How insurance companies operates? Insurance companies business.

Principles of Insurance

There are several principles governing insurance business, the important of which are discussed below.

(a) The principle of indemnity: Insurance is a contract of indemnity. The insurer is called indemnifier and the insured is the indemnified. In a contract of indemnity, only those who suffer loss are compensated to the extent of actual loss suffered by them. One cannot make the profit by insuring his risks.

(b) Insurable interest: All and sundry cannot enter into contracts of insurance. For example, A cannot insure the life of B who is a total stranger. But if B. happens to be his wife or his debtor or business manager, A has insurable interest i.e vested interest and therefore he can insure the life of B. For every type of policy insurable interest is insisted upon. In the absence of such interest, the contract will amount to a wagering contract.

(c) The principle of uberrimae fidei: Under the ordinary law of contract there is no positive duty to tell the whole truth in relation to the subject-matter of the contract. There is only the negative obligation to tell nothing but the truth. In a contract of insurance, however, there is an implied condition that each party must disclose every material fact known to him. This is because all contracts of insurance are contracts of uberrima fidei, i.e., contracts of utmost good faith. This is because the assessment of the risk and the determination of the premium by the insurer depend on the full and frank disclosure of all material facts in the proposal form.

Principles (How insurance companies operates)

• Insurance involves pooling funds from many insured entities (known as exposures) to pay for the losses that some may incur
• The insured entities are therefore protected from risk for a fee, with the fee being dependent upon the frequency and severity of the event occurring
• In order to be an insurable risk, the risk insured against must meet certain characteristics
• Insurance as a financial intermediary is a commercial enterprise and a major part of the financial services industry, but individual entities can also self-insure through saving money for possible future losses