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INSURANCE

Insurance    Risk    Risk Management   
Pure Risk & Speculative Risk    Insurable risk    Hazard vs. Peril    Consensus ad idem    Legal principles to Insurance Contracts    Essentials for Insurable Interest    Subrogation    Co- Insurance    Re-insurance    Proximate cause

INSURANCE

         The economic well being of any society is measured by the role, industry and commerce play in it. If these are well organized and stable, it is reflected in the living standards of the people. Anything, which adversely affects the working, affects the society and the country as a whole, sometimes the whole world. A lot of examples can be listed like, storm, fir, hurricane, tsunami etc. There can be no other remedy against such unforeseen happenings, except INSURANCE. The insurance has its role to play in industry & commerce as well as in the lives of individuals exposed through unexpected perils. Unless we understand the risk exposure, we cannot come up with any remedy. So I just go about to explain the basics in Insurance.

Risk

         Means exposure to danger / set of perils. In insurance parlance it means uncertainty about the financial loss. Financial loss may be by way of loss or damage to the insured property. Due to the operation of an insured peril for example if a factory building or machinery therein sustains damage, this is a Physical loss. Consequent on the physical loss, there will be stoppage of production and a consequential loss may arise for profits.

A risk in relation to the insurance represents an accidental or fortuitous event by which the insured sustains pecuniary loss.

Risk is universal and Risk is essential to progress. "Higher the risk, Higher is the return." Risk and opportunity go hand in hand. There is a thin line of demarcation between RISK and UNCERTAINITY. The objective is to reduce the risk as far as possible & practicable by MANAGING THE RISKS.

The business is exposed to variety of risks viz

Financial risks: Market risk, Liquidity risk, Credit risk, Economic risk,
Strategic Risks: poor marketing strategy, acquisitions, poor product launches, outsourcing risk,
Reputation risk: Damage to brand & corporate image,
Other risks: environmental, technological, operational, Information risk, political risk, Insurable or Pure risks.

Risk Management

Risk Management (RM) is the act of controlling the risk & its adverse impact on the day to day workings. RM includes:

• Identification of the risks.


• Measuring / assessing the risks.


• Likelihood of occurrences & consequences.


• Developing strategies to manage the risk.


• Finding alternative actions.


• Prioritization of processes.

Finding alternative solutions / actions include:
1. Risk avoidance- deliberate attempt not to perform the activity, which is risk prone.
2. Risk retention-Taking risky proposal since NO OTHER ALTERNATIVE to avoid that risk.
3. Risk transfer -Causing another to accept the risk (Insurance) for a price.
4. Risk hedging ( risk reduction). - Systematic process of reducing risks thro' some
proposal when risk is inevitable (i.e.Forward Covers, Options, swap, installation of Fire
fighting appliances, etc).

Risk Categories

Risk can be broadly divided into Pure Risk & Speculative Risk.

Pure Risk

        Pure Risk can be explained as a physical loss sustained by the insured on account of a peril insured against. Physical loss may consequently result into loss of expected profits due to stoppage of production in the factory, nearby property sustaining damage due to fire accident in the insured premises, court awarding reasonable compensation. In addition the owner of the factory may sustain injuries for which resonable medical expenses could be incurred. These are all coming in the fold of financial losses. Such of those losses are termned as Pure Risks or Risks of Trade.

Speculative Risk

        Speculative Risk or losses represent business or trade losses for example, the owner of the factory may suffer loss due to other reasons like: the existing do not suit to the present fashion or trend, goods may not be sold due to declaration of war etc, goods will be stagnant due to Exchange Control Regulations and so on.

Pure risks are insurable but speculative risks are beyond the scope Insurance Cover.

Insurable risk :

• The risk must be accidental or fortuitous in nature. If a risk in unavoidable or bound to
  occur, it is not coming under insurance ( eg. Wear & tear, depreciation, inherent vice, delay etc)
  
• The risk must be pure in nature. Trade risks / business risks cannot be insured.
  
• Loss must be capable of measurable in money.
  
• Risk must not be illegal in nature.
  
• Risk must not be of a catastrophic nature. ( eg. Insurers not to grant cover for war and allied
  perils due to agreement between countries).
  

Hazard vs Peril

Consensus ad idem

Special Legal principles to Insurance Contracts:

Perils covered under various policies:

A - Fire Policy: Fire, Lightning, Explosion / Implosion, Impact damage, Air craft damage, Riot, Strike, Malicious damage, Storm, Cyclone, Tempest, Hurricane, Flood & Inundation, earthquake, Subsidence & land sllide ( including rock slide).

B - Mediclaim Policy: Covers reimbursement of medical expenses incurred in a hospital as an inpatient as a direct result of accident or sickness occurring or contracted anywhere in the world.

C - Householders' Shop-keepers' Policy: The cover includes fire & allied perils, burglary, & house breaking,, personal accident, baggage, plate glass and public liability.

Essentials for Insurable Interest are:

1. There must be a property rights, interest, life or financial liability
   capable of being insured

2. Such property rights, life, etc must be the subject matter of insurance
    

3. The insured must bear a legal relationship to the subject matter whereby
   he stands to benefit by the safety of property rights, interest, life or freedom
   from liability and he stands to lose by any loss, damage, injury or creation of
   liability.

Interest may arise under the following circumstances

Interest may arise under the following circumstances:

A- Arising from ownership
B- Arising from law
C- Arising from contract
D- Arising from legal liability
E- Of a person in life
F- Arising out of insurance.

Unless a person has an insurable interest in a subject matter, he cannot arrange for insurance with respect to the same. Insurable interest should be capable of measurement in terms of money. Under an insurance contract, the insured cannot recover more than an amount of his insurable interest since he cannot lose more than this amount. The principle of indemnity also provides the same. The insurance contract cannot pay an amount, which is more than this financial loss because that would give him a profit or undue profit.

Subrogation