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Chapter 6 Key Notes

This document discusses the principles and requirements of insurance as a risk management technique. It defines insurance as both an economic institution and a legal contract between an insured and insurer. Insurance reduces risk by pooling together many similar risks, so aggregate losses become predictable. The key principles are indemnity, insurable interest, subrogation, and utmost good faith. For a valid insurance contract, there must be an insurable interest, offer and acceptance, consideration, and compliance with public policy. Insurers consider factors like the number of similar risks and predictability of losses, while insureds consider the severity and probability of loss. Social insurance differs in being compulsory, providing minimum benefits, and subsidizing costs.

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341 views2 pages

Chapter 6 Key Notes

This document discusses the principles and requirements of insurance as a risk management technique. It defines insurance as both an economic institution and a legal contract between an insured and insurer. Insurance reduces risk by pooling together many similar risks, so aggregate losses become predictable. The key principles are indemnity, insurable interest, subrogation, and utmost good faith. For a valid insurance contract, there must be an insurable interest, offer and acceptance, consideration, and compliance with public policy. Insurers consider factors like the number of similar risks and predictability of losses, while insureds consider the severity and probability of loss. Social insurance differs in being compulsory, providing minimum benefits, and subsidizing costs.

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Japs
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CHAPTER 6 – Insurance as Risk Management Technique: Principles

SUMMARY

 Insurance is a special form Risk Management technique and maybe defined in two major
categories: As an economic or social institution designed to perform certain functions and as a
legal contract between two parties, the insured (transferor) and the insurer (transferee).

 Insurance reduces a risk by combining under one management group of objects situated so that
the aggregate losses to which the insureds are subject become predictable within the narrow
limits. Losses that result are shared among the insureds, usually through the payment of an
insurance premium.

PRINCIPLES OF INSURANCE:

1. Principle of Indemnity
2. Principle of Insurable Interest
3. Principle of Subrogation
4. Principle of Utmost Good Faith

 The principle of insurable interest is necessary for an insurance contract to valid. The principles
of indemnity and subrogation reinforce the principle of insurable interest.

 Because insurance is a contract of utmost good faith, breach of warranty or a material


misrepresentation on the part of the insured can void the coverage. A concealment has the
same legal effect as a material misrepresentation. The application of this principle may best be
explained in a discussion of representations, warranties, concealments, and mistakes.

REQUIREMENTS OF AN INSURANCE CONTRACT

1. An insurance contract must not be against public policy


2. Must be enacted by parties with legal capacity to contract
3. Must be effected through a valid offer and acceptance
4. Must be supported by a monetary consideration.

Insurance policies are also aleatory, conditional and unilateral.

 Insurance is effected through agents who have varying degrees of Authority, depending on the
custom in different lines of insurance and on the doctrines of waiver and estoppel. Brokers are
agents of the insured.
 From the standpoint of the Insurer, there are four requisites of insurable risk:
a. There must be a sufficient number of similar insured objects to allow a reasonably close
calculation of probable future losses
b. the loss must be accidental and unintentional in nature
c. the loss must be capable of being determined and measured
d. the exposure units must not be subject to simultaneous destruction

 From the standpoint of the Insured, there are two main requirements of insurability:
a. The loss must be severe enough to warrant protection
b. the probability of loss should not be so high as to command a prohibitive premium when
compared with the possible size of the loss

 In contrast to private insurance, social insurance is:


a. Compulsory
b. Does not allow individual choice in selecting the amount of benefit
c. Provides only a minimum level of benefit
d. Subsidized by groups other than the insured group
e. Has a total cost that is often unpredictable
f. covers only individuals who have been attached to the labor force and who meet certain
minimum requirements
g. offers conditional benefits.

 There are many social and economic values of insurance, but perhaps the greatest values lies in
the reduction of risk in society. The benefits of insurance are achieved at certain socials costs,
the chief of which is the cost of the economic resources used to operate the insurance business.

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