Principles of insurance ppt

Principles of insurance

Insurable interest

1) Insurable interest• Insurable interest means that the person opting for

insurance must have pecuniary interest in the property he is going to get insured and will suffer financial loss on the occurrence of the insured event.

• This is one of the essential requirements of any insurance contract.

• Therefore , a person can go for insurance of only those properties where he stands to benefit by the safety of the property, and will suffer loss, damage, injury if any harm takes place to such property.

Example • If the house you own is damaged by fire, the value of your

house has been reduced by the damages sustained in the fire.

• Whether you pay to have the house rebuilt or you and up selling it at a reduced price. You have to suffered a financial loss resulting from the fire.

• By contrast, if your neighbor’s house, which you do not own, is damaged by fire, you may feel sympathy for your neighbor and you may even be emotionally upset, but you have not suffered a financial loss from the fire, but in this example you do not have an insurable interest in your neighbor’s house.

2) Uberrima fides

• Uberrima fides – Almost good faith• The insurance contract must be based on good faith.• If the insurance contract is obtained by way of fraud

or misrepresentation it is void.• When an individual apply for life insurance, it is

important to answer all questions truthfully and to volunteer any information even if not asked, if in doubt, just disclose it. Failure to disclose material facts could render the entire contract void.

Example • If a person was suffering from sinusitis but did not disclose

it, the entire contract could be cancelled when the insurer discover non-disclosure.

• Cancellation of the entire contract means other non-related illnesses like cancer could no longer be covered.

• Some financial advisors who in their enthusiasm in closing the sale advice their clients not to disclose their pre-existing conditions for fear that the underwriter would reject the case.

• Therefore it is important to engage an ethical financial advisor. To avoid any conflict of interest, ensure you pay a fee for consultation.

3) Material facts disclosure

• In the insurance contract, the proposer is required to disclosure to the insurer all the material facts in respect of the proposed insurance.

• This duty of disclosing the material facts not only applies to the material facts which are known to him but also extends to material facts which he is supposed to know.

Examples

• Acquisition of new companies and/or mergers• Changes to your business description.• Additional product lines and/or new services• Hazardous trade processes, or storage of

hazardous matter, including changes or additons to processes or storage already declared

• Incidents not reported to insurers that might otherwise have led to a claim e.g theft or small fires.

Indemnity

4) Indemnity • The insurance contract should always be a contract of

indemnity only and nothing more.• Insured can’t make any profit from the insurance contract.

Insurance contract means for coverage of losses only.• Indemnity means a guarantee to put the insured in the

position as he was before accident.• This principle does not apply to life insurance contracts.• The main object of this principle is to ensure that the

insured is not able to use this contract for speculation or gambling.

Contribution

5) contribution• In case the insured took more than one insurance policy for

same subject matter, he/she can’t make profit by making claim for same loss more than once.

• For example: Raj has a property worth Rs 5 lakhs. He took insurance from company A worth Rs. 3 lakhs and from company B –Rs 1 lakhs.

• In case of accident, he incured a loss of Rs. 3 lakhs to the property. Raj can claim Rs 3 lakhs from company A but after then he can’t make profit by making a claim from company B.

• Now company A can make a claim from company B to for proportional loss claim value.

6) Subrogation

What is subrogation?Defnition :• Subrogation is defined as a legal right that

allows one party (e g, your insurance company) to make a payment that is actually owed by another party (e g, the other driver’s inurance company) and then collect the money from the party that owes the debt after the fact.

How subrogation works?

Example :• Suppose another driver runs a red light and your car is

totaled. You have insurance on your car, so you call your insurance carrier and they pay you for all of your expenses related to the accident.

• Your insurance company realizing that the other driver had an insurance policy, then seeks reimbursement from the as fault party’s insurance carrier.

• Your insurer is “subrogated” to the rights of your policy and can “step in your shoes” to recover any amount paid out on your behalf.

Partial fault and subrogation

• If the insurance company’s investigation finds that you’re partially at fault in the accident, the amount of the deductible you can recover will be prorated to the percentage of your fault.

• Example – if the judgment is that you were 40 % of fault, for example and your insurer chooses to subrogate your claim, you’ll be entitled to 60% refund of your deductible.

Waiving subrogation

• If you sign any settlement with other driver’s insurance company, be careful to read the fine print.

• Some insurers attempt to insert a “waiver of subrogation” clause to prevent your insurance company from attempting to get reimbursement for money that it has paid out to you.

• If you waive subrogation after an accident, your auto insurance company may refuse to pay your claim because they will not be able to seek reimbursement from the other driver’s insurance company.

7) Loss minimisation

• This principle states that the insured must take all the necessary steps to minimize the losses to insured assets.

• For example – Ram took insurance policy for his house. In an cylinder blast, his house burnt. He should have called nearest fire station so that the loss could be minimised.

Causa proxima

8) Causa proxima

• Word “Causa Proxima” means “Nearest Loss”• An accident may be caused by more than one

cause.• In case property insured for only one cause. In

such case nearest cause of the accident is fount out.

• Insurer pays the claim money only if the nearest cause is insured.

Salary saving scheme (SSS)

Salary saving schemes (SSS)• Salary saving scheme are intended to cater to the needs of the

working classes.• In these schemes the insurance company has an arrangement

with the employer, whereby the employer deducts the premium from the employee’s salary and passes it on to the insurance company every month

• As the premium is deducted from their salary before it reaches the employee they do not need to worry about defaulting on the premium.

• The insurance company also benefits as it receives the consolidated premium from the employer for all the employees who have enrolled on the scheme

• The employer makes the deduction for the premium from the employee’s salary based on an authority letter signed by the employee, which is with the proposal form and is sent to the employer by the insurer, when the policy is accepted

• A demand list containing the list of employees, their designation along with the amount to be deducted is sent to the organisation periodically by the insurance company.

• A salary saving scheme is not a specific insurance plan. It is just a convenient arrangement to collect the premium. It can be used for a term plan, an endowment plan or any other plan as offered by the insurer under the SSS arrangement.

Employee deposit linked insurance scheme (EDLIS)

• The act was amended to incorporate an insurance scheme, called the Employee ‘Deposit linked insurance scheme (EDLIS) in 1976.

• The objective of the scheme was to put in place a mechanism to provide employees ‘families with income security after the death of the member.

• It was founded through contributions by the employer and the central government with no contribution by the employee himself.

Applicability

• EDLIS is applicable to all the factories and establishments to which EPF & MA Act, 1952 applies.

• This include both the exempt and unexempt establishments covered by the act

• All employees who join the Employees Provident Fund (EPF) are covered by the EDLIS.

EDLIS -Contributions• The act specified that the employer shall contribute not more

than 1% of the aggregate of basic wages, dearness allowance including cash value of food concession and retaining allowance.

• In 1977 it was decided that the employer would contribute 0.5 % of the above mentioned aggregate pay, subject to a ceiling of Rs 6500.

• The central government contributed 0.25% of the pay in respect of the covered employees.

• After 1998 the central government must credit its contributions to the fund as soon as possible after the closure of every financial year.

Benefits • On the death of an employee who is a member of the

Provident Fund, the selected nominee will get the existent accumulations in the PF account of the employee as well as an additional amount.

• This additional amount is equal to the average balance in the account of the deceased during the proceeding twelve months or during the period of membership, whichever is less where the average balance exceeds Rs 35,000 plus 25% of the amount in excess of this figure.

• This total amount in subject to a ceiling of Rs 60,000 . The lump sum is tax free.

A Unit Linked Insurance Plan (ULIP)

• It is a product offered by insurance company that unlike a pure insurance policy, gives investors both insurance and investment under single integrated plan.

Working principle

• A unit link insurance plan is basically a combination of insurance as well as investment.

• A part of the premium paid is utilized to provide insurance cover to the policy holder while the remaining portion is invested in various equity and debt schemes.

• The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various market investments(debt and equity) in varying proportions just the way it is done for mutual funds.

Features

• ULIP policy holders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.

Types

• There are a variety of ULIP plans to choose from based on the investment objectives of the investor, his risk appetite as well as the investment horizon.

• Some ULIP’s play it safe by allocating a larger portion of the invested capital in debt instruments while other purely invest in equity.

• All this totally based on the type of ULIP chosen for investment and the investor preference and risk appetite.

Charges

• Unlike traditional insurance polices, ULIP schemes have a list of applicable charges that are deducted from the payable premium. The notable ones include policy;

• Administration charges• Premium allocation charges• Mortality charges• Policy surrender or withdrawal charge.• Some insurer also charge “Guarantee charge” as a

percentage of Fund Value for built in minimum guarantee under the policy.

Risks

• Since ULIP returns are directly linked to market performance and the investment risk to portfolio is borne entirely by the policy holder,

• One needs to throughtly understand the risks involved and one’s own risk absorption capacity before deciding to invest in ULIPs.

Providers

• Public insurance providers include LIC of india, SBI life and Canara.

• Some of the private insurance providers include Reliance life, ICICI Prudential, HDFC Life, Bajaj Allianz, Aviva Life insurance and Kotak Mahindra Life.