Page 41 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes after studying this unit. The unit will throw some light on the role of insurance in economic
development.
In the next unit, you will study about the meaning of insurance contract. You will study about
the various types of insurance contracts prevailing in the market today. Besides this, the next
unit will update you about the documents of insurance. The next unit will also explain the term
partial insurance.

3.1 Nature of Insurance

Following characteristics will help you to understand the nature of insurance, which are generally,
observed in the case of all kinds of insurance contracts whether life, marine, fire, or miscellaneous
insurance:

1. Risk Sharing and Risk Transfer: Insurance is a device to share the financial losses, which
might occur to an individual or his family on the happening of a specified event. The event
may be death of the earning member of the family in the case of life insurance, marine-
perils in marine insurance, fire in fire insurance and other certain events in miscellaneous
insurance, e.g., theft in burglary insurance, accidents in motor insurance, etc. The loss
arising from these events if insured are shared by all the insured in the form of premium
which they have already paid in advance. Hence, the risk is transferred from one individual
to a group.

2. Co-operative Device: A group of persons who agree to share the financial loss may be
brought together voluntarily or through publicity or through solicitations of the agents.
An insurer, by insuring a large number of persons, is able to pay the amount of loss. Like
all co-operative devices, there is no compulsion here on anybody to purchase the insurance
policy (third party liability insurance in case of a vehicle owner is an exception).
3. Calculates Risk in Advance: The risk is evaluated on the basis of probability theory before
insuring since the premium payable on a policy is to be determined. Probability theory is
that body of knowledge, which is concerned with measuring the likelihood that something
will happen and making estimates on the basis of this likelihood.

Notes The likelihood of an event is assigned a numerical value between 0 and 1. Those
events that are impossible are assigned a value of 0 and those that are inevitable are
assigned a value of 1. The higher values (between 0 and 1) are assigned to those events
estimated to have a greater likelihood or probability of occurrence.

4. Payment of Claim at the Occurrence of Contingency: The payment is made on happening
of a certain insured contingency. It is true for all non-life insurances that payment will be
made on the happening of the specified contingency only.
The life insurance claim is a certainty, because the contingency of death or the expiry of
term will certainly occur and the payment is certain.
Similarly, in certain types of life policies, payment is not certain due to uncertainty of a
particular contingency within a particular period.

Example: In term-insurance the payment is made only when death of the assured occurs
within the specified term, may be one or two years.

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