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Insurance Laws and Practices

Notes premium. These payments are intended as fairly small fees, which over time can add up to a
significant amount. The total value of the premiums is meant to compensate the insurer and
provide enough funding to cover potential costs if an insurance claim is filed by the insured.
In the next unit you will study about the nature and functions of insurance including the scope
of insurance. The unit will guide you through the difference between insurance, gambling and
hedging and will help you to understand some of the related terms of insurance. It will also
explain the role of insurance in economic development.

2.1 Insurable Risks

You must remember that insurable risks have certain common features. They are enumerated
below:

1. Insurance is concerned only with pure risks: Speculative risks, where there is the possibility
of some gain, cannot be insured. This is generally the case, although certain modern
developments may lead us to alter this statement in due course. Speculative risks are
normally taken in the hope of a gain. All pure risks are insurable but speculative risks, on
the whole, are not.
2. Homogeneous exposures: If there are thousands of people/properties having similar
exposures then the contributions could be comparatively small as the percentage of losses
on the whole will decrease.
3. Financial value: The risk must involve a loss that is capable of financial quantification.
Insurance is concerned only with situations where monetary compensation is given
following a loss. Loss or damage of property may lead to a loss, which is quantifiable.

Example: In life assurance, the financial loss suffered by a wife on the death of her
husband is difficult to quantify, still a specific sum of money is decided prior to taking out the
policy.
4. Not against public policy: It is a common principle in law that contracts must not be
contrary to what the society considers the right and moral thing to do. This applies to
insurance contracts also. Something against public policy is not insurable, E.g. risk of loss
of goods while smuggling.
5. Risk of being fined by the police: A fine is intended to penalize the person and while
insurance may be available to meet the losses following, say, a motor accident. It is not
possible to provide insurance to pay the fine of the driver who was found guilty of some
offence.
6. Insurable interest: The risk that is to be insured must result in some form of financial loss
to the person taking insurance. Otherwise any person could insure some other person’s
house or car so that when the house or car was damaged he, in addition to the owner of the
property, would receive compensation from the insurance company. This is not allowed.

!

Caution One of the basic doctrines of insurance is that the person insuring must be the one
who stands to suffer some financial loss if the risk materializes.
7. Fortuitous (by fortune): The loss must be entirely fortuitous as far as the person seeking
insurance is concerned. It is not possible to insure against an event that will occur with
certainty, as in such a case, there would be no risk, no uncertainty of loss.

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