3. Concept of Insurance
Insurance is based on this concept-
Transfer of risk from an individual to a group or
community
Sharing of loss by all on equitable basis
200 motorbikes in a town valued Tk.30,000 each.
04 motor bikes are either stolen or totally damaged
every year. Loss = Tk.1,20,000.
Rate of contribution= L/V x100,
L= Loss, V=total value.
Tk.(1,20,000/60,00,000)x 100 = 2% on value.
Each member to contribute= 2% of Rs.30,000 i.e.
Tk.600 to compensate 4 motor bikers each yr.
but is that all ?........
4. Concept of Insurance…….
It is possible that after a loss few members
do not pay.
To avoid such situations, the contribution
can be taken in advance
To organize a system it shall require some
expenses as well
It is also possible that the estimate of loss of
only four m/c may deviate
To solve it, the contribution can be suitably
increased to Tk.750 per member or 2.5% per
value of m/c to meet expenses and
deviations
5. INSURANCE
So, from individual point of view, insurance
is an economic device whereby an individual
substitutes a small contribution for a large
uncertain financial loss
It eliminates the risk of financial loss that an
individual may suffer by loss/damage to his
property
7. 7
Example
Say 1000 motor cars valued @ 300,000/- are observed
over a period of five years. On an average say per year
two are total loss by accident. Then the total annual
loss would be Tk. 600000. If the loss is to shared by
all the thousand owners then they have to contribute
Tk.600/-
The loss experience will be established by taking the
past experience, geographical area in which the
vehicles are used and density of traffic.
8. IMPORTANT ELEMENTS INVOLVED IN
THE CONCEPT OF INSURANCE
Subject matter of insurance.
The PERIL (risk)
The financial loss.
Subject matter is property, human life,
machinery, goods etc.,
Peril is fire, storm, burglary, earth quake, injury,
explosion etc.,
Financial loss is normally defined before the
contract is signed.
9. How Insurance Co. use Concept of Insurance
Insurance Companies work on large scale
and in an organized manner
Collect premium contribution in advance
from a large number of members
Compensate the few sufferers
Collect/maintain statistical data to find the
behavior of various categories of insurances
or policies and segments of insured
members
10. How Insurance Co. use Concept of Insurance….
Use probability theory to predicts the expected loss
and analyze it
Fix the premium rate in a scientific manner based
on past data analysis and changes expected for
each product.
The rate should be near accurate otherwise
Insurance Company shall suffer a loss.
11. How Insurance Co. use Concept of Insurance….
While fixing premium or contribution, addition
is also done for administrative expenses,
provision for future contingencies and profit in
the rate of premium
Sell the insurance product in large numbers to
spread the risk
To invest the idle or surplus funds available
with the insurer to earn an investment income
12.
13. What is Insurance ?
Insurance is something that we hear all the time.
Car Insurance, Motor Bike Insurance, Factory
Insurance, Health Insurance, Personal accident
Insurance, Ship Insurance, Aircraft insurance, Satellite
Insurance, Cattle Insurance, there are a whole bunch
of insurance products available.
What is Insurance ?
Insurance is a contract between the insurer (The
Insurance Company) and the insured (You) to get paid
an amount as compensation if any unforeseen event
occurs.
It’s a financial security against certain contingencies
14. Definition of Insurance
The collective bearing of risk is Insurance. – W.
Beverideges
Insurance is a cooperative form of distributing a
certain risk over a group of persons who are
exposed to it and who are agree to ensure
themselves. – Ghosh and Agarwal
15. Insurance
Insurance may be described as a social device
whereby a large group of individuals, through a
system of equitable contributions, may reduce or
eliminate certain measurable risks of economic
loss common to all members of the group. –
Encyclopedia Britannica
16. Insurance…….
Insurance in law and economics is a form of risk
management primarily used to hedge against the
risk of a contingent uncertain loss.
Insurance is defined as the equitable transfer of
the risk of a loss from one entity to another in
exchange for payment.
17. Insurer VS Insured
An insurer is a company selling the insurance;
an insured or policyholder is the person or
entity buying the insurance policy
Insurer
Insured
Insurance
18. Functional Definition of insurance
Insurance is defined as a co-operative device to
spread the loss caused by a particular risk over a
number of persons who are exposed to it and
who agree to ensure themselves against that risk-
M.N Mishra
19. Definition explanation
A co-operative device to spread the risk
The system to spread the risk over a number of
persons who are insured against that risk
The principal to share the loss of each member
of the society on the basis of probability
The method to provide security against losses to
the insured
20. Contractual Definition
Insurance has been defined to be that in which
sum of money as a premium is paid in
consideration of the insurer’s incurring the risk
of paying a large sum upon a given contingency.
21. Explanations……..
Certain sum called premium is charged in
consideration
Against the consideration large sum is
guaranteed to be paid by the insurer
The payment will be made in a certain definite
sum
The payment is only upon a contingency
22. Definition in legal sense
Insurance can be defined as a contract between
two parties by which one party undertakes to
make good or indemnify any financial loss
suffered by other party, in consideration of a
sum of money, on the happening of a specified
event e.g. fire, accident or death.
We call the party agreeing to pay for the losses
the insurer. We call the party whose loss makes
the ‘insurer’ pay the claim the insured.
23. Characteristics of Insurance
1. It is a contract for compensating losses.
2. Premium is charged for insurance Contract.
3. The payment of Insured as per terms of
agreement in the event of loss.
4. It is a contract of good faith.
5. It is a contract for mutual benefit.
24. Characteristics of Insurance
6. It is a future contract for compensating losses.
7. It is an instrument of distributing the loss of
few among many.
8. The occurrence of the loss must be accidental.
9. Insurance must be consistent with public policy
25. Why do we need Insurance?
As everyone knows, future is uncertain.
An element of RISK is always there in life or in any activity.
There may be a scenario's where the loss due to some
event would be extensive and we would not be in a position
to absorb the losses.
A factory or office is totally damaged due to fire or
earthquake, etc.
The entire investment and loan amount is at stake
It is better to be proactive - Arrange Insurance
26. Purpose and Need of insurance
Indemnifies loss
Reduces worry and fear
Makes available funds for investment
Provides employment to a large number of
people
Educates people about loss prevention
Insurance enhances credit worthiness
Social benefits
27. Function of Insurance
Primary Function
Provision of certainty of payment at the time of
loss
Provision of protection
Risk sharing
Secondary Function
Prevention of loss
Provision of Capital
28. Secondary Functions Continue….
Ensuring welfare of the Society
Employment
Financial services
Loss control/prevention
Savings/investments
Economic growth/development
29. Nature of Insurance
1) Sharing of Risks
2) Co-operative Device
3) Valuation of Risk
4) Payment made on contingency
5) Amount of Payment
6) Large Number of Insured Persons
7) Insurance is not gambling
8) Insurance is not charity
30. Sharing of Risks
Insurance is a device to share the financial losses
on the happening of a specified event.
The event may be death in case of life insurance
fire in fire insurance
If insured the loss arising shared by all insured
31. Co-operative device
Insurance plan is the cooperation of large
number of persons
Agree to share the financial loss
A particular risk which is insured.
Insurer would be unable to compensate all
losses
By insuring a large number of persons, he is able
to pay the amount of loss.
32. Value of risk
The risk is evaluated before insuring
Charge the amount of share of an insured,
premium.
Expectation of more risk, higher premium may
be charged
The probability of loss is calculated at the time
of insurance.
33. Amount of payment
Depends upon the value of loss
The particular insured risk
In life insurance the financial loss suffered
The insurer promises to pay a fixed sum
The contingency takes place
If the policy is valid and in force at the time of
the event.
34. Payment at contingency
Payment is made certain contingency insured
Life insurance contract is a contract of certainty
death or the expiry of term will certainly occur
the contingency in the fire or the marine perils
contingency occurs payment is made otherwise
no amount is given to the policy-holder.
35. Large number of insured persons
To spread the loss immediately, smoothly and
cheaply
Large number of persons should be insured
Lower the cost of insurance and the amount of
premium
Insurance is not a gambling
serves indirectly to increase the productivity
uncertainty changed into certainty insuring
property
life insurance is essentially non-speculative
36. Insurance is not charity
Charity is given without consideration but
insurance is not possible
provides security and safety to an individual in
consideration of premium it guarantees the
payment of a loss
It is a profession charging a nominal premium
for the service.
38. Principles of Probability
repeated over a large number of trials
how likely loss-event is to happen and how
much this loss-event is likely to cost
financially
The events to be examined are those which
are uncertain
The frequency with which an event happens
or repeated reflects the actual probability
The larger is the sample under examination.
39. Principles of Probability
In a commercial factory, the probability of a theft is 0.1, fire
is 0.05 and for M.B is 0.3
There should be larger contributors or insurance contracts
Expenses incurred by Insurer - Administrative expenses in
procuring premium, other management expenses, taxes,
provision for contingencies; and profit
The rate of contribution is accordingly added/loaded to
meet these expenses and profit.
40. Principles of Probability
But if we study Two small samples- 100 houses each and one bigger 1000 hs.
Yr burnt houses (I) burnt houses (II) (III)
1 06 16 99
2 09 04 103
3 12 10 100
4 08 12 97
5 15 08 101
Total 50 (5 yrs.) 50 500
Chance of loss 10 houses/yr/100 10 houses/yr/100 100/yr/10000
Estimate of probability- 10/100=.1 10/100=.1 100/1000= .1
but the variation of loss per year is different:
Loss per year 6- 15 04-16 97- 103
This problem can be reduced by the insurance companies by observing a
larger sample over a period of large number of years and adjust the
probability with margin of errors or variations.
41. Principles of Probability
WHAT If things may not happen in the future as they were
expected ?
Then the estimate of probability used to calculate the price
may be inaccurate and contribution (premium) may be
insufficient to meet the liabilities and expenses.
Actuaries work on the law of probability
42. Role of insurance companies in
the economic development
Formation of capital & increase of
investment
Reduce of hindrance of risk
Maintenance of national wealth
Distribution of risks
Extension of business
Increase of awareness
43. Prospects of insurance in Bangladesh
Higher GDP
Increased population
New business’s individual insurance
Developing mass awareness about insurance
44. Problems of insurance in Bangladesh
Low per capital income
Poor knowledge of agents
Illiteracy
Religious superstition
Low awareness
Low savings
Shortage of fund
45. Insurance Contract
Insurance may be defined as a contract
whereby one party agrees to indemnify the
other party against a loss which may be
arise or to pay a certain sum of money on
the happening of a certain event in return
of a compensation called premium -M. K.
Ghosh & A. N.Agarwal
46. Insurance is that in which a sum of money as a
premium is paid in consideration of the insurer’s
incurring the risk of paying a large sum upon a
given contingency- M. N Mishra.
Insurance Contract
47. ESSENTIALS OF COMMERCIAL CONTRACT
A. Elements of General Contract
1. Offer & Acceptance
2. Consideration
3. Legal capacity to contract or competency
4. Consensus “ad idem”
5. Legality of object
48. B. Elements of Special Contract relating to Insurance
1. Life Insurance
a. Utmost Good Faith (Uberrima Fides)
b. Insurable Interest
2. General Insurance
a. Utmost Good Faith (Uberrima Fides)
b. Insurable Interest
c. Indemnity
d. Subrogation
e. Proximate Cause
49. Essentials of an Insurance Contract
A. Legal elements
Plurality of members
Offer & acceptance
Legal relationship
Lawful consideration of object
Capacity to contract of the parties
Free consent
Certainty
50. B. Element related to insurance business
Written contract
Insurable interest
Fiduciary relationship
Payment of premium
Financial indemnity
Causa proxima
Proportionate contribution
Subrogation
51. Principles of Insurance contract
Insurable interest
Utmost good faith
Proximate cause
Indemnity
Contribution
Subrogation
Mitigation of loss
Warranties
52. Insurable Interest
The word "interest" can have a number of
meanings. In the present context it means a
financial relationship to something or
someone.
The insurable interest is the pecuniary interest
whereby the policy-holder is benefited by the
existence of the subject matter and is prejudice
by the death or damage of the subject matter.-
M. N Mishra
53. Essential Criteria
a) There must be some person, property (thing),
liability or other legal right capable of being
insured
(b) That person, thing etc. must be the subject
matter of the insurance
(c) The person wishing to have insurance must
have the legally recognized relationship to the
subject
54. How It Arises
Insurance of Persons
Insurance of Property (physical things)
Insurance of Liability (legal responsibility)
Insurance of other legal Rights
55. When is it needed?
a) When the insurance is arranged
(b) When a claim arises.
56. Utmost Good Faith
Still frequently referred to by its Latin name
"uberrima fides", utmost good faith relates to
the duty of disclosure upon the parties involved
in an insurance contract.
57. Ordinary Good Faith
Ordinary good faith means that the parties must
behave with honesty and such information as
they supply must be substantially true.
It is not their responsibility to ensure that the
other person asks all relevant questions
Ordinary good faith is effectively the negative
duty of not telling lies
58. Utmost Good Faith
Insurance is subject to a more tough duty of
good faith
positive duty of revealing all vital information
the other party asks for this information or not.
59. (a) Material Facts
"Material facts" must be revealed, whether asked
for or not
A fact that would influence the judgment of a
prudent insurer in determination
Accept the risk, or on what terms he will accept
it".
60. (b) Non-material facts
would not influence the existence or terms of
the contract
Matters of common knowledge;
Facts already known, or deemed to be known, by the
insurer;
Facts which improve the risk
63. 2.6 Remedies for a Breach of Utmost Good Faith
Avoid the contract;
Refuse payment of a particular claim;
Additionally sue for damages if fraud is involved;
Waive the breach, in which case the
contract/claim is valid.
64. 3. PROXIMATE CAUSES
Insurable interest and utmost good faith apply
to all insurance contract
exclusively related to claims
Proximate cause important with all types of
insurance
65. 3.1 Definition of Casa proximate
The active efficient cause that sets in motion a
train of events which brings about a result,
without the intervention of any force started
and working actively from a new and
independent source. -M N Mishra
67. 4. INDEMNITY
will not apply to every kind of insurance
Suppose, a person insured his factory for Tk.20
lakhs against fire, the factory is partially burnt
and it is estimated that a sum of Tk.10 lakhs will
be required to restore it to the original
condition. The insurer is liable to pay Tk.10
lakhs only.
68. 4.2 Implications
An exact financial compensation
Some types of insurance deal with "losses" that
cannot be measured precisely in financial terms.
Life insurance and most personal accident
insurances. Both are dealing with death or injury
to human beings and there is no way that these
things can be measured precisely
69. 4.4 How Indemnity is provided
(a) Cash payment
(b) Repair
(c) Replacement
(d) Reinstatement
70. 4.3 Link with Insurable Interest
Principle represents the financial "interest" in
the subject matter
Exactly what should be payable in a total loss
situation
Life and personal accident insurances having an
unlimited insurable interest
Indemnity cannot apply to them.
71. 4.5 Salvage
Certain property remain damage
The remains have any financial value
Value has to be taken by insurer when providing
an indemnity
Value of the salvage is deducted from the
amount payable to the insured
Insurer pays in full and disposes of the salvage
72. 4.6 Abandonment
Mostly found in marine insurance
Surrendering the subject matter
Other classes of property insurance policies
usually specifically exclude abandonment.
Completely handed over to the insurer
Therefore benefit from its residual value
73. 4.7 Policy Provisions Preventing Indemnity
(a) Average
For example, if the actual value of property at the time
of a loss was Tk.2 million and it was only insured for
Tk.1 million, we may say that the property is only 50%
insured. Therefore, by the application of average only
50% of any loss is payable.
(b) Policy excess/deductible
(c) Policy franchise
(d) Policy limits
74. 5. CONTRIBUTION
In simple terms, contribution means that if two
(or more) insurers are contracted to provide an
indemnity to the same person (interest), the
insurers should share ("contribute" towards) the
indemnity payment.
75. 5.2 How Arising
(a) The respective policies must each be providing
an indemnity
(b) They must each cover the same financial interest
(c) They must each cover the same peril giving rise
to the loss
(d)They must each cover the same subject matter;
(e) Each policy must cover the loss
76. 5.5 How Calculated
Policy A has a Sum Insured of Property 200,000
Policy B has a Sum Insured of Property 400,000
There is a loss in the amount of Property 60,000
77. Which one selected…….
(a) We may say A should pay Property 20,000
and B should pay Property 40,000.
(b) We could say A should pay Property 30,000
and B should pay Property 30,000.
Method (a) above is known as the "respective
sums insured" method.
Method (b) above is known as "independent
liability" method
78. 6 SUBROGATION
Again in simple terms, subrogation provides that
an insurer who provides an indemnity is entitled
to take over and use for his own benefit any
recovery rights the insured may possess against
third parties.
Suppose, a house is insured for Tk.2 lakhs against fire, the
house is damaged by fire and the insurer pays the full value
of Tk.2 lakhs to the insured. Later on the damaged house is
sold for Tk.20, 000. The insurer is entitled to receive the
sum of Tk.20, 000.
