Insurance

Valuation - Based Policies

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It is based on valuation. They can be:

1. Valued Policy:
In this policy, the value of subject matter of insurance is fixed at the time of contract. The value may relate to ship, cargo, freight and profit margin.
The loss is compensated on the basis of predetermined value.

2. Unvalued:
In this policy, the value of subject matter of insurance is not fixed at the time of contract. It is decided at the time of loss.
This policy creates disputes. It is not popular.

Marine Insurance Policies

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Term Based Policies:
They are specified time or voyage. They can be:
1.Time Policy:
It is taken a specified period of time. It is generally for one year or loss.
a. It is suitable for insurance of ship. It can cover navigating ship or ship under construction.
b. It can cover single vessel or fleet or ship.

2. Voyage Policy:
It can be taken for a single from one port to another port. It covers a specified voyage.
a. It is suitable for cargo.

3. Mixed policy:
It is a combination of time policy and voyage Policy. It is taken for specified time and voyage.
a. It is suitable for both ship and cargo.

Different Risks covered under Marine Insurance

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1. Perils of Sea:
They are casulties or accidents at sea. They are extraordinary and unexpected damages during voyages of the ship. They can be:

Sea strom, cyclone, tsunami, heavy rain
Collision with rocks, iceberg or another ship

2. Fire:
The fire may damage the ship and its cargo. Fire can results from:

Explosion due to chemical reaction or accidents

Inflammable events such as coal, oil, electricity
Natural events such as lightning, thunder, friction

3.Jettison:
It is throwing away cargo or other goods to reduce the weight in the ship. It is deliberately
done.
4.Theft:
Cargo may be stolen by sea pirates and outsiders for personal gain.

The theft should not be committed by people inside the ship.

They are captain, crew members and passengers of ship.
5.War Risks:
The war situation between two countries may create risks of loss to ships, cargo and freight. Enemies may capture the ship and cargo.

Cargo can be subject to land risks during transportation. Marine policy also covers land risks.

6. Barratry:
It is cheating. It is mischievous and willfull action of captain and crew to cause loss. It can be:

Theft of ship or cargo
Setting ship and cargo on fire
Illegal sales of cargo

The marine policy should clearly specify the risks covered.

Scope of Marine Insurance

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The scope of marine insurance consists of:
1. Hull Insurance: Hull means the ship. The hull is insured against sea risks.

The insurance can be for a particular journey or for a particular period of time. It can be for a single vessel or fleet.

2. Cargo insurance: Cargo means goods carried in ship to various destinations. Cargo is insured to cover risk of loss during transportation. The insured amount is payable to the cargo owner in case of loss.

3. Freight Insurance: Freight is charges payable for transportation of goods. Freight payable at destination is insured to cover risk of loss of freight to shipping company.

The main elements in the meaning of marine insurance are:

It is a contract of indemnity based on utmost good faith. It compensates for actual loss caused by sea risks up to the amount of contract.
The insurable interest in marine insurance should exist at the time of loss.
Ship, cargo and freight can be insured.
The insurance can be for single journey, multiple journeys or a particular period of time.
The compensation is paid in cash only.

Meaning of Marine Insurance

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Marine insurance covers risk of loss to ship, cargo and freight in sea routes. It is a written contract between the insured and insurer. The insured agrees to indemnify the insured against risks of marine losses caused by perils of sea.
Marine insurance is the oldest type of insurance. It provides protection to exporter, importer and the shipping company. It is concerned with international trade.

Definition of Marine Insurance

According to I.G. Crane

Marine insurance is a contract in which the insurer agrees indemnify the insured, in consideration of premium, against loss or damage caused by certain perils of the sea to the subject matter insured.

Stoke Value Policy

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They can be:
1. Floating Policy:
A single policy covers the stock at different places. The places can be warehouse, port and in transit.

This policy includes average clause. The premium is payable is payable on average basis.

This policy is suitable for business who keep stocks at different places.

2. Declaration Policy:
It covers the maximum value of stock during policy period. The insured declares expected maximum value of stock during policy period. The insured declares expected maximum value of stock. Provisional premium is paid for 75 percent of insurance amount.

The insured declares the actual value of monthly stock. The premium is calculated on average value of stock on maturity. Extra premium is paid or refunded.
This policy is useful for businessmen who have fluctuating stocks.

3. Adjustable Policy:
The policy is taken for a definite value of stock. The insured provides information about actual value of closing stock every month. The rate of premium is adjusted according to the charging value of stock.

This policy provides option to change the insured amount.

4. Excess Policy:
The insured takes two policies. The first policy is for minimum value of stock. The second policy is for excess value of stock. The excess value is calculated every month from information provided by the insured. The premium is based on average stock level.

Indemnity Policy

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They can be:
1. Valued Policy:
The value of the insurance is agreed upon. This amount is payable to insured in case of loss.

This policy is taken for property whose value cannot be determined after loss. For example, works at art, jewelery, antiques.

2. Average Policy:
It contains average clause. The compensation is proportionately reduced if the property is undervalued. This policy penalizes undervaluation. The formula used is:
Insured Amount Х Actual Loss
Value of Property

For example:

Insured amount Rs. 50,000
Value of property Rs. 100,000
Actual loss Rs. 50,000

Compensation=50000 Х 50000
100000

3. Specific Policy:
It specifies insured amount. It has no average clause. The insurer pays full compensation for loss up to the insured amount.

The insured does not compensate for the loss exceeding the insured amount.

4. Reinstatement Policy:
It reinstates the damaged property. Monetary payment is not made. The damaged property is replaced by new property.

This policy is also known as "Replacement Policy".

Risk Coverage Policy

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1. Comprehensive Policy:
It is all in one policy. It covers not only the risk of loss by fire but also by lightning. earthquake, flood, explosion, theft, riot, strikes etc. The risks are defined int the policy.
The rate of premium is high for such policy.

2. Blanket Policy:
One policy covers various types of assets located at different places. It insures building in one location and stocks in warehouses in other locations.
The policy covers both fixed and current assets.

3. Consequential Policy:
It covers not only the loss caused by fire but also consequential loss. For example, loss of profit due to interruption of business activities.
It is also called loss of profits policy.

Main Elements in the meaning of Fire Insurance

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Fire insurance has following elements:
1. The contract is based on utmost good faith. The insured and insurer must provide true information in full.
2. It is a contract of indemnity. It compensates for actual loss up to the insured amount.
3. The insured must have insurable interest both at the time of making contract and at the time of making claim.

4. It is subject to principle of subrogation. The rights over damaged property pass on to insurer after payment of claim.

5. The claim can be settled in cash or rehabilitation of damaged property.
6. There must be accidental fire to make a claim

Fire insurance contract is generally for one year. It can be renewed.

Meaning of Fire Insurance

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Fire insurance provides protection for the risk of loss or damage of property by fire. It is a written contract between insured and the insurer. The insurer agrees to indemnify the insured for loss or damage by fire during a specified period. The insured pays premium to the insurer as consideration for the contract.
To make a claim under fire insurance, two conditions should be fulfilled :
a. There must be actual fire.
b. The fire must be accidental. It should not be intentional.

Procedures for Effecting Life Insurance

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1. Submission of Proposal
The person desiring life insurance should first select the life insurance company of his choice. He should submit a proposal through the agent of the selected company. This proposal serves as the basic for insurance policy.
A printed form is fied-in with the following details:
i. Name, address, occupation and proposer.
ii. Family history and health status of the proposer.
iii. Facts about income, life and habits of proposer.
iv. Date of birth and age of proposer.
v. Mode of payment of premium.
True and correct information should be provided in the proposal.
The insurance contract is based on utmost good faith.

2. Certificate of Age
The proposer should submit certificate of actual age. It can be birth certificate, school examination certificate with date of birth, citizenship certificate or horoscope.
The risk of life depends on age. Higher the age, more the premium.

3. Medical Examination Report
The proposer is required to undergo medical examination by the approved doctor of the insurance company.
The medical examiner submits medical report about the health of proposer to the insurance company. The risk of life is evaluated on the basis of this report.

4. Agent's Report
The insurance agent submits a confidential report about the proposal to the insurance company. It covers material facts about the proposer, such as health, character, financial position and personal information.
The agent explains the proposed terms and conditions of the insurance contract to the proposer. It is about type of policy, insurance amount, premium payable, maturity period, and other technical details.

5. Acceptance of Proposal
The insurance company decides to insure or not to insure the proposer after examination of:
i. Proposal form and certificate of age
ii. Medical report
iii. Agent's report
If the proposal is insurable, the insurance company accepts the proposal and sends:
iv. Acceptance letter to the proposer
v. Notice for payment of first installment of premium stating the amount.

6. Payment of First Premium
The proposer makes payment of first premium to the insurance company. The insurance policy comes into effect and the risk is insured from the date of this payment.
A receipt is issued for the payment of premium. This is the proof of existence of contract.

7. Issue of Policy
The insurance company prepares the life insurance policy. It is duly stamped and signed. It contains terms and conditions of life insurance contract. It contains details of risks covered. It is sent to the insured.

Differences Between Whole Life and Endowment Policy

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Point of Difference	Whole Life Policy	Endowment Life policy
1. Maturity	On the death of the insured	On the expiry of fixed term or death, whichever is earlier
2. Rate of Premium	Comparatively low	Comparatively high
3. Period of Premium	Payable for whole life	Payable for a fixed term
4. Benefits	Financial support to family	Financial security for old age
5. Beneficiary	Nominees of the insured	Insured or his nominees

Procedures for Effecting Life Insurance

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Persons Covered Based Life Policy

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They are based on the number of persons covered by the policy. They can be of following types:

1. Joint Life Policy:
It insures the life of two or more persons. When one of the insured dies, the insurance amount is paid to the survivor.
This policy is useful for husband and wife. It is also useful for partners in a firm.

2. Group Life Policy:
It insured the life of a group of employees. The employers pays premium every month. The insured amount is paid when the employee dies or retires from service. In case of death, the nominees get the insured amount.

3. Multipurpose Life Policy:
It provides different types of benefits through a single policy. If the insured dies before maturity of the policy, it provides
i. Immediate payment of a part of insured amount.
ii. Regular installments to family for a certain period.
iii. Balance of insured sum on maturity of the policy.
This policy is useful for maintenance of family, education, and marriage of children.

Variations of Term Policy

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Variations of term Policy are:

a. Straight Term: Lump sum premium is paid as one installment. Insured sum is payable if the death occurs within the term policy.

b. Convertible Term: Option is available to convert it to whole life or endowment policy. Premium rated change.

c. Renewal Term: The policy can be renewed after the expiry of fixed term.

Endowment Policy

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This policy is for a fixed period of time. The premium is payable regularly till the maturity of policy. The insured amount is payable on maturity or the death of the insured whichever is earlier.
This is the most popular type of life insurance. This is also called ordinary Endowment Policy. The rate of premium is high in this policy.

Variations of Endowment Policy

The variations of endowment policy are:
a. Pure Endowment Policy: This policy is for a fixed period of time. The insured amount is payable only to the insured is he survives till the maturity of the policy.

b.Double Endowment Policy: Double the insured amount is payable if the insured survives till maturity of the policy. If he dies before maturity of policy, the nominees get only the insured amount.

c. Differed Endowment Policy: The insured amount is payable on maturity of policy even if the insured dies earlier. The premium is not payable after the death of insured.

d. Anticipated Endowment Policy: The insured is paid part of insured sum before the maturity of policy. The balance is paid after the maturity of policy.

If the insured dies before maturity, full insured amount is payable to nominees without deduction the amount paid before maturity.

Duration Based Life Policy

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It is based on duration of time. It can be of three types:

a. Whole Life Policy:
This policy is for the lifetime of the insured. The premium is payable regularly till the insured is alive. The insured amount is payable on the death of insured to the nominees.
This is also known as ordinary life policy. The rate of premium is low for this policy.

Variations of Whole Life Policy
The variations of Whole Life Policy are:
a. Limited Whole Life Policy: The premium is paid for a limited period. The insured amount is paid to the nominees only after the death of insured.

b. Single Premium Whole Life Policy: The insured pays lump sum premium at one time. The insured amount is paid to nominees only after the death of insured.

c. Convertible Whole Life Policy: The insured has the option to convert the policy into endowment policy during specified period.

Life Insurance Policy

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Life insurance policy contains terms and conditions of contract. It can be the following types.

1.Duration Based
a.Whole Life
b. Endowment
c. Term

2. Profit Participation Based
a. With Profit
b. Without Profit

3. Persons Covered Based
a. Joint Life
b. Group Life
c. Multipurpose Life

Definition of Life Insurance

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According to J. H. Magee
Life insurance contract embodies an agreement in which the insurer undertakes to pay a stipulated sum upon death of insured or at some designated time.

The important elements in the meaning of life insurance are:
a. It is a legal contract between insured and insurer.
b. The insured pays premium at fixed intervals till maturity of contract.
c. The insurer pays a definite sum of money on maturity of contract.
d. The person insured must have insurable interest at the time of contract.
e. It is not a contract of indemnity. It provides financial security to human lives.

Meaning of Life Insurance

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Life insurance provides financial security to human lives. Life insurance is a legal contract between the insured and the insurer. The insurer agrees to pay a definite sum of money to the insured on maturity of contract. The insured agrees to pay uniform premium at fixed intervals till maturity of contract. The contract matures on the death of insured or expiry of a specified period, whichever is earlier.

In case of death, the nominee of the insured gets money. The insured himself gets money on expiry of the fixed term of period.
Life insurance is not a contract of indemnity. The insured amount is always payable.
Life insurance provides both protection as well as investment. It is also known as life assurance.

Principles of Insurance

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Insurance contracts are based on the following principles:

1. Utmost Good Faith
Insurance contract is based on utmost good faith. Both insured and insurer should provide true information in full.

The insured should disclose all facts about the subject matter of insurance. This is used to ascertain risk and the rate of premium.

The insurer should clearly disclose the terms and conditions of insurance contract.

The contract may be void if the facts are not disclosed.
This principle avoids cheating.

2. Insurable Interest
The insured should have insurable interest in the subject matter of insurance. Insurable interest means interest of ownership or financial interest.

There should be relationship between subject matter of insurance and the insured. It should involve monetary gain from existence and loss from destruction of subject matter of insurance.

Insurance interest should exist:
a. At the time of contract in life insurance.
b. At the time of contract and at the time of loss in fire insurance.
c. At the time of loss in marine insurance.

3. Indemnity
Insurance is a contract of indemnity. It compensates for actual loss up to the amount of contract. No profit should be made from the insurance contract.

Indemnity requires following conditions:

a. There should be actual loss calculated in terms of money.
b. The loss must occur from insured risk.
c. The compensation by insurer should not be more than actual loss.

The principle is not applicable to life insurance. Human life cannot be measured in terms of money.

4. Subrogation
The rights of the subject matter of insurance get transferred from insured to insurer after indemnity. The insurer gets ownership of the damaged property.

This principle ensures that

a. Insured does not get more than the actual loss.
b. Insurer gets all rights and remedies to damaged property after compensation for loss.

This principle is not applicable to life insurance.

5. Proximity Cause
The nearest cause of loss should be considered for compensation. Insurer should pay for the damage caused by the insured risk only.
If there is more than one cause for loss, the insured should prove that the loss was caused by the proximate cause.

6. Contribution
Contribution is sharing of actual loss among con insurers. The insured can insure the same property with more than one insurance company. But he will be compensated for actual loss by all insurers in proportion of premium paid.

The principle prevents the insured from making profit from insurance.
This principle is not applicable to life insurance.

7. Mitigation of Loss
Mitigation is to make the loss less severe. It is the duty of insured to take necessary steps to minimize the loss of subject matter of insurance.

The insured should make reasonable efforts of minimize the loss. But it should not be at the risk of life.
This principle is not applicable to life insurance.

Importance of Insurance to Society

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1. Employment:
Insurance creates employment opportunities in the country.

Insurance companies provide direct employment to carry out business activities.
Insurance provides self-employment to various people. Insurance agents are an example. So are medical doctors.

2. Capital Formation:
Insurance accumulates small savings in premium. It makes investment for productive purposes. This leads to capital formation in the country.

Insurance companies invest in industries, commerce and shares of listed companies.

3. Economic Development:
Insurance contributes to economic development of country.

Insurance creates positive development climate by providing protection from risks.
Capital formation leads to economic development.
Insurance funds are invested for productive purposes.
Taxes paid by insurance company are used for social development by government.

4. Living Standards:
Insurance helps to improve living standards of society.

Payments received from life insurance help to improve living standards of individuals and family.
Investment in productive activities by insurance companies also contribute to living standards of people.

Importance of Insurance to Business

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1. Protection:
Insurance provides protection to business against financial loss. It safeguards business from uncertain risks.

Businessmen get a sense of security from insurance.
The expansion and growth of business is helped by insurance.

2. Stability:
Insurance provides stability to business. In ensures its smooth operation by compensation for future financial losses.

Insurance contributes to the promotion of industries and commerce. It is an important aid to business.

3. Efficiency:
Insurance provides feeling of security. This helps to increase working efficiency of businessmen.

Insurance of employees, machines and materials decreases the risk of financial loss from uncertain events.
Life and accident insurance promotes employee welfare.

4. Credit:
Insurance helps to obtain loans and credit facility from financial institutions.

Life insurance policy can be used as security to get loan.
Financial institutions require insurance of properties to be used as security for loans.

5. Foreign Trade:
Insurance helps to promote foreign trade.

Marine insurance protects from risk to trade in seat routes.
Fire insurance protects from risk of fire and accidents.
Insurance is almost compulsory for foreign trade.

Importance of Insurance to Individual

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1. Financial Security:

Insurance provides financial security to individual and family. It contributes to mental peace. For this purpose, different types of insurance are available.

Life insurance provides insured amount on maturity to the insured. This is helpful in the old age. In case of death, the dependents receive the insured amount. This provides security against loss of family income.
Fire insurance provides protection against risk of loss to property. It can be due to fire, floods, earthquake, accidents, etc.
Marine insurance provides protection against risk of loss to ship, cargo and freight during sea voyage.
Miscellaneous insurance fulfills various social needs.

2. Savings:
Insurance provides incentive to save.

Life insurance premium is compulsory saving. It is payable in installments.
Insurance develops saving habit. Wasteful expenditures are reduced.

3. Investments:
Insurance is good investment

The premiums paid to life insurance companies build into a fund. The insured gets lump sum payment on maturity.
The premiums paid for marine and fire insurance are investment to get indemnify from financial loss.
Life insurance policy can be used as collateral for loan from financial institutions.

Social Need:
Insurance fulfills social needs.

Insurance can be taken for education of children. Money is available when it is needed.
Insurance cab be taken for marriage of children. Money is available when the children reach marriageable age.

5. Tax Savings:
Life insurance premium is allowed as a deduction for income tax purposes. Individuals can make tax savings by taking life insurance policy.

Miscellaneous Insurance Stage

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The industrial revolution along with social development led to the growth of miscellaneous insurance. It covers the following:

a) Accident Insurance: It covers risk of physical injury to people and damage to property by accidents.

b) Theft Insurance: It covers risks of loss resulting from robbery and burglary.

c) Unemployment Insurance: It covers risk of loss of income during unemployment.

d) Fidelity Insurance: It covers risks of loss resulting from dishonesty of employees.

e) Social Insurance: It covers risk of loss of income due to old age and disability.

f) Health Insurance: It covers risk of loss due to ill Health.

g) Vehicle Insurance: It covers risk of damage to vehicle and liability to third party.