Principles of insurance review and practice

PRINCIPLES OF INSURANCE

Insurance is a contract between two parties. Hence, all the element of a validcontract should present in every insurance contract. Besides these elements,there are certain other principles also to be followed essentially at the timeentering insurance contract.1.

Principle of utmost good faith (Uberrimae Fidei): All types of insurancecontracts requires utmost good faith towards each other. The insurer andthe insured must also disclosed all material facts, clearly, correctly andcompletely.If the insurer finds that certain material facts relating to the contract wasnot disclosed the insurer may avoid the contract, this principle is moreimportant for life insurance as the information disclosed will affect thedecision of the insurance company to decide whether to accept or rejectthe proposal.2.

Principle of Insurable Interest: The insured must have insurable interest(financially) in the subject matter of insurance. In life Insurance it refersto the life insured. In Fire and General Insurance, it must be present atthe time of the occurrence of loss and in marine Insurance, the insurableinterest exists only at the time of the occurrence of the loss. It isapplicable to all contracts of insurance. Following are the causes of insurable interest.a)

A person has insurable interest in his own life and his property.b)

A wife has insurable interest in life of her husband.c)

A businessman has insurable interest in the good he deal with and inthe business property.d)

A creditor has insurable interest in the life of the debtors to theextent of loan given.e)

A partner has insurable interest in the life of other partners(partnership firm).3.

Principle of Indemnity: Indemnity means a guarantee or assurance to putthe insured in the same position in which he was immediately prior tothe happening of the uncertain event. The insurer undertakes to makepayment of actual loss incurred by the insured.Insurance contract is signed only for getting protection againstunpredicted financial losses arising to the future uncertainties. Insurancecontract is not made for making losses arising due to the future uncertainties.

The two basic functions in insurance are underwriting and rating, which are closely related to each other. Underwriting deals with the selection of risks, and rating deals with the pricing system applicable to the risks accepted.

Underwriting principles

Underwriting has to do with the selection of subjects for insurance in such a manner that general company objectives are met. The main objective of underwriting is to see that the risk accepted by the insurer corresponds to that assumed in the rating structure. There is often a tendency toward adverse selection, which the underwriter must try to prevent. Adverse selection occurs when those most likely to suffer loss are covered in greater proportion than others. The insurer must decide upon certain standards, terms, and conditions for applicants, project estimated losses and expenses through the anticipated period of coverage, and calculate reasonably accurate rates to cover these losses and expenses. Since many factors affect losses and expenses, the underwriting task is complex and uncertain. Bad underwriting has resulted in the failure of many insurers.

In some types of insurance major underwriting decisions are made in the field, and in other types they are made at the home office. In the field of life insurance the agent’s judgment is not accepted as final until the home-office underwriter can make a decision, for the life insurance contract is usually noncancelable, once written. In the field of property and liability insurance, on the other hand, the contract is cancelable if the home-office underwriter later finds the risk to be unacceptable. It is not uncommon for a property and liability insurer to accept large risks only to cancel them at a later time after the full facts are analyzed. The insurance underwriter must tread a thin line between undue strictness and undue laxity in the acceptance of risk. The underwriter’s position is not unlike that of the credit manager in a business corporation, in which unreasonably strict credit standards discourage sales but overly weak credit standards invite losses.

An important initial task of the underwriter is to try to prevent adverse selection by analyzing the hazards that surround the risk. Three basic types of hazards have been identified as moral, psychological, and physical. A moral hazard exists when the applicant may either want an outright loss to occur or may have a tendency to be less than careful with property. A psychological hazard exists when an individual unconsciously behaves in such a way as to engender losses. Physical hazards are conditions surrounding property or persons that increase the danger of loss.

An underwriter may suspect the existence of a moral hazard on applications submitted by persons with known records of dishonesty or when excessive coverage is sought or the replacement value of the property exceeds its value as a profit-making enterprise. Underwriters are aware that fire losses are more likely to occur during business depressions. The underwriter can detect moral hazard in various ways: An applicant’s credit may be checked; courthouse and police records may reveal a criminal history or a history of bankruptcy; and other insurance companies can be queried for information when it is suspected that an individual is trying to obtain an excessive amount of coverage or has been turned down by other insurers.

The psychological type of hazard can take a number of forms. Some persons are said to be “accident-prone” because they have far more than their share of accidents, suggesting that unconsciously they want them. It is well known that persons applying for annuities tend to have longer than average lives, and consequently a special mortality table is used for annuitants. Certain types of insanity have to be watched for—notably the impulse to set fires.

Physical hazards include such things as wood-frame construction in buildings, particularly in areas where such properties are densely concentrated. Earthquake insurance rates tend to be high where geologic faults exist (as in San Francisco, which is built almost directly over such a fault).

What are the principles of insurance practice?

In insurance, there are 7 basic principles that should be upheld, ie Insurable interest, Utmost good faith, proximate cause, indemnity, subrogation, contribution and loss of minimization.

What are the principles and practices of general insurance?

To ensure the proper functioning of an insurance contract, the insurer and the insured have to uphold the 7 principles of Insurances mentioned below:.

Utmost Good Faith..

Proximate Cause..

Insurable Interest..

Indemnity..

Subrogation..

Contribution..

Loss Minimization..

What are the 5 principles of insurance explain?

In the insurance world there are six basic principles that must be met, ie insurable interest, Utmost good faith, proximate cause, indemnity, subrogation and contribution. The right to insure arising out of a financial relationship, between the insured to the insured and legally recognized.

What are the 10 principles of insurance?

In insurance, there are 7 basic principles that should be upheld, ie insurable interest, utmost good faith, proximate cause, indemnity, subrogation, contribution, and loss of minimization.