CORE FEATURE OF INSURANCE CONTRACT
In day-to-day life the human being is confronted with diverse risks. However nifty a genius he may be, it is non possible for him to foresee all the calamities that are inwards shop for him in addition to to supply necessaries for them to advance.
Many happy lives are ruined either yesteryear the untimely croak of the earning fellow member of the describe of piece of occupation solid unit of measurement or yesteryear other disastrous calamities such every bit floods fire, earthquake war, accident, etc. which may have got a heavy toll of human life.
These risks are such which cannot travel known inwards advance every bit to when they win travel on in addition to it is physically impossible for an private to brand provision against them yesteryear him. Insurance is a device non to avert these risks but to mitigate their rigorous on individuals.
Insurance is defined every bit a co-operative device to spread the loss caused yesteryear a detail risk over a number of persons who are exposed to it in addition to who concur to ensure themselves against that risk.
Risk is incertitude of a fiscal loss. It should non travel confused with the risk of loss which is the in all likelihood number of losses out of a given number of exposures’.
It should non travel confused with peril which is defined every bit the motility of loss or with peril which is a status that may increase the risk of loss.
risk must non travel confused with loss itself which is the unintentional reject inwards or disappearance of value arising from a contingency. Wherever at that spot is incertitude with honor to a in all likelihood loss at that spot is risk.
Risk is incertitude of a fiscal loss. It should non travel confused with the risk of loss, which is the in all likelihood number of losses out of a given number of exposures.
It should non travel confused with “peril” which is defined every bit the motility of loss or with “hazard” which is a status that may increase the risk of loss. Before nosotros fully elaborate on the definition of insurance; nosotros should instruct familiar with the next terms;
The definition of insurance tin travel made from 2 points:
(1) Functional definition and,
(2) Contractual Definition.
Let’s instruct a brief sentiment virtually the tow points;
Functional definition of Insurance
Insurance is a co-operative device to spread the loss caused yesteryear a detail risk over a number of persons, who are exposed to it in addition to who concur to insure themselves against the risk.
Thus, the insurance is
(a) a co-operative device to spread the risk;
(b) the scheme to spread the risk over a number of persons who are insured against the risk;
(c) the regulation to portion the loss of each fellow member of the monastic state on the soil of probability of loss to their risk; and
(d) the method to supply safety against losses to the insured.
Similarly to a greater extent than or less other definition tin travel given. Insurance is a co-operative device of distributing losses, falling on an private or his describe of piece of occupation solid unit of measurement over a large number of persons, each bearing a nominal expenditure in addition to feeling secure against heavy loss.
Contractual definition of Insurance
Insurance has been defined to travel that inwards which a amount of coin every bit a premium is paid inwards consideration of the insurance incurring the risk of paying a large amount upon a given contingency. The insurance, thus, is a contract whereby;
1. Certain sum, called premium, is charged inwards consideration,
2. Against the said consideration, a large amount is guaranteed to travel paid yesteryear the insurer who received the premium,
3. The payment volition travel made inwards a sure definite sum, i.e., the loss or the policy amount whichever may be, and
4. The payment is made solely upon a contingency.
More specific definition tin travel given every bit follow “Insurance may travel defined every bit a consisting ane political party (the insurer) agrees to pay to the other political party (the insurer) or his beneficiary, a sure amount upon a given contingency (the risk) against which insurance is sought.”
So it is clear that every risk involves the loss of ane or the other kind. The business office of insurance is to spread this loss over a large number of persons through the machinery of co-operation.
The persons who are exposed to a detail risk cooperate to portion the less caused yesteryear that risk whenever it takes place. Thus the risk is non averted but the loss on its occurrence is shared yesteryear the members. The Significance of this fact volition travel clear yesteryear the next example.
The legal definition focuses on a contractual scheme whereby ane political party agrees to compensate to a greater extent than or less other political party for losses.
The fiscal definition provides for the funding of the losses whereas the legal definition provides for the legally enforceable contract that spells out the legal rights, duties in addition to obligations of all the parties to the contract.
Every risk involves the loss of ane or other kind. The business office of insurance is to spread the loss over a large number of persons who concur to co-operate each other at the fourth dimension of loss.
The risk cannot travel averted but loss occurring due to a sure risk tin travel distributed with the agreed persons.
They are agreed to portion the loss because the chances of loss, i.e., the time, amount, to a somebody are non known. Anybody of them may endure loss to a given risk, so, the remainder of the persons who arc agreed volition portion the loss.
The larger the number of such persons, the easier the procedure of distribution of loss. In fact; the loss is shared yesteryear them yesteryear payment of premium which is calculated on the probability of loss. In olden time, the contribution yesteryear the persons was made at the fourth dimension of loss.
The insurance is every bit good defined every bit a social device to accumulate funds to run across the uncertain losses arising through a sure risk to a somebody insured against the risk.
Features of Insurance
From the higher upward explanation nosotros tin break these next characteristics which are, generally, observed inwards illustration of life, marine, burn downward in addition to full general insurances.
1. Sharing of Risk
Insurance is a device to portion the fiscal losses which mightiness befall on an private or his describe of piece of occupation solid unit of measurement on the happening of a specified event.
The trial may travel croak of a bread-winner to the describe of piece of occupation solid unit of measurement inwards the illustration of life insurance, marine-perils inwards marine insurance, burn downward inwards burn downward insurance in addition to other sure events inwards full general insurance, e.g., theft inwards burglary insurance, accident inwards motor insurance, etc. The loss arising from these events, if insured are shared yesteryear all the insured inwards the cast of premium.
2. Co-operative Device
The most of import characteristic of every insurance innovation is the co-operation of large number of persons who, inwards effect, concur to portion the fiscal loss arising due to a detail risk which is insured.
Such a grouping of persons may travel brought together voluntarily or through publicity or through solicitation of the agents.
An insurer would travel unable to compensate ail the losses from his ain capital. So, yesteryear insuring or underwriting a large number of persons, he is able to pay the amount of loss.
Like all cooperative devices, at that spot is no compulsion hither on anybody to buy the insurance policy.
3. Value of Risk
The risk is evaluated earlier insuring to accuse the amount of portion of an insured, herein called, consideration or premium. There are several methods of evaluation of risks.
If at that spot is expectation of to a greater extent than loss, higher premium may travel charged. So, the probability of loss is calculated at the fourth dimension of insurance.
4. Payment at Contingency
The payment is made at a sure contingency insured. If the contingency occurs, payment is made.
Since the life insurance contract is a contract of certainty, because the contingency, the croak or the expiry of term, volition sure as shooting occur, the payment is certain. In other insurance contracts, the contingency is the burn downward or the marine perils etc., may or may non occur.
So, if the contingency occurs, payment is made, otherwise no amount is given to the policy-holder. Similarly, inwards sure types of policies, payment is non sure due to incertitude of a detail contingency inside a detail period.
For example, inwards term-insurance the, payment is made solely when croak of the assured occurs inside the specified term, may travel ane or 2 years. Similarly, inwards Pure Endowment payment is made solely at the survival of the insured at the expiry of the period.
5. Payment of Fortuitous Losses
Another characteristic of insurance is the payment of fortuitous losses. H5N1 fortuitous loss is ane that is unforeseen in addition to unexpected in addition to occurs every bit a final result of chance. In other words, the loss must travel accidental.
The police of large numbers is based on the supposition that losses are accidental in addition to occur randomly. For example, a somebody may sideslip on an icy sidewalk in addition to interruption a leg. The loss would travel fortuitous. Insurance policies create non encompass intentional issues.
6. Amount of Payment
The amount of payment depends upon the value of loss occurred due to the detail insured risk provided insurance is at that spot upward to that amount. In life insurance, the role is non to brand proficient the fiscal loss suffered. The insurer promises to pay a fixed amount on the happening of an event.
If the trial or the contingency takes place, the payment does neglect due if the policy is valid in addition to inwards forcefulness at the fourth dimension of the event, similar belongings insurance, the dependents volition non travel required to test the occurring of loss in addition to the amount of loss.
It is immaterial inwards life insurance what was the amount of loss was at the fourth dimension of contingency. But inwards the belongings in addition to full general insurances, the amount of loss, every bit good every bit the happening of loss, is required to travel proved.
7. Large Number of Insured Persons
To spread the loss immediately, smoothly in addition to cheaply, large number of persons should travel insured. The co-operation of a small-scale number of persons may every bit good travel insurance but it volition travel express to smaller area.
The toll of insurance to each fellow member may travel higher. So, it may travel unmarketable. Therefore, to brand the insurance cheaper, it is essential to insure large number of persons or belongings because the lessor would travel toll of insurance in addition to so, the lower would travel premium.
In yesteryear years, tariff associations or usual burn downward insurance associations were flora to portion the loss at cheaper rate. In monastic state to business office successfully, the insurance should travel joined yesteryear a large number of persons.
Insurance is a cast of risk management primarily used to hedge against the risk of potential fiscal loss. Again insurance is defined every bit the equitable transfers of the risk of a potential loss, from ane entity to another, inwards central for a premium in addition to duty of care.