Insurance involves the pooling of risks and works on the law of large numbers. The Insurance company (Insurer) insures the customer (Insured) against some perils and uncertain events. The Insurance company thus indemnifies the Insured on the occurrence of the insured peril or the uncertain event which has been insured. The amount the Insurance company collects from each person is called a premium, and what it pays out on the occurrence of the insured event is called claims. Thus the management of a common pool with a promise to pay a benefit upon the occurrence of an uncertain event with the aim to restore the beneficiary to the financial position before the occurrence of the loss.
So this can be summarized as follows
- Independent management (Insurance Company),
- Creation of a fund or common pool (Line of Business),
- A promise to pay on the occurrence of a specified event. (concept of ‘Utmost Good Faith‘),
- Probability of an uncertain event occurring,
- The payout from the pool to the members (Insured),
- Restoration of the insured to financial position before the loss is called indemnity.
The item that is getting insured is called interest insured. Now, this could be a motor vehicle, a house property, a factory, a person, a person‘s health or hospitalization expenses, cash, a ship, an airplane, etc. These properties are insured against some perils; for example, if there is an accident and there is damage to the motor vehicle, then the insurance company pays for the repair of these damages. Now the insurer should have an insurable interest, or he should stand to lose on the occurrence of the insured event, and so the insurance company indemnifies him. Finally, there needs to be utmost good faith in the contract of insurance. So the insurer should declare all the relevant details, and the insurance company should keep his promise to pay on the occurrence of the event insured. So the basic principles of Insurance are – the principle of indemnity, the principle of insurable interest, principle of utmost good faith, and the principle of proximate cause. Proximate cause means that an insurance policy will provide indemnity only if caused by the peril included in the policy and not one of the excluded perils. If the latter happens then the loss is not payable.
For citing this article use:
- Acharya, D. (2017). Drivers of Customer Choice in Multichannel Distribution System of Indian General Insurance Companies An Empirical Study.
