There are basic theories upon which insurance scheme works. Though the basic theories are applicable in all classes of insurance, there are some special features each class of insurance exhibit. The basic theory guiding the insurance operation is founded on the truism concerning the law of large number.
The insurance scheme
to be practicable, however the following basic features must be in place:
1.
A large number of people must have the same kind
of risk which they wish to transfer and are capable of transferring to the
insurers.
2. And the possibility of the insured event happening should be so low as to ensure acceptable market premium, that is, the premium or the price which most prospective insured shall be able to pay for the insurance protection and at which price the insurer will be able to discharge its obligations to the insured and its other constituencies (shareholders, creditors, regulatory authorities employees and others);
3.
And more importantly, both the insurer and the
insured must have the legal to transact insurance business.
Types of insurance contracts.
The description of modern insurance business can be portrayed
in the nature of the insurance contract performance by insurer, that is the
nature of the expected claims payable or benefits due to the insured if the
insured event occur within the specified contract period. Thus there are
indemnity contracts and non-indemnity contracts which can be called benefit
insurance policies.
Indemnity Contracts.
Indemnity contracts refer to those types of insurance
contracts whereby, the nature of the subject-matter of insurance, the insurer
is equitably expected to restore the insured to his financial position
immediately before the loss or the happening of the insured perils. Insurances
subject to indemnity are usually for a period of one month. There could be
shorter than one month.
The indemnity insurance suggests strongly the basis of
insurance being described as a pool of risks. In other words, the insured pay relatively
small amounts called premium in relation to the sum insured to the insurer who
accumulates them in a fund class by class.
The insurable risks of the respective insured are pooled according to the type of risks, and those insured who suffer financial
arising from the insured perils are compensated or indemnified from the fund.
The insurer is liable to indemnify even if the fund is insufficient since he
must be a limited liability company. The insurer is the custodian of the
insurance fund, and administers it in line with legal insurance principles and
practices as shall always be implied or expressed in the insurance policy. The
insured or the policyholders who should constitute a sizeable large number of
homogenous exposure units are the members of the insurance scheme and
invariably potential candidates for indemnity.
In indemnity insurances the insured perils may not occur at
least within the contractual period. The satisfaction or value received by the
insured who did not suffer loss during the currency of the contracts is the
confidence and peace of mind resulting in active enterprising and effective
concentration needed for enhanced productivity. However, should any insured
suffer loss, arising from the insured perils, he is indemnified subject to the
contractual terms. An amount of money that will restore him to the position he
enjoyed immediately before the loss is paid them.
Limitation of indemnity.
There are contractual terms that limit indemnity. Those that
limit indemnity are usually expressed in the policy document. Some of the
factors are discussed in brief as follows:
The sum insured: this represents the maximum amount the
policyholders can recover from the insurer if the insured perils happen. The
insured cannot recover limit of liability. The insured do state the sum insured
before the commencement of the insurance.
Average: the word average means two things in insurance
depending on whether the discussion is dealing with marine insurance or non-marine
property insurance. In marine insurance, average means “partial loss” and this
can be qualified either as particular average or general average. The
particular average relates to partial loss affecting one particular interest in
marine venture say the owner of a ship. The general average refers to partial
loss sustained and shared among the persons interested in the marine venture
threatened by a total loss. This later case involves willful act like
jettisoning deck cargo to save the ship from threats of total loss. The general
average applies only if the Voyage is saved.
Excess Clause and Franchise Clause: the excess clause means
that the insured is required to bear the first Nx of any claim. But, if the
insurance is subject to franchise, the insurer will not be liable to any claim
or loss not exceeding Nx; for losses exceeding the Nx the insurer undertakes to
pay the full amount limited only by the principle.
Non-indemnity insurance.
Non-indemnity insurance contracts refer to those insurance
contracts in which the insured events are certain to happen, though on
uncertain date and time. They are mainly life assurances like Endowment
Assurance. Whole life assurance and Term assurance. The risks insured against
in such insurance contracts are usually inherent and contingent upon human life,
and the amounts paid as benefits are not the economic value of what have been
lost due to happening of the unwanted events. Stated differently, the exact
amount payable in events of the insured risks happening can hardly be measured
in financial terms because the value of life, limb and health cannot be
accurately stated in monetary terms. A sum assured or its equivalent or known
benefits are paid to the beneficiaries should the contingency insured against
occur. Honestly, another name for this type is called Benefit Policies.
In non-indemnity insurance contracts, insurer’s liabilities
are negotiable or fixed at the Inception of the contract. A little variation on
the benefits payable will exist if the insurance is with-profit participation
in which case the amount payable will increase with the declared bonus from the
agreed benefits in event of the insured events occurring.
Non-indemnity insurance contract include virtually all life
assurances and personal Accident Insurances. They promises or guarantee the
payment of contractual sums if the in accordance with the contractual terms.