Principle of Business
Insurance
Insurance vs Assurance
Insurance is protection against risks that might happen in the future such as
accidents, illness, or damage to property while assurance is protection against
events that are inevitable such as death.
Insurance
Insurance offers a system of providing compensation (money awarded) to those
who do suffer a loss.
Insurance is an agreement between an insurance company (the insurer) and
someone who wants financial protection (the insured - the proposer) that
compensation (indemnity) will be paid if a particular loss occurs.
Insurance - Continued
The charge the insurance company makes is called a premium and the contract
drawn up between the insurer and the insured is known as the policy.
The purpose of insurance is to uphold the principle of indemnity, that is to put
someone who has suffered a loss back into the position that they would have
been in had the loss not been suffered.
Insurance - Pooling Risk
To offset the possible effect of a loss, all those at risk can contribute a relatively
small sum of money (the premium) to a fund or 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 in the pool
to compensate (indemnify) them.
Insurance - Pooling Risk
Insurance - Indemnity
Indemnity is the insurance principle by which the policy holder is compensated
for the loss incurred.
Key terms relating to indemnity are:
No Profiteering - Although receiving compensation no profits should be made
Overinsurance - If the value of the insured item is overstated then compensation
will only be for the true value.
Underinsurance - If the value of the insured item is understated then
compensation will only be for that portion of the true value.
Insurance - Subrogation
To subrogate means 'to take the place of'. When an insurance company pays out
compensation against a claim, the money they pay out takes the place of the
article damaged.
For example: a truck is written off. The policyholder is paid the value of the
vehicle and the insurance keeps the old vehicle to sell the parts for scrap.
Insurance - Proximate Cause
When an insurance policy covers a particular risk it is quite possible that damage
may be incurred which is not directly related to the terms of the policy, but may
still be compensated by the insurance company.
Insurance - Proximate Cause
For example, your house may be covered by fire insurance and, of course, the insurance
company would be expected to pay out compensation as a result of the fire; but they
will also pay for damage caused to doors caused by the firemen having to break into
your house to fight the fire. However, such a claim will only be allowed if the loss is
closely related to the original event.
For example, if your car is damaged in an accident and you leave it unattended for a
long period of time, the insurance company would be expected to pay for repairs to the
car, but would not be expected to pay for a computer left unsupervised on the back
seat.
Types of Insurance
There are two main categories of insurance:
Life Insurance (Assurance)
Non-Life Insurance
Insurance - Life
There are two main types of life insurance:
Whole life policies provide for a payment to be made after the death of the
insured.
Endowment policies provide a payment of a sum at a certain age or on the death
of the insured, whichever occurs first.
Insurance - Non-life
Non-life insurance is protection against risk that might happen in the future:
Car/Motor Insurance
Property Insurance
Travel Insurance
Etc.
Insurance - Promoting Trade
All businesses have to take some risks, but they also have to avoid any which are
unnecessary. Insurance helps to narrow down the number of risks.
Insurance promotes business confidence; entrepreneurs are reassured that they
can claim compensation should some unforeseen and costly event occur. This
saves them from having to set aside funds against such an occurrence, thus
increasing the funds available to operate and expand the business.
Insurance - Promoting Trade
Insurance itself is not only a source of employment but also a source of
investment for individuals and corporate investors in the money market.
It is particularly attractive to investors because it is generally a safe investment,
especially in the long term.
Insurance - Promoting Trade