MARY THE QUEEN COLLEGE

INSTITUTE OF BUSINESS EDUCATION

FINMKT 1.5- INSURANCE MARKET

The economic significance of the insurance industry lies in its unique role as an absorber of personal and
business risks. By providing financial protection, the industry plays a key role in a country’s economic
growth and development. Because of the risk aspects of the business and the contractual obligations to
policyholders, the insurance industry’s traditional investment practices have been characterized as
conservative.

For purposes of considering investment policy, it is sufficient to narrow the categories to life and non–life
(casualty) insurance companies.

WHAT IS INSURANCE?

Insurance

Insurance is defined as a contract, which is called a policy, in which an individual or organization

receives financial protection and reimbursement of damages from the insurer or the insurance company.
At a very basic level, it is some form of protection from any possible financial losses.

First, insurance is designed to make a loss whole. In the simplest terms, a loss occurs when things you
own are destroyed or reduced in value. If your house burns to the ground, insurance will provide the funds
to rebuild it. The idea is to pay for your actual losses without allowing you to make money. This is what
an insurer means by making the loss whole. In addition, it’s important to note that an insurance policy is a
legally binding contract between two parties. One party is the insured person—you—and the other is the
insurance company.

Insurance Contracts- Outlines the circumstances under which the insurer will compensate the insured
for a damage or loss.

As is true with all contracts, an insurance policy describes the rights and obligations of each party. In
addition, the policy identifies how much you must pay to receive those rights. This amount is known as
the premium. The policy identifies how much the insurance company is obligated to pay, if certain events
should occur. The maximum amount an insurance company will have to pay is the limit of insurance.

DEFINITION OF TERMS:

Insured. Any person organization or company or a member of these specifically designated by name as
the one(s) protected by the insurance policy. •

Insurer. The party to an insurance arrangement who undertakes to indemnify for losses, provide
pecuniary benefits or render services. The word “insurer” is often used instead of “carrier” or “company”
since it is applicable without ambiguity to all types of individuals or organizations performing the
insurance function. The word insurer is generally used in statutory law.
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Loss. Generally, refers to (1) the amount of reduction in the value of an insured’s property caused by an
insured peril (danger), (2) the amount sought through an insured’s claim or (3) the amount paid on behalf
of an insured under an insurance contract.

Insuring Agreement (or Clause). That portion of an insurance contract which states the perils insured
against, the persons and/or property covered, their locations and the period of the contract.

Claim. A demand made by the insured or the insured’s beneficiary, for payment of the benefits provided
by the contract.

• Indemnity (Pay or Refund). To restore the victim of a loss to the same position as before the loss
occurred. Payment provided by the insurer to the insured if a loss occurs.

CONCEPTS OF INSURANCE

The premiums or cost associated with insurance are affected by:

a. The likelihood of a loss occurs.

b. The severity or size of a loss if it does occur ( How much will the insurance company will pay for
the loss)

LEGAL ELEMENTS OF INSURANCE (LIFE AND NON-LIFE)

Elements of a Contract

1. Agreement. When an offer made by one party has been accepted by the other, with mutual
understanding by both, an agreement exists.

2. Legal Purpose. For a contract to be valid it must not be for an illegal subject or contrary to public
policy. Insurance does not cover intentional loss or criminal acts for this reason.

3. Consideration. The exchange of values on which a contract is based. In insurance, the

consideration offered by the insured is usually the premium and the statements contained in the
application. The consideration offered by the insurer is the promise to pay in accordance with the
terms of the contract.

4. Competency. This is one of the elements that must be present in order to have a legal contract. It
relates to the fitness or ability of either of the parties to the contract. An example of incompetency
would be a mental incapacity.
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OTHER LEGAL PRINCIPLES IMPORTANT IN INSURANCE LAW

Concealment. The failure to disclose a material fact.

Materiality. In insurance, it refers to a fact which is so important that the disclosure of it would change
the decision of an insurance company, either with respect to writing coverage, settling a loss, or
determining a premium. Usually, the misrepresentation of a material fact will void a policy.

Fraud or Deceit, trickery, or misrepresentation with the intent to induce another to part with something
of value or surrender a legal right.

Representation. A statement made on an application for insurance that the applicant represents as correct
to the best of his or her knowledge and belief.

TYPE OF INSURANCE

1. Health Insurance (Critical Illness or HMO)

Covers medical expenses for illnesses, injuries, and medical conditions. Some companies provide
health insurances to their employees as part of their employee benefit package or some avail
individual plans.

Health Insurance providers may require medical exams as part of the application

process. Factors affecting Premiums:

a. Age, gender, profession, weight and physical fitness, smoker or non- smoker

b. Personal and Family Health History

c. Pre- Existing conditions

2. Life Insurance

Basic Features of a Life Insurance Policy

a. The Death Benefit- the amount of money the insurance company will pay when the
insured person dies. Typically, this benefit is tax free if it is irrevocable.

b. The Beneficiaries- The person or people who get the death benefit. It can all go to a
 single person or it can be divided by percentage among the people. As a rule, it muts
be blood related.

c. The policy length or term- The time period that the insurer agrees to pay a death
benefit. In a term policy, it is defined as a specific number of years such as 10, 20 or
30. A permanent policy lasts for the life of the insured for whole life as long as
premiums are paid

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d. The premium - The monthly or yearly payments needed to keep the policy in effect.

e. The Cash Value- the policy’s investment component that builds value over time and
can be cashed out or borrowed.

Type of Life Insurance

a. Term life insurance, also known as pure life insurance, it covers for a specific term or
length of time, typically between 10 and 30 years. It is called a pure life insurance
because unlike whole life insurance, there is no cash value to the policy. It is designed
solely to give your beneficiaries a payout if you die during the term.

b. Whole life insurance or Permanent Life Insurance is a type of permanent life

insurance, which means the insured person is covered for the duration of their life as
long as premiums are paid on time.

c. Variable Life Insurance- It is a contract between you and an insurance company. It is

intended to meet certain insurance needs, investment goals, and tax planning
objectives. It is a policy that pays a specified amount to your family or others (your
beneficiaries) upon your death. It also has a cash value that varies according to the
amount of premiums you pay, the policy’s fees and expenses, and the performance of
a menu of investment options—typically mutual funds—offered under the policy.

3. Disability Insurance (Social Insurance)

 Disability insurance is an insurance provided if an employee is disabled and cannot work.

4. Accidental Death Insurance

Accidental death benefit and dismemberment is an additional benefit paid to the

policyholder in the event of his death due to an accident.

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In an event of death, the insured person gets the additional amount mentioned under these
benefits in the insurance policy. These are the supplementary benefits incorporated in life
insurance and health insurance policies.

5. Home Insurance

Home insurance is designed to cover you financially should something happen to your home
and/or belongings. There are three main types of home insurance – building insurance (which
covers the building itself and the fixtures), contents insurance (which covers your personal
belongings) and combined home and contents insurance (which covers both).

Home insurance covers your home and/or contents if it is damaged or destroyed due to an
‘insured event’. Cover will vary between insurers, but it generally covers events such as:

• Fire
• Theft
• Storm

• Earthquake
• Explosion

• Impact damage (such as from a car or a falling tree)

• Vandalism, or Riot

What is Mortgage Redemption Insurance?

Mortgage Redemption Insurance is a life insurance policy that helps repay your mortgage balance
in the event of your death before the housing loan’s full repayment. MRI is designed to protect
your home from foreclosure as it will take out your outstanding debt if you die.

6. Auto Insurance

Provides coverage for damages associated with motor vehicle accidents.

 Types of Coverage:

a. Liability- Own Damage, Theft, Bodily Injury, Acts of God or Nature (Typhoon,
Hurricanes, Earthquake, Volcanic Eruptions, hitting an animal while driving the
road), Personal Accident.

b. Collision- Damage to your vehicle from a collision with another vehicle, Damage to
your vehicle from a collision with an object such as tree, Damage to your vehicle
from a single car accident that involve rolling or falling over.

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c. Comprehensive – It covers all letter A and B plus

c.1 legal assistance. If you are involved in a legal case caused by a vehicular
accident, this coverage can aid you financially by paying for hearings and legal
consultations. Legal assistance allows you to settle legal issues in a more cost
effective way.

c.2Roadside Assistance. Consider adding this coverage to your policy if you

wish to receive immediate assistance when your car breaks down on the road.
Roadside assistance covers various vehicle services including towing services,
roadside repairs, and fuel deliveries.

c.3 Loss of Use. If you can’t use your car due to damage, this will reimburse any
transportation expenses incurred during your vehicle’s repair period. Some
insurance companies also offer temporary transport services in events like this.

c.4 Riots, Strikes, and Civil Commotion. This coverage covers damages from
kicking, scratches, broken mirrors, shattered windows and windshield, and other
forms of vehicle damage caused by riots.

REPUBLIC ACT NO. 10607

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“If you don’t go after what you want, you’ll never have it. If you don’t ask, the answer is always
no. If you don’t step forward, you’re always in the same place.” – Nora Roberts

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