The insurance companies themselves have used the example of a man who knocks over someone’s beer in a crowded pub to illustrate indemnity. Suppose I knocked over someone’s glass of beer, from which he had already taken a generous swig, in a pub. I would of course apologize, and insist on buying him another pint. In other words I would more than make up for the damage, and would restore him to a better position than he was in before. The insurance company would not be generous in this way. It would make the most careful inquiries as to how much had been drunk already, and would replace the exact quantity spilled. It is no function of the insurers to pay out more from the pool than is necessary; to do so would offend against the principle of indemnity.
Monday, December 31, 2007
PRINCIPLE NO. 3-INDEMNITY, WITH CONTRIBUTION AND SUBROGATION
The contract of insurance is one of indemnity, except in the case of life assurance and personal-accident insurance. In everyday use the word 'indemnity' means to restore someone to the position that he was in immediately before the event concerned took place. For instance, an employer undertakes to indemnify his employee if the employee is put to expense of any sort on behalf of the employer’s business. If I pay out fares, or postage for my employer he will refund the money to me.
The contract of insurance is the same, in that a person suffering a loss after insuring against it will be indemnified for the amount of the loss. He will be restored as near as possible to the condition that was in immediately before the loss occurred. Indemnity never restores us to a better position than we were in before, if it did people might fell tempted to make the loss occur. Therefore any depreciation in value suffered by the property since it was purchased new, must be take into account.
Example. A motor vehicle which originally cost RM60,000 is wrecked in an accident two years after purchase. From the current list published by the motor traders, the insurance company can see that the vehicle is now worth only RM48,000. This sum will therefore be complete compensation.
The contract of insurance is the same, in that a person suffering a loss after insuring against it will be indemnified for the amount of the loss. He will be restored as near as possible to the condition that was in immediately before the loss occurred. Indemnity never restores us to a better position than we were in before, if it did people might fell tempted to make the loss occur. Therefore any depreciation in value suffered by the property since it was purchased new, must be take into account.
Example. A motor vehicle which originally cost RM60,000 is wrecked in an accident two years after purchase. From the current list published by the motor traders, the insurance company can see that the vehicle is now worth only RM48,000. This sum will therefore be complete compensation.
PRINCIPLES NO: 2-UBERRIMA FIDES OR UTMOST GOOD FAITH
When a contract is made it is presumed that people will deal honestly with one another, but it is also deemed that neither party will be a fool. You are therefore expected in the eyes of the law to ask sensible questions when entering into a contract. The law says caveat emptor, let the buyer beware. If I want an oak dining table and I agree to buy the table for RM 6,000, the law will not allow me to back out of the agreement, if the table turns out to be made of walnut. I should have inquired about which wood it was made from before I placed a firm order. The rule therefore for simple contracts is caveat emptor, let the buyer beware.
With insurance contacts the rules are more strict. Uberrimae Fidei, ‘of utmost good faith’ is the rule with these contracts. The person wishing to be insured must be absolutely open in his dealings with the insurance company, because in deciding what is a fair premium to charge, the insurance company will depend absolutely on the truth of the facts given by the applicant. For instance, if I reply to the question ‘ How old are you?’ that I am 20 years old when in fact I am 45 years old, this would make a great difference to the premium in certain policies. Life assurance is very cheap to a 25-year-old, and much more expensive to a 45-year-old. We shall see later that a Proposal Form filled up by an applicant for insurance is really a set of questions designed to discover the full facts. On the basis of these facts a fair premium is decided. False answers to the question render the policy voidable at the election of the aggrieved party, so that the insurance company need not pay out compensation, nor need they refund the premium to the applicant.
The requirement to show the ‘utmost good faith’ is strict. Supposing I am asked in the proposal form, ‘Is your father living?’ It so happens that he is , but he is on his death-bed and in fact dies later the same day. It would be a breach of’ utmost’ good faith not to reveal this material fact even though I were telling the truth when I wrote ‘ yes ‘ in answer to the question.
These first two principles of insurance(insurable interest and utmost good faith) apply to all contracts of insurance. You may insure only if you have an insurable interest, and you must show the utmost good faith in all your dealings with the insurance company
Therefore it is incumbent on both parties to an insurance contract-the insurance company as well as the insured- to disclose at the time the insurance is effected all relevant particulars which might materially influence the other party's willingness to make the contract. No important information must therefore be held back. This would debar a man from taking out a life-assurance policy if he knew that he was suffering from an incurable disease without first informing the insurance company of the fact.
With insurance contacts the rules are more strict. Uberrimae Fidei, ‘of utmost good faith’ is the rule with these contracts. The person wishing to be insured must be absolutely open in his dealings with the insurance company, because in deciding what is a fair premium to charge, the insurance company will depend absolutely on the truth of the facts given by the applicant. For instance, if I reply to the question ‘ How old are you?’ that I am 20 years old when in fact I am 45 years old, this would make a great difference to the premium in certain policies. Life assurance is very cheap to a 25-year-old, and much more expensive to a 45-year-old. We shall see later that a Proposal Form filled up by an applicant for insurance is really a set of questions designed to discover the full facts. On the basis of these facts a fair premium is decided. False answers to the question render the policy voidable at the election of the aggrieved party, so that the insurance company need not pay out compensation, nor need they refund the premium to the applicant.
The requirement to show the ‘utmost good faith’ is strict. Supposing I am asked in the proposal form, ‘Is your father living?’ It so happens that he is , but he is on his death-bed and in fact dies later the same day. It would be a breach of’ utmost’ good faith not to reveal this material fact even though I were telling the truth when I wrote ‘ yes ‘ in answer to the question.
These first two principles of insurance(insurable interest and utmost good faith) apply to all contracts of insurance. You may insure only if you have an insurable interest, and you must show the utmost good faith in all your dealings with the insurance company
Therefore it is incumbent on both parties to an insurance contract-the insurance company as well as the insured- to disclose at the time the insurance is effected all relevant particulars which might materially influence the other party's willingness to make the contract. No important information must therefore be held back. This would debar a man from taking out a life-assurance policy if he knew that he was suffering from an incurable disease without first informing the insurance company of the fact.
I will further elaborate on this subject ( utmost good faith) in my future posting at this site.
Sunday, December 30, 2007
PRINCIPLE NO: 1-INSURABLE INTEREST
Everyone who has an insurable interest in something is entitled to insure it against any risks that may occur. To have an insurable interest we must be in danger of suffering some loss or incurring some liability should the thing concerned be destroyed or damaged in any way. If we shall not suffer loss or incur some liability then we may not insure; if we do we shall waste our premium because under no circumstances will we be allowed to receive money from the pool.
It is therefore perfectly all right to insure my own house, furniture, motor car, jewellery, etc. because I will suffer loss should they be destroyed, damaged or stolen. I can insure my own life, or my wife’s life, or even the life of the man who manages my business. It would be quite wrong to insure someone else’s house, furniture, motor car, jewellery, etc. because I have no real interest in it, and will suffer no loss if it is damaged or stolen. I cannot insure Henry Tan house and claim money if it is burned down. If this were allowed I might just be tempted to help it burn down. Of course very few people do commit crimes, but if crime of this sort were encouraged, even if only by a small amount, it would be very unpleasant for the victims. It is therefore ‘against public policy’ to permit to insure without an insurable interest.
Therefore to simplified the whole meaning of insurable interest, let me point out to you that it is illegal for persons or firms to take out insurance against risks which do not directly affect them. In general, when the insured makes a claim under an insurance policy he must first have to suffered some kind of loss himself. A man can insure his own property against fire or burglary, but not the house of a friend or neighbour. The insured must have an insurable interest in what he insures.
THE PRINCIPLES AND DOCTRINES OF INSURANCE
There are three main principles of insurance, and a famous doctrine which is rather similar to be a basic principle.
Two of the principles apply to every contract of insurance. They are the principles of Insurable Interest, and Uberrima Fides or Utmost Good Faith. The third principle, Indemnity, applies to all contracts of insurance except personal accident and life assurance. It has two corollaries, Contribution and Subrogation. Finally, the doctrine is called the Doctrine of Proximate Cause.
Let us take a careful look at each of these principles at my next posting.
Two of the principles apply to every contract of insurance. They are the principles of Insurable Interest, and Uberrima Fides or Utmost Good Faith. The third principle, Indemnity, applies to all contracts of insurance except personal accident and life assurance. It has two corollaries, Contribution and Subrogation. Finally, the doctrine is called the Doctrine of Proximate Cause.
Let us take a careful look at each of these principles at my next posting.
Saturday, December 29, 2007
HOW THE 'INSURANCE POOL' WORKS
The successful conduct of an insurance-pool system depends for success on three main points.
(a) The contributions to the pool must be adequate to pay the claims made by those who suffer a loss.
(b) The pool itself must be looked after carefully and wisely invested, so that it grows bigger year by year.
(c) The just claims must be paid promptly and in full.
(a) The contributions to the pool must be adequate to pay the claims made by those who suffer a loss.
(b) The pool itself must be looked after carefully and wisely invested, so that it grows bigger year by year.
(c) The just claims must be paid promptly and in full.
Each of these three points is easy to say, but difficult to achieve, and a full understanding of what is involved in each point is important. Before looking at the detailed arrangements made by insurance companies to put these points into effect, we must first consider the principles which control all insurance activities.
AN EARLY INSURANCE ACT
The preamble to an Act of Parliament of 1601 in Britain included the phrase
By means of which policies of assurance…..the loss lighteth rather easily upon many, than heavily upon few.
This phrase explains rather well the basic idea of insurance, which is that losses shall be shared more evenly among the whole population, rather than be suffered by just the odd unfortunate person. The word ‘population’ here can mean just those who are interested, or it can mean every person in the country, as for instance in Britain with its National Insurance Scheme. Whichever meaning it has, we must be clear that the losses that are suffered are real enough. The family house is burnt down have suffered a loss, but if they were fully insured against fire it may cost them only a small premium. Enough money will be provided from the pool to restore them to their previous condition in a rebuilt house, or similar accommodation elsewhere.
It is worth returning to the phrase from the Act of 1601. It says so exactly, in its old-fashioned way, what happens when a heavy loss suffered by one person becomes only a tiny loss, because his partners in the insurance scheme have helped him bear the blows of a cruel and unkind fate—the loss lighteth rather easily upon many than heavily upon few.
By means of which policies of assurance…..the loss lighteth rather easily upon many, than heavily upon few.
This phrase explains rather well the basic idea of insurance, which is that losses shall be shared more evenly among the whole population, rather than be suffered by just the odd unfortunate person. The word ‘population’ here can mean just those who are interested, or it can mean every person in the country, as for instance in Britain with its National Insurance Scheme. Whichever meaning it has, we must be clear that the losses that are suffered are real enough. The family house is burnt down have suffered a loss, but if they were fully insured against fire it may cost them only a small premium. Enough money will be provided from the pool to restore them to their previous condition in a rebuilt house, or similar accommodation elsewhere.
It is worth returning to the phrase from the Act of 1601. It says so exactly, in its old-fashioned way, what happens when a heavy loss suffered by one person becomes only a tiny loss, because his partners in the insurance scheme have helped him bear the blows of a cruel and unkind fate—the loss lighteth rather easily upon many than heavily upon few.
Friday, December 28, 2007
THE PRINCIPLES OF INSURANCE
The principle upon which insurance is based is “the pooling of risks.”If the incidence of some particular risk can be calculated from past experience its probability can be calculated. If, for example, over a long period of time fire has destroyed business premises to the value of an average of RM 50 millions a year such premises can be insured against fire if the combined payments collected from people insuring against this risk total RM 50 millions plus the insurance company’s expenses in conducting the business. Thus, what happens is that each person insuring against a particular risk pays a relatively small contribution to a common fund or pool, from which compensation can be paid to those who suffer in that way. The same result would be achieved if a large group of businessmen made an agreement to share any loss due to fire (or due to any other specified cause) among themselves. It is obviously more satisfactory to allow an independent body like an insurance company to undertake the business.
Insurance, therefore, can be effected only against those risks the probability of which can be mathematically calculated. It must be stressed that the insurance company itself is not taking any risk of loss, for, by spreading the risk over as wide a field as possible, the compensation it is called upon to pay should be well covered by the premiums it collects. Most Malaysian insurance companies have now been in existence long enough to have built up large reserves which protect them against any abnormal demands which might be made upon them. If, however, insurance companies find that are having to pay out more in premiums for a particular risk, they will clearly have to increase their premiums. An insurance company will keep a separate fund for each branch of insurance it undertakes.
Insurance, therefore, can be effected only against those risks the probability of which can be mathematically calculated. It must be stressed that the insurance company itself is not taking any risk of loss, for, by spreading the risk over as wide a field as possible, the compensation it is called upon to pay should be well covered by the premiums it collects. Most Malaysian insurance companies have now been in existence long enough to have built up large reserves which protect them against any abnormal demands which might be made upon them. If, however, insurance companies find that are having to pay out more in premiums for a particular risk, they will clearly have to increase their premiums. An insurance company will keep a separate fund for each branch of insurance it undertakes.
THE NATURE OF INSURANCE-THE 'POOLING' OF RISKS
A “pool” is a collection of money contributed by interested parties for a particular purpose. With a football pool, for example, the participants put a contribution into a central pool of money. They then try to guess something quite extraordinary, for example which eight teams will draw their matches next Sunday. Very often nobody guesses correctly, and the one who guesses nearest to the correct answer collects all the money in the pool, apart from the portions taken by the Government for taxation and by the management for the expenses of running the pool. A football pool therefore has the basic plan as explained above.
The difference with insurance is that it is not the lucky person who takes all, but the unlucky person or persons who take enough to enable them to recover from the unkind blow that fate has dealt them. This is much better than a football pool. A football pool is a gamble; a surrender of part of our assets in the wild hope that good fortune will smile upon us. Insurance is a much wiser and more sensible activity. It is a surrender of a tiny portion of our assets in order that a pool of money shall be created. From this pool, if we suffer the risk insured against, compensation will be paid to restore us to our previous good condition. We shall never win a fortune, we all know this is unlikely anyway, but we shall be sure that whatever standard of living we have achieved will continue for years to come.
With life assurance the man who insures his own life so that his wife and children are provided for should he die, is not gambling upon his death. He does not wish to win the money in the pool; he hope to lead a normal healthy life, and the feeling of security he gets from knowing his family is covered by a Family Protection Policy will help him enjoy life all the more.
The difference with insurance is that it is not the lucky person who takes all, but the unlucky person or persons who take enough to enable them to recover from the unkind blow that fate has dealt them. This is much better than a football pool. A football pool is a gamble; a surrender of part of our assets in the wild hope that good fortune will smile upon us. Insurance is a much wiser and more sensible activity. It is a surrender of a tiny portion of our assets in order that a pool of money shall be created. From this pool, if we suffer the risk insured against, compensation will be paid to restore us to our previous good condition. We shall never win a fortune, we all know this is unlikely anyway, but we shall be sure that whatever standard of living we have achieved will continue for years to come.
With life assurance the man who insures his own life so that his wife and children are provided for should he die, is not gambling upon his death. He does not wish to win the money in the pool; he hope to lead a normal healthy life, and the feeling of security he gets from knowing his family is covered by a Family Protection Policy will help him enjoy life all the more.
THE ADVANTAGES OF INSURANCE
Many risks have to be faced by people who run businesses. Some of these risks, as will be seen below cannot be insured against. There are , however, a great many risks against which it is possible nowadays to insure.
For example, in return for a payment, known as a premium, an insurance company will undertake to compensate the person making the payment (the Insured) in the event of a specified loss. Thus, if Jimmy is the owner of a shop with a value of RM100,000 which he wishes to insure against fire he will take out a policy(the document setting out the exact terms of the agreement) with an insurance company. Jimmy will then have to pay a premium at regular intervals, the amount depending on the value of the property insured. If he wishes to obtain full compensation for any loss he may suffer he must must insure his property for its full value. If the shop should be completely destroyed by fire he will, after due inquiries have been made, receive a sum of RM100,000 as compensation. Similarly, he could insure his stock against fire or burglary.
The advantage of insurance is clear. In return for a relatively small payment Jimmy is relieved of worry regarding the safety of his property, for he knows that should he suffer loss he will receive compensation. How, then, does it come about that an insurance company can bear risks which people like Jimmy cannot bear? That subject will be made clear in the next part of my site.
For example, in return for a payment, known as a premium, an insurance company will undertake to compensate the person making the payment (the Insured) in the event of a specified loss. Thus, if Jimmy is the owner of a shop with a value of RM100,000 which he wishes to insure against fire he will take out a policy(the document setting out the exact terms of the agreement) with an insurance company. Jimmy will then have to pay a premium at regular intervals, the amount depending on the value of the property insured. If he wishes to obtain full compensation for any loss he may suffer he must must insure his property for its full value. If the shop should be completely destroyed by fire he will, after due inquiries have been made, receive a sum of RM100,000 as compensation. Similarly, he could insure his stock against fire or burglary.
The advantage of insurance is clear. In return for a relatively small payment Jimmy is relieved of worry regarding the safety of his property, for he knows that should he suffer loss he will receive compensation. How, then, does it come about that an insurance company can bear risks which people like Jimmy cannot bear? That subject will be made clear in the next part of my site.
THE PURPOSE OF INSURANCE
The purpose of insurance is to provide a sum of money in compensation for any damage that has been suffered as a result of running the risk that we insured against. Every policy of insurance defines the risk that is being insured against, and if that risk causes a loss the person insured will receive compensation to indemnify him for the loss. The meaning of this phrase will be made clear later in this site of mine.
DEFINITION OF INSURANCE
What is insurance? Consumers and even some agents could not even really know the actual definition of insurance. Insurance is actually a method of financial protection by which one party undertakes to indemnify another against certain forms of loss.. An insurance company pools the payments for this service and invests them to earn further funds. Each insured person pays a relatively small amount, the premium, for a stated period of coverage. In return the company will, subject to an assessment of a claim, reimburse the insured for loss caused by an event covered in the policy.
Forms of insurance have existed since the earliest civilizations. Modern insurance began with the medieval guilds, which sometimes insured members against trade losses. The specialized fields of fire and maritime insurance developed in the 17th and 18th centuries. The development of probability theory allowed the statistical likelihood of damage to be calculated , making insurance as a business possible
Forms of insurance have existed since the earliest civilizations. Modern insurance began with the medieval guilds, which sometimes insured members against trade losses. The specialized fields of fire and maritime insurance developed in the 17th and 18th centuries. The development of probability theory allowed the statistical likelihood of damage to be calculated , making insurance as a business possible
Thursday, December 27, 2007
Wednesday, December 26, 2007
Monday, December 24, 2007
Tuesday, December 18, 2007
AUTHOR INTRODUCTION
FRANCIS PAY, the author association with the insurance industry goes back more than thirty two years ago when he began his career in the insurance line with an authorised underwriting agencies in Batu Pahat, Johor in the year of 1975.
From there on he had worked in several insurance companies and underwriting agencies until his resignation on 01/01/2008 from his former job in an insurance company which he had worked with for more than 12 years.
With the author 32 years of experience in the insurance industry he had decided to devote his time in creating this insurance site to offer independent information on various aspect of insurance both to the consumers and insurance agents.
Sunday, December 2, 2007
COMMENTS AND CONTRIBUTIONS
Feel free to leave your comments ; ideas and feelings about my blog and articles posted!!! They are highly appreciated. Comments are moderated and spam will not be tolerated and will be deleted!!! If you wish to share something or have any problems regarding any insurance matters from any insurance company, just feel free to state your problems through the comment section or if you are unable to do so, you can always write to me at my e-mail address which is stated in the “my profile” section or if you are unable to find it I have it down below for you:
insuranceblog4u@gmail.com
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insuranceblog4u@gmail.com
In order to leave your comments in my blog, you need to have a Gmail account. If you do not have one, kindly sign up for one today!!! It is free of charge!!! Gmail is easy to use and they have a storage capacity of 5.7 GB and is still increasing everyday so that you will never need to delete another message. To apply for the free Gmail account, kindly click at the link provided below:
http://www.gmail.com
Wednesday, October 10, 2007
DISCLAIMER AND LEGAL NOTICES
DISCLAIMER AND LEGAL NOTICES: Insurance 4 consumers-agents is a blog about general and life insurance for the general public; consumers and agents which is published by the author who have been in the insurance industry for more than 32 years. While the author have taken all reasonable precautions to ensure that the advice, information and data given in the blog are reliable and accurate, the author cannot accept legal responsibility for them. The advice contained herein is not meant to replace legal or other professional counsel, and should be used in conjunction with governing laws and regulations. Views expressed in the articles are not necessarily those of the author. The author reserve the right to alter or change the contents in this blog without notice to reflect changes within the insurance industry.
PLEASE NOTE: No part of this blog publication may be reproduced, or stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without written permission of the author. For information regarding permission, please write to insuranceblog4u@gmail.com
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