Business Risks and Types of Insurance
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Meaning of Risk:
Risk means possibility of loss due to some unfavourable event in future. It implies
uncertainty about the future course of events.
Types of risks Insurable risks Non-insurable risks
Meaning Insurable risks are all those risks Non-insurable risks are those
which can be insured against. The which cannot be insured against
probability and magnitude of these because they cannot be anticipated
risks can be financially estimated with reasonable accuracy.
beforehand with past experiences and
statistical techniques.
Characteristics ● Large exposure
● Accidental
● Estimable
● Unexpected
● Not catastrophic
● Not against public policy or
society
● Significant loss
Insurance: Insurance may be defined as a contract in writing whereby one party (known as
insurer) undertakes to indemnify the other party (known as insured) in consideration for a
certain sum of money (called premium) against any loss as a result of some uncertain event.
● The event or contingency against which insurance is made is called the ‘risk’.
● The contract providing for insurance is known as ‘insurance policy’.
Objective/purpose of insurance:
• Insurance aims at indemnifying against loss arising from the happening of uncertain
events.
• It is a method by which an individual or business protects itself from the loss due to an
uncertain event.
• It provides a sense of security by compensating the insured for the loss.
, Principles of Insurance
1) Utmost good faith: An insurance contract is based on good faith on the part of both
the parties. It is the legal duty of the insured to disclose all the material facts about the
subject matter of insurance to the insured. A material fact is one which would affect
the judgment of the insurer in assessing the degree of risk. Since insurer has no access
to the information about the subject matter of insurance, he relies on the information
provided by the insured. The amount of premium is fixed on the basis of the
information provided by insured. If he withholds or conceals any material facts,
insurer can repudiate the contract of insurance on grounds of material
misrepresentation.
2) Insurable interest: It means that the insured must be in such a position that he will
suffer a primary loss by the happening of the event insured against. A person is said
to have an insurable interest in the subject matter insured, if he is benefitted by its
existence and suffers a loss by its destruction. In the absence of insurable interest, a
contract becomes a wagering contract which is null and void and unenforceable at
court of law.
3) Indemnity: Indemnity means a promise to compensate in case of loss. The object of
every insurance contract is to place the insured as nearly as possible in the same
financial position after the loss as he was before the loss. The insured is entitled to
recover from the insurer only the amount of loss actually suffered. The amount of
compensation will be up to the sum insured or the value of the policy whichever is
less. The insured will not be allowed to make any profit out of the happening of any
loss covered by insurance contract.
All insurance contracts except those of life insurance are contracts are contracts of
indemnity.
Life insurance contract is a contingent contract nor a contract of indemnity. The
principle of indemnity is not applicable in case of life insurance because no amount of
money can compensate for the loss of life. The sum insured is fixed which is payable
at the time of death of the insured or at the expiry of the policy. It's not a contingent
contract because the insured will receive the amount of sum insured at the time of
maturity of the policy (in case of endowment policy, wherein the event of death of
insured may not have happened).
4) Doctrine of subrogation: It implies that after indemnifying the insured for his loss, the
insurer becomes entitled to all the rights and remedies relating to the property insured.
Insurer’s right of subrogation will extend only to the extent of the sum insured.
Subrogation applies only after the insurer has paid the claim to the insured. Doctrine
of subrogation is applicable to all contracts of indemnity and it is not applicable to life
insurance. Insurer’s right of subrogation will extend only to the extent of the sum
insured. The insurer can recover only what the insured himself could recover.
Doctrine of subrogation is a corollary of indemnity and also is not applicable to life
insurance.
\
Meaning of Risk:
Risk means possibility of loss due to some unfavourable event in future. It implies
uncertainty about the future course of events.
Types of risks Insurable risks Non-insurable risks
Meaning Insurable risks are all those risks Non-insurable risks are those
which can be insured against. The which cannot be insured against
probability and magnitude of these because they cannot be anticipated
risks can be financially estimated with reasonable accuracy.
beforehand with past experiences and
statistical techniques.
Characteristics ● Large exposure
● Accidental
● Estimable
● Unexpected
● Not catastrophic
● Not against public policy or
society
● Significant loss
Insurance: Insurance may be defined as a contract in writing whereby one party (known as
insurer) undertakes to indemnify the other party (known as insured) in consideration for a
certain sum of money (called premium) against any loss as a result of some uncertain event.
● The event or contingency against which insurance is made is called the ‘risk’.
● The contract providing for insurance is known as ‘insurance policy’.
Objective/purpose of insurance:
• Insurance aims at indemnifying against loss arising from the happening of uncertain
events.
• It is a method by which an individual or business protects itself from the loss due to an
uncertain event.
• It provides a sense of security by compensating the insured for the loss.
, Principles of Insurance
1) Utmost good faith: An insurance contract is based on good faith on the part of both
the parties. It is the legal duty of the insured to disclose all the material facts about the
subject matter of insurance to the insured. A material fact is one which would affect
the judgment of the insurer in assessing the degree of risk. Since insurer has no access
to the information about the subject matter of insurance, he relies on the information
provided by the insured. The amount of premium is fixed on the basis of the
information provided by insured. If he withholds or conceals any material facts,
insurer can repudiate the contract of insurance on grounds of material
misrepresentation.
2) Insurable interest: It means that the insured must be in such a position that he will
suffer a primary loss by the happening of the event insured against. A person is said
to have an insurable interest in the subject matter insured, if he is benefitted by its
existence and suffers a loss by its destruction. In the absence of insurable interest, a
contract becomes a wagering contract which is null and void and unenforceable at
court of law.
3) Indemnity: Indemnity means a promise to compensate in case of loss. The object of
every insurance contract is to place the insured as nearly as possible in the same
financial position after the loss as he was before the loss. The insured is entitled to
recover from the insurer only the amount of loss actually suffered. The amount of
compensation will be up to the sum insured or the value of the policy whichever is
less. The insured will not be allowed to make any profit out of the happening of any
loss covered by insurance contract.
All insurance contracts except those of life insurance are contracts are contracts of
indemnity.
Life insurance contract is a contingent contract nor a contract of indemnity. The
principle of indemnity is not applicable in case of life insurance because no amount of
money can compensate for the loss of life. The sum insured is fixed which is payable
at the time of death of the insured or at the expiry of the policy. It's not a contingent
contract because the insured will receive the amount of sum insured at the time of
maturity of the policy (in case of endowment policy, wherein the event of death of
insured may not have happened).
4) Doctrine of subrogation: It implies that after indemnifying the insured for his loss, the
insurer becomes entitled to all the rights and remedies relating to the property insured.
Insurer’s right of subrogation will extend only to the extent of the sum insured.
Subrogation applies only after the insurer has paid the claim to the insured. Doctrine
of subrogation is applicable to all contracts of indemnity and it is not applicable to life
insurance. Insurer’s right of subrogation will extend only to the extent of the sum
insured. The insurer can recover only what the insured himself could recover.
Doctrine of subrogation is a corollary of indemnity and also is not applicable to life
insurance.
