Slide 1: Understanding the Concept of Insurance

Concept of Insurance

• The world is full of uncertainties and risks that impact individuals, families, businesses, and assets.
• Risks include potential losses related to life, health, and property.
• Insurance products help mitigate these losses by offering financial compensation for unavoidable events.
• Insurance is designed to minimize or eliminate various risks' financial impact.
• Insurance protects individuals from loss and uncertainty by compensating potential losses.
• It can be seen as a social tool aimed at reducing or removing the risk of loss to life and property
• Insurance safeguards the economic value of assets.
• Asset owners value their property and are provided with benefits, whether in the form of income or protection against potential loss, which could result in significant harm.
• Owning a car for personal use can provide comfort and pleasure.
• Car owners need to provide insurance coverage to protect against unexpected events that could cause potential damage.

Evolution of Insurance

• The concept of insurance dates back thousands of years, originating from the idea of pooling risks.
• In earlier times, a common fund was established at the village or community level.
• Small contributions from many individuals were gathered and then used to compensate those who experienced losses.
• The contribution amount was determined based on estimating the average number of people who might face losses.
• For example, in a village with 500 houses, each valued at AED 200,000, an average of 4 houses are damaged by fire annually, causing a total loss of AED 800,000.
• If all 500 homeowners contribute AED 1,600 each, the collective funds cover the risk of 4 houses being destroyed by fire.
• The risk faced by 4 homeowners is spread across all 500 homeowners.
• The first known written insurance policy was on the Babylonian obelisk monument with the code of King Hammurabi.
• The Hammurabi Code was one of the first forms of written laws.
• The basic insurance gave Babylonian traders protection against loss of cargo.
• The principle of general average is a maritime law concept that requires all parties involved in a sea venture to proportionally share any losses incurred from a voluntary sacrifice of part of the ship or cargo to preserve the entire vessel in an emergency situation.
• In 1666, during the Great Fire of London a fire began at a bakery on Pudding Lane and rapidly spread throughout London.
• The city consisted mainly of timber-framed buildings clustered closely together, making them highly vulnerable to fire.
• Once the fire was finally contained, many people were left without homes as the city was rebuilt showing a need for a professional fire service and insurance.
• Fire insurance companies emerged, initially offering coverage to property owners.
• These companies also established their own fire services to minimize the risk of fires breaking out.

Principles of Insurance

• The business of insurance aims to protect the economic value of assets or life of a person.
• The insurer agrees to make good any loss on the insured property or loss of life that may occur in course of time for a small premium paid by the insured.
• These include and are not limited to the following:
  • Utmost Good Faith
  • Insurable Interest
  • Indemnity
  • Subrogation
  • Contribution
  • Proximate Cause
  • Loss of Minimization

Principle of Utmost Good Faith

• Both the insured and the insurer should have good faith.
• The insurer must provide complete, correct, and clear information regarding the contract's terms and conditions.
• It applies to all insurance contracts.
• The person getting insured must willingly disclose and surrender complete true information to the insurer regarding the subject matter of insurance.
• The insurer's liability gets void if any facts about the subject matter of insurance are omitted, hidden, falsified, or presented in a wrong manner by the insured.

Principle of Insurable Interest

• The insured must have insurable interest in the subject matter of insurance.
• In life insurance, it refers to the life insured.
• In marine insurance, it is enough if the insurable interest exists only at the time of occurrence of the loss.
• The principle of insurable interest states that the person getting insured must have.
• A person has an insurable interest when the physical existence of the insured object gives him some gain but its non-existence will give him a loss.
• The insured person must suffer some financial loss due to the damage of the insured object.

Principle of Indemnity

• Indemnity refers to a commitment or assurance to restore the insured to the position they were in immediately before the occurrence of an unforeseen event.
• The insurer agrees to compensate.
• Indemnity refers to security, protection, and compensation provided to cover damage, loss, or injury.
• Under the principle of indemnity, an insurance contract is established solely to protect against unforeseen financial losses resulting from future uncertainties.
• The primary objective is not to generate profit but to offer compensation in the event of damage or loss.
• The amount of compensation paid is proportionate to the incurred losses in an insurance contract.
• Compensation is limited to the assured amount or the actual losses, whichever is less.
• The compensation is not less or more than the actual damage.
• Compensation is not paid if the specified loss does not happen due to a particular reason during a specific time. Insurance is only for giving protection against losses and not for making profit.

Principle of Subrogation

• Once the insured is compensated for the loss or damage to the insured property, the ownership rights are transferred to the insurer.
• It applies to all indemnity contracts.
• Subrogation means substituting one creditor for another.
• The principle of subrogation is an extension and a corollary of the principle of indemnity.
• When the insured is compensated for losses due to damage to insured property, the ownership right shifts to the insurer.
• This principle applies only when the damaged property has any value after the event causing the damage.

Principle of Contribution

• it says the insured can claim compensation only to the extent of actual loss either from one or many insurers.
• This principle is a corollary to the principle of indemnity and applies when the insured has multiple policies covering the same subject matter.
• The insured can recover compensation only up to the actual loss, either from all insurers collectively or from one insurer.
• If a single insurer pays the full compensation, that insurer can seek a proportionate contribution from the other insurers.

Principle of Proximate Cause

• The principle of Causa Proxima, when a loss is caused by more than one, the proximate, nearest, or closest cause should be considered.
• It is the most dominant and direct cause of the loss.
• The loss of insured property can be caused by more than one cause in succession to another.
• The property may be insured against some causes and not all causes.
• The proximate or nearest cause of loss must be found.
• If the proximate cause is one that is insured against, the insurance company will pay the compensation.
• To find out if the insurer is liable for the loss, the proximate (closest) and not the remote (farthest) cause must be discovered.

Principle of Loss Minimisation

• The insured must take all reasonable steps to minimize the loss to the insured property.
• The insured must make every effort to reduce the loss of their insured property when faced with unforeseen events, such as a fire, explosion, or similar incidents.
• The insured is expected to take all necessary actions to control and mitigate losses.
• The insured should not act negligently or irresponsibly and remain responsible for protecting the property and prevent further damage or loss.