CHAPTER 2: INTRODUCTION TO INSURANCE
Minh Phuc Nguyen, Division of Logistics and Supply Chain Management
School of International Economics and Business, Foreign Trade University
Definition
Insurance is the pooling of fortuitous losses by transfer of such risks to
insurers, who agree to indemnify insureds for such losses, to provide
other pecuniary benefits on their occurrence, or to render services
connected with the risk (Rejda, 2008)
Insurance is mechanism for contractually shifting burdens of a number
of pure risk by pooling them (Rubin, 2008)
Insurance provides economic protection against losses that may be
incurred due to chance events (death, disability, economic losses) that
may or may not occurred during the effective time of the contract called
a policy.
Basic characteristics of insurance
Pooling of losses (the law of large numbers)
Payment of fortuitous losses
Risk transfer
Indemnification
Common terms
Insurer: company offering protection through the sale of an insurance
policy to an insured.
Insured: party covered by an insurance policy.
Subject matter of insurance (subject matter insured): is an object of an
insurance policy and is the reason for issuing the policy.
Value of subject matter of insurance (V): the total value of the subject
matter insured at the time of an insurance policy.
Insurance event: Su kien bao hiem <=> When the insurance happens
Common terms
Amount of insurance to value (A): proportion of the sum insured to the
total property value.
Liability limits: maximum amount of coverage available under a
liability insurance policy.
Rates (R): cost per unit of insurance.
Premium (I): rate that an insured is charged, reflecting his or her
expectation of loss or risk. The insurance company will assume the risks
of the insured in exchange for a premium payment.
I = V(A)*R
Common terms
Reinsurance: form of insurance that insurance companies buy for their
own protection, “a sharing of insurance”. An insurer (the reinsured)
reduces its possible maximum loss on either an individual risk or large
number of risk by giving a portion of its liability to another insurance
company.
Overlapping insurance: coverage by at least two insurance policies
providing the same coverage for the same risk.
Over-insurance: situation in which insurance benefits exceed the actual
loss of an insured. Mua CIF bao hiem 110% khong phai overinsurance vi 10% la surcharge cho cac chi phi phat sinh sau khi het trach nhiem
ben mua (Unloading, custom clearance,...) => Chi la tap quan thuong mai qte, khong phai la luat
Luat VN quy dinh khi import, maximum value for CIF is 110%
Coinsurance Reinsurance (Tái bao hiem):
VD. Van chia phan cover bao hiem cho cac ben, tuy nhien
, se chi co 1 party bear the liability with owner
Elements of insurable risk
Large Number of Expose Units
Accidental and Unintentional Loss
Determinable and Measurable Loss
Calculable Chance of Loss
No Catastrophic Loss
Economically Feasible Premium
Risk must be legally
Principles of insurance
Indemnity: the principle of indemnity implies that on the happening of
an event insured against, the Insured will be placed by the Insurer in
the same pecuniary (monetary) position that he/she occupied
immediately before the event.
Utmost good faith: is a positive duty voluntarily to disclose, accurately
and fully, all facts material to the risk being proposed, whether
requested or not.
Principles of insurance
Insurable interest: is the legal right to insure out of financial relationship
recognised under law, between the insured and the subject matter of
insurance.
(The insurable interest must exist both at the time of the proposal and at
the time of claims except for marine insurance)
Subrogation: in general, means the legal right of one person, having
indemnified the other in a contractual obligation to do so, to stand in
the place of another and avail of all the rights and remedies of the
another, whether enforced or not.
Principles of insurance
Fortuity not certainty
Proximate cause: the immediate or actual cause of loss under an
insurance policy.
Loss or not loss
Types of insurance
According to operating method
Social
insurance
Commercial insurance
According to the nature of insurance
Life
insurance
Non-life insurance
Types of insurance
According to subject matter insured
Personal insurance
Property insurance
Liability insurance
According to Vietnamese law (in certain cases)
Compulsory
Voluntary