What is Insurance?
Insurance is a service people can purchase that compensates
them for a financial loss. In return for payment of a premium
an insurance company promises to pay compensation should a
financial loss occur.
Risks are insurable when
- The person taking out insurance gains from its existence
and suffers from its loss
- The loss is accidental
- The risk is one of many similar risk being insured
- The possible loss is not so big that it would ruin the
Principles of Insurance
Insurance is governed by three principles:
- Insurable interest:
A person who wishes to take out insurance must gain from
the existence of what is being insured and suffer from its
- Utmost good faith:
A person applying for insurance must always answer all questions
asked truthfully. Failure to do so can make the insurance
cover null and void (worthless).
An insured person cannot gain from insurance i.e. insurance
can at best put an insured person in the same financial
position as they were prior to a loss occurring.
The principle of indemnity has two sub-principles:
Principle of contribution: Should the same risk be
insured by two or more insurance companies, the compensation
must be shared out between them.
Principle of subrogation: It always
follows that once an insurance company pays out compensation
it becomes the owner of the item insured.
Types of Insurance
The main types of insurance cover taken out by households
- Personal insurance
- Property insurance
- Life insurance/assurance
- Motor insurance
The main types of insurance cover taken out
by businesses include:
- Fire insurance
- Theft insurance
- Product liability
- Employer’s liability
- Public liability
- Motor insurance
When taking out insurance a person
completes a proposal form and when making a claim
for compensation a person completes a claims form.
An actuary calculates the premium to
be paid for insurance. When a person makes a claim for compensation
an assessor calculates the compensation to be paid.
Loadings (factors that increase the
risks insured) increase the size of the insurance
premium whereas deductions (factors that reduce
the risk insured) decrease the size of the insurance
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