WHAT IS AN INSURANCE?
Definition of Insurance:
People often have some kind of insurance: for their car, their house, or even their life. However, we don’t bother to think about what insurance is or how it works and how much importance does it possess in our lives. Insurance is an important economic tool to manage risks and to maintain a good ratio of risks and rewards. It is a financial hedging instrument.
Critical components of most insurance policies:
There are several type of insurance policies available. Life, health, fire, marine, auto are the most common forms of insurance.
To select the best insurance policy , it is important to pay attention to the critical components of most insurance policies:
- Premium: The consideration for which the insurer agrees to insure or secure the insured. The premium is determined by the insurer based on your business’s risk profile, which may include creditworthiness.
- Policy Limit: The policy limit is the maximum amount that an insurer will pay under a policy for a covered loss. Maximums may be set per period (e.g., annual or policy term), per loss or injury, or over the life of the policy, also known as the lifetime maximum.
- Subject Matter: It refers to the subject or entity that is life property cargo or ship which is insured against which the policies taken.
Principles of Insurance:
- Principle of Utmost good faith: In all insurance contracts both the parties must have utmost good faith towards each other. The insurer and insured must disclose all material facts clearly, completely and correctly regarding the subject matter. Similarly, the insurer must provide relevant information regarding the terms and conditions of the contract. Failure to provide complete information may lead to non settlement of claim.
- Principle of insurable interest: Insurable interest means some financial interest in the subject matter. This principle is applied to all the insurance contracts.For example, a person has insurable interest in his own life. A business entity has insurable interest in the goods it deals with.
- Principle of indemnity: Indemnity means a guarantee or assurance to put the insured in the same financial position in which he or she was immediately prior to the happening of the uncertain event. This principle is applicable to fire marine and general insurance. It is not applicable to Life insurance as loss of life can never be measured in monetary terms. In case of death of the ensured the actual sum assured is paid to the nominee of the ensured.
- Principle of subrogation: As per this principle, after the ensured is compensated for the loss due to damage of the property insured then the right of ownership of such property passes on to the insurer. This principle is applicable only when the damaged property has any value after the happening of the uncertain event.
- Principle of contribution: Where the insured has taken out more than one policy for the same subject matter. Under this principle, the insured can claim the compensation only to the extent of actual loss either from one insurer or all the insurers. The claim will only be settled for the actual loss occurred.
- Principle of mitigation of loss: Insured must always try to minimise the loss of the property in case of uncertain events. The insured must take all possible measures and necessary steps to control and reduce losses.
- Principle of Causa- Proxima: The principle of Causa- Proxima means, when a loss is caused by more than one causes, then proximate cause of loss should be taken into consideration to decide the liability of the insurance. The subject matter is insured against some causes and not all the causes. If the direct cause is one which is insured against the ensure insurance company is bound to settle the claim.
