Session 8

Nature of Insurance Contract - Insurance & Wager, Re-insurance Need and Types, Advantages, Double Insurance, CoInsurance, Underinsurance

Essential elements of
Insurance Contract
Essential elements of a valid contract under Section 10 of Indian Contract Act Proposal and acceptance Consideration Capacity of parties: major, of sound mind and not disqualified by any law

Consensus ad idem: not caused by coercion, undue influence, fraud, misrepresentation or mistake Legality of object: should not be speculative or wagering

Basic Features of Insurance

Pooling of losses
Actual loss is substituted by average loss

Payment of fortuitous loss

Accidental and occurs as a result of chance

Risk transfer
Transfer of pure risk from the insured to the insurer, who typically is in a stronger financial position

Indemnification
Insured is restored to the approximate financial position prior to the occurrence of loss
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Insurance & Wager

There is a common perception that insurance is wagering. But there are some similarities and dissimilarities between insurance and wagering. They seem alike because there are uncertainty of events and payment is made when that event occurs. The time and the amount of loss is unknown in both cases.

Insurance & Wager

Insurance 1 2 3 4 5 6 7 Risks are existing. Occurring of incident is not certain. The insurer indemnifies the amount of loss suffered due to the insured peril. Insurable interest is required. Valid. Utmost good faith essential. For safety, security and investment. Wager Risks are created. Occurring of incident is must. In wagering contract, one party loses while another earns profit. Insurable interest not required. Illegal. Not required. These elements not present.

Double Insurance
Insurance covers from more than one insurer. Insured has a right to claim from each of the insurer, subject to application of the principle of indemnity (total claim not to exceed the actual loss or aggregate insured value, whichever is less). In case of Double insurance, the Principle of Contribution is applicable. In case of life insurance (which is NOT a contract of indemnity), the above does not apply.
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Co-Insurance
Often exists in case of property insurance Requires the insured to insure the property for a stated percentage of insurable value. CLAIMS= ACTUAL AMOUNT OF INSURANCE * LOSS AMOUNT AMOUNT OF INSURANCE REQUIRED

Principle of Contribution
Right of an insurer, who has paid compensations for loss under a policy, to recover a proportionate amount from other insurers who are liable for covering the loss. Insured can recover full loss under the sum insured from any insurer he likes (in case of double insurance). He has no right against any other insurer. The insurer who has already indemnified, has a right to proportionate contribution from other interested insurers.

Principle of Contribution
Right of an insurer, who has paid compensations for loss under a policy, to recover a proportionate amount from other insurers who are liable for covering the loss. Insured can recover full loss under the sum insured from any insurer he likes (in case of double insurance). He has no right against any other insurer. The insurer who has already indemnified, has a right to proportionate contribution from other interested insurers.

Under-Insurance
The failure to insure the potential exposure to loss. Example: A plant worth Rs. 1 crore is insured only to the tune of Rs.60 lacs It implies that only 60% of the value is covered. The insured bears the risk for the balance 40%. In other words, the insured is presumed to be his own insurer to the extent of 40% of the value of the property.

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Reinsurance

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Reinsurance
Reinsurance means insuring again. The transfering insurer is known as principal or ceding insurer. The insurer to whom the business is transfered is known as reinsurer. Possible mostly in case of large risks that cause greatest exposure to the insurer. Breaking down an unbearable risk into bearable units.

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Treaty Reinsurance
An obligatory contract. Ceding company has to cede and the reinsurer has to oblige by accepting the business as per the treaty. Reinsurer assumes part or all of a ceding companys risk for certain classes of business in accordance with the terms of the treaty.

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Facultative Reinsurance
Reduces the ceding companys exposure to risk of individual contract. Considering a particular underlying risk of an individual contract.

Reinsurance of all or part of a single policy after the negotiation of terms.

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