The Sri Lanka Insurance Institute

THE SLII DIPLOMA IN

INSURANCE

UDENI KIRIDENA
Chartered Insurer,
ACII(UK), AII, ANZIIF(Snr. Assoc), Dip.B.Mgt.

8/19/2021 1
8/19/2022 1
 INTRODUCTION TO CONCEPTS OF INSURANCE

‘We are exposed to many RISKS’

A simple definition of RISK :

‘Uncertainty of a future event where the result will be a loss’

Types of Risks
Two Main Categories

 Pure risks -  Speculative risks –

No prospect of Mainly business risks which
a gain include an element of gain
1/21/2022 3
Components of Risk
● Uncertainty – Unknown future event
● Frequency - How often will an event occur
● Severity – Size of the impact (Large/Small)
● Peril - cause of loss
● Hazard - which influences the operation of the peril

Physical
Physical attributes
hazard
Hazard

Moral
Approach of the person
hazard
1/21/2022 4
3 ways to deal with Risks

1. Eliminating or minimizing - Loss prevention

2. Bearing the Risk yourself – self funding

3. Transferring the Risk to an organization specialized to

carry such Risks - INSURANCE

● Insurance CANNOT avoid or stop an event from

happening. It can only help compensate the loss

● Insurance can compensate only financial losses

1/21/2022 5
CONCEPT OF INSURANCE
The Insurance Company (Insurer) promises to
pay the owner (Insured) a certain amount of
money (sum insured or part of it) according to
the policy terms, if a loss occurs.
The Insured pays money to the Insurance
Company for bearing the risk, which is known
as premium

1/21/2022 6
History of Insurance
Way back in Babylonian times, around 2100 B.C., the Code of Hammurabi was the
first basic insurance policy. This policy was paid by the traders in the form of a
loan to guarantee the safe arrival of their goods by caravan.

During the 13th century, the ancient Babylonians also devised a system that
protected both the merchants and their customers against theft or loss, and this is
one of the earliest recorded examples of insurance.

Insurance in the modern sense (i.e., insurance in a modern money economy, in

which insurance is part of the financial sphere), early methods of transferring or
distributing risk were practiced by Chinese and Babylonian traders as long ago as
the 3rd and 2nd millennia BC, respectively.

The Romans were the first to have burial insurance – people joined burial clubs
which paid funeral expenses to surviving family members

The Greeks and Romans introduced the origins of health and life insurance c. 600
AD when they organized guilds called "benevolent societies" which cared for the
families and paid funeral expenses of members upon death.
1/21/2022 7
History of Insurance…..contd.
Towards the end of the seventeenth century, London's growing importance as
a center for trade increased demand for marine insurance. In the late 1680s,
Mr. Edward Lloyd opened a coffee house that became a popular haunt of
ship owners, merchants, and ships’ captains, and thereby a reliable source of
the latest shipping news. It became the meeting place for parties wishing to
insure cargoes and ships, and those willing to underwrite such ventures.

Insurance as we know it today can be traced to the Great Fire of London,

which in 1666 demolished 13,200 houses. In the aftermath of this disaster,
Nicholas Barbon opened an office to insure buildings. In 1680, he
established England's first fire insurance company, "The Fire Office," to
insure brick and frame homes.

The world´s oldest insurance market, Lloyd's of London was formed 300
years ago. Queen Elizabeth I introduced the Insurance Act, stating the
intention to ensure "that the loss lighted easily on many rather than
heavily on few."

s1o/21u/20r22ce: in8ternet
 THE LLOYDS
BUILDING
LONDON

1/21/2022 9
CAN ALL RISKS BE INSURED?

For a risk to be insurable the following features must apply

The event insured against must be fortuitous

There must be insurable interest

There must be homogeneous exposure

Must not be against public policy

1/21/2022 10
 Law of large numbers

The larger the number of separate-but-

similar risks in a group, the more
predictable future losses become.

Insurance companies must predict

losses on a group basis in order to
arrive at fair premiums for individuals
within groups.

1/21/2022 11
Understanding the insurance contract

Insurance contract

AGREE TO PAY CLAIMS

OFFER
INSURER INSURED

ACCEPTANCE

CONSIDERATION
( PREMIUM)

1/21/2022 12
Purpose of Insurance

Bring people who are exposed to the same

risk together
( sharing the same risk)

Collect equitable premium

( operation of the common pool)

Risk transfer from one party to another

( Risk transfer mechanism)

1/21/2022 13
CONDITIONS, WARRANTIES AND EXCEPTIONS (EXCLUTIONS)

The Insurance contract will contain conditions, warranties,

exclusions etc.

It is very important that the insured is aware of the

conditions warranties in the Contract ( Insurance policy)

Purpose of the conditions

 To remind the insured of his obligations
 To restrict the cover
 For compliance of certain requirements
 To outline certain procedures

1/21/2022 14
CONDITIONS, WARRANTIES AND EXCEPTIONS (EXCLUTIONS)
Cont.…

Purpose of
Warranties
 To ensure that insured takes certain
precautions to limit the occurrence of the peril
insured

 To ensure that certain features which will

increase the risk, are not introduced

1/21/2022 15
CONDITIONS, WARRANTIES AND EXCEPTIONS (EXCLUTIONS)
Cont.…

Conditions

Specify terms and critical to the understanding of the cover

Two types - Express conditions – specifically stated

- Implied conditions - Accepted without mentioning

Warranties

Some duty ( to do or to refrain) is incorporated within the

contract

Two types - Express warranties – specifically stated

( E.g. - No smoking)
- Implied warranties - Accepted without mentioning
(E.g..-Marine – seaworthiness)
1/21/2022 16
CONDITIONS, WARRANTIES AND EXCEPTIONS (EXCLUTIONS)
Cont.…

Exceptions (Exclusions)

The section details what the insurer will not pay for

Onus is on the insurer to exclude. If not excluded, by

definition it is covered

1/21/2022 17
UNDERWRITING

Function of the underwriter is to :

-Assess the risk

-Decide whether to accept the risk or not
-If accepting, on what premium and terms
-Manage exposure

Risk Engineers
‘Eyes of the underwriter’
Advise about quality of risks, risk improvement methods

1/21/2022 18
 UNDERWRITING – Conti…

 Underwriter will concentrate on Physical

hazards and Moral hazards

 Examples of Physical hazard

Marine insurance – age and condition of vessel, Type of cargo,
voyage, geographical area, packaging
Motor insurance - type and use of vehicle, person using the
vehicle, geographical location
Fire Insurance – Construction of building, contents, trade, industrial
process
Miscellaneous insurance – Occupation for Personal accident
- Industrial process for Workmen’s
compensation
- Control systems for Fidelity guarantee

1/21/2022 19
 UNDERWRITING – Conti…

 Examples of Moral hazard

Fraud – A very high moral hazard. May arise in the event of a claim by:
-Submitting a claim for an incident which has not occurred
-Exaggerating the amount of a claim

Carelessness - Eg. Driving vehicles at high speed

Not following required security measures for a shop

Unreasonableness – Although honest, the insured will accept only his view

1/21/2022 20
Components of the Insurance policy

Heading Name and address of insurer

The Recital Parties to the contract and premium

Operative clause
Explains the cover provided under
Printed stipulations
Explains the cover provided under the policy
Exceptions
Restrictions on the operative clause
Conditions
Specify terms, requirements to keep the policy valid
Warranties Duty on the insured
Policy schedule Customized to the insured
Signature
Policy should be signed on behalf of the insurer
1/21/2022 21
Insurance
Documents
Proposal form – is the basis of the contract. To obtain
Information for the insurer to accept or decline
the risk

Cover note – is issued before the certificate. Confirms the

existence of the insurance policy

Certificate of insurance – provide evidence of the Existence of the

insurance cover. Eg motor insurance

Endorsements – issued agreeing to an alteration in the Existing

terms of the policy, to correct errors, effect
changes to the cover, inclusions, deletions etc.

Policy wording - the common terms and conditions for a particular

class of insurance are printed and the Schedule is
attached to this
1/21/2022 22
Insurance Documents - cont.…
Schedule – Will contain name and address of the insured,
property Or liability, sum insured, premium and any
other Condition etc.

Renewal notice - Invites renewal. Provides existing

policy details (Not a legal requirement to send)

Renewal endorsement - When the insured has given

instructions to renew the Policy, a new contract is formed
which has to be evidenced with suitable documentation.

Claim form - To obtain information relevant to the claim

1/21/2022 23
INSURANCE MARKET

SELLERS INSURANCE COMPANIES

BUYERS INDIVIDUALS, ORGANISATIONS

INTERMEDIARIES BROKERS AND AGENTS

REINSURERS REINSURANCE COMPANIES

WHAT IS RE-INSURANCE ?

‘Insuring the insurers’ – Arisk sharing method

The insurance company will ‘obtain insurance’ from a reinsurance
company for the risks they have insured.
1/21/2022 24
FUNCTIONS OF RE-INSURANCE
1. Capacity / Spreading Risk

Ability to write more premium while maximizing

principle of insurance.
2. Loss Control / Catastrophe Protection
Minimize financial impact from losses.
3. Financing
Providing financial resources for growth.
4. Stabilization
Minimize variations in financial results.
5. Services
Facilitate operations of insurance
companies.

1/21/2022 25
• Insurance Companies
• Composite Insurance companies
• Accepts life business and general business

• Captive Insurance companies

• Created in a group of companies to handle their insurance

• Specialist companies
• Handles only one type of business

Brokers
Operates as a separate company or person and connects the insured
and the insurance company.

Agents
Mostly operates as individuals. Connects the insured and the
insurance company.
1/21/2022 26
 BRIEF HISTORY OF THE DEVELOPMENT OF
INSURANCE IN SRI LANKA

• Colonial era –Insurance relating to Tea and coffee

plantations
• Several foreign insurance companies were in operation
• ‘Agency houses’ were in charge of the plantation
business and also were handling insurance
• The first Sri Lankan insurance Company was
established in 1938 – Ceylon Insurance
• The Motor Traffic Act was introduced in 1951

1/21/2022 27
 BRIEF HISTORY OF THE DEVELOPMENT OF
INSURANCE IN SRI LANKA…….contd.

• Insurance corporation Act No 2 of 1961

• Insurance Corporation of Sri Lanka (SLIC) established
in 1961
• General Insurance Nationalization in 1964
• Monopoly of SLIC
• National insurance Corporation was established in
1980
• Insurance Privatization in 1988
• Introduction of Broker intermediary

1/21/2022 28
 BRIEF HISTORY OF THE DEVELOPMENT OF
INSURANCE IN SRI LANKA…….contd.

• Insurance Board of Sri Lanka (IBSL) was established in 2000 and

changed name to Insurance Regulatory Commission of Sri Lanka on
19th October 2017 by Act 23 of2017.
• Tariff for Motor insurance removed in 2002
• Currently there are 28 Insurance Companies and 68 Broker
companies.

1/21/2022 29
PRINCIPLES OF
INSURANCE
The contract of insurance is subject to certain Important
principles.

  Utmost good faith

  Insurable interest

  Proximate cause

  Indemnity

  Subrogation

  Contribution
1/21/2022 30
Utmost Good Faith (Uberrima Fidei)
The parties to a contract must voluntarily disclose Material facts
before the contract is completed. This principle applies to both the
proposer and The insurer.

Material facts
Those facts which would influence the insurers judgement….

Examples of material facts

- Fire insurance - construction of the building

- Motor insurance - usage of the vehicle

1/21/2022 31
IMPORTANCE OF “UTMOST GOOD FAITH’IN
INSURANCE CONTRACTS

1. Insurance contracts are different from normal

contracts

2. Insurance does not deal with a physical product

3. The facts about the risks are better known to the

proposer. Insurer relies on the proposer to disclose
all material facts about the risk .

1/21/2022 32
Insurable interest
The legal right to insure.
The insured should have a legally recognised financial
relationship between the insured and the subject matter
of insurance

Subject matter of insurance

-Any type of property
-Or any event that may create a legal liability

In Life Assurance – Husband & Wife, Debtor & Creditor,

Employer & Employee.

1/21/2022 33
Proximate cause

When a loss occurs and the insured makes a claim,

The insurer needs to know the cause of the loss
And whether that peril was covered by the policy.

The proximate cause of an insurance is

The dominant cause and there is always a
Direct link between it and the resulting loss.

Nature of perils
•- Insured perils
•- Excepted or excluded perils
•- Uninsured perils
1/21/2022 34
INDEMNITY
-
Financial compensation to place the insured in the same financial
position after a loss as he enjoyed before the loss .
(In Life Assurance policies it is based on the earning capacity.)

Methods of providing indemnity

Repair Replacement

Indemnity

Reinstate Reimburse
(Cash payment

1/21/2022 35
 Sum Insured

● In property insurance, maximum recoverable is

the Sum insured.
● In liability policies the maximum recoverable is
the limit of indemnity.

If there is an underinsurance, the average clause

Would apply

Sum insured × Loss

Actual Value
1/21/2022 36
 Excess - Deductibles

Is the first amount of each claim which is not

covered by the policy, Which will be borne by
the insured

- Voluntary excess
- Compulsory excess

1/21/2022 37
Contribution
Contribution arises when more than one policy Is
obtained. If there is more than one policy, All related
insurers should contribute when Settling the claim.

For contribution to apply the following conditions

Must be fulfilled

-Two or more policies of indemnity must exist

-Policies must cover a common interest
-Policies must cover a common peril
-Policies must cover a common subject matter
-Each policy must be liable for the loss

1/21/2022 38
Subrogation
The insurers right to recover the payments From
another source.

Example:
A’s car is knocked by b’s car and b is at fault
A should file action against b and recover the
damage
However, A’s insurer pays A for the damage but it
Should be recovered from b
A will pass the rights to A’s insurer for the recovery
1/21/2022 39
INSURANCE BUSINESS

INSURANCE CAN BE DIVIDED IN TO TWO CLASSES

-LONG-TERM ( LIFE ASSURANCE)

-NON LIFE (GENERAL INSURANCE)

SUB CLASSES OF GENERAL INSURANCE

- FIRE
- MISCELLANEOUS
- MARINE
- MOTOR
1/21/2022 40
 Fire Insurance
- Fire
- Business interruption(consequential loss)
- Engineering - CAR
- EAR
- boiler
- electronic
- machinery breakdown etc.

Miscellaneous Insurance
- Burglary
- Money insurance
- Glass insurance
- Public liability
- Products liability
- Workmen's compensation
- Personal accident
- Surgical and hospitalization etc.
1/21/2022 41
 Marine Insurance

-Cargo insurance – covers loss or damage to the

cargo on the carrying vessel etc.
• Motor Insurance and incidental storage
-Hull Insurance - covers loss or damage to the
• -Comprehensive cover
actual– structure
Covers the vehicle
of the and the
vessel
• damage to third parties

-Third party cover - Covers damages only to third

party bodily injury and
property damage

‘Compulsory insurance under Motor

1/21/2022
TrafficAct’ 42
Unique Features Of General Insurance

Majority of subject matter of insurance will be

property

Majority are annually renewable policies

Majority of the policies are on indemnity basis

Majority of classes require insurable interest to

continue from the start of the policy ,during claims
and till the end of the policy

1/21/2022 43
CLAIMS
INSURANCE DOCUMENTS

Claims handling is the ‘moment of truth’ for the Insurance

Industry
 In an Insurance contract, the responsibilities are mutual.
The insured also has a responsibility to comply with terms
and conditions in the policy.
 The insurer will need notification immediately or within a
certain period of time.

ENDORSEMENTS –
ISSUED AGREEING TO AN ALTERATION IN THE EXISTING TERMS
OF THE POLICY,TO CORRECT ERRORS,EFFECT CHANGES TO
THE COVER, INCLUTIONS, DELETIONS ETC.

1/21/2022 44
Matters that would concern the Insurer

 Whether the policy was in force at the time of loss

 To identify the insured and his entitlement to receive the claim

 Whether the loss or damage has occurred due to an insured peril

 Whether the insured has taken reasonable steps to minimize loss

 Whether the policy condition and warranties have been complied with

 Whether the loss falls under any exceptions in the policy

 Actual extent of loss

1/21/2022 45
 Duties Of An Insured After The Loss

 Take all reasonable steps to minimize the loss

 Report to the authorities ( according to the type of

loss)

 Submit a completed claim form

 Should not carry out repairs without the insurers

approval

 Should not enter into any agreements with third

parties

1/21/2022 46
Claims Process -

Occurrence of an event

Intimation of claim

Setting up the claims reserve

Investigation
‘Moments
Offer/ Negotiation /Declinature of
Truth’

Final settlement

Recovery

Internal procedure
Closure
1/21/2022 47
Thank you

1/21/2022 48