Insurance: Its Evolution, Meaning & Tool in Risk Management: Prof Mahesh Kumar Amity Business School

Insurance: Its Evolution, Meaning &
Tool in Risk Management
Prof Mahesh Kumar

Amity Business School
[email protected]
History
 Insurance existed in mutual protection form in the Aryan
tribes some 3000 years back.
 The word ‘Bima’ was derived from the Persian word ‘Bim’
meaning ‘Fear’ and ‘Bima’ means ‘expense to get rid of
fear’.
 Traders in olden times devised a system of contract in
which, the supplier of the capital for business would agree
to cancel the loan if the trader was robbed of his goods.
The trader who borrowed the capital paid an extra sum (a
premium) for this kind of protection over and above the
usual interest. As for the lender, collecting these
premiums from many traders made it possible for him to
absorb the losses of the unfortunate few, who really
suffered the loss.
History
 The Phoenicians & the Greeks applied a similar kind of
system to their sea borne commerce.
 The Romans used burial clubs as a form of life insurance,
providing funeral expenses for members & later on
payments to the survivors for their future subsistence.
 The first kind of formal insurance business was marine
insurance.
 The first insurance policy was issued in England in 1583.
 Insurance primarily creates counterpart of the risk, which
is security.
 Insurance is a co-operative device to spread the loss
caused by a particular risk over a number of persons who
are exposed to it and it does not reduce the risk nor
alters probability of risk but it only reduces/spreads
financial losses.
Insurance Defined
 Insurance is the pooling of fortuitous losses by
transfer of such risks to the insurer, who
agreed to indemnify insured for such losses, to
provide other pecuniary benefits on their
occurrence, or to render services connected
with the risk.
Characteristics of Insurance
 The basic characteristics of insurance are:
1. Pooling of losses.
2. Payment of fortuitous losses.
3. Risk Transfer.
4. Indemnification.
Pooling of Losses
 Pooling is spreading of losses incurred by the
few over the entire group, so that in the
process average loss is substituted for actual
loss.
 Pooling implies:
1. Sharing of losses by the entire group
2. Prediction of future losses with some accuracy
based on the Law of Large Numbers.
Payment of Fortuitous Losses
 A fortuitous loss is one that is unforeseen &
unexpected and occurs as a result of chance.
The loss must be accidental.
Risk Transfer
 Risk Transfer means that a pure risk is
transferred from the insured to the insurer
who typically is in a stronger financial position
to pay the loss than the insured.
Indemnification
 Indemnification means that the insured is
restored to his or her approximate financial
position prior to the occurrence of the loss.
Pre-Requisites of Insurable Risk
There are six pre-requisites of insurable risk:
1. There must be large number of similar
exposure units.
2. The loss must be accidental and unintentional.
3. The loss must be determinable and
measurable.
4. The loss should not be catastrophic.
5. The chance of loss must be calculable.
6. The premium must be economically feasible.
Large number of similar exposure units
 Ideally, there should be a large group of
roughly similar, but necessarily identical,
exposure units that are subject to the same
peril or a group of perils.
 The purpose is to enable the insurer to predict
loss based on the law of large numbers.
 Loss data can be compiled over time and
losses for the group as a whole can be
predicted with some accuracy.
 The low cost is then spread over all insured.
Accidental and Unintentional Loss
 A second requirement is that the loss should be
accidental and unintentional; ideally the loss should be
fortuitous and outside the insured’s control.
 If an individual deliberately causes a loss, he or she
should not be indemnified for the loss.
 Adverse selection is the case in which the loss is not
accidental. In this the insured possesses knowledge
about likely losses that is unavailable to the insurer and
the insurer is said to have asymmetric information. In
case underwriting process is not strong then the
insurance arrangement may enter ‘death spiral’.
Accidental and Unintentional Loss
 The requirement of an accidental and unintentional loss
is necessary for two reasons:
1. If intentional losses were paid, moral hazard would
substantially increase and premiums would rise as
result. The substantial increase in premiums could
result in relatively fewer persons purchasing the
insurance and the insurer might not have a sufficient
number of exposure units to predict future losses.
2. The loss should be accidental because the law of large
numbers is based on the random occurrence of events.
A deliberately caused loss is not a random event
because the insured knows when the loss will occur.
Thus, prediction of future experience may be highly
inaccurate if a large number of intentional or non-
random losses occur.
Determinable and Measurable Loss
 A third requirement is that the loss should be
determinable and measurable.
 The loss should be definite as to cause, time, place and
amount.
 In life insurance the cause and time of death can be
readily determined and if the person is insured, the face
amount of the life insurance policy is the amount paid.
 The basic purpose of this requirement is to unable an
insurer to determine if the loss is covered under the
policy, and if it is covered, how much should be paid.
No Catastrophic Loss
 The fourth requirement is that ideally the loss
should not be catastrophic which implies that a
large proportion of exposure units should not
incur losses at the same time.
 Ideally insurers wish to avoid all catastrophic
losses but in reality however this is impossible
because catastrophic losses periodically result
from floods, hurricanes, earthquakes,
tornadoes, forest fires and other natural
disasters. Catastrophic losses can also result
from acts of terrorism.
Managing of Catastrophic Loss by Insurance Cos.
1. Reinsurance can be used by which insurance companies
are indemnified by re-insurers for catastrophic losses.
Reinsurance is the shifting of part or all of the insurance
originally written by one insurer to another. The re-
insurer is then responsible for payment of its share of
the loss.
2. Insurers can avoid the concentration of risk by
dispersing their coverage over a large geographic area.
The concentration of loss exposures in a geographical
area exposed to frequent floods, earthquakes,
hurricanes or other natural disasters can result in
periodic catastrophic losses. If the loss exposures are
geographically dispersed, the possibility of catastrophic
loss is reduced.
Calculable Chance of Loss
 A fifth requirement is that the chance of loss
should be calculable.
 The insurer must be able to calculate both the
average frequency and the average severity of
losses with some accuracy.
 This requirement is necessary so that a proper
premium can be charged that is sufficient to
pay all claims and expenses and yield a profit
during the policy period.
Economically Feasible Premium
 A final requirement is that the premium should
be economically feasible.
 The insured must be able to pay the premium.
In addition, for the insurance to be an
attractive purchase, the premiums paid must
be substantially less than the face value, or
the amount of the policy.
 To have an economically feasible premium, the
chance of loss must be relatively low.
 One view is that if the chance of loss exceeds
40%, the cost of policy will exceed the amount
the insurer must pay under the contract.
Risk of Fire as an Insurable Risk
Risk of Unemployment as an Insurable Risk
Most personal, property and liability

risks can be insured.
Market risks, financial risks, product
risks and political risks are usually
uninsurable.
Insurance and Gambling Compared
Gambling Insurance
1. Gambling creates a new 1. Insurance is the technique
speculative risk. for handling already
existing pure risk
2. Gambling is socially 2. Insurance is always socially
unproductive because the productive because neither
winner’s gain comes at the the insurer nor the insured
expense of the loser. is placed in a position
where the gain of the
winner comes at the
expense of the loser. Both
insurer and insured have a
common interest in the
prevention of the loss. Both
the parties win if the loss
does not occur.
Insurance and Hedging Compared
Hedging Insurance
1. Hedging is the technique 1. Insurance transaction
for handling risks that involves the transfer of
are typically uninsurable, insurable risks.
such as protection
against a decline in the
price of agricultural
products and raw
materials.
2. Hedging typically 2. Insurance can reduce
involves only risk the objective risk of the
transfer, not risk insurer by application of
reduction. the Law of Large
Numbers.
Types Of Insurance
Types of Insurance
Life Insurance Non Life Insurance
General Insurance Misc. Insurance
Fidelity Guarantee
Marine Insurance
Insurance
Fire Insurance Crop Insurance
Personal Accident
Burglary Insurance
Insurance
Vehicle Insurance Flood Insurance

Insurance and Assurance Compared
Insurance (Non Life) Assurance (Life Insurance)
1. The term insurance is 1. The term ‘Assurance’ is
used for non-life referred to Life
insurance contracts. Insurance business.
2. In the case of insurance, 2. Loss due to risk is
loss due to risk is not certain to happen sooner
certain loss may or may or latter.
not happen.
3. Generally goods or 3. Human Life is the
property are the subject subject matter of life
matter of non-life insurance contract.
insurance. 4. Life insurance contract is
4. Insurance contracts is a continuing contract i.e.
usually for one year. long term contract.
5. Fire, marine insurance and 5. It is not a contract of
other contracts are indemnity since life lost
contracts of indemnity. cannot be returned.
6. In fire insurance, 6. Insurable interest must be
insurable interest must be present only at the time of
present, both at the time taking out the policy, but
of affecting the policy & need not be present at the
also at the time of time of maturity of the
occurrence of the loss. In policy.
marine insurance it must
be present only at the
time of loss. It is not
necessary at the time of
affecting the policy.
7. In the case of marine & 7. A life insurance policy
fire insurance, policy can be surrendered by
cannot be surrendered the assured before its
by the insured before maturity.
its maturity.
8. In the case of fire and 8. Life Insurance contains
marine insurance, the both the element of
insurance only contains security and
the protection element. investment.
Benefits Of Insurance to Society
 The major social and economic benefits of
insurance include:
1. Indemnification for loss.
2. Less worry and fear.
3. Source of investment funds.
4. Loss prevention.
5. Enhancement of Credit.
Indemnification for Loss
 It permits individuals and families to be
restored to their former financial position after
the loss occurs.
 Indemnification to business firms also permits
firms to remain in business and employees to
keep their jobs.
Less Worry and Fear
 Insurance reduces worry and fear both before
and after a loss because the insured knows
that in case of loss they have insurance that
will pay for the loss.
Source of Investment Funds
 The insurance industry is an important source of fund for
capital investment and accumulation.
 Premiums are collected in advance and the funds not
needed to pay immediate losses and expenses can be
loaned to business firms.
 The investments increase society’s stock of capital goods
and promote economic growth and full employment.
 In addition, because the total supply of loanable funds is
increased by the advance payment of insurance premiums,
the cost of capital to business firms that borrow is lower
than it would be in the absence of insurance.
Loss Prevention
 Insurance companies are involved in
numerous loss prevention programs and also
employ a variety of loss prevention personnel
including safety engineers and specialists in
fire prevention, occupational safety and health
and product liability. The loss prevention
activities reduce both direct and indirect
consequential loss. Society benefits, since both
types of losses are reduced.
Enhancement of Credit
 Insurance makes a borrower a better credit
risk because it guarantees the value of the
borrower’s collateral or gives greater
assurance that the loan will be repaid.
Cost of Insurance to Society
 The major social costs of insurance include:
a) Cost of doing business
b) Fraudulent Claims
c) Inflated or ‘Padded’ Claims
Rights and Responsibilities of the Insurer
1) Right to collect the premium from the insured.
2) Right to specify the terms and conditions that
govern the promise made under the policy.
3) Responsibility to pay for the losses occurred
and claimed by the insured.
Rights and Responsibilities of the Insured
1) Obligation to pay the premium to the insurer.
2) Right to collect the payment from the insurer if
a covered loss occurs.
3) Obligation to comply with the terms and
conditions prescribed by the insurer.
Nature of Insurance
Insurance is usually implemented through
legal contracts, or policies, in which the
insurer promises to reimburse the insured for
losses suffered during the term of the
agreement.
Contract Terminologies
 A contract is a legally binding agreement creating
right and duties for those who are parties to it.
 If one party to the contract fail to perform its
duties without a legal excuse, the contract is said
to be breached.
 A valid contract is one a court will enforce.
 A voidable contract allows one party the option of
breaking the agreement because of an act or
omission of an act (a breach) by the other party.
Ex: The insured attempts to defraud the insured.
 A void contract is one a court will not enforce because
it lacks one or more features of a valid contract.
Ex: Assume an insurance contract is purchase for an
illegal purpose, insuring property with the interest of
committing the fraud or arson.
 Binder: A temporary contract called binder is often
used before the issuance of formal insurance policy.
The binder must meet all the requirements for a legal
contract. It is distinguished by its temporary nature
(often 30 days or less). The purpose of binder is to
provide coverage during the time it takes to process
an application. A binder can be oral or written.
 Conditional Receipts: Binders are not used in life insurance.
Temporary coverage, however, contingent on an applicant’s
ability to present evidence of insurability, can be provided by a
conditional receipt. Evidence of insurability always includes but
is not limited to, good health. Occupation would be another
factor. Life insurance agents give applicants a conditional
receipt when applicant submit a premium payment with the
application.
Ex Assume Raj Bahadur submits a premium of Rs.4800 with his
application for Rs.180000 for LI. The next day he takes and
passes medical examination. The next day, he drowns in a
fishing accident. Despite the fact that death occurred before the
policy was issued, there would be Rs.180000 payment by the
issuer because there was conditional receipt and evidence of
insurability.
Elements of A Valid Contract
 All valid contracts must have the following four
elements:
1. Offer and Acceptance
2. Consideration
3. Capacity
4. Legal Purpose
Offer and Acceptance
 The proposal to make an exchange is
called the offer. If the second person
agrees to the exchange, this is called
acceptance.
 The offer must be reasonably definite and
communicated clearly.
 The acceptance must be unconditional,
unequivocal and communicated clearly.
 There must be meeting of the minds.
Consideration
 The value of exchange between the parties to the
contract is the consideration.
 The consideration is what each party gives to the
other i.e. there must be an exchange consideration
to have a valid contract.
 Most insurance contracts are unilateral contracts i.e.
only the insurer makes an enforceable promise. The
insured does not promise to pay the premiums and
cannot be sued for failure to do so.
 Contracts in which both parties make enforceable
promise are called bilateral contracts.
Capacity
 Not every person legally has the capacity to
enter into a contract. As a general rule, for
reasons of social welfare, minors, the insane
and the intoxicated cannot enter into a binding
agreement.
 Similarly insurance companies must be
qualified to enter into contracts. They must
have a license to operate their business.
Legal Purpose
 A contract must have a legal purpose , a
function or intention permitted by law.
 Contracts having an antisocial purposes are
legally enforceable. No court will aid the
parties to such a contract.
Ex: An insurance policy purchased as a gamble
on famous person’s life or any life on which
the contract owner has no legal interest is an
example of an unenforceable contract.
Distinct Legal Characteristics of Insurance Contract
There are five distinct legal characteristics:

1. Aleatory Contract
2. Unilateral Contract
3. Conditional Contract
4. Personal Contract
5. Contract of Adhesion
Aleatory Contract
 An aleatory contract is a contract where the
values exchanged may not be equal but
depend on an uncertain event. Depending on
chance, one may receive a value out of
proportion to the value that is given.
 Other commercial contracts are
communicative. A communicative contract is
one in which the values exchanged by both
the parties are theoretically equal.
Unilateral Contract
 A unilateral contract means that only one
party makes a legally enforceable promise.
 In this case, only the insurer makes a legally
enforceable promise to pay claim or provide
other services to the insured.
 After the first premium is paid and the
insurance is in force, the insured cannot be
legally forced to pay premium or to comply
with the policy provisions.
 In contrast, most commercial contracts are
bilateral in nature.
Conditional Contract
 An insurance contract is a conditional contract i.e.
the insurer’s obligation to pay depends on whether
the insured or the beneficiary has complied with all
policy conditions.
 Conditions are provisions inserted in the policy that
qualify or place limitations on the insurer’s promise
to perform.
Ex: Under a home owner policy, the insured must
give immediate notice of the loss. If the insured
delays for an unreasonable period in reporting the
loss, the insurer can refuse to pay the claim on the
grounds that a policy condition has been violated.
Personal Contract
 It means that the contract is between the
insured and insurer.
 The insurer’s consent is normally required
before a property insurance policy can be
validly assigned to another party. If property is
sold to another person, the new owner may not
be acceptable to the insurer.
 A life insurance policy can be freely assigned to
anyone without the insurer’s consent because
assignment does not usually alter the risk or
increase the probability of death.
Contract of Adhesion
 A contract of adhesion means the insured
must accept the entire contract with all of its
terms and conditions.
Discharge of Insurance Contract
 Insurance contracts may be discharged by
1. Performance
2. Breach of contract conditions
3. Recision (Recision is an agreement by both
parties to end a contract)
Principles of Insurance
 Following are the distinctive characteristics
and legal doctrines applying to insurance
contract.
1. Principle of Indemnity
2. Principle of Insurable Interest
3. Principle of Subrogation
4. Principle of Utmost Good Faith
5. Principle of Proximate Cause
6. Principle of Contribution
Principle of Indemnity
 Indemnity means the insured should be placed
in the same financial position after as before
the incurred loss.
 The insured should not profit from an
insurance transaction.
 Any departure from this rule should be on the
side of under compensation.
 There are three exceptions to the rule.
1. Life Insurance: Because the economic value of human
life cannot be measured precisely before death, life
insurance cannot be the contract of indemnity. A person
could not be put in exactly the same financial position
occupied before death because that position includes
unknown future income. However insurance companies
take care in over insurance as it creates an
unacceptable moral hazard for life insurers, who do not
want their insured worth dead more than alive.
2. Replacement Cost Insurance: This insurance is written
when the insurer promises to pay an amount equal to
the full cost of repairing or replacing the property
without deduction or depreciation.
3. Valued Insurance Policy: Valued policies pay the limit of
liability whenever an insured total loss occurs. The
value of the insured property is agreed to before the
policy is written. If a total loss occurs, it may cause
more or less damage than the stated amount.
Nevertheless, the stated amount will be paid.
 The principle of indemnity has two main purposes:
1. To prevent the insured property from a loss.
2. To reduce moral hazard.
Principle of Insurable Interest
 If people could insure property or life in which they had
no financial interest, insurance would become gambling.
 The principle of insurable interest states the insured
must be in a position to lose financially if a loss occurs.
 Insurance contracts must be supported by an insurable
interest for the following reasons:
1. To prevent gambling
2. To reduce moral hazard.
3. To measure the amount of insured loss in the property
insurance.
 Examples of Insurable Risk for Property and Liability
Insurance:
a) Ownership of property can support an insurable interest.
b) Potential legal liability can also support insurable interest. Ex.
a watch repairer, a tailor, a dry-cleaner has an insurable
interest in the property of the customer.
c) Secured creditors have insurable interest. A commercial bank
or savings and loan institutions that lends money to buy a
house has an insurable interest in the property.
d) Contractual right supports an insurable interest. Ex. A
business firm that contracts to purchase goods from abroad on
the condition they arrive safely in India has an insurable
interest in the goods because of the loss of the profits if
merchandise does not arrive.
 Insurable Interest for Life Insurance:
 The law considers the insurable interest
requirement to be met whenever a person
voluntarily purchases LI on his life. Also when you
apply for life insurance on your life, you can name
anyone as the beneficary. The beneficary is not
required to have an insurable interest in your life.
 If you wish to purchase a life insurance policy on
the life of another person, however, you must have
an insurable interest in that person’s life.
 Close family ties or marriage will satisfy the
insurable interest requirement in life insurance.
 Remote family relations will not support an
insurable interest. Ex. Cousins cannot insure each
other unless pecuniary relationship is present.
 In case of pecuniary relationship where there is no
relationship by blood or marriage, i.e. one person
may be financially harmed by death of another, the
insurable interest requirement in life insurance can
be met. Ex: A corporation can insure the life of an
outstanding salesperson, one business partner can
insure the life of the other person etc.
 When must an Insurable Interest Exist
 In property insurance, the insurable interest must exist
at the time of loss.
 Insurable interest at the time of insurance contract but
not at the time of the loss (Loss to property after it has
been sold).
 Insurable interest does not exist at the time of
insurance contract but at the time of loss (Insurance of
return cargo in ocean marine insurance).
 In life insurance, the insurable interest requirement
must be met only at the inception of the policy, not at
the time of death. Life insurance is not the contract of
indemnity but is a valued policy that pays a total sum
upon the insured's death.
 Example: If Rekha takes out a policy on her
husband’s death and later gets a divorce. She
is entitled to the policy proceeds upon the
death of her former husband if she has kept
insurance in force.
Principle of Subrogation
 Subrogation means substitution of the insurer in
place of the insured for the purpose of claiming
indemnity from a third person for a loss covered by
insurance. The insurer is therefore entitled to
recover from a negligent third party any loss
payment made to the insured.
 Subrogation does not apply if a loss payment is not
made. However, to the extent that a loss payment
is made, the insured gives to the insurer legal
rights to collect damages from the negligent third
party.
 Purpose of Subrogation: It has three basic
principles:
1. Subrogation prevents the insured from collecting
twice for the same loss. The principle of indemnity
would be violated because the insured would be
profiting from a loss.
2. Subrogation is used to hold the guilty person
responsible for the loss.
3. Subrogation helps to hold down the insurance
rates. Subrogation recoveries can be reflected in
the rate making process, which tends to hold rates
below where they would be in the absence of
subrogation.
 Importance of Subrogation: There are five important
corollaries of the principle of subrogation:
1. The general rule is that by exercising its subrogation
rights, the insurer is entitled only to the amount it has
paid under the policy. One commonly held view is that
the insured must be reimbursed in full for the loss; the
insurer is then entitled to any remaining balance up to
the insurer’s interest without the remaining going to the
insured.
2. The insured cannot impair the insurer’s subrogation
rights. The insured cannot do anything after a loss that
prejudices the insurer’s right to proceed against the
negligent third party. If the insurer’s right to subrogate
against a loss is adversely affected, the insurers right to
collect from the insurer is forfeited.
3. The insurer can waive its subrogation rights in the
contract. The insurer may decide not to exercise its
subrogation rights after a loss occurs. The legal
expenses may exceed the possible recovery; a counter
claim against the insured or insurer may be filed by the
alleged wrong doer, the insurer may wish to avoid the
embarrassment to insured or the insurer company may
wish to maintain good relations.
4. Subrogation dos not apply to life insurance. Life
insurance is not a contract of indemnity and subrogation
has relevance only for contracts of indemnity.
5. The insurer cannot subrogate against its insured. If the
insurer could recover a loss payment for a covered loss
from an insured, the basic purpose of purchasing the
insurance would be defeated.
Principle of Utmost Good Faith
 Insurance contract is based on the principle of
utmost good faith-that is, a high degree of honesty
is imposed on both parties to an insurance contract
than is imposed on parties to other contracts.
 The principle of utmost good faith is supported by
three legal doctrines: representations,
concealment and warranty.
 Representations are statements made by the
applicant for insurance.
 The legal significance of a representation is that
the insurance contract is voidable at the insurer’s
option if the representation is (a) material (b) false
and (c) relied on by the insurer.
 Material means that if the insurer knew the true
facts, the policy would not have been issued, or it
would have been issued on different terms.
 False means that the statement is not true or is
misleading.
 Reliance means that the insurer relies on the
misrepresentation in issuing the policy at a
specified premium.
 An innocent misrepresentation (not intentional) of
material fact makes the contract voidable.
 Concealment
 A concealment is intentional failure of the
applicant for insurance to reveal a material
fact to the insurer.
 To deny a claim based on concealment,
insurer must prove to things:
1. The concealed fact was known by the insured
to be material.
2. The insured intended to defraud the insurer.
 Warranty
 A warranty is a statement of fact or promise made by
the insured, which is part of the insurance contract and
must be true if the insurer is to be liable under the
contract.
 Ex. In exchange for reduced premium, the owner of a
retail store may warrant that an approved burglary and
robbery alarm will be operational at all times. The
clause describing the warranty becomes part of the
contract.
 Warranty can be affirmative warranty (something has
happened or exists) or something will happen
(promissory warranty). The warranties can be
written/expressed warranties or understood/implied
warranties.
Principle of Proximate Cause
 The principle of proximate cause is based on the
principle of cause and effect.
 Insurance companies will only make good the loss
which has occurred due to insured peril and not
otherwise.
Ex 1: Suppose Rakesh takes personal accident
policy which does not cover for sickness. He met
with an accident. He was injured but lay on the road
for hours in that cold and rainy night before
somebody came and transferred him to the hospital.
He fell sick due to pneumonia and lost his life.
The insurer will pay only the cost of hospitalization
and nothing else.
Principle of Proximate Cause
Ex 2: In one ship, oranges and lemons were
insured a cargo against collision of ship. The ship
actually collided and in emergency was put into a
port for repairs. For convenience of repairs, the
cargo was unloaded and reloaded on the ship
after repairs. The fruits when reached the
destination had been destroyed.
Here, which is nearest cause of loss?
Collision or loading and unloading.
The perishable nature of the fruits and
unloading-loading of cargoes were the proximate
causes. This was not insured and hence no
damages were paid.
Principle of Contribution
 This refers to the sharing of the loss between
co-insurers when insured takes multiple policies
against one loss and one intent.
 Principle of contribution says that the insurer
paying the claim has the right upon other
insurers to pass or transfer part of his burden.
 Insurers will share the total loss ratably.
 The right arises only after paying the insured for
his loss.
Principle of Contribution
 Essentials of this principle are:
1. The insured should be same for all contracts.
2. The policies should cover the same peril, which
caused the loss.
3. All protect the same interest of the same
insured.
4. All policies should be in force when loss occurs.
Consequences of Ignoring the Principles
 People might take policies on non existing things
(Principle of Insurable Interest)
 People may do double insurance and hide policies already
taken.
( Principle of Indemnity)
 A few dishonest policies will take huge claims from the
insurance company and suffering will be caused to many
innocents.
(Principle of Insurable Interest and Principle of Indemnity)
 People will insure anything and everything without insurable
interest.
 People will not guard/maintain their assets once insured.
 Whole insurance system may crumble.

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Insurance: Its Evolution, Meaning &

Tool in Risk Management

Prof Mahesh Kumar

Most personal, property and liability

Life Insurance Non Life Insurance

General Insurance Misc. Insurance

Fire Insurance Crop Insurance

Vehicle Insurance Flood Insurance

There are five distinct legal characteristics:

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