insurance and ptrinciples

1. By : SHUBH AGGARWAL & RAMANDEEP SINGH
Class – bcom sem4

2. Meaning of Risk
 Risk is the potential that a chosen action or activity (including
the choice of inaction) will lead to a loss (an undesirable
outcome)
OR
 Risk is an uncertainty concerning the occurrence of a loss
 In insurance industry we define risk to identify the property or
life being insured
 “that driver is a poor risk”, “cancer patient is an unacceptable
risk”

3. Types of Risk
 Objective Risk: relative variation of actual loss from expected
loss
 For eg: An insurer has 100000 cars insured for a long period of
time, and on the average 10000 cars meet with at least one
accident and claim for damages each year. However, for a
particular year, it is unlikely that there will be exactly 10000
claims. Under certain assumptions, it can be proven that over a
long period of time, the deviation of the number of claim in a
year from 10000 will, on the average be 100.
 Thus there is a variation of 100 claims from the expected
number of 10000 or a variation of 1%.
 This relative variation of actual loss from expected loss is
known as objective risk

4. Types of Risk
 Subjective Risk-an uncertainty in the individual’s personal
estimate of the chance of loss.
 It can vary from one person to another.
 For eg-Somebody who has lost a lot of money in the stock
market will probably feel more risk investing in the market
than someone who has profited handsomely.
 Subjective risk may alter the behavior of the risk taker if it is an
undesirable risk

5. Categories of Risks
 Pure and Speculative Risks
 Fundamental and Particular Risks
 Enterprise Risk

6. Pure Risk & Speculative Risk
 Pure risk : there are only the possibilities of loss or no loss
 Examples: Damage to property from fire, lightning, flood or
earthquake etc
 Speculative risk : either profit or loss is possible
 Examples: investment in shares or real estate, betting on horse
race
 ONLY Pure Risks are insured but exceptions always exist…..
Like some insurers will insure institutional portfolio
investments

7. Fundamental & Particular Risks
 Fundamental risk affects the entire economy or large number of
persons or groups within the economy – rapid inflation,
cyclical unemployment, war, natural disaster, terrorist attack
 Particular Risk affects only individuals and not the entire
community . For e.g.. Car thefts, bank robberies, dwelling fires

8. Enterprise Risk
 Relatively new term that encompass major risks faced by a
business firm
 Pure Risk
 Speculative Risk
 Strategic Risk: uncertainty regarding the firm’s financial goals
and objectives
 Operational Risk: results from the firm’s business operations
like a bank that offers new online banking services may incur
losses if hackers break into the bank ‘s computers

9. A Contract
 A contract is an agreement between parties, creating
mutual obligations that are enforceable by law. The
basic elements required for the agreement to be a
legally enforceable contract are: mutual assent,
expressed by a valid offer and acceptance; adequate
consideration; capacity; and legality.


10. INSURANCE
 An insurance is a legal agreement between an insurer
(insurance company) and an insured (individual), in
which an insured receives financial protection from an
insurer for the losses he may suffer under specific
circumstances.
 Under an insurance policy, the insured needs to pay
regular amount of premiums to the insurer. The
insurer pays a predetermined sum assured to the
insured if an unfortunate event occurs, such as death
of the life insured, or damage to the insured or his
property.

11. TYPES OF INSURANCE
 GENERAL INSURANCE- General insurance is an
agreement between a policyholder and insurer
wherein the insurance company protects your valuable
assets from fire, theft, burglary, or any other
unfortunate accident.
 LIFE INSURANCE- Life Insurance can be defined as a
contract between an insurance policy holder and an
insurance company, where the insurer promises to pay
a sum of money in exchange for a premium, upon the
death of an insured person or after a set period.

12. Requirements of an Insurance Contract
 Offer and acceptance
 Consideration
 Competent parties
 Legal Purpose

13. Requirements of an Insurance Contract
 Offer and Acceptance: Applicant for insurance makes the offer and the
company accepts or rejects the offer
 An agent merely solicits the prospective insured to make the offer
 In property & Liability insurance especially personal line insurance – auto ,
home insurance , the agents typically have the power to bind the insurer
through the use of binder.
 Binder is a temporary contract for insurance
 In life insurance, agent does not have the power to bind the insurer
 A conditional premium receipt is given to the applicant after filling the
application form

14. Consideration
 Consideration is the value that each party gives to the
other
For Insured: Payment
of first premium plus
an agreement to abide
by the conditions
specified in the policy
For insurer: Promise to
do certain things as
specified in the
contract. For e.g.:
paying for a loss from
the insured peril

15. Competent Parties
 Each party must be legally competent/ must have legal
capacity to enter into a binding contract
 Most adults are legally competent to enter into the
insurance contracts but there are some exceptions like
 Insane persons, intoxicated persons, minors
 Also, insurer must be licensed to sell insurance in that
country

16. Legal Purpose
 An insurance contract that encourages something illegal or
immoral is contrary to the public interest and can not be
enforced
 For e.g. policy can not cover seizure of the drugs by the
police

17.  Aleatory Contract
 Unilateral Contract
 Personal Contract
 Conditional Contract
 Contract of Adhesion
Distinct Legal Characteristics of
Insurance Contracts

18. Distinct Legal Characteristics of
Insurance Contracts
 Aleatory Contract: where the values exchanged may not be
equal but depend on an uncertain event . For e.g..- ??????????
(Commutative Contract?)
 Unilateral Contract: only one party makes a legally
enforceable promise. Only the insurer makes a legally
enforceable promise to pay a claim . After the first premium is
paid, the insured can not be legally forced to pay the premiums
(Bilateral Contract?)
 Personal Contract: the contract is between the insured and the
insurer

19. Distinct Legal Characteristics of
Insurance Contracts
 Conditional Contract: Insurer’s obligations to pay a claim
depends on whether the insured has compiled with all policy
conditions
 For e.g. In a homeowner’s policy , the insured must give
immediate notice of loss. If the insured delays for an
unreasonable period in reporting the loss, the insurer can refuse
to pay the claim
 Contract of Adhesion: means the insured must accept the
entire contract, with all of its terms and conditions

20. Principles of Insurance
 Utmost Good Faith
 Insurable Interest
 Indemnity
 Corollaries of Indemnity
 Proximate Cause

21. Utmost Good Faith
 Uberrima fides is a Latin phrase meaning "utmost good faith”
.This means that all parties to an insurance contract must deal
in good faith, making a full declaration of all material facts in
the insurance proposal
 A minimum standard that requires both the buyer and seller in a
transaction to act honestly toward each other and to not mislead
or withhold critical information from one another
 A positive duty voluntarily to disclose ,accurately and fully, all
facts material to the risk being proposed ,whether requested or
not

22. Representations
 Statements made by the
applicant for insurance
 For e.g. If you apply for life
insurance, you may be
asked questions
concerning your age,
weight, height, occupation,
state of health, family
history etc. Your answers to
these questions are the
representations

23. Representation
 (A)Material
 (B)False
 (C)Relied on by the insurer
 Material - If the insurer knew the true facts, the
policy would not have been issued, or it would have
been issued on different terms
 False-the statement is not true or misleading
 Reliance – the insurer relies on the representation in
issuing the policy at specified premium
Contract is voidable if
the representation is

24. Examples
 Karim applied for life insurance and states in the
application that he has not visited a doctor within the
last five years
 However, six months earlier he had surgery for lung
cancer. So, the statement made by him is false,
material and relied on by the insurer

25. Misrepresentation
 If an applicant for insurance states an opinion that
later turns out to be wrong , the insurer must prove
that the applicant spoke fraudulently and intended to
deceive the company
 An innocence misrepresentation of a material fact, if
relied on by the insurer , also makes the contract
voidable.

26. THANKYOU……