Page 143 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes insurance. But in life assurance some could argue that there is no uncertainty about death:
it is one of the few certainties we have. Life assurance is, however, still involved with
fortuitous events as it is the timing of death that is beyond the control of the person
affecting the policy.
5. 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.
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.
6. 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.
7. 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. The classes of risk and their insurability:

(i) Financial and Non-financial Risks: There are several risks in life, which have little or no
financial consequences. But insurance is concerned with indemnifying only losses
arising from financial risks.
(ii) Static and Dynamic Risks: Changes in the prices of essential commodities consumer
tastes and technology are dynamic risks. All these risks have financial consequences,
but are still not considered insurable as they are unpredictable. Static risks have
nothing to do with changes in the economy but arise due to perils of nature,
dishonesty or infidelity. The property may be ruined or dispossessed and there is a
financial loss from such risks and they are predictable and hence insurable.

(iii) Fundamental and Particular Risks: These are a group of risks which are caused by
economic, social and political factors. They affect large segments of the population.
Some examples are floods, war, inflation, earthquake, etc. They are uncontrollable
and are considered to come under social insurance. However, some risks like
earthquake are covered by commercial insurance companies. Particular risks involve
losses that happen to individuals and may be dynamic or static. Destruction of a
house by fire and robbery of a bank are particular risks and hence, are insurable.
(iv) Pure and Speculative Risks: Risks that produce only loss but no gain are pure risks but
speculative risks involve possibility of gain and are almost similar to wagering or
gambling.

Self Assessment

Fill in the blanks:
1. ……………..risks involve possibility of gain and are almost similar to waging or gambling.
2. The loss must be entirely …………….as far as the person seeking insurance is concerned.
3. A family is protected against losses on ……………with the help of insurance.

4. The life insurance claim is a……………., because the contingency of death or the expiry of
term, will certainly occur.
5. Insurance is concerned only with …………..risks.

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