Document is related to insurance principles

1. UNIT – 2

2. Significance of Insurance

3. Insurance contributes a lot to the general economic growth of the society by
provides stability to the functioning of process. The insurance industries
develop financial institutions and reduce uncertainties by improving financial
resources.
1. Provide safety and security:
Insurance provide financial support and reduce uncertainties in business and
human life. It provides safety and security against particular event. There is
always a fear of sudden loss. Insurance provides a cover against any sudden
loss. For example, in case of life insurance financial assistance is provided to
the family of the insured on his death. In case of other insurance security is
provided against the loss due to fire, marine, accidents etc.
2. Generates financial resources:
Insurance generate funds by collecting premium. These funds are invested in
government securities and stock. These funds are gainfully employed in
industrial development of a country for generating more funds and utilised for
the economic development of the country. Employment opportunities are
increased by big investments leading to capital formation.
3. Life insurance encourages savings:
Insurance does not only protect against risks and uncertainties, but also provides
an investment channel too. Life insurance enables systematic savings due to
payment of regular premium. Life insurance provides a mode of investment. It
develops a habit of saving money by paying premium. The insured get the lump
sum amount at the maturity of the contract. Thus life insurance encourages
savings.

4. 4. Promotes economic growth:
Insurance generates significant impact on the economy by mobilizing domestic
savings. Insurance turn accumulated capital into productive investments.
Insurance enables to mitigate loss, financial stability and promotes trade and
commerce activities those results into economic growth and development. Thus,
insurance plays a crucial role in sustainable growth of an economy.
5. Medical support:
A medical insurance considered essential in managing risk in health. Anyone
can be a victim of critical illness unexpectedly. And rising medical expense is of
great concern. Medical Insurance is one of the insurance policies that cater for
different type of health risks. The insured gets a medical support in case of
medical insurance policy.
6. Spreading of risk:
Insurance facilitates spreading of risk from the insured to the insurer. The basic
principle of insurance is to spread risk among a large number of people. A large
number of persons get insurance policies and pay premium to the insurer.
Whenever a loss occurs, it is compensated out of funds of the insurer.
7. Source of collecting funds:
Large funds are collected by the way of premium. These funds are utilised in
the industrial development of a country, which accelerates the economic
growth. Employment opportunities are increased by such big investments. Thus,
insurance has become an important source of capital formation.

5. Insurance
Insurance is defined as a contract, which is called a policy, in which an individual
or organisation receives financial protection and reimbursement of damages from
the insurer or the insurance company. At a very basic level, it is some form of
protection from any possible financial losses.
The basic principle of insurance is that an entity will choose to spend small
periodic amounts of money against a possibility of a huge unexpected loss.
Basically, all the policyholder pool their risks together. Any loss that they suffer
will be paid out of their premiums which they pay.
Principles of Insurance
Insurance is actually a form of contract. Hence there are certain principles that are
important to ensure the validity of the contract. Both parties must abide by these
principles.
1] Utmost Good Faith
A contract of insurance must be made based on utmost good faith. It is important
that the insured disclose all relevant facts to the insurance company. Any facts that
would increase his premium amount, or would cause any prudent insurer to
reconsider the policy must be disclosed.
If it is later discovered that some such fact was hidden by the insured, the insurer
will be within his rights to void the insurance policy.
2] Insurable Interest

6. This means that the insurer must have some pecuniary interest in the subject
matter of the insurance. This means that the insurer need not necessarily be the
owner of the insured property but he must have some vested interest in it. If the
property is damaged the insurer must suffer from some financial losses.
3] Indemnity
Insurances like fire and marine insurance are contracts of indemnity. Here the
insurer undertakes the responsibility of compensating the insured against any
possible damage or loss that he may or may not suffer. Life insurance is not
a contract of indemnity.
4] Subrogation
This principle says that once the compensation has been paid, the right of
ownership of the property will shift from the insured to the insurer. So the insured
will not be able to make a profit from the damaged property or sell it.
5] Contribution
This principle applies if there are more than one insurers. In such a case, the
insurer can ask the other insurers to contribute their share of the compensation. If
the insured claims full insurance from one insurer he losses his right to claim any
amount from the other insurers.
6] Proximate Cause
This principle states that the property is insured only against the incidents that are
mentioned in the policy. In case the loss is due to more than one such peril, the
one that is most effective in causing the damage is the cause to be considered.

7. Legal Aspect of Insurance contract
An Insurance contract is basically an arrangement in which one party the insurer
accepts significant insurance risk from another party the policyholder, to
compensate the policyholder if a specific uncertain future event impacts the
policyholder. The policyholder enters into an Insurance Contract in order to
mitigate its risk of loss.
Parties to an insurance agreement must conduct due diligence before putting ink
to paper. Few legal aspects of the Insurance contract are mentioned below.
 The premier lawful component of an insurance contract is to comprehend
the limitation under such agreement. This is the point from which most
disputes between the parties to the contract emerge. Deciding the extent
of the risk which the insurer is committed to making up for is typically
subject to legal suits. It is, in this way, frequently lawfully fitting for both
sides to concentrate the understanding record appropriately before
marking. For example, an insurance contract which does not list specific
anticipatory losses which the insured may suffer means that policyholders
may have a hard time getting indemnified. So, if the subject-matter for a
household insurance contract is only against loss by fire but the house is
destroyed by flood, then the insurer is not bound to indemnify the insured
at all.
 The next legal hurdle to consider in insurance contracts is the issue
of fraudulent misrepresentation. All contracts including insurance are
entered into on the basis of good faith representations. Each party
represents that there is no fraudulent fact which is presented knowingly as
being the truth. When an insured party under a life insurance contract, for
instance, lies to an insurer about material facts such as age or other pre-
existing health conditions – which are reasonably expected to be

8. disclosed – this may be a legal ground for such insurer to avoid
contractual obligations.
 Another important legal component is what is known as insurable
interest. For general insurance, the policyholder must have an “insurable
interest” at the time the contract is entered into. This means that there
must be some benefit the policyholder stands to lose if the subject matter
is lost or destroyed.
 The last legal hurdle to be crossed in insurance contracts is the settlement
of claims. Most insurers take pride in making good their bond that
genuine claims will be settled expeditiously. It is not so simple in reality
to fulfill this promise taking into cognizance all that has been discussed
above in this article. The notorious difficulty in this area is commercial
aviation disasters. Airlines are legally bound to ensure aircraft’s,
passengers, and cargo. Aviation accident bureaus are normally tasked
with investigating airline disasters, which, in truth, takes longer to
conduct before the cause of the accident is determined. These sorts of
delays are likely to affect prompt payment of claims to affected
passengers.
It might add up to pie in the sky speculation to assume that all insurance
contracts are great. Parties under an insurance plan must guarantee that there is
an accord on all focuses in the agreement. Regardless of whether the debate will
wind up in the law courts, later on, will mostly rely on upon the situation and
wordings of every insurance contract.
Evolution of Insurance Business in India
The insurance industry is the backbone of country’s Risk Management. The
beginning of the Indian insurance industry dates back to the nineteenth century.

9. In 1818, Europeans started Oriental Life Insurance Company in Kolkata
(Calcutta) to exclusively serve their community. Colonial masters with racial
prejudice unfairly characterised the age and premium for Indians. The Indian
policy holders paid more premium than European counterparts. Indians
desperately wished for Indian insurance companies to set foot in the market.
Bombay Mutual Life Assurance Society started in 1870 was the first Indian
insurance company to cover the lives of the Indians at normal rates. Triton
Insurance Company Ltd in the year 1850 is the first general insurance company.
Gradually insurance business fledged into a huge sector boosting the economy
of India.
Only during the early years of twentieth century new companies started
mushrooming in India. In order to regulate these insurance companies, Life
Insurance Companies Act and Provident Fund Act were passed in 1912.
Evolution of insurance industry has undergone three phases, Pre-
Nationalisation, Nationalisation and Privatisation. The Insurance industry was
nationalised only after passing Life Insurance Corporation Act of 1956. There
were more than two hundred insurance companies of both Indian and European
origin.
Even after the nationalisation, government Insurance companies were not
making profit. Privatisation was a preferable solution for effective distribution
and implementation of marketing strategies. With privatisation insurance
industry almost changed overnight. Competition forced providers to advertise
their products effectively. Once the gates were thrown open to the private
players insurance industry improved remarkably. Along with safeguarding lives
and property, insurance companies also offered enormous job opportunities.
The privatization helped to increase efficiency of insurance business. Many new
private companies came up with attractive products. Some of the major private

10. players in the Indian market are ICICI Prudential, Bajaj Allainz Life Insurance,
Tata AIG life, Kotak Life Insurance, HDFC Standard Life, Reliance Life, ICICI
Lombard etc.
This millennium marked drastic changes in Insurance administration with the
introduction of Computers. The internet has enabled the insurance business to
become more accessible and user- friendly. Now you can buy the policy of your
choice sitting at home. The greatest benefit buying online is you can compare
life insurance policies offered by different companies in a single website. E
India Insurance is a combination of internet and insurance revolution in India.
Juxtaposing modern day with colonial era, we notice rapid growth prospects of
the insurance industry. According to Insurance Regulatory and Development
Authority ( IRDA ), Indian insurance industry registered a impressive growth
rate of 120% in the year 2008. Economic experts anticipate that Indian domestic
insurance would touch US $ 60.5 Billion by 2010.
What is Double Insurance?
Double insurance is a type of insurance where the same subject matter is
insured more than once.
In such cases the same subject is insured, but with different insurers. The
method of double
insurance is considered a legal act. In case of loss the insured can claim from
both the insurers
and the insurers are liable to pay under their respective policies.
1
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What is Double Insurance?
Double insurance is a type of insurance where the same subject matter is
insured more than once.
In such cases the same subject is insured, but with different insurers. The
method of double

11. insurance is considered a legal act. In case of loss the insured can claim from
both the insurers
and the insurers are liable to pay under their respective policies.
1
.'
What is Double Insurance?
Double insurance is a type of insurance where the same subject matter is
insured more than once.
In such cases the same subject is insured, but with different insurers. The
method of double
insurance is considered a legal act. In case of loss the insured can claim from
both the insurers
and the insurers are liable to pay under their respective policies.
1
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REINSURANCE
➢ Reinsurance means insurance for insurance companies. Insurance companies
cover the risks for individuals and businesses.
➢ Reinsurance covers the risk of excessive claims due to different reasons for
insurance companies.
OBJECTIVES OF REINSURANCE
• Distribution of risk to ensure the coverage of a claim.
• It provides a great level of stability for underwriting in the period of the claim.
• The financial obligation out of the capacity of the insurance company is
outsources to another company having such capacity. Thus, the ceding company
is left with only the financial obligation which it can fulfill.
FUNCTIONS OF REINSURANCE
Some of the key functions of reinsurance are:

12. • It helps the main insurer to grow or multiply in terms of volume of premium.
• It protects the main insurer from catastrophe to occur.
• It increases the capacity to assume more risks and to issue to more policies.
• It provides a great stability to the profits of insurance business.
• Distribution of risk to big players.
• Assurance of claim settlement from big players.
DOUBLE INSURANCE
➢ Double insurance refers to insurance where the same subject matter is
insured twice or more than that.
➢ In such scenarios, the same subject is insured but with different insurance
companies. The concept of Double insurance is not illegal at all.
➢ Double insurance come to light when a business avail insurance w.r.t the
same risk and subject matter from two different insurers.
➢ This write-up will explore different instances where double insurance may
occur and the real-life implications for businesses
PRINCIPLES OF DOUBLE INSURANCE
➢ The first point on concurrent insurance is that, in principle, a business entity
should not be left without an insurance payment. Where there is a presence of
double insurance, & a business entity intends to claim w.r.t a loss covered by
more than one policy, it will be entitled to claim whichever insurance policy it
prefers.
➢ The insurance company that does not dispense cover w.r.t the double insured
risk can approach other insurers for the contribution which has rendered similar
cover.

13. ➢ Therefore, if a business does claim under one insurance policy & not the
other, the insurance company that has not paid out probably has to pay a share
to the insurer who has paid out.
Coinsurance
Coinsurance is the amount, generally expressed as a fixed percentage, an
insured must pay toward a covered claim after the deductible is satisfied. It is
common in health insurance. Some property insurance policies also contain
coinsurance provisions. In this case, coinsurance is the amount of coverage that
the property owner must purchase for a structure.
 Coinsurance is common in health insurance and some property insurance
policies.
 In health insurance, coinsurance is the percentage under an insurance
plan that the insured person pays toward a covered expense or service,
after the policy deductible is satisfied.
 One of the most common coinsurance breakdowns is the 80/20 split: The
insurer pays 80%, the insured 20%.
 A coinsurance provision is similar to a copayment provision, except
copays require the insured to pay a set dollar amount at the time of the
service, and coinsurance is a percentage amount of the overall cost.
 The coinsurance clause in a property insurance policy requires that a
home is insured for a percentage of its total cash or replacement value.
Over Insurance
Over insurance can be defined as the situation where an insured has bought so
much coverage that it exceeds the actual cash value (or the replacement cost) of
the risk or property insured.
Example:

14. Your car is insured for R200,000 and is written off in an accident. The assessor
comes to the conclusion that the car can be replaced for R160, 000.
As a result only R160, 000 is paid out. You have however been paying
premiums to cover an amount of R200,000 and those premiums paid on the
additional R40, 000 have been paid unnecessarily.
Over insurance is a risk to the insurance industry and especially to insurance
fraud. The insured who is over insured may be tempted to make a false claim to
profit from a loss.
Underinsurance
Underinsurance refers to an insufficient insurance policy. A good insurance
policy won’t prevent any of life’s calamities, but it should make the financial
consequences easier to bear. However, underinsurance can leave the enrollee
liable for a large financial expense if a serious event occurs. Whether it’s a
home damaged by a hurricane or fire, or an insured person experiencing a
serious disease or accident, insurance should ideally cover enough of the
expense that the policyholder can manage the difference.
Main differences between under and over insurance
The major differences between under and over insurance can be summarized as
follows:
 Through under insurance you are insured for less than market value whereas
with over insured you are insuring for an amount above market value.
 Your risk with under insurance manifests itself when you claim – and find that
less than the insurance claim will be paid as you would have to cover part of the
damage yourself.

15.  With over insurance you are at risk of paying too much in premiums from the
moment that the market value of insured property is less than the amount
insured.