Insurance: Meaning And Principles Of Insurance

Table Of Contents

  • Meaning Of Insurance
  • Principles Of Insurance
  • Types Of Insurance Coverage

Definition Of Insurance

Insurance is defined as “A contract in writing whereby one party (the insurer), agrees, in consideration of either a single or a periodical payment, called the premium, to indemnify another party (the insured), against loss or damage resulting to him on the happening of certain events, or to pay him a sum on the happening of a specified event or events”.

Insurance is a pooling of risk. It can be seen as a fund, into which all who are insured will pay their contribution (premium). In return, those insured are paid out of the fund when the risk insured occurs.

Insurance is an arrangement by which one party (the insurer) promises to another party (the insured or policy holder) a sum of money if something should happen which cause the insured to suffer a financial loss. The responsibility for paying such losses is then transferred from the policy holder to the insurer. In returen for accepting the burden of aying for losses when they occur, the insurer charges the insured a price, the insurance premium.

Principles Of Insurance

An insurance ‘policy’ is a contract between the insurer and the insured. Insurance transaction is subject to the law which governs contracts generally. Because of the special nature of insurance, however, there are special principles which are also applied:

1. Insurable Interest

In order to purchase insurance, an applicant must demonstrate that he or she has insurable interest in the property, i.e. the policy holder must stand to suffer financial loss due to occurence of the risk insured. Without this principle a person could insure the life of any other person and subsequently take the person’s life in order to collect the insurance benefit.

2. Insurable Risks

Insurable risks state the conditions under which a risk can be economically insured. In other words, if the requisites of insurability are not met, the risk is not economically insurable. The requisites to make risk insurable include:

i. The likelihood of loss should be predicted.

ii. The loss should be financially measurable in order to determine the amount of premium income necessary to cover the amount of losses. The naira amount of losses must be known.

iii. The loss should be fortuitous or accidental, i.e. losses must happen by chance and not be intended by the insured.

iv. The risk should be spread over a wide geograhic area. The reason is that an insurance company that concentrates its coverage in one geograhical area risks the possibility of a major catastrophe affecting most of the policy holders.

3. Principle Of Indemnity

This principle states that a person may not collect more than his actual cash loss in the event of damage caused by an insured peril. Thus, a person may insure property in excess of its actual value but he cannot collect damages for more than his actual loss.

The principle of subrogation also derives from the princile of Indemnity and it says that once the insured has been indemnified, the insurance company stands in the insured position to recover anything salvaged from the damaged property.

4. Principle Of Utmost Good Faith

Most insurance contract states that misrepresentation or fraud will void the contract. So failure to reveal facts about the risks that are relevant but known only to the insured will invalidate the policy. This principle is also known as Uberimae Fidei.

5. Principle Of Contributions

It is also a derivation from the principle or Indemnity. If an insurer insures his property with more than one insurance company., The insured will contribute proportionately to indemnify the loss sustained. The insured cannot receive complete value of loss sustained from respectively from each insurance company. The basic principle underlying the operation of contribution is that the insured is not in business to make insured gains.

6. Law Of Large Number

Insurance is based on the law of average or statistical probability. The insurance companies have studied the occurrence of deaths, injuries and all types of hazards. From their investigation, they have developed the law of large number which is defined as “A probability calculation of the likelihood of the occurrence of hazards on which premiums are based”.

Types Of Insurance Coverage

The following are the types of insurance coverage:

1. Fire Insurance: It gives protection to losses due to fire.

2. Automobile Insurance: It gives protection to insurance due to accident, automobile theft, claims resulting to damages from other properties due to accident or injury or death or another person resulting from an automobile accident.

3. Burglary/Theft Insurance: It gives protection against insurance due to unlawful taking of insured property either by force or by burglaries.

4. Workers Compensation Insurance: It gives protection against medical expenses and salary payments to workers injured on the job.

5. Health Insurance: It gives protection against medical and surgical expenses and lost income due to sickness or accident.

6. Marine Insurance: It gives protection against loss to property that is being shiped from one location to another.

7. Fidelity, Surety, Title And Credit Insurance

This gives protection against mis-appropriation of fund, i.e. Fidelity bond, failure to perform a job, i.e. Surety bond; failure to repay loans, i.e., credit insurance; and protection against loss due to effective title to land or other property, i.e. Title insurance.

8. Public Liability Insurance: It gives protection against claims against property owners for injuries or damages to properties or others caused by false, mal-practice, negligence, or faulty products.

9. Mortgage Protection: To cover housing and estate property.

10. Personal Accident Insurance: To cover casualty protection or injury to persons.

Life Assurance

Life assurance deals with certainty. The certainty is that death is the only that is certain to befall mankind. Life assurance is divided broadly into two:

1. Whole Life Assurance: The sum assured is payable after the death of the policy holder and his/her beneficiary.

2. Endowment Assurance Or Term Assurance: The policy covers a given period of time. The policy may last for 5-10 years or more and may or may not mature at the holder’s life time.

A surrender value is allowed to the assured in case he/she may want to discontinue the policy after the payment of two or more years of premium. The amount paid to the assured by the insurance company at the surrender of the assurance policy is called “Surrender Value”.

Purposes Of Life Assurance

1. The primary purpose of life assurance is financial security.

2. It provides for certainty of death which is bound to befall every household, especially, the breadwinner of a home.

3. In the case of term assurance, it guarantees the future of dependents in the event of untimely death or lump sum assured in one’s life time.

4. It increases wealth through savings and investments.

5. It provides for the continuing education of one’s offspring in the event of death.

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