Second Part- Insurance

Chapter outline

• Insurance Contracts
• Life insurance
• Fire insurance
• Marine insurance
• Other insurance
• Development of insurance manpower
• Insurance act of 1938
• Risk management

Books Recommended :
1. Insurance Principles and Practices; M.N. Mishra

2. Principles of Risk Management and Insurance; George E. Rejda

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 Chapter- 01
Introduction

Insurance Definition:

Insurance is a contract whereby, in return for the payment of premium by the insured,
the insurers pay the financiallosses suffered by the insured as a result of the occurrence
of unforeseenevents.

The definition of Insurance can be made from two points:

1.Functional Definition

2.Contractual Definition

FunctionalDefinition:

The insurance is co-operative devices to spread the loss caused by a particular risk
over a number of persons, who are exposed to it and who are agree to insure
themselves against the risk. Thus the insure is-

• A co-operative device to spread the risk;

• The system to spread the risk over a number of persons who are insured
against the risk;

• The method to provide security against losses to the insured

Contractual Definition:

• Insurance has been defined to be that in which a sum of money as a premium is

paid in consideration of the insurer's incurring the risk of paying a large sum
upon a given contingency. The insurance, thus, is a contract whereby (a) certain
sum, called premium, is charged in consideration, (b) against the said,
consideration, a large sum is guaranteed to be paid by the insurer who received
the,, premium, (c) the payment will be made in a certain definite sum, i.e., the loss
or the policy amount whichever may be, and (d) the payment is made only upon
a contingency.

• Insurance may be defined as a consisting one party (the insurer) agrees to pay
the other party (the insured) or his beneficiary, a certain sum upon a
contingency (the risk) against which insurance is sought.

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Risk :
• The term Risk is used to describe all the accidental happenings which produce a
monetary loss. For e.g.: A factory catching fire, a ship sinking etc.

Functions of Insurance :
The function of insurance can be studied into two parts:

1.Primary function

2.Secondary function

Primary Function:

• Insurance provides certainty: Insurance provides certainty of payment

at the uncertainty of loss. The uncertainty of loss can be reduced by better
planning and administration.

• Insurance provides protection:The insurer provides the guarantees to

the payment of loss against the premium and thus protects the assured
from suffering.

• Risk Sharing: The risk is uncertain; and therefore, the loss arising from
the risk from the risk is also uncertain. When risk takes place, the loss is
shared by all the persons who are exposed to risk.

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Secondary Function:

• Protection of loss: The insurance assist the financially to the health

organization, fire brigade, educational institutions and other organizations which
are engaged in preventing the losses the masses from death or damage.

• Improves Efficiency:The insurance eliminates worries and miseries of losses at

death and destruction of property. As a result to improve the efficiency against
the losses.

• Provide Capital:The insurance provides capital to the society so that the

accumulated capital is invested to the productive sector.

• Helps Economic Progress:The insurance protect the society from huge losses of
damaged, destruction and death and then brings the economic progress of a
country.

Importance of Insurance :
Importance of Insurance in individual point of view:

▪ Bring financial security

-if any man killed or died due to any accident

-damaged any assets or property

▪ Creation of savings – create tendency to increase saving, make a man economy

▪ Provide the facilities of investment – provide loan by insurer before maturity,

after maturity provide a lump-sum amount
▪ Security of old age

▪ Bring the mental satisfaction

Importance of Insurance in business point of view :

1. Reduce the hindrances of risk

2. Encourages of investments

3. Development of foreign trade

-collection of payments, sending of goods, collection of goods

4. Stimulates the employees- insurance for business, group insurance for employees

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Importance of insurance in Economic point of view:
1. Increase savings

2. Formation of capital and increase investment

3. Maintenance of national wealth

4. Creation of employment opportunity

5. Encourage all sectors of economy

Social importance :
▪ Establishment of social security

▪ Increase awareness of the citizens

▪ Solution of unemployment problems

▪ Enhance standard of living

Contribution of insurance to national development :

• Increase the savings

• Formation of capital and increase investment

• Reduce the hindrance of risk

• Maintenance of national wealth

• Distribution of risk

• Extension of business

• Increase of awareness

• Increase of employment facilities

• Increase invisible export

• Bring social security

• Increase national income

• Economic development-agriculture, industry, trade and commerce and to

established any risky project

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 Chapter- 02
Insurance Contract

Contract

An insurance contract is an agreement enforceable by law, made between two parties,

i.e., insurer and the insured, by which in consideration of the payment of a premium by
the insured the insurer undertakes to indemnify the insured against financial losses
sustained or to be sustained as a result of the operation of the perils insured against.

Legal elements of contract :

o -plurality of members
o -offer and acceptance
o -legal relationship
o -lawful consideration and object
o -capacity to contract of the parties
o -free consent
o -certainty

Elements related with the insurance contract :

1. Written contract

2. Insurable interest

3. Utmost goodfaith

4. Payment of premium

5. Financial indemnity or payment

6. Proximate cause

7. Proportionate contribution

8. Subrogation

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Difference between Insurance and Gambling/wagering :
▪ Nature of Risk
▪ Insurable Interest
▪ Legality
▪ Utmost Good faith
▪ Event take place
▪ Insurable interest
▪ Indemnity

Difference between Insurance and Assurance :

Subject Insurance Assurance

Related Insurance is related in general Assurance is related only for life

insurance insurance

Application More word are used for making Comparatively less word are used
of word insurance contract for making contract.

Popularity More popularity Less popularity

Duration Short period applicable Long period applicable

Certainty of Uncertain Certain
payment
Orgin Its starts on the beginning of It starts on the business after
insurance business coming life insurance

Difference between Fire Insurance And Life Insurance:

• Type of Contract: The fire insurance is a contract of indemnity, where payment
of loss will be made only when fire occurred, but the life insurance contract is a
contract of certainty, wherein payment is certainly made.

• Occurring of Event: The fire may or not occur in fire insurance but in life
insurance the death will certainly occur.

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 • Classification of Risk: There are numerous types of risk in fire insurance
whereas the risks in life insurance are divided into three classes – the standard
risk, sub-standard risk and uninsurable risk.

• Period of Insurance: The term of insurance in fire insurance does not exceed
generally more than one year but in life insurance it lasts for a very long period.

• Protection and Investment: Fire insurance includes only the element of

protection whereas the life insurance includes the element of protection and
investment because the premium paid or sum assured is returnable in the latter
case whereas no premium or amount is returnable in fire insurance.

• Insurable Interest: In fire insurance, the insurable interest must exist from the
date of the proposal to the date of completion of the contract whether by death
or by expiry of term. In life insurances insurable interest must exist at the time of
proposal. This is the reason that the insured property, insurance policy, or policy
amount cannot be assigned to others in fire insurance whereas it is freely assign
able in life insurance.

• Moral Hazard: The degree of moral hazard in fire insurance is maximum where
as it is very nominal in case of life insurance

Difference Between Fire Insurance And Marine Insurance:

Fire and marine insurance contracts are similar in most of the cases because both these
contracts indemnity contracts. But, the following differences are observed in both the
contracts.

• Moral Hazard: In marine insurances, the chances of moral hazard do not exist so
much as are in the fire insurance

• Insurable Interest: The insurable interest must exist both the time, at the
inception and at the completion of the contract. This is the reason fire insurance
policies cannot be freely assignable. The insurable interest in marine insurance
must exist at the time of loss. So, the marine policies are freely assignable.

• Profit: Marine policies generally allow certain margin of profit to be charged at

the time of indemnification of loss, but the fire policies do not allow it ordinarily.

• Valued Policies: Marine insurance policies are generally valued policies and the
market fluctuation is avoided; but the fire polices strictly adhere to the doctrine
of indemnity and only the market value of the property at the time of loss
(valuable amount) is compensated.

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 Chapter- 03
Insurance Classifications

The Insurance can be divided from the two angles: first, from the business point of view
and the second, from the risk point of view.

Business point of view: The insurance can be classified into three categories from
business point of view :

➢ Life Insurance

➢ General Insurance

➢ Social Insurance

• Life Insurance: Life insurance is different from other insurance in the sense
that, here, the subject matter of insurance is life of human being. The insurer will
pay the fixed amount of insurance at the time of death or at the expiry of certain
period.

• General Insurance: General insurance includes property insurance, liability

insurance and other forms of insurance. The insurer will pay the particular
amount of money at the happening of these occurrences.

• Social Insurance: The social insurance is to provide protection to the weaker

section of the society who is unable to pay the premium for adequate insurance.
Such as Pension plan, disability benefits, unemployment benefits, sickness
insurance etc.

Risk Point of View:From the risk point of view insurance is divided into property,
liability and other from form high point of view:

Property Insurance: Under the property insurance property of person/persons are

insured against a certain specified risk. The risk may be fire or marine perils, theft of
property or goods, damage to property at accident.

Marine Insurance: Marine insurance provides protection against loss of marine perils.
Such as Ship attacks by enemies, Sank the ship by natural disasters. It has two parts:

✓ Ocean Marine Insurance- insure only the marine perils

✓ Inland Marine Insurance- covers inland peril which may arise with the delivery
of cargo (goods) from the godown of the insured and may extend up to the
receipt of the cargo by the buyer (importer) at his godown.

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Fire Insurance: Fire insurance covers risks of fire. In the absence of fire insurance, the
fire waste will increase not only to the individual but to the society as well. With the
help of fire insurance, the losses, arising due to fire are compensated and the society is
not losing much. The individual is protected from such losses and his property or
business or industry will remain approximately in the same position in which it was
before the loss. The fire insurance does not protect only losses but it provides certain
consequential losses also. War risk, riots, etc, can be insured under this insurance, too

Miscellaneous Insurance: The Property, goods, machine, furniture, automobile,

valuable articles, etc, can be insured against the damage or destruction due to accident
or disappearance due to theft.

Liability Insurance: The general insurance also includes liability insurance whereby
the insured is liable to pay the damage of property or to compensate the less of personal
injury or death. Such as automobile insurance and machine insurance etc.

Other Forms: Besides the property and liability insurances, there are certain other in-
surances which are included under general insurance. The examples of such insurances
are export-credit insurances, State employees insurance, etc., whereby the insurer
guarantees to pay certain amount at the certain events. This insurance is extending
rapidly these days

Principles of Insurance :
➢ Utmost Good Faith

➢ Insurable Interest

➢ Financial indemnity

➢ Subrogation

➢ Proportionate contribution

➢ Proximate Cause

➢ Collecting huge number of policy

➢ Probability;actuary

➢ Taking optimum risk

➢ Quick response

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Utmost Good Faith :
➢ Good faith- Let the buyer beware

➢ Declaration of all material Information about the subject mater of insurance

➢ Material Information is that information which enables the insurer to decide:

➢ whether he will accept the risk and;

➢ if so, at what rate of premium and subject to what terms and conditions

➢ Breach of duty of utmost good faith arises in two ways:

➢ Non-disclosure of material facts- oversight, proposer thought it’s not essential

etc.

➢ Misrepresentation- Intentional.

Insurable Interest:
The legal right enjoyed by the owner of a property to insure is called ‘Insurable
Interest’. The insurance will become null and void, without the insurable interest.

Insurable Interest: The insurable interest is the pecuniary interest whereby the policy-
holder is benefited by the existence of the subject-matter. The essentials of a valid
insurable interest are the following:

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 • There must be a subject-matter to be insured.

• The policy-holder should have monetary relationship with the subject-matter.

• The relationship between the policy-holders and the subject-matter should be

recognized by law. In other words, there should not be any illegal relationship
between the policy-holder ad the subject-matter to be insured.

• The financial relationship between the policy-holder and subject-matter should

be such that the policy-holder is economically benefited by the survival or
existence of the subject-matter and/or will suffer economic loss at the death or
existence of the subject-matter.

Indemnity:
The principle of Indemnity states that under the policy of insurance, the insured has to
be placed after the loss in the same financial position in which he was immediately
before the loss.

Condition for Indemnity principle: The following conditions should be fulfilled in full
application of principle of indemnity.

• The insured has to prove that he will suffer loss on the insured matter at the time
of happening the event and the loss is actual monetary loss.

• The amount of compensation will be the amount of insurance. Indemnification

cannot be more than the amount insured.

• If the insured gets more amount than the actual loss the insurer has right to get
the extra-amount back.

• If the insured gets some amount from third party after being fully indemnified by
insurer, the insurer will have right to receive the entire amount paid by the third
party.

• The principle of indemnity does not apply to personal in insurance because the
amount of loss is not easily calculable there.

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Applicability:

• When the losses suffered by the insured can be measured in terms of money
• It is practicable to place the insured in the same financial position which he
occupied before the loss

• In Marine Cargo where valued polices are issued, there is only commercial
indemnity- the value declared for insurance is accepted at the time of loss.

Limitation of Insurers liability:

• If the sum insured is less than the indemnity, only the sum insured is payable.
• Property insurances- Condition of average- If there is under insurance only
proportionate value is payable.

Exceptions for Indemnity: Personal Accident

Subrogation:
• Transfer of rights and remedies from the insured to the insurer who has
indemnified the insured in respect of the loss.

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Contribution:

• The right of insurers who have paid a loss under a policy to recover a
proportionate amount from other insurers, who are liable for the same loss.

Proximate Cause:
The efficient or effective cause which causes the loss is called proximate cause. It is the
real and actual cause of loss. If the cause of loss is insured, the insurer will pay;
otherwise the insurer will not compensate. In life insurance the doctrine of cause
proximate is not applied because the insurer is bound to at the end of duration. But
some cases proximate cause is to be consideration-

• War-risk

• Suicide

• Accident Benefit

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Brief history of Insurance Business Development

Insurance at ancient period:

• There are no evidence of insurance Business development in ancient period.

• Before Christ 900 years Businessmen and captain of ship used different bond
business like: Bottomry bond and Responditia bond.

• If at a time of distress in mid ocean, the master of the vessel used to be in need of
fund/money for completion of the journey, but could not manage the same at an
intermediary port either on his own account or on the account of the owner of
the vessel, he(master) was empowered to raise such fund by pledging the vessel.
Such a system was known as Bottomry Bond.

• Similar loan could also be raised on the pledge of cargo and this was used to be
done on Respondentia Bonds.

Insurance in the middle Age:

• Insurance in the area of mediterian sea: 1st insurance business was started in
Italy at 1182. France and Spain were also involved with trade and commerce.
Their product or goods were transfer through river/seaway. Then the insurance
business was spread to Europe in 1200 century.

• Insurance in England:

During the 13th/14th century the Italian merchants went to U.K and along with the
merchandise carried with them the trading customs including the concept of Marine
insurance. Gradually the lombard street of England named after the merchants of
lombard of Italy) started becoming the nerve center of marine insurance activities as it
was here where the merchants used to assemble for the purpose of trade insurance
protection.

• Institutionalization of insurance business: In 1720 institutionally two insurance

company was established: The lioyd’s Assurance and The Royal Exchange

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Insurance during industrial revolution:
Due to industrial revolution in Europe business and production system was changed
day by day from 1750 to 1850. As a result fire insurance business was started beside the
marine insurance business.

Introduction of life insurance:

In 1762 a life insurance company was established in U.K. it was named

“equitable assurance Society”. This organization started the level
premium system in life insurance. Then this system was spread over the
europe and America.

Introduction of Social insurance:

1883 – sick insurance

1884 – Accident insurance
1890 – crop insurance
Group insurance, Car insurance

Insurance in modern age

Insurance in Bangladesh:

• In 1947 to 1971 there was transacting about 49 insurance companies (life and
general) in East Pakistan

• Except a few companies these were mostly limited liability companies acting
under a free competitive economy.

• With the emergence of the People’s republic of Bangladesh , the govt.

nationalized the insurance industry in 1972 by presidential order no. 95.

• Five insurance corporations were basically established, viz: Jatiya Bima

Corporation, Teesta Bima Corporation, Karnaphuli Bima Corporation, Rupsa
Jiban Bima Corporation, Surma Jiban Bima Corporation

• In addition in 1974 there was a foreign insurance company named ALICO

operated their business. 1952 to 1971 they operated their business in East
Pakistan. They started their business in 1984 when the Govt. passed “ The
insurance (amendment) Ordinance 1984”

• Now in our country about 44 insurance company operate their business.

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