Insurance | Insurable Risks, Non-insurable Risks, Indemnity Insurance & Non-Indemnity Insurance

Insurance is a contractual arrangement wherein an insurer or underwriter commits to compensating the insured in the event of a loss, and in return, the insured makes premium payments. Insurance is essentially a formal agreement between the insured (the entity or individual seeking coverage) and the insurer or underwriter (the insurance company). This agreement outlines […]

Insurance is a contractual arrangement wherein an insurer or underwriter commits to compensating the insured in the event of a loss, and in return, the insured makes premium payments.

Insurance is essentially a formal agreement between the insured (the entity or individual seeking coverage) and the insurer or underwriter (the insurance company). This agreement outlines that the insurer will provide financial compensation to the insured in case of a covered loss or occurrence. The insured, in turn, agrees to pay a premium for this coverage.

 

The fundamental components of an insurance contract

  1. Insured: The entity or individual seeking protection and coverage against potential risks or losses.
  2. Insurer/Underwriter: The insurance company or entity agreeing to offer coverage and compensate the insured for covered losses.
  3. Premium: Payments made by the insured to the insurer, usually on a regular basis (monthly or annually), determined by factors like coverage type, risk level, and the insured’s profile.
  4. Coverage: The extent of protection and benefits outlined in the insurance policy, specifying the covered risks, exclusions, and limitations.
  5. Loss: An event triggering the insurance policy’s coverage, leading to a possible claim and compensation from the insurer.
  6. Claim: A request by the insured for compensation following a covered loss or occurrence, as defined in the insurance policy.

The insurance contract establishes the rights, duties, and obligations of both parties, ensuring financial protection for the insured against specific risks or losses.

The foundational principle of insurance involves risk pooling. Individuals collectively contribute to a common fund, from which compensation is provided to those experiencing losses from a particular risk. Premium amounts are influenced by the likelihood of the risk; higher risks entail higher premiums.

 

Insurance and Assurance:

  1. Insurance: Pertains to uncertain events that may or may not occur, such as fire or burglary, and is based on probabilities.
  2. Assurance: Deals with certain events that are sure to happen, like death. Life assurance is an example, and it is based on certainties.

 

Insurable Risks and Non-insurable Risks:

  1. Insurable Risks: Calculable risks, with estimable likelihoods of occurrence, allowing premiums to be assessed. Examples include motor accidents, life, marine, and theft.
  2. Non-insurable Risks: Unpredictable risks with indeterminable likelihoods, making it challenging to assess premiums. These risks do not offer the prospect of loss.

 

Uninsurable Risks

Non-insurable risks also referred to as un-insurable risks, are those for which insurance coverage cannot be provided. This is because the likelihood of these risks occurring cannot be accurately calculated due to insufficient information available to insurers, preventing them from estimating an appropriate premium. These risks carry both the potential for gain and loss.

 

Examples of uninsurable risks

  1. Loss of profit due to competition: Insurance typically excludes losses incurred from regular business competition or market forces, considering them a normal aspect of business operations.
  2. Losses from gambling: Insurance generally does not cover losses arising from betting or speculation, as these are viewed as speculative risks voluntarily undertaken by individuals.
  3. Losses from changes in taste and fashion: Insurance typically does not provide coverage for losses resulting from shifts in consumer preferences or changes in fashion trends, as businesses are expected to adapt and bear such risks.
  4. Losses from maladministration: Insurance does not usually cover losses resulting from poor management decisions or mismanagement, as these risks are considered inherent to the business and fall under management responsibility.
  5. Risks from war: Insurance companies typically exclude coverage for losses resulting from war, civil unrest, or acts of terrorism due to their unpredictable and widespread nature.
  6. Loss of profits due to a decline in demand: Insurance typically does not cover losses resulting from a general decline in market demand for a product or service, as fluctuations and market conditions are considered normal business risks.

It is essential to recognize that while traditional insurance policies may not cover these risks, businesses and individuals have the option to explore alternative risk management strategies or financial instruments to mitigate exposure.

 

Indemnity Insurance And Non-Indemnity Insurance

  1. Indemnity Insurance: This type of insurance compensates the insured for the actual loss suffered due to a covered event. The goal of indemnity insurance is to restore the insured to the same financial position they were in before the incident, ensuring that the insured does not profit from the coverage. Examples include property insurance (fire, marine, burglary) and liability insurance (professional liability, general liability).
  2. Non-Indemnity Insurance: Also known as non-life insurance or benefit-based insurance, this type differs from indemnity insurance as it does not aim to restore the insured to their previous financial position. Instead, it provides a predetermined benefit or sum assured in the event of a specified occurrence, such as death, disability, or certain medical conditions. Non-indemnity insurance typically involves a fixed payout regardless of the actual financial loss experienced by the insured. Examples include life insurance, personal accident insurance, critical illness insurance, and health insurance.

It is important to note that while non-indemnity insurance may not fully restore the insured to their former financial state, it still offers valuable financial protection through predetermined benefits or coverage for specific risks.

 

Insurance Principles

The validity of insurance contracts hinges on six key principles. These principles include:

  1. Insurable Interest: The insured party must have a vested interest in the subject matter of the insurance policy, ensuring they benefit from its existence and stand to incur damage or loss upon its demise. For example, a homeowner has an insurable interest in the house, while a tenant has it in the contents of the house.
  2. Utmost Good Faith (Uberrimae Fidei): Both the insured and the insurer must engage in open and honest dealings, disclosing all relevant facts. The insured must act with utmost good faith, providing accurate information. Failure to do so may render the insurance contract void.
  3. Indemnity: This principle dictates that the insurer compensates the insured for any losses suffered, aiming to restore the insured to the financial position held before the loss occurred. Most insurance types follow this principle, with the exception of life assurance and personal accident insurance.
  4. Subrogation: The insurer, having paid a claim to the insured, gains the right to step into the insured’s shoes and pursue legal remedies against parties responsible for the loss. This right applies to all insurance contracts except life assurance and personal accident policies.
  5. Contribution: When the same risk is insured with multiple insurers, the insured can only recover to the extent of the loss, preventing a windfall. Each insurer contributes a proportionate share of the loss. Life assurance and personal accident policies are exceptions to this principle.
  6. Proximate Cause: Indemnification occurs only if the loss directly and immediately results from the insured risk. There must be a close connection between the insured risk and the cause of the loss, such as death from an accident rather than illness under a personal accident policy.

 

Pooling of Risks:

The concept of insurance is akin to a “pooling of risks,” signifying the collective sharing of potential losses among a group of insured individuals or entities. In essence, each participant contributes premiums into a common pool, and when a loss occurs to any member, the funds from the pool are utilized to compensate for that loss. This approach spreads the financial burden of risk among many, reducing the impact on any single participant. The fundamental idea is to provide a safety net for individuals or businesses facing unforeseen events, promoting financial stability within the group.

 

Types of Life Insurance Policies

  1. Whole Life Assurance: Premiums are paid throughout the lifetime of the insured, and the sum assured is disbursed only upon the death of the policyholder. This type of policy is typically acquired for the benefit of dependents such as children, spouses, and other relatives.
  2. Term Assurance: This policy provides coverage for a specific period, and the sum assured is paid out only if the policyholder passes away before the predetermined date. No payment is made if the insured survives beyond that date. Term assurance is commonly chosen to cover the policyholder during specific events like air travel.
  3. Endowment Assurance (Policy): Premiums are paid over an agreed-upon number of years, and the sum assured is paid either at the end of the specified period or upon the death of the policyholder, whichever occurs first.
  4. Annuities: Annuities function as a pension plan where an insurance company, in exchange for a lump sum or installment payments, agrees to repay the invested amount along with the accrued investment income over the expected lifespan of the investor or a predetermined period.

 

Accident Insurance

Accident insurance encompasses all insurance types except for life, fire, and marine insurance.

Types of Accident Policies

  1. Motor Vehicle Insurance: This policy provides compensation for death or bodily injury resulting from the use of vehicles on the road. There are two main types:
  2. Third Party Insurance Policy: Covers losses or injuries suffered by third parties, excluding damage to the owner or their vehicle.
  3. Comprehensive Insurance Policy: Optional coverage that includes the owner, insured vehicle, third parties, and sometimes the contents of the insured vehicle. Premiums for comprehensive policies are higher than those for third-party policies.
  4. Personal Accident Insurance Policy: This policy covers losses arising from partial or permanent deformity or disability resulting from accidents, such as loss of sight or limb.

 

Marine Insurance

Marine insurance provides coverage for both ships and their cargo against risks at sea.

Types of Marine Insurance

  1. Hull Insurance: Covers damage or loss to the insured vessel and damage or loss caused by it to other vessels. Subdivided into Time policy and Voyage policy.
  2. Cargo Insurance: Covers goods and cargoes carried by a ship, providing a refund for the value of lost or damaged goods.
  3. Ship Owners Liability: Covers risks and losses for which ship owners or their employees are liable, including negligence in handling goods, injuries to crew and passengers, and damage to other ships or ports.
  4. Freight Insurance: Protects against the refusal to pay charges for lifting goods and reimburses the ship owner if goods are lost in transit, necessitating a refund of the freight to the owner.

 

Insurance Contract Procedures

Steps involved in securing an insurance policy include:

  1. Inquiry: This involves gathering information about the insurance either directly from the insurer or through intermediaries such as agents or brokers.
  2. Proposal Form: Provided by the insurance company, this document must be completed honestly and transparently by the individual seeking coverage. It establishes the foundational terms of the insurance agreement between the policyholder and the insurer.
  3. Premium: This refers to the payment made by the policyholder. It can be a one-time payment or spread out over intervals such as annually, monthly, or weekly. Failure to make timely premium payments results in the policy becoming invalid.
  4. Cover Note: Once the initial premium is paid, the insurer issues a temporary cover note to the policyholder. This offers provisional protection until the insurer conducts further investigations and finalizes the insurance policy. Typically, this cover note remains valid for thirty days, after which a new one is needed if the policy is still pending.
  5. Insurance Policy: This document outlines the specifics of the insurance agreement, detailing its terms and conditions.

 

Common Terms in the Insurance Sector

  1. Underwriter: An individual or entity that agrees to shoulder a portion of the insurance risk.
  2. Re-insurance: When an insurer decides to share or transfer a portion or all of its risk to another insurance firm. This approach mitigates losses by distributing risks among multiple insurers, providing added security to policyholders.
  3. Actuary: A professional responsible for evaluating risks associated with insurance and determining the appropriate premiums. They also manage aspects related to pension funds.
  4. Surrender Value: The cash amount that an insurer will reimburse to an endowment policyholder if they choose to terminate the policy before its maturity date. This value is typically a percentage of the total premiums paid up to the surrender date.
  5. Jettison: The intentional discarding of cargo from a ship to reduce its weight and prevent sinking.
  6. Barratry: Actions taken by a ship’s captain that are detrimental to the ship owners’ interests.

 

Significance of Insurance in Trade and Industry

  1. Streamlines international trade.
  2. Mobilizes funds for investment purposes.
  3. Mitigates business risks.
  4. Acts as a savings avenue and future financial planning tool.
  5. Enables businesses to use insurance as collateral for bank loans, particularly life assurance policies.
  6. Offers tax benefits to policyholders, such as tax reliefs or rebates.
  7. Generates employment opportunities for professionals like brokers and actuaries.
  8. Provides a safety net, instilling confidence in entrepreneurs and businesses to venture into commercial endeavors.

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