargo aboard the vessel. ○ General AverageGeneral average originated in ancient times as a way to apportion fairly among all parties to amaritime venture any losses incurred by some of the ventures in the interest of preserving the entireventure. Modern hull and cargo policies include a provision covering the insured’s share of generalaverage. 31
  33. 33. Insurance Dundamental in English Fix mục lụcWd8042- Types of Marine InsuranceMarine insurance can be broadly classified as either property or liability insurance▪ Types of Marine Property InsuranceThe principal branches of marine property insurance are - cargo insurance, - hull and machinery insurance, and - loss of income insurance. ○ Cargo insuranceCargo insurance covers the interest of shippers, consignees, distributors, and others in goods andmerchandise shipped primarily by water or, if in foreign trade, also by air. Most cargo insuranceinvolves foreign trade across oceans, but the cargo may also be transported within a nation orbetween nations on inland waterways. Cargo insurance is underwritten on the Institute CargoClauses, with coverage on an A, B, or C basis, A having the widest cover and C the most restricted.(A), (B) and (C) clauses. One of these (usually the (A) clauses) is always used in conjunction withInstitute War Clauses (Cargo) and Institute Strikes Clauses (Cargo). ○ Hull and Machinery insuranceThis term applies to the insurance of all types of vessels during construction, in operation or laid up,whether used for commercial work including the carriage of cargo and passengers or for privatepleasure purposes. Hull and Machinery insurance protects ship-owners and others with an interest in vessels, and thelike against the expenses that might be incurred in repairing or replacing such property if it isdamaged, destroyed, or lost due to a covered peril. Usually, hull insurance on pleasure craft andtugs and barges, is provided as part of a package policy providing both property and liabilitycoverage. ○ Loss of income insuranceMarine loss of income insurance covers a ship-owner against loss of business income resulting fromdamage to or loss of the insured vessel. When written for cargo vessels, whose income is calledfreight, the coverage is referred to as freight (freight fee income) insurance.▪ Types of Marine Liability InsuranceLiability insurance can also be divided into three categories: - collision liability, - protection and indemnity, and - other liability insurances. 32
  34. 34. Insurance Dundamental in English Fix mục lụcWd8042 ○ Collision Liability InsuranceCollision liability insurance is included in most commercial hull insurance policies. Due to reasonssuch as the size of the Hull and Machinery policy deductible and prompt guarantees issued by the P& I Underwriters, it is often more prudent and practical to have this aspect of cover underwrittenunder the P & I policy. It covers the liability of the insured vessel for damage to another vessel andproperty thereon resulting from collision between the insured vessel and the other vessel. ○ Protection and Indemnity InsuranceThere are many liabilities and expenses arising from the owning or chartering of ships or from theoperation of ships as principals such as: Liabilities in respect of: - collision with another vessel - pollution - towage or other service - wreck liabilities - cargo and other property on the vessel - loss or of damage to other property Protection and indemnity (P&I) insurance is the major form of liability insurance for vessels. Thisinsurance protects the insured against liability for bodily injury or property damage arising out ofspecified types of accidents, and certain unexpected vessel-related expenditures.In many cases, P&I policies are broadened to include coverage for collision liability losses in excessof the collision liability coverage provided under the hull policy. This optional P&I feature is mostdesirable and is quite commonly incorporated into the policy because collision liability coveragewhether underwritten under the Hull and Machinery or the P & I policy is ordinarily limited to aseparate amount of insurance equal to the agreed value of the vessel, which could be less thanneeded to pay collision liability claims. ○ Other Liability InsurancesOther liability policies include the following: - Liability insurance for maritime businesses such as ship repairers, stevedores, wharfingers, marina operators, boat dealers and terminal operators - Charterers liabilities policies - Excess liability policiesIn many insurance markets others types of specific marine policy types exist such as: 33
  35. 35. Insurance Dundamental in English Fix mục lụcWd8042 - New building risks: This covers the risk of damage to the hull whilst it is under construction. - Yacht Insurance: Insurance of pleasure craft is generally known as yacht insurance and includes liability coverage. Smaller vessels, such as yachts and fishing vessels are typically underwritten on a binding authority or line slip basis. - War risks: Usual Hull insurance does not cover the risks of a vessel sailing into a war zone... War risks cover protects, at an additional premium, against the danger of loss in a war zone including acts of war. - Increased Value: Increased Value cover protects the ship-owner against any difference between the insured value of the vessel and the market value of the vessel. - Overdue insurance: This is a form of insurance now largely obsolete due to advances in communications. It was an early form of reinsurance and was bought by an insurer when a ship was late at arriving at her destination port and there was a risk that she might have been lost (but, equally, might simply have been delayed).2.2.1.2 Oil & Gas InsuranceOil and Gas insurance is a sector of the market which covers a wide range of activities pertaining tothe oil and energy industries.Marine insurance sometimes is defined as an area which includes also the offshore exposedproperty (oil platforms, pipelines) - offshore assets in the oil and gas industry are exposed tomaritime perils. However, offshore oil and gas insurance has much that will be similar to marineinsurance and much that will not.This segment is a brief look at the main types of oil and gas insurance and focuses on offshore oiland gas insurance related to oil exploration, offshore construction and the operation of fixed andfloating offshore properties.- Property Damage InsuranceThis insurance covers all properties used by oil companies and drilling contractors duringexploration or production phase, and it is classified into the following categories: - Industrial All Risk Insurance covers all oil and gas related assets, either in onshore or offshore locations, such as Refinery Plants, Terminals, Storage Tanks, Platforms, etc. - Pipelines All Risk Insurance covers all pipelines used in oil and gas distribution system. - Well Drilling Tools Floater Insurance insures well drilling, servicing, work over, or special equipment against physical loss or damage from any external causes. 34

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