Every individual as well as every businessman has to face risks. It is impossible
to identify with certainity when or where those risks would occur. Instant fires,
storms, floods, tsunamis, earthquakes, accidents and riots are some such risks.
In order to face to these risks a systematic method should be adopted. Insurance
institution give systematic method to minimize these risks.
The basis of insurance is accumulating risk. The insurance collects premiums
from individuals who anticipate different risks and pays compensation from that
common fund to those individuals who have faced these risks in definite. Insurance
accumulates the risks of all into a single insurance funds hence insurance is known
as a pool of risks.
Insurance is established to share financial losses among the participating individuals
of that insurance fund, of one or few individuals who have worn a risk with difficulty.
Insurance is a pool of risks where the losses of one party are shared collectively.
This is an agreement between two parties.
Parties involved in insurance
1. First party – The party who obtains the insurance coverage i.e. the insured.
2. Second party – The party who provides the insurance coverage i.e. the insurer.
The insurer is the insurance company.
3. Third party – All the other parties and properties will be affected by an insurance
contract. For example, the passengers and other vehicles on the
roads will become the third party when a vehicle is insured.
Principles of insurance
Insurance service is built on insurance principles of which a few are mentioned below.
- Insurable interest
- Utmost good faith
- Indemnity
Insurable interest
The legal right to obtain an insurance coverage for a life or for a property is known
as insurable interest.
Example :-
Husband and wife have insurable interest for each other's life.
In property insurance, the legal owner of such property has an
insurable interest.
A creditor has an insurable interest over the life of the debtor up to
the value of the loan.
Utmost good faith
This principle states that both parties to the insurance contract should disclose all
the relevant information accurately for the contract. The parties involved in the
contract are the insurer and the insured. The insurer is the insurance company and
the insured is the party who has obtained the insurance coverage. If either party
does not disclose any important information it will be a breach of utmost good faith.
Then both parties have the legal right to cancel the insurance contract.
Indemnity
This principle states that if a loss occurs to an insured property, the compensation
paid should be sufficient only to reinstate the damage to the previous state. This
principle does not apply to the life insurance.
Example :-
When a motor vehicle having a value of $ 2 000 000 is insured for
the same value, a compensation of $ 500 000 can only be obtained
for a damage valued $ 500 000.
