8 Insurance

8. The necessity of insurance for the existence of businesses.

 

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.

Insurable risks	Non-insurable risks
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.	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.

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

life insurance	other insurances( General insurance)
·         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	·         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.

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.