1. Chapter 5 Principle of insurance
Dr. A. PHILIP AROKIADOSS
Assistant Professor
Department of Statistics
St. Joseph’s College (Autonomous)
Tiruchirappalli

2. Household Insurance

3. Distinguish between Insurance
Protection against a loss you hope will not happen.
Eg. car accident.
Assurance
Protection against a loss you know will happen.
Eg. death.

4. Two reasons for adequate insurance
You must cover all possible risks.
Eg. In household insurance: fire, theft, flood and accidental damage.
You must insure enough to cover full amount of loss.
Eg. If your house is worth €200,00 you must insure it for that value.

5. The basis for insurance is sharing the risk.
Large number of
small premiums
Insurance
pool/fund
Ins. co. expenses
Ins. co. profit
Compensation

6. Distinguish between Insurable risk Things that can be insured. Eg.
Houshold insurance; fire theft, damage.
Personal accident for a farmer.
Non-insurable risk
Things that cannot be insured against.
Eg.
Damage to car used in crash testing.
Personal accident for a bungee jumper.

7. Insurance Terms Exclusion Clause: Situations that cannot be insured.
Eg.
Household insurance:
A house situated near a river that is known to flood every year.

8. Insurance Terms Policy Excess/Excess Clause:
The insured person may have to pay the first €100 of the compensation themselves.
This is to reduce the number of small claims being made.
To make people more careful.

9. Insurance Terms Proximate Cause: What is the exact cause of the loss.
Eg. was it fire or theft or flood?
ie. what actually happened?
This helps the insurer decide if compensation is due.

10. Insurance Terms Compensation:
Is the money you get when you make a claim.

11. Principles of insurance
Insurable Interest
Utmost Good Faith
Indemnity
Contribution
Subrogation

12. Insurable Interest
In order to insure something you must benefit from its existence & suffer from its loss.
Eg. You can insure your own house but you cannot insure your neighbours’s house.

13. Utmost Good Faith
You must tell all relevant information when filling out an application for insurance.
Eg. If you have an illness you must tell the ins. co. as they may want to charge a higher premium or not insure you at all.

14. Indemnity You cannot make a profit from insurance.
There is no point in insuring your house for more than it is worth as the ins. co. will only compensate you for the actual value of the house.

15. Contribution
If a risk is insured with two insurance companies each will pay half of the compensation.
Eg: A ring insured with two ins. co.’s. for €1,000
Both will give ??
€500 each.

16. Subrogation
Passes the legal right of the insured over to the insurer to claim from a third party who caused the loss.
Eg. Whirlpool oven causes house to go on fire. Ins. co. pays compensation to insured and then seeks their own compensation from whirlpool.

17. Average Clause Related to underinsurance and partial loss.
If you only insure an item for a fraction of the value, you only get the same fraction compensation.

18. Formula
SUM INSURED x CLAIM = COMPENSATION
ACTUAL VALUE

19. EXAMPLE 1. Mary insured her house for €200,000.
The market value is €250,000.
A fire causes €10,000 worth of damage.
How much compensation will she receive???

20. Solution 1
200,000 x 10,000 = 8,000
250,000

21. Documents used in insurance
Proposal Form
Application form for insurance

22. Policy
Contract of insurance
Gives full details of cover
Must be filled away safely

23. Cover Note
Temporary policy
Used in car insurance, while you are waiting for insuracne disc

24. Certificate of Insurance
Proof of insurance

25. Claim Form
Form you fill out when a loss occurrs and you want compensation

26. People in insurance Broker Gives advice on insurance
Sells insurance on behalf of lots of companies.
Eg:

27. Agent
Sell insurance for only one co.
Eg: FBD, Quinn Direct……..

28. Actuary
Calculates insurance premiums

29. Loss Adjuster
Calculates the value of the loss
Works for the insurance co.

30. Loss Assessor
Calculates the value of the loss
Represents the insured

31. Steps involved in taking out insurance
Decide what risks you want covered. (ask a broker)
Fill out proposal form. (ugf)
Pay your premium.
File your policy in a safe place.

32. Steps involved in making a claim.
Contact guards & ins. co.
Obtain estimates of lost/stolen items.
Fill out claim form. (ugf)
Talk to assessor and agree on compenstaion.

33. Terms relating to premium calculation

34. Premium The cost of insurance Money you pay to be insured
The higher the risk the higher the premium

35. Risk Effect Things that cause premiums to be high or low
Eg: In car insurance
No car accidents = lower premium
Under 25 male = higher premium

36. Loading Extra premium for higher risk
Eg: A smoker will have a higher premium for life assurance than a non smoker

37. Discount Money taken off premium for a lower risk
Eg: In house insurance you get a discount for having an alarm

38. No Claims Bonus
In car insurance you get a discount if you do not claim for any accidents the previous year
It encourages people not to claim for small amounts

39. Renewal Date
The date you must have your premium paid by.
Eg : 1/10/08

40. Days of Grace You may be given a few extra days to pay your premium
Not allowed in motor insurance

41. Premium Calculation Questions

42. Types of Personal Insurance

43. PRSI Pay Related Social Insurance.
Statutory Deduction from you salary.
You will receive an income if you are out of work due to illness, disabiity, maternity leave…

44. Medical Insurance In case you get sick or need an operation Eg: VHI
Voluntary Health Insurance

45. Personal Accident Covers people who are injured due to an accident.
Lump sum payment for loss of finger, sight, hearing etc.

46. Salary Protection
Provides an income in case you can’t work due to illness.
Will provide you with a higher income than PRSI only.

47. Pension Plan
Provides you with lump sum and income for your retirement.

48. Holiday Insurance
Provides you with health care if you get sick on holidays.

49. Risk Effects for Personal Insurance
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Older, smoker, risky job
Discount
Younger, non-smoker,
low risk job