Insurance services- Introduction, Principles, and Types

Insurance services are those services that provide protection against loss or uncertainty. These services are explained in the form of some types of insurances like Family Insurance, Life Insurance, Car Insurance, Travel Insurance, Fire Insurance, Health Insurance, etc.

Meaning of Insurance services:

Insurance is the contract between the insured and the insurer in which the insurer agrees to pay for the loss insured at the time of the event happening in consideration of the regular payment by the insured.

Definitions of Insurance Services:

“Insurance is a social device providing financial compensation for the effects by misfortune, the payment being made from the accumulated contribution of all parties in the scheme.”

-D.H.Hausell

“Insurance is a device for transfer of risks of individuals to an insurer, who agrees for a consideration(called the premium, to a specific extent, losses suffered by the insured.”

-W.A.Dinsdale

Important Questions related to Insurance Services:

Who is the Insurer?

The Firm/individual who agrees to pay the compensation is called the Insurance company (Insurer).

Who is the Insured?

The individual who gets the compensation is called an insured.

What is the premium?

Premium means the amount which is paid by the insured person to an insurer for getting compensation at the time of loss.

The premium can be paid quarterly, half-yearly, or annually.

Note: The loss is compensated only if it is due to the subject matter of the policy. For example in marine insurance, the loss is compensated only if it is due to marine risks covered under the insurance policy.

Principles of Insurance services:

There are six important principles of insurance which are as follows:

1. Principle of Utmost Good Faith:

Firstly, Faith means Trust, Confidence, belief. The insurance contracts totally based on faith. If the person wants to take the insurance policy he has to disclose all the material facts to the insurance company (insurer) and on the other side insurer also discloses the policy matters. Failure to make disclosure of the material facts by both parties will make the contract voidable.

For example, If the owner of the business takes a fire insurance policy but not disclose the facts that the electricity board issued him a warning letter to get the factory’s wiring changed but the owner has not done these things before taking the insurance policy then it will be refused by the insurance company at the time of compensation paid against the mishappening of fire due to short circuit.

2. Principle of Insurable Interest:

Insured must have the insurable interest in the subject matter of insurance policy. The insured must suffer a financial loss if the subject matter is damaged to prove the interest or he must be the owner of the subject matter in which the policy is taken.

3.Principle of Indemnity:

Insurance is not a contract for making a profit. Compensation is paid according to the actual loss of the subject matter. For example, the owner insured his factory for Rs.4 lakh against fire but due to fire he suffered an actual loss of Rs. 2 lakh then the insurance company will compensate him only with Rs.2 lakh.

Note: the principle of indemnity is not applicable to life insurance because we cannot estimate the loss due to the death of a person.

4. Principle of subrogation:

Subrogation means replacement. According to this principle when the insured is compensated for the loss then the right of ownership of such property loss is transferred to the insurer.

For example, if the owner suffers a loss of Rs 1 lakh due to fire and he gets equal compensation then the remaining half-burnt goods sold by the insurance company for RS. 10,000 and will be kept by an insurance company not by the insured because he has already got full compensation for the loss.

5. Mitigation of loss:

Mitigation means reduction. The insured must take care of his property. It does not mean that if the owner has taken the insurance policy then he is free from his responsibility regarding his subject matter. The insured should not be careless.

For example, if a person took fire insurance against his business property and when a fire breaks out then he should take all measures to stop the fire instead of looking at the fire because he will get compensation against loss.

6. Principle of Causa Proxima:

Causa Proxima means the nearest cause. According to this principle, the cause for the loss must be closely related to the subject matter which was disclosed in the insurance policy.

Types of Insurance services:

There are four types of insurance services:

1. Life Insurance:

Life insurance is related to two types of risks:

1. Risk of dying too early
2. Risk of dying too late

Life insurance provides financial support to the family after the death of the insured person. Sometimes people take a life insurance policy to get financial independence during their old age. In both, cases a life insurance policy is very helpful.

In a life insurance policy, the insured pays a fixed amount in the form of a premium and get the compensation at the time of maturity or death whichever comes earlier.

2. Fire insurance:

The fire insurance policy provides protection against the loss by fire, explosion, etc.

Fire insurance covers riot, foreign enemy, civil strife.

3.Marine insurance:

It is an agreement between the insurer and the insured against the marine losses. Marine insurance covers: perils of sea e.g. sinking of ship, storm, seizure, etc. Insured is the owner of the ship or owner of the cargo. There are some marine insurance policies which are as follows: 

cargo insurance is related to cargo or goods in the ship and the personal belongings of the crew members.

Hull insurance covers the whole ship which includes: furniture, fitting, tools, machinery, fuel, etc.

4. Health insurance:

This type of insurance is related to the health of the person and his family. It covers the medical expenses related to hospitalization, cost of illness, nursing home charges, etc.

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Also, Check our Tutorial on the following subjects: 

1. https://tutorstips.com/financial-accounting/
2. https://tutorstips.com/advanced-financial-accounting-tutorial/