PRINCIPLES OF

INSURANCE
 BASICS OF INSURANCE
• INTRODUCTION TO INSURANCE:

• In the modern civilized world even after taking proper

care at every step, life and property is continuously
exposed to loss or damage. A person moving on road
can be killed by a car, a motor bike parked may be
stolen, a factory may be gutted, cargo may be damaged
while in transit by a ship –what not - to say everything
including life is exposed to risk and there is uncertainty
every where despite taking necessary precautions.
CONTRACT OF INSURANCE

• It is an agreement between the Insurers (Insurance

companies) and the insured (Policy holder)
 Insurance Contracts
• where by the Insurers, in consideration
of having received the premium,
undertake to make good the financial
loss, subject to the limit of a specified
amount, suffered by the insured as a
result of loss or damage of the insured
property by specified perils during the
stated period.
 INSURABLE RISK
RISK

Pure risks Trade Risks

 Risk must be fortuitous in nature

 Loss caused must be capable of being measured.
 Risk must not be of illegal nature
 Insurance must not be against public policy.
 Pure & Speculative
Pure Risk :
• Pure Risk always produce losses. In Pure risks,
there is no possibility of gain.

Speculative Risk:
• Speculative risks can result into a gain or loss.
 Insurance Contracts
Involves two parties – Insured & Insurer

Governed by Indian Contract Act, 1872.

Elements for legal validity of contract:

Offer and Acceptance

Consideration

Agreement between parties – consensus ad idem

Capacity of the parties
Legality of the contract
 Offer & Acceptance
• Offer from proposer made orally, in paper,
over telephone or by completing a Proposal
form.
• Acceptance by Insurer usually by issuance of
cover note
 Consideration
• Act or Promise offered by one party and
accepted by the other as the price of the
promise. In Insurance, consideration from the
insured is known as “Premium” and that from
the Insurer is the “Promise to Indemnify”.
 Capacity of the parties to contract
Insured:
• Should have attained age of majority
• Is sound of mind
Insurer:
• Must have legal capacity to contract.
• Authorisation by the Government
 Legality of contract
Subject matter should be legal.
Object is not lawful if:
• it is forbidden by law
• Is of such a nature that if permitted would defeat
the provisions of any law.
• Involves or implies injury to the person and
property of another.
• The court regards it as immoral or opposed to
public policy.
 BASICS OF INSURANCE
INSURANCE

LIFE INSURANCE GENERAL INSURANCE

 BASICS OF INSURANCE

LIFE INSURANCE GENERAL INSURANCE

Benefit policy Indemnity policy

Renewal cannot be denied Can be denied

Not duty to inform any Changes to be informed

change

Constant Premium Premium varies every yr.

 BASICS OF INSURANCE
RISK:
Uncertainty about a Loss.

PERIL :
Cause of Loss

HAZARD :
Conditions which may create or increase the
chance of loss arising from any peril.
 FUNCTIONS OF INSURANCE
• Insurance provides financial security to an
individual
• Insurance provides assistance to business
enterprise
• Insurance provides financial stability to commerce,
industry, and the community.
• Insurance serves as a basis of credit
• Insurance plays a vital part in the reduction of
losses
• Insurance provides fund for investments
• Insurance earns foreign exchange
 Principles of Insurance
• Insurable Interest
• Utmost Good faith
• Indemnity
• Subrogation and Contribution
• Proximate Cause
 Insurable Interest
• There must be property, right, interest, life or
potential liability capable of being insured.
• Such property should be the subject matter of
insurance.
• The insured must bear a legal relationship to
the subject matter
• Insurable interest must exist at the time of
loss.
 Insurable Interest
• Interest arising from ownership
• Interest arising from law
• Interest arising from contract
• Interest arising from legal liability
• Interest of a person in life
• Interest arising out of insurance
 Utmost Good Faith
• Duty of Utmost Good faith implies that a proposer
must disclose to the insurer all material facts in
regards to the proposed insurance. The duty applies
not only to the material facts that he knows but
also extends to the facts that he ought to know.

• Material Fact : Fact which would affect the decision

of a prudent underwriter w.r.t acceptance of risk.
 Utmost Good Faith
• Excepted Material Fact :
– Facts which diminish the risk
– Facts which are presumed to be known by
underwriter
– Facts which could be ascertained from information
provided.
– Matters of law.
– Facts in regard to which insurer is indifferent
– Facts possible of discovery during inspection.
 Utmost Good Faith
A breach of utmost good faith is by :
• Non disclosure
• Misrepresentation.
 Principle of Indemnity
• Compensation for loss or injury sustained
• Security or protection against loss or damage.

Object:
• Loss or damage must be made good in such a manner
that financially the insured should be neither better off
nor worse off as a result of loss.
• To place the insured in the same financial position as he
was before a loss.
• Prevent insured from making a profit out of a loss.
 Principle of Indemnity
Methods :
• Cash Payment
• Repairs
• Replacement
• Reinstatement
 Subrogation & Contribution
Subrogation:
• Transfer of rights and remedies of insured to
the insurer who has indemnified the insured
in respect of the loss.
• This arises from the principle of indemnity.
Collecting claim as well as money/ goods from
the person responsible for loss will be against
indemnity principle.
 Subrogation & Contribution
Contribution :
• The right of an insurer who has paid a loss under a
policy to recover a proportionate amount from other
insurers who are liable for loss.
• Arises from the principle of indemnity as the insured
is prevented from claiming from all insurers
separately.
• The foll. are reqd.:
• Subject matter must be the same.
• Peril which causes the loss should be common to all
policies.
• Policies must be in force at the time of loss.
 Proximate Cause
• The active efficient cause that sets in motion a
train of events which brings about a result,
without the intervention of any force started and
working actively from a new independent source.
• Cause of causes not to be looked into but for the
immediate cause.
• Immediate does not mean the cause nearest to
the loss in point of time. It should be understood
in terms of effectiveness and efficiency.
Reinsurance

%
25

2 5%

25%

25
%
 Why Reinsurance?
• Wider distribution of risk
• Insurers can contract more risk
• Stabilize the income and losses of insurer
• Insurer can insure large amount
Double insurance

100%
10

10
0%

% 0
10
0%

100%