CH 4

DEFINITION
 IMPORTANT TERMS

Proposal: It is a written request by the proposer (insured) to the insurance company

to issue insurance policy.
Insurance Policy: This is the document containing the terms & conditions of
contract of insurance.
Insurer: The organization which agrees to pay money for compensating the losses is
call insurer or assurer.
Insured: The person who is insured is called the insured or the assured.
Premium: The regular consideration paid by the insured to insurer.
Risk: Happening of a contingency against which insurance is affected.
Subject matter of insurance: subject against which the policy is taken.
• In Life Insurance, the life of the assured is a subject matter.

• In Fire Insurance, the goods and assets or property of the insured is the subject matter.

• In Marine Insurance, the cargo or ship is the subject matter.

Claim: It is the demand made by the insured on the insurer to compensate for loss
on happening of the event.
Individuals Business

Society
FUNCTIONS OF INSURANCE
 PRIMARY FUNCTIONS

1.Provide protection: The primary function of insurance is to provide

protection against future risk, accidents and uncertainty. Insurance cannot check the
happening of the risk, but can certainly provide for the losses of risk. Insurance is
actually a protection against economic losses, by sharing the risk with others.

2. Collective Bearing of Risk: Insurance is a device to share the financial loss of few
among many others. Insurance is a means by which few losses are shared among a
larger number of people. All the insured contribute the premiums towards a fund and
out of which the persons exposed to a particular risk is paid.

3. Assessment of Risk: Insurance determines the probable volume os risk by

evaluating various factors that give rise to risk. The risk is the basis for determining the
premium rate also.

4. Provide Certainty: Insurance is a device, which helps to change from uncertainty to

certainty. Insurence is a device whereby the uncertainty risk may be made more certain.
 SECONDARY FUNCTIONS

1.Increases efficiency 2. Provides capital

3. Prevention of Losses: Insurance cautions individuals and businessmen to
adopt suitable device to prevent unfortunate consequences of risk by observing
safety instructions; Prevention of losses causes lesser payment to the assured by
the insurer and this will encourage for more savings by way of premium. Reduced
rate of premiums stimulates for more business and better protection to the
insured.
4. Small Capital to cover larger risks: Insurance relives the businessmen from
security investments, by paying a small amount of premium against larger risks
and uncertainty.
5. Contributes towards the development of larger industries: Insurance
provides development opportunity to those larger industries having more risks in
their setting up. Even the financial institutions may be prepared to give credit to
sick industrial units which have insured their assets including plant and machinery.
6. Helps to judge the viability of major projects
 OTHER FUNCTIONS
1. Encourages savings and investment :Insurance serves as savings and investment,
insurance is a compulsory way of savings and it restricts the unnecessary expenses by
the insured’s for the purpose of availing income-tax exemptions also, people invest in
insurance.
2. Source of earning foreign exchange :Insurance is an international business. The
country can earn foreign exchange by way of issue of marine insurance policies and
various other ways.
3. Risk-free trade :Insurance promotes exports insurance, which makes the foreign
trade risk free with the help of different types of policies under marine insurance.
4. Credit facility
5. Increases goodwill and self confidence
6.It checks inflation
7. Social security
PRINCIPLES OF INSURANCE

contribut
ion
1. PRINCIPLE OF UTMOST GOOD FAITH
 2. PRINCIPLE OF INSURABLE INTEREST

In principles of insurance, principle of insurable interest is a contract. The

subject matter of the insurance is the correlation between the insured and
insurable interest. In the subject of insurance the insured must have insurable
interest. The insured must own a part or whole property. He should be in a such
condition that whatever harm happened to his property; he should be held
responsible for that. The contract of insurance gets void and termed as invalid
in the absence of such interest.
For example: If a person owns a house and has insurable interest to the house,
to protect it from any possible risk. If the person sells the same house to
another person, then the house will not have insurable interest.
 3. PRINCIPLE OF INDEMNITY

In principles of insurance, principle of indemnity (security) is not valid to life

insurance contract. It is based on other forms of insurance such as marine,
accidental and fire. The main objective of the general insurance is to bring the
person to the same condition to the subject matter as he was before the damage.
The insurer pays compensation only against the actual loss. Assured is not allowed to
make a profit out of the contract of insurance. The compensation cannot be more
than the actual loss. Hence double insurance is impossible in general insurance.
In the principle of indemnity life insurance contract is not applicable, because if the
person expires due to injury, then the life of that person is not measureable in terms
of money. The person life is precious;; it has many insurable interest to his life.
Example: Mr. Ronaldo has three million dollar life insurance policy by his name
then he would get the specific amount after his death. Not more than that because
Mr. Ronaldo life value cannot be counted in terms of money.
 4. PRINCIPLE OF CONTRIBUTION

In principles of insurance, a principle of contribution is the fundamental principle.

The principle of indemnity is conclusive to the principle of contribution. Under this
principle, the insured has the liberty to claim only on the actual damages from any
one insurer or all the other insurers.
Example: If Mr. Bill Gates has the property of 79 billion dollars, if he has insured
himself from three companies, State Farm Group 40 billion dollars, All-State
Insurance Group 30 billion dollars and from Liberty Mututal Insurance Cos 20
billion dollars. If the loss of actual property is a worth 40 billion dollar, then he can
claim only 40 billion dollar from one company that is State Farm Group and not
from the other companies.
5. PRINCIPLE OF SUBROGATION

In principles of insurance, a principle of subrogation is the fundamental principle.

Principle of indemnity, is the outcome from this principle. Therefore, life insurance is
not applicable in this principle. This principle applies in fire and marine insurance.
This principle is established to compensate to the loss against the damages of the
insure. If the claim is settled by the insurer, then the ownership of that entire
property would be of the insurer company. This principle helps the insurer company
from to prevent double insurance.
Example: If Pepsi company caught fire due to negligence of coco cola company, In
this fire accident Pepsi, loss is of 20 billion dollars, then the insurance company has
to pay 20 millions dollars to the Pepsi company. However, if the insurance company
files a case against coco cola company, if the insurance company wins the case, then
coco cola has to pay the entire amount, including case, lawyer expenses. If any
amount is balanced with the insurance company, then it would be returned to pepsi.
6. PRINCIPLE OF MITIGATION OF LOSS
 7. PRINCIPLE OF CAUSA PROXIMA

In principles of insurance, a principle of Principle of causa proxima is the

fundamental principle. This principle consists of, to find one or more reasons for the
cause, and the nearest cause should be taken into account to decide the liability of
the insurer.
Example: A trawler vessel was insured against losses resulting from collision. Co-
incidentally a trawler vessel gets to collide, which result in further delay for few days.
Because of this delay, the banana on the trawler vessel got putrid and was unsuitable
for consumption. Hence there are two reasons for the losses one is of collision and
other is delay, the closest cause of putrid banana was delay. As the trawler vessel was
insured only for collision and not for the delay, so for putrid bananas the insured will
not get any compensation from the insurance company. But trawler vessel will get
compensation for collision.
IDRA