Unit-11 INSURANCE

UNIT- 11

INSURANCE

Insurance is an important aid to trade. It is a contract between two parties whereby one party undertakes the risk of the other by receiving an amount is called premium.

PARTIES TO THE INSURANCE

Insurer- 

The party who undertakes the risk is called ‘Insurer’. Eg- Insurance Company.

Allied Insurance Company of the Maldives Pvt.Ltd.

Insured-

The person who receives the protection of loss from the insurer is called ‘Insured’.

Eg- Owner of the assets or name of person who insured with

IMPORTANT TERMS IN THE INSURANCE.

Insurance policy

The document on which the contract of insurance is written is called an ‘Insurance Policy’.

Premium-

It is a regular payment made by the policy holder to the insurance company. The premium may be paid either in lump sum or through periodical installment

Subject matter-

            The subject matter refers to the things what are insured by the insurer.

Eg- House, Boat, Vehicles, Life of the people.

TYPES OF INSURANCE

Insurance is broadly classified into two,

            1. Life insurance

            Life insurance is also known as contract of assurance. The insured risk in life insurance will be happened anyway so the payment is sure as far as an insurer is concerned. Here the life of the people is insured instead of assets or properties.

            2. Non-Life insurance. (General Insurance)

            It is a type of insurance whereby the assets or properties are insured instead of life. The risk is not sure but the possibility to occur is fifty percentages and it may be either partially or fully.

Need or importance of insurance

1. It provides protection against sudden and unexpected losses.

2. It encourages the habit of saving and investment.

3. It provides security to the assets as well as the life of the business men.

 4. It reduces the difficulties in foreign trade.

5. It increases the confidence and efficiency of businessmen.

Advantages of insurance.

  1.  Protection

 Insurance provides protection against sudden and unexpected losses. It creates a sense of security in the life of an individual as well as the businessman.

  2. Sharing of Risk

Insurance shares the risk to which human life and property are subject. It distributes a certain risk over a group of persons who are exposed to it on a cooperative basis.

3. Increases confidence and efficiency among the businessmen.

The security of life and property given by insurance brings peace of mind and confidence to the insured. This increases their efficiency.

4. It enables to obtain to loan from the banks or other firms

Insurance serves as a basis of credit. Credit on insured properties is easy to secure. Banks may even charge a lower rate of interest in such cases. The policy is an important document it also can be considered as a collateral security for getting loans and advances from the banks.

5. Promotes Savings and investment.

Insurance promotes the habit of saving among the public. In the case of life insurance, the premiums paid by the insured will be accumulated and paid after the expiry of agreed period.

6. Provides the better atmosphere for the employees and employers.

Insurance helps to bring good working conditions in the business organizations. Any accident occurred to the workers during working time, increase the liability of employers. It can be managed by insurance.

7. Reduces the difficulties in foreign trade.

Insurance reduces the uncertainties such as the chance of damage on products, loss on trading, bad debts, etc arising in international trade.

RISK

            Risk means uncertainty. This includes the chance of loss, damage on assets or properties and the accident or the death of people.

TYPES OF RISK

Insurable Risks: - The insurable risks are calculable in terms of money. Insurance company can make this calculation on the basis of past statistics. Insurance company provides only protection against the insurable risks.

Eg- Motorcycle accidents, theft, damage of buildings, damage of properties, etc

Non-insurable risks: - The non-insurable risks are not calculable in terms of money. The necessary calculations cannot be made because no statistics are available and insurance protection cannot be undertaken.

  Eg- Loss due to fewer sales, changes in fashion, less demand, loss due to bad management, examination failure, etc

PRINCIPLES OF INSURANCE

1. Utmost good faith.

An insurance contract is based on the principle of utmost good faith. It means that both the parties to the contract must disclose all the material facts relating to the subject matter of the insurance. If the insured does not disclose all material facts, the contract between the parties becomes void.

For example, when applying for the assurance, a person must disclose the age, the ownership of the property and the previous history furnishing the any loss happened so far.

2. Insurable interest

The insured should have insurable interest in the subject matter of insurance. It means that the insured must suffer a loss by the destruction of the subject matter and is benefited by its safety.

For example, a person has insurable interest on his life, wife, his property, etc.

3. Indemnity

According to this principle, the insured will be paid only the actual loss happened to the subject matter. Here the insured is paid only the actual compensation.

      For example, if a 10-years old car is damaged so badly in an accident that it cannot be repaired; the insurance company will give the amount which is sufficient to buy a 10-years-old car in a similar model rather than a new model.

4. Subrogation

This principle follows the principle of indemnity. According to this principle, after the insured is compensated for a loss, the right of ownership of such damaged part of the property passes to the insurer.

For example, a car is insured for one lakh, unfortunately it is damaged completely on a fire and the scrap remained worth 500. The insured will be paid one lakh as compensation and the insurance company will undertake the damaged car (scrap).

5. Contribution

Sometimes a person may get his goods insured with more than one insurer for the purpose of making profit. This is referred to as double insurance. But in the event of loss, each company pays a proportion of the cost so that no profit is made by the insured.

6. Proximate cause

Before an insurance company pays out on a claim, it will want to satisfy itself that the claim is for an event caused by something which is within the precise terms of the policy. The root cause of the event is known as the proximate cause and this must be covered by the policy for a claim to be valid.

For example, a house is insured against the fire, if it is damaged due to earth quake, the insurer does not give the compensation.

IMPORTANT DOCUMENTS USED IN INSURANCE

1. Proposal form.

A person wishes to takeout any insurance protection, must complete a proposal form which requires him to answer a series of questions, so that it is in effect an application which the insurance company can accept or reject.

2. Policy.

 This is an important document issued by the Insurance Company to the insured. This shows the details about the contract made between them. Once the risk has been accepted and the premium paid, the company will issue a policy. It sets out the terms and conditions of the contract.

3. Cover note.

While the policy is being prepared, the company will confirm that the risks have been accepted, by issuing a temporary document called the cover note.

4. Claim form.

            This is the form should be filled by the insured furnishing the details of the loss happened to the subject matter. This form should be verified by the insurer to pay the compensation.

5. Insurance quotation

            Insurance quotation is an important document issued by the insurance company as part of advertisements of their business. It shows the entire details about the company and their businesses such as policies, amount of protection, premiums, agent’s details, etc.

Uses of insurance quotations

1. It helps the companies to advertise their business.

2. Customers get information about the policies and services.

3. Customers can compare the policies and can choose best alternate one

 PREMIUM

It is a regular payment made by the policy holder to the insurance company. The premium may be paid either in lump sum or through periodical installment

Factors Affecting Insurance Premium

            The rate of insurance premium is depended on the following factors

1. The nature of the property or assets

            According to the type of property the premium rate will be changed. If it is good in condition the chance of loss will be low and the premium rate also will be low.

2. Age of the property or assets  

            If the property is very old, the chances of damage are high and so the premium will be high.

3. Value of the property or assets

            According to the value of the property, the premium may change. Higher the rate of premium will be charged for the high valued property.

4. Location of the assets or property

            If the property is near an oil factory or sulphur factory, the chances of fire will be high and will have to pay higher rate of premium.

5. Past details about the assets or property

            If the property has a record of many accidents, the premium rate will be high.

6. Chance of loss or damage

            If the property has highly inflammable contents or it deals with highly explosive items bring high chance of loss and leads to the high premium.

7. Precautionary or safety methods

            If the property is sufficient with precautionary measures like fire extinguishers, sprinklers, alarms, etc, the insurance company will charge a lower rate of premium.

8. Cost of repairs.

             According to the maintenance cost or repair cost the premium rate may change.

TYPES OF NON- LIFE POLICIES (GENERAL INSURANCE)

1. Marine insurance

a. Hull insurance

It covers the vessels-boats, ships, launches, etc and their fixtures, either for a particular voyage or for a particular period of time.

b. Cargo insurance

It covers the goods (cargoes) carried by the vessels. The loss of goods will be undertaken in this insurance policy.

c. Freight insurance

‘Freight’ is not the same as ‘cargo’ in this context: it is the charge levied by the shipping company for carrying the goods. If the foods are not delivered for some reason, the shipping company may have loss, so this loss can be managed in this policy.

d. Ship owner’s liability

This policy covers the losses due to injury to the passengers, crew or dock workers, etc.

2.   Fire, motor, aviation insurance

a. Fire insurance

This policy covers the risks due to fire.

b. Motor insurance

 Motor insurance is compulsory for all drivers. The various motor insurance is as follows.

                        1. Comprehensive Policy

This policy covers injuries to third parties on the public roads, damage of other people’s property, fire, theft, personal injury to the driver and other related legal costs.

c. Aviation insurance

      This policy covers the losses to the air craft against accidental damage and the operator’s injury or the deaths of passengers and crew and third parties.

3. Accident insurance.

a. Personal accident insurance

This policy covers the insured against partial or total disability arising from accidental causes.

b. Property insurance

This policy covers the losses on the properties due to any accidents such as natural disasters, theft, fire, etc.

4. Liability insurance:-

a. Public liability insurance

This policy covers the accidents happening to the public due to the hazardous emission from the business organizations.

b. Employers’ liability insurance

This policy helps to reduce the liabilities of the employers happening inside the organization such as accident to the employees, death of the employees, etc.

            c. Fidelity bond

This policy covers the loss of the employers happening from the fraudulent activities of the employees inside the organization.

5. Consequential loss policy.

In the case of any accident occurred, the business may be interrupted for some periods. The owner has to face the loss of profit for that period due to the interruption in the business. If consequential loss policy is taken out, the insurer agrees to indemnify the insured for such loss of expected profits.

POOLING OF RISK

            Insurance is based on Co-operation. A large number of people contribute money called premium to a central pool (collection); here the policy holders pay the premiums, become a large amount and out of this the compensation can be paid to the parties. The money collected as premium must be sufficient to pay compensation, and to get profit to the insured.

INSURANCE MARKET

            Insurance market consists of the insurance companies, agents or brokers, underwriters and other parties.

Lloyds’ of London

             It is a corporation which provides facilities for its members (Brokers and Underwriters) who wish to provide or negotiate insurance for business or individuals.

Underwriters

 Underwriters are the permanent members of Lloyds of London. They do not deal with the public directly.

Brokers

Brokers are the member of Lloyds’ of London. A public can obtain insurance only through the brokers, whose job is to find the best possible policy for their clients.

Syndicates

Underwriters have formed themselves into groups known as Syndicates. An underwriting agent accepts insurance on behalf of the Syndicate.

Actuaries

These are expert people who help to calculate the premium based on the past statistical records.

Assessors

These are people help to establish what the insured receives in compensation after damage or loss.

Q. Why an insurance company may refuse (or reject) to provide insurance protection to a person?

Ans:- Following are the reasons for the refusal or rejection of the insurance protection.

·         If he hides any details about the subject matter. (Utmost good faith).

·         If he has had convictions for dangerous to the subject matter.( Consumption of alcohols, Drugs, etc)

·         If he is outside the age ranges of the insurance policies offered by the company e.g. Age less than 18 years or Very old.

·         If he is unable to pay the premium (bankrupt).

·         If he has no insurable interest on the subject matter – not his own property

·         Health reasons – suffering serious sick

·         Chance of loss is very high- earth quakes, tsunami, etc

NO CLAIM BONUS

            It is a reduction in premium given to the insured by the insurer for not making claim for the past years.

            For example, A person insured his property for the last three years by paying the premium of $1000, If there was no any loss (claim) on the property for the last three years, the company will give him a discount of 10% premium for the next year. Therefore he can insure his property by paying $ 900(1000-100) as premium for the next year.

UNDER INSURANCE AND OVER INSURANCE

Over insurance.

             If a property is insured more than its actual price, it is called over insurance.

For example- A property worth $1000 is insured for $2000. It is illegal and the insurer may reject to pay the compensation if any loss occurred on such property.

Under insurance.

            If a property is insured less than its actual price it is called under insurance.

For example- A property worth $5000 insured only for $3000. It is considered as partial insurance so the insurer will pay a proportionate amount of compensation to the insured.

The amount of compensation will be calculated by applying the following formula,

            Compensation  =         Insured amount                X  Actual loss

                                               Value of the property      

ROLE OF INSURANCE AGENTS OR BROKERS IN THE BUSINESS

            Insurance agent is a person appointed to find the parties those need insurance services.

1. Agent helps to bring parties to the insurer

2. Agent acts as a middleman between the insured and insurer.

3. Agent helps to find better policy for the customers

4. Agent helps in documentation such as collection policy, filling up of proposal form, collection of cover note, distribution of quotations, etc

5. Agent helps the in the payment of premium.