8.
The necessity of insurance for the existence of businesses.
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8.1 Insurance
Risk
The space of occurring
damage which can be estimated financially is known as risk in insurance.
There can be various
risks when performing business activities,
Examples:
·
Catching fire
·
Risk of theft
·
Loss from business.
·
Damages that can happen to business
properties.
Insurance is an
agreement between an insurer and the insured whereby the insured agrees to pay
the premium and the insurer agrees to pay compensation that the insured face
from insured risks.
Risks can be
categorized as insurable risks and non-insurable risks, Given below are
some characteristics that should be in insurable risks.
·
Risks can be forecast.
·
Risks that may happen in the future can
be calculated in terms of money.
·
Risks should not be certain. In other
words, the loss should happen in a random way.
·
It should be of no connection. It means,
the loss that has happened should not be related to any other insured loss.
·
It should be verifiable. The cause for
the loss, the place where it occurred, time and amount can be analyzed.
To be an insurable
risk, the above facts need to be fulfilled. If the above facts are not fulfilled then
those kinds of risks are non-insurable risks.
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Insurable risks
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Non-insurable risks
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v
The risk that may be caused by the buildings
catching fire.
v
The risks of motor vehicle accidents.
v
Damages that happen to money in transit.
v
The risk of not receiving the money from a debtor.
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v
Businesses experiencing loss.
v
The risks from natural reasons. ( Depreciation,
expiration, vaporisation )
v
The risks decided by one’s ability and strength (
Failure in exam , loss of love )
v
The risks caused by the change in design.
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Importance of Insurance
·
Investors are motivated to start
businesses since the risks of the businesses are covered by the insurance.
·
Receiving protection in terms of money
when disabled or at death. ( for employees )
·
Capital for the development of the
country is provided since the insurance companies reinvest their funds.
·
The international trade has been
developed since marine insurance.
Insurance agreement
Insurance agreement is
a written agreement that takes place when an insurance proposal form, presented
by the person who intends to obtain an insurance coverage, is accepted by an
insurance institution.
Insurance policy
Insurance policy is a written certificate
given by an insurance institute to the insured after an insurance agreement for
a life or a property has taken place,
There are two parties related to insurance
agreement
v First
party (Insured )
The
person who presents an insurance proposal or the person who obtains insurance coverage.
v Second
party ( Insurer)
The
party who accepts the insurance proposal or the insurance company.
Apart from the above
there can also be a third party. The third party is the relationship about
external party that comes into the activation of the agreement.
To validate an
insurance agreement, there should be the following :
v Idea
of legal obligation
v Insurance
offer or proposal
v Acceptance
v Legal
validity
v Ability
to have legal obligation by parties.
8.2 The principles of
insurance
To maintain the
insurance business in an orderly manner, the principles of insurance should be followed.
v Insurable
interest
v Utmost
good faith
v Indemnity
v Subrogation
v Contribution
v Proximate
cause
Insurable interest
The interest over
anything, whereby the existence of it causes economic advantages and the loss
of it causes economic disadvantages is known as insurable interest.
Examples:
Ø There
are insurable interests over husband’s life to wife as well as over wife’s life
to husband.
Ø The
legal owner of any property has insurable interest over the property. (Own
motor vehicle, land etc.)
Ø A
creditor has insurable interest over the debtor’s life which limits the amount
of money he has lent.
Utmost good faith.
Revealing all the
information related to the insurance agreement by the insurer and the insured morally
regarding the object, subjected to insurance, is known as utmost good faith.
Indemnity
When an insured
property has been damaged, payment of an adequate amount of the compensation to
restore the property is known as indemnity.
Examples:
Ø If
a motor vehicle worth 40 lakhs has been insured for the same amount and if a
damage of 2.5 lakhs takes place, only 2.5 lakhs will be received as
compensation.
Contribution
When a property has
been insured in several insurance companies and if a damage has occurred to it,
payment of compensation by all the insurance companies for it by contributing proportionately
is known as contribution.
Examples:
Ø If
a property worth 10 lakhs has been insured in three insurance companies named
A, B and C for 5, 3, and 2 lakhs respectively, and if a damage of Rs. 100,000
has occurred to it, According to the ratio 5 : 3 : 2, A contributes 50,000, B
contributes 30,000 and C contributes 20,000 as compensation.
Subrogation
When the insurance
company has settled the loss for the damage caused to the insured property,
transfer of other advantages and rights from external parties that the insured can
obtain, to the insurer is known as subrogation.
Examples:
Ø If
a motor vehicle, insured for 50 lakhs is destroyed totally in an accident, then
the insurance company pays all 50 lakhs as compensation and takes over the
debris of the vehicle.
Proximate reason
When several reasons
cause the damage of an insured property or a life, the payment of compensation
is made only if the proximate reason is covered by the policy is known as proximate
reason.
Examples:
Ø A
person owning a theft insurance policy cannot obtain compensation if his home
is damaged by a fire. The reason is, the risk of catching fire hasn’t been
covered by the insurance policy.
Insurance interest,
utmost good faith and proximate reason are the only principles that are relevant
to life insurance.
Indemnity and the
principles relevant to it such as contribution and subrogation are not relevant
to life insurance. The reason for that is, the loss is immeasurable when a loss
or an accident happens to lives and that it cannot be recovered. In life
insurance a certain value mentioned in the policy will be granted as
compensation.
Reinsurance
Insuring back a risk that is undertaken by an
insurance company by itself under another insurance company or many is known
reinsurance. Since an insurance company can transfer the liabilities through
reinsurance, the premium charged from the insured is rather low.
Underwriting
Dividing the risk of a property, which is of
higher value, into several insurance companies and handing over the risks to several
insurance companies and in case of an accident to the property the loss will be
compensated by the companies to the amount they have undertaken is known as
underwriting.
Double insurance
Insuring a property in
more than one company can be known as double insurance. The compensation for
the damages will be paid according to the insured ratio.
8.3 Types of insurance
policies which covers various risks in business.
Insurance is categorized
under two categories.
·
Life insurance / long term insurance
·
General insurance.
Life insurance / long term insurance
When faced with risks due to the demise or
physical hazards of the insured, providing monetary benefits to the insured or
his beneficiaries is done in life insurance.
The aim of the life
insurance is to protect a certain person against the losses caused as a result
of demise disability or turning to old age.
Life insurance is
obtained for a certain period of time, if the insured dies during that period,
the agreed total value is given to beneficiaries or a named person and if he
lives until the period is over, he can obtain the value of the insurance policy
and benefits at the end of the period.
The way that the life insurance differ from
other insurances
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life insurance
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other insurances( General insurance)
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·
The risk of life insurance is certain
·
Indemnity principle is not relevant to life
insurance
·
Life insurance is equal to a saving
·
Life insurance policy cannot be transferred
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·
The risk of other insurances is uncertain.
·
Indemnity principle is relevant
·
compensation for other insurances can only be
obtained when a loss is occurred
·
Other insurance policies can be transferred.
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General insurance
General insurance can be categorised as
follows .
v Fire
insurance
v Theft
and burglary insurance
v Natural
disaster insurance
v Marine
insurance
v Motor
vehicle insurance
v Liability
insurance
v Goods
in transit insurance
v Money
in transit insurance
Fire insurance
Insurance that can be
obtained to cover the losses caused to a person, building or any other property
due to fire is the fire insurance.
Apart from the losses
caused due to fire, the following risks can also be covered in the policy by extending
the policy by paying extra premium.
·
Losses by riots / strikes
·
Losses by explosions
·
Losses by electricity
·
Earth quakes / tsunami
·
Flood /whirl winds /storms
·
Aircraft crashes
·
Losses from crashes.
·
Consequential losses
Theft and burglary
insurance
Theft insurance
policies can be obtained to cover the risks that can happen to busness premises
or to homes from thievery.
Natural disaster insurance
Natural disaster
insurance can be obtained to cover the losses occurred to properties such as by
storms.
Marine insurance
The losses caused to
ships and goods in them while transporting by the sea can be covered by marine
insurance.
Marine insurance is of
two parts.
·
Hull insurance
·
Cargo insurance
Different kinds of insurance policies can be
obtained under the hull insurance.
·
Full option policy (Comprehensive
policy)
·
Total loss policy
·
Port risk policy
·
Maintenance policy
·
Construction all risk insurance policy
Different kinds of
insurance policies can be obtained under the cargo insurance.
·
Valued policy
·
Open cover/ floating policy
·
Future time policy
Motor traffic insurance
An agreement made
between an owner of a motor vehicle and an insurance company to obtain compensation
for the loss occurred to motor vehicles, people traveling in motor vehicle and
other external parties due to motor vehicle accidents.
There are some kinds of
insurance policies that can be obtained under motor traffic insurance.
·
Full insurance
·
Third party fire and theft insurance
·
Third party insurance
Full insurance policy
By a full insurance
policy losses to the relevant vehicle, people and properties that traveling the
vehicle are covered.
Third party fire and
theft insurance
By third party fire and
theft insurance, apart from losses to relevant vehicle by fire and theft,
losses to external people and properties are also covered.
Third party insurance
By a minimum third
party insurance losses only to third party and properities are covered. To run
a motor vehicle on the road at least minimum third party insurance must be obtained.
The liability insurance
Insuring the liability
for the losses caused to other parties is known as liability insurance. Because
of this insurance, businessmen can get protection against liabilities for other
parties for the losses caused by them selves.
Given below are some
liability insurance policies under liability insurance.
General liability insurance
An insurance coverage obtained by relevant
businessmen or owners of the properties for the loss that may unexpectedly
occur from properties or from business activities.
Product liability
insurance
An insurance coverage obtained by businessmen
for the losses that may occur to consumers by consuming the products that the
relevant business sells.
Employer liability insurance
It is the responsibility of the employer to
pay compensation for the accidents to employees while being engaged in service.
In that kind of situation the liability to pay compensation can be transferred
to an insurance institute.
The insurance that the employers obtain for
employees , who work under them, to pay compensation for wounds and ailments which
happen due to work is known as employer
liability insurance.
Goods in transit insurance
Insurance that is obtained to cover the losses
that can occur to goods from the moment they are loaded to transport till they
are unloaded intending to transport on
land is known as goods in transit insurance.
Money in transit insurance
The insurance that is
obtained to cover the loss that can happen while taking money from one
place to another is known as money in transit insurance.
