Question

explain the overall concept of insurance and describe the third party payer system

Answer 1

Insurance:

•Introduction:

• Life is open to risks and uncertainties of so many kinds.
• There are risks of death and disability for human life, fire and burglary (Robbery, theft etc..) risk for property and so on.
• In case of occurrence of any of the events the individuals and or organizations may suffer a greater loss.
• In order to minimise the impact of such uncertainties there a is a need for Insurance

Meaning of insurance: Insurance is a contract between two parties, whereby one party agrees to indemnify (Cover) the loss suffered by the other party for a consideration of some money is known as Insurance.

Meaning of Insurer, Insured and Insurance policy

• Insurer: The party which promises to indemnify the loss is called ‘Insurer’ (Insurance company).
• Insured: The persons or the property subject to risks is called ‘Insured’.
• Insurance Policy: The agreement/ contact is put in writing it is called an ‘Insurance Policy’

Fundamental principle of insurance:

• The basic principle of insurance is the an individual or a business concern chooses to spend a definitely known sum in place of a possible huge amount involved in an indefinite future loss.
• Insurance is a form of risk management primarily used to safe guard against the risk of potential financial loss.
• Insurance is defined as the equitable transfer of the risk of potential loss from one entity to another in exchange for reasonable fee (Known as Premium).

Functions of insurance

• Providing certainty
• Protection
• Risk sharing
• Assist in capital formation

1. Providing certainty:

• Insurance cannot remove the uncertainty involved in the business.
• However it provides certainty of payment for the risk of loss.
• The insurer charges premium for providing the certainty.

2. Protection:

• Insurance cannot stop the happening of a risk.
• However it gives protection against risk of a probable loss that may arise due to happening of an uncertain event like fire, theft, natural calamities etc..

3. Risk Sharing:

• Insurance is an agreement, in which large number of people, who are expose to the same risk, contribute to fund, maintained by the insurance company.
• The premium paid by all of them is pooled and in case of loss to any person, the compensation is paid to him out of such fund.
• Thus, by insurance risk is shared by large number of people.

4. Assist Capital Formation:

• The funds collected by the insurance company in the form of premium, are invested by them in various income generating schemes.
• It leads to capital formation in the company.

Principles of Insurance:

• Utmost Good Faith
• Insurance Interest
• Indemnity
• Proximate Cause
• Subrogation
• Contribution
• Mitigation

1. Principle of Utmost Good Faith: A contract of insurance is based on the principle of utmost good faith to be observed by both the parties – the insured and the insurance company – towards each other. If one party conceals any material information from the other party, which may influence the other party’s decision to enter into the contact of insurance; the other party can avoid the contract.
2. The Principle of Indemnity: Except life insurance, all other contracts of insurance are contacts of indemnity; which means that in the event of the loss caused to the subject matter of insurance, the insured can recovery only the actual amount of loss-subject to a maximum of sum assured.
3. Principle of Insurable Interest: The principle of insurable interest is the foundation of a contract of insurance. In the absence of insurable interest, the contract of insurance is a mere gamble and not enforceable in a court of law.
4. Principle of Contribution: The principle of contribution applies in cases of double-insurance. In case of double insurance, each insurer will contribute to the total payment in proportion to the amount assured by each. In case, one insurer has paid the full amount of loss; he can claim proportionate contribution from other insurers.
5. Principle of Subrogation: According to the principle of subrogation, after the insurance company has compensated for the loss caused to the insured; the insurance company steps into the shoes of the insured i.e. the insurance company acquires all the rights of the insured, in respect of the damaged property.
6. Principle of Cause Proxima (i.e. the Proximate Cause): According to this principle, we find out which is the proximate cause or the nearest cause of loss to the insured property. If the nearest cause of loss is a factor which is insured against; then only the insurance company is liable to compensate for the loss, otherwise not. This principle is significant in cases when the loss is caused by a series of events.
7. Principle of Mitigation of Loss: (Mitigation means making something less harmful). According to the principle of mitigation of loss, it is the duty of the insured to take all possible steps to minimize the loss caused to the property covered by the insurance policy. He should behave as a prudent person and must not become careless after taking the insurance policy.

Types of Insurance:

(1) Life Insurance:

Definition of life insurance: Life insurance is a contract under which the insurance company – in consideration of a premium paid in lump sum or periodical installments undertakes to pay a pre-fixed sum of money on the death of the insured or on his attaining a certain age, whichever is earlier.

(2) Fire Insurance:

Definition of fire insurance: Fire insurance is a contract, under which the insurance company, in consideration of a premium payable by the insured, agrees to indemnify the assured for the loss or damage to the property insured against fire, during a specified period of time and up to an agreed amount.

(3) Marine Insurance:

Definition of marine insurance: A contract of marine insurance is a contact under which the insurance company undertakes to indemnify the insured against losses which are incidental to the marine adventure.

Types of marine insurance:

1. Hull insurance (or insurance of the ship): It covers the insurance of the vessel and its equipment’s like furniture and fittings, machinery, tools, engine etc.

2. Cargo insurance: It includes insurance of the cargo or goods contained in the ship and the personal belongings of the crew and the passengers.

3. Freight insurance: The shipping company charges some freight for carrying the cargo. Very often there is an agreement between the shipping company and the owners of goods that freight will be paid only when goods reach the destination safely.

4. Liability insurance: Under liability insurance, the insurance company undertakes to indemnify against the loss which the insured may suffer on account of liability to a third party.

What Is Third-Party Insurance?

Third-party insurance is an insurance policy purchased for protection against the claims of another. One of the most common types is third-party insurance is automobile insurance. Third-party offers coverage against claims of damages and losses incurred by a driver who is not the insured, the principal, and is therefore not covered under the insurance policy. The driver who caused damages is the third party.

How Third-Party Insurance Works?

Third-party insurance is essentially a form of liability insurance purchased by an insured (first-party) from an insurer (second party) for protection against the claims of another (third party). The first party is responsible for their damages or losses, regardless of the cause of those damages.