The History and Principles of Insurance
Basically Insurance means the transfer of risk of a loss, from one party to another in exchange for a consideration or payment. This safeguards the insured against any risk arising from unexpected loss.
The industry of insurance has indeed grown and evolved into an intricate practice and field of study with such advancements such as NI card.
Early methods of risk management were practiced by the Babylonian and Chinese merchants in the period between third and second millennium BC. The Chinese traders who used to have huge amount of cargo would re-distribute these to many vessels so as to reduce the loss that can be suffered on individual basis.
The Babylonians developed a unique system of funding shipments in 1750 known as Code of Hammurabi. This involved a cargo owner taking a loan that would be paid later plus the interest agreed upon; but in case the shipment was lost in the process of transit, the lender would cancel the loan with no charges involved.
Another case of Insurance referred to as the general average was practiced by the inhabitants of Rhodes in the 1st Millennium BC. The arrangement was that a group of merchants would pay to insure their goods on transit and in case any of them suffered loss; there would be compensation to the affected party.
Other forms of Insurance contracts which were not intertwined with other agreements like loans were developed in Genoa in the 14th century. Continued developments in insurance resulted into premiums being varied with extent of risk, and eventually separating insurance from the basic perspective of investment.
Principles of Insurance
For insurance to be effective and manageable there are certain regulation and rules that the parties involved must adhere to. Insurance functions as a financial intermediary where individuals pool together their funds in order to get protection from various risks. These principles are:
This refers to compensation of the insured in the event of a loss only up to the level of the insured interest.
Indemnity therefore guards against the insured gaining more than the loss suffered.
This means that the insured must directly suffer in case of a loss.
This exists in both property and life insurance and demands that the person involved must be affected by the loss incurred.
This therefore means that the person related to the loss must have claim to substantiate the payment in the event of such a loss.
The claim on the policy will be determined by the kind of insurance, the property ownership or the kind of relationship that exists in case of life insurance.
This concept or principle of insurable interest is what differentiates insurance from a mere wager.
Utmost good faith (Uberrima fides)
It states that insured and the insurer are to exercise honesty and fairness in good faith.
For this reason; all material facts must be disclosed in order to ensure that the contract is actualized as per agreement.
Material fact is every detail that would influence the decision making of an insurer in determining the risk. This will then be used to determine the amount of premium to apply in order for the risk to be covered.
This concept applies where the insured has already taken legal action against the negligent party who caused the loss. In such a case the insurer still has the responsibility of ensuring that the insured is compensated for the loss suffered.
This states that all the insurers who have similar obligations to the loss suffered by the insured must contribute towards the compensation according to the laid down guidelines.
This means that the insurer gets legal rights to recover damages on behalf of the insured in case of a loss. This could be through court action even though this subrogation rights can be withdrawn by application of special clauses.
This mean that the cause of the loss or peril must be indicated in the insurance policy agreement, and the main cause highlighted and specified.
This serves to minimize the loss suffered in case of occurrence of the risk insured. It places obligation on the insured to exercise utmost care and assume even there is no insurance contract and thus aim at lowering the loss that could result.