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TOPIC 2: INSURANCE | COMMERCE FORM 4

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The Meaning of Insurence

Define Insurance

Insurance:

is an agreement in which a person makes regular payments to a company and the company promises to pay money if the person is injured or dies, or to pay money equal to the value of something (such as a house or car)

if it is damaged, lost, or stolen. Or is the Risk-transfer mechanism that ensures full or partial financial compensation for the loss or damage caused by event(s) beyond the control of the insured party. Under an insurance contract, a party (the insurer) indemnifies the other party (the insured) against a specified amount of loss, occurring from specified eventualities within a specified period, provided a fee called premium is paid. In general insurance, compensation is normally proportionate to the loss incurred.

Insurance police:
is a contract whereby the insurer will pay the insured (the person whom
benefits would be paid to, or on behalf of), if certain defined events
occur. Subject to the “fortuity principle”, the event must be uncertain.
The uncertainty can be either as to when the event will happen (e.g. in
a life insurance policy, the time of the insured’s death is uncertain)
or as to if it will happen at all (e.g. in a fire insurance policy,
whether or not a fire will occur at all).
  • Insurance
    contracts are generally considered contracts of adhesion because the
    insurer draws up the contract and the insured has little or no ability
    to make material changes to it. This is interpreted to mean that the
    insurer bears the burden if there is any ambiguity in any terms of the
    contract. Insurance policies are sold without the policyholder even
    seeing a copy of the contract.In 1970 Robert Keeton suggested that many
    courts were actually applying ‘reasonable expectations’ rather than
    interpreting ambiguities, which he called the ‘reasonable expectations
    doctrine’. This doctrine has been controversial, with some courts
    adopting it and others explicitly rejecting it.[3] In several
    jurisdictions, including California, Wyoming, and Pennsylvania, the
    insured is bound by clear and conspicuous terms in the contract even if
    the evidence suggests that the insured did not read or understand them.
  • Insurance contracts are aleatory
    in that the amounts exchanged by the insured and insurer are unequal
    and depend upon uncertain future events. In contrast, ordinary
    non-insurance contracts are commutative in that the amounts (or values)
    exchanged is usually intended by the parties to be roughly equal. This
    distinction is particularly important in the context of exotic products
    like finite risk insurance which contain “commutation” provisions.
Premium;
is the amount of money that an individual or business must pay for an
insurance policy. The insurance premium is considered income by the
insurance company once it is earned, and also represents a liability in
that the insurer must provide coverage for claims being made against the
policy. The amount of insurance premium that is
required for insurance coverage depends on a variety of factors.
Insurance companies examine the type of coverage, the likelihood of a
claim being made, the area where the policyholder lives or operates a
business, the behaviour of the person or business being covered, and the
amount of competition that the insurer.
Risk:
is the event against which insurance is taken out e.g. fire, theft
etc.The insured is compensated on the actual risk insured in case the
loss happens.
Sum insured: This is the price of the property insured as declared by the proprietor at the time of applying for insurance.
Insurer:
Insurance company that issues a particular insurance policy to an
insured. In case of a very large risk, several insurance companies may
combine to issue one policy. after its insured driver caused a three-car
accident on the interstate, the driver’s insurer was forced to settle
the property damage claims of the two non-liable drive.
Insured:
a person or entity whose interests are protected by an insurance
policy; a person who contracts for an insurance policy that indemnifies
him against loss of property or life or health etc.
The
policy holder who agrees to pay a premium against the insurers promise
to pay a certain sum in case certain event should happens.
INSURANCE AND ASSURANCE
Insurance refers to the events or incidents which may or may happen e.g fire,theft etc while
Assurance refers to incidents which bound to happen or that must happens e.g death and old age.
Historical Development of Insurance
Describe the historical development of Insurance
Merchants
and traders, until well into the Middle Ages, had to borrow funds to
finance their trade or to secure goods on consignment from producers or
suppliers. As security for the loans or for the goods of their trade,
the merchants pledged not only their ships or other tangible property
but also their lives (as slaves) and those of their families as well.
Babylonia, in 2000 B.C., was the center of trade with caravans
transporting goods to all parts of the known world.
To
reduce the risk of robbery and capture for ransom, the Babylonians
devised a system of contracts in which the supplier of capital for the
trade venture agreed to cancel the loan if the merchant was robbed of
his goods. An extra charge was added to the usual rate of interest as a
premium for the creditor, to whom the risk of loss by robbery was
transferred. The Code of Hammurabi legalized this practice. (This code
also provided for the indemnification, by the state or the temple, of a
person whose home was destroyed by fire and for murder or robbery.)
These
arrangements were later known as bottomry contracts (where the ship is
security for the loan) and respondent contracts (where the cargo is the
security). Knowledge of these arrangements was transmitted through the
Phoenicians to the Greeks, Hindus, and Romans. The Rhodians established a
comprehensive code of sea laws, including the principle of “jettison”
or “general average,” which provides that if goods are thrown overboard
in order to lighten the ship, what is sacrificed for the common benefit
should be made good by a common contribution. The sea laws, including
the Greek laws of Solon and the Rhodian sea law, were absorbed in the
early Roman civil codes and in the laws of the Byzantine Empire in 533
A.D., and they are a part of today’s laws.
The Need for Insurance
Discuss the need for insurance
The following point shows the role and importance of insurance:
Insurance
has evolved as a process of safeguarding the interest of people from
loss and uncertainty. It may be described as a social device to reduce
or eliminate risk of loss to life and property.
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. 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.
The Meaning of “Pooling of Risk”
Define “pooling of Risk”
To
offset the possible effect of a loss, all those at risk can contribute a
relatively small sum of money (premium) to fund (pool) operated by an
insurance company. The many small sums of money people pay in premiums
form a large pool of money. when a contributor to the pool suffers a
loss there is enough money to compensate (indemnify) them.
The
result of co-operating with others in this way is that risks are
‘spread’ or ‘shared’ between the many people and organizations that have
contributed to the insurance pool. For this reason insurance is
sometimes said to be the ‘pooling of risks’.
The Basic Terms Applied in Insurance
Point out the basic terms applied in insurance
Here is some of terms and their definitions to better help you navigate the sometimes confusing world of insurance.
The General Principles of Insurance
Mention the general principles of insurance
PRINCIPLES OF INSURANCE.
  1. Nature of contract:
    Nature of contract is a fundamental principle of insurance contract. An
    insurance contract comes into existence when one party makes an offer
    or proposal of a contract and the other party accepts the proposal. A
    contract should be simple to be a valid contract. The person entering
    into a contract should enter with his free consent.
  2. Principal of utmost good faith:
    Under this insurance contract both the parties should have faith over
    each other. As a client it is the duty of the insured to disclose all
    the facts to the insurance company. Any fraud or misrepresentation of
    facts can result into cancellation of the contract.
  3. Principle of Insurable interest:
    Under this principle of insurance, the insured must have interest in
    the subject matter of the insurance. Absence of insurance makes the
    contract null and void. If there is no insurable interest, an insurance
    company will not issue a policy. An insurable interest must exist at the
    time of the purchase of the insurance. For example, a creditor has an
    insurable interest in the life of a debtor, A person is considered to
    have an unlimited interest in the life of their spouse etc.
  4. Principle of indemnity:
    Indemnity means security or compensation against loss or damage. The
    principle of indemnity is such principle of insurance stating that an
    insured may not be compensated by the insurance company in an amount
    exceeding the insured’s economic loss. In type of insurance the insured
    would be compensation with the amount equivalent to the actual loss and
    not the amount exceeding the loss. This is a regulatory principal. This
    principle is observed more strictly in property insurance than in life
    insurance. The purpose of this principle is to set back the insured to
    the same financial position that existed before the loss or damage
    occurred.
  5. Principal of subrogation: The
    principle of subrogation enables the insured to claim the amount from
    the third party responsible for the loss. It allows the insurer to
    pursue legal methods to recover the amount of loss, For example, if you
    get injured in a road accident, due to reckless driving of a third
    party, the insurance company will compensate your loss and will also sue
    the third party to recover the money paid as claim.
  6. Double insurance:
    Double insurance denotes insurance of same subject matter with two
    different companies or with the same company under two different
    policies. Insurance is possible in case of indemnity contract like fire,
    marine and property insurance. Double insurance policy is adopted where
    the financial position of the insurer is doubtful. The insured cannot
    recover more than the actual loss and cannot claim the whole amount from
    both the insurers.
  7. Principle of proximate cause:
    Proximate cause literally means the ‘nearest cause’ or ‘direct cause’.
    This principle is applicable when the loss is the result of two or more
    causes. The proximate cause means; the most dominant and most effective
    cause of loss is considered. This principle is applicable when there are
    series of causes of damage or loss.
The Meaning of Indemnity Insurable Interest, Utmostgood Faith, Subrogation, Doctrine of Proximate Cause
Explain the meaning of indemnity insurable interest, utmost good faith subrogation, doctrine of proximate cause
An
insurable interest is a stake in the value of an entity or event for
which aninsurancepolicy is purchased to mitigate risk of loss. Insurable
interest is a basic requirement for the issuance of an insurance
policy, making it legal and valid and protecting against intentionally
harmful acts. Entities not subject to financial loss from an event do
not have an insurable interest and cannot purchase an insurance policy
to cover that event.
The
indemnification principle holds that a policyholder should be
compensated for a covered loss, but that holders should be neither
penalized nor rewarded by a loss. This suggests that policies should be
designed to cover the value of the at-risk asset appropriately. Poorly
conceived or poorly designed policies create moral hazard, in which
parties have incentive to allow or even affect a loss. If moral hazard
is too prominent, it would increase the costs to insurance companies,
thereby driving up premiums to unsustainable levels.
Utmost good faith is a common law principle (sometimes calledUberrimae Fidei).
The principle means that every person who enters into a contract of
insurance has a legal obligation to act with utmost good faith towards
the company offering the insurance. A person must, therefore, always be
honest and accurate in the information they give to the insurance
company. The insurance company also has a responsibility to act with
good faith in all its dealings with the insured.
Subrogation
is a term denoting a legal right reserved by most insurance carriers.
Subrogation is the right for an insurer to legally pursue athird
partythat caused an insurance loss to the insured. This is done as a
means of recovering the amount of the claim paid by the insurance
carrier to the insured for the loss.
One
example of subrogation is when an insured driver’s car is totaled
through the fault of another driver. The insurance carrier reimburses
the covered driver under the terms of the policy, and then pursues legal
action against the driver at fault. If the carrier is successful, it
must divide the amount recovered after expenses proportionately with the
insured to repay anydeductiblepaid by the insured.
Types of Insurance Policies
Identify types of insurance policies
Due
to the development of commerce all over the world, leads to increase
the types of insurance policies categorized into two groups:
  1. Property insurance
    provides protection against most risks to property, such as fire, theft
    and some weather damage. This includes specialized forms of insurance
    such as fire insurance, flood insurance, earthquake insurance, home
    insurance, or boiler insurance. Property is insured in two main
    ways—open perils and named perils. Open perils cover all the causes of
    loss not specifically excluded in the policy. Common exclusions on open
    peril policies include damage resulting from earthquakes, floods,
    nuclear incidents, acts of terrorism, and war. Named perils require the
    actual cause of loss to be listed in the policy for insurance to be
    provided. The more common named perils include such damage-causing
    events as fire, lightning, explosion, and theft.
  2. Life insurance or life assurance
    is a contract between an insurance policy holder and an insurer or
    assurer, where the insurer promises to pay a designated beneficiary a
    sum of money (the benefit) in exchange for a premium, upon the death of
    an insured person (often the policy holder). Depending on the contract,
    other events such as terminal illness or critical illness can also
    trigger payment. The policy holder typically pays a premium, either
    regularly or as one lump sum. Other expenses (such as funeral expenses)
    can also be included in the benefits.
The Procedures for Taking Insurance
Explain the procedures for taking insurance
Customer shall:
  1. Contact by phone or visit one of Company’s representations (see the List of Representations);
  2. Fill in the insurance application form on a chosen class of insurance;
  3. Show (if necessary) the insured assets and sign the survey report.
Company (consultant) shall:
  1. Answer the call and appoints the meeting; Familiarize the potential customer with the insurance conditions;
  2. Investigate the risk (in case of motor, construction and property insurance, etc.).
  3. Prepare and sign the insurance contract and policy;
  4. Issue the insurance policy and exercise contract administering;
  5. Verify, when necessary, the way the insured asset is maintained.
How Insurance Companies Make Profit
Show how insurance companies make profit
First, they pool themoneyto pay claims. Second,insurance companiespay for expenses involved in selling and providinginsuranceprotection. Third,insurance companiesinvestmoney. Earnings from investments help keep down the cost ofinsuranceto policyholders.

3 COMMENTS

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