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Sunday, July 22, 2018

COMMERCE: FORM FOUR: Topic 2 - INSURANCE

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TOPIC 2: INSURANCE

The Meaning of Insurance
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 called Uberrimae 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 subrogationis 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 categorised 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 the money to pay claims. Second, insurance companies pay for expenses involved in selling and providing insurance protection. Third, insurance companies invest money. Earnings from investments help keep down the cost of insurance to policyholders.


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