Be Insured

     The word "average" in insurance has two meanings depending on whether one is dealing with marine insurance or other property insurances.

 Marine insurance

   Here the word "average" means "partial loss" and it is qualified by the word "particular" or the word "general".

 (a) Particular average refers to a partial loss affecting one particular interest, e.g. the hull or a particular consignment of cargo. The policy may exclude or "be free of' particular average meaning that partial losses affecting the individual, rather than all involved in the maritime venture, are excluded. Sometimes partial losses under a certain percentage, say 3 per cent or 5 per cent of value, are excluded. New cargo wordings available since 1982 do not contain this clause.

 (b) General average refers to a loss which is partial when looked at from the total values at risk in the adventure (although it could be total for one individual). If this loss was incurred voluntarily in order to save the whole venture, and this sacrifice was successful in so doing, then all parties to that venture will share the loss

                             Non-marine property insurances

      Here the word means to share the loss and is a device used by insurers to combat under-insurance. If there is an average clause on the policy the insured will, or may become, an insurer for the proportion underinsured, and share in contribution. The most common forms of average clause are given under the three headings which follow.

   Pro rata condition of average. This is applicable almost universally to fire and theft policies.

     If a sum insured is low compared with the value at risk, the insured will have contributed too little to the common pool, i.e. sum insured x rate per cent instead of value x rate per cent. In order to correct this imbalance, policies subject to the pro rata condition will only pay such proportion of the loss, as the sum insured bears to the value at risk, i.e.

        Sum insured      Loss

        Value                 x -        1-

   Where first loss insurances are arranged (see above) the sum insured cannot be used as it had been agreed that it will be substantially lower than the declared value at risk. However, the latter is a factor which the underwriter takes into account in fixing his rate, and average is sometimes incorporated into these insurances on the basis of:

 Declared total value           Loss

Actual-total-value-      x       -1-

 Subject to the limit of the first loss sum insured.

   The special condition of average Here a 75 per cent condition of average is applied to agricultural produce at farms. In this case the insured will share in the loss only if the sum insured is less than the stated percentage, i.e. 75 per cent of the value as insured (i.e. indemnity) at the time of the loss. If average does apply it is the pro rata condition as dealt with immediately above which applies. A similar form of the application of average applies in reinstatement insurances (see Chapter Nine) where the percentage is 85 per cent.

     The two conditions of average this clause is used for fire insurance on stock in certain warehouses. It would be applied to an insurance covering stock in several situations or of several types, when there was a possibility that other policies might be in force covering more limited situations or more limited types of stock. The second condition states that the wider ranged policy does not insure what is more specifically insured by the narrower ranged ones and for the application of pro rata average as stated in condition one, the value at risk is construed accordingly. The more specific policies must deal with the loss first.

                                      Claims payment

     Except in liability cases, when payment is made direct to the third party and solicitors, most claims are settled by payment to the insured. In rare circumstances the insurers may exercise their option to repair or replace, but this is discussed in Chapter Nine when dealing with indemnity. If payment is not made to the insured, it may be made:

(a) To his legal representative, e.g. in death claims, or when a person is a minor, or bankrupt or of unsound mind;

(b) To any person to whom the insured has assigned the proceeds of the policy, e.g. he may instruct the insurers to pay the building firm direct in the case of building repairs;

(c) To another party by order of the court-by a garnishee order-but this is rare.

                            Claims agreements

     It frequently happens that an insured has a right of recovery under his policy and also from a third party by way of tort, statute, custom of trade, or contract. In these circumstances the insured will usually intimate the claim to his company and subrogate to them his rights against the third party. Alternatively he may recover from the third party and so be denied his claim

 

 

 

 

 

      Our life is full of uncertainties and a risk that’s why we are always worried about our future life assurance is the solution to overcome all the uncertainties.

  Special features of life assurance

   The provision of life assurance is a quite different process from the provision of non-life insurance. The main distinction is that in life assurance the event being assured is certain to happen in the case of those policies paying on death, or is scientifically calculable in the event of policies not paying a benefit on death.

     Premium payments

     As we saw under "Actuarial principles" above, premiums are payable by level amounts throughout the period of the policy. This means that each person pays the same amount throughout, that amount being determined by his age on effecting the policy. Premiums can be paid annually, half-yearly, quarterly or monthly and are often met by standing orders with banks whereby the policyholder instructs his bank to make the appropriate payments at the right times.

       Participation in profits

     Life assurance companies value their assets and liabilities at regular intervals, some every year and others every three years. This valuation of their operation allows them to determine if any surplus exists after calculating all future liabilities and other contingencies. Should such a surplus exist it is distributed among those policyholders who have "with profits" or "participating" policies.

            Surrender values

    When a person no longer wishes to continue his policy or for some reason cannot continue the premiums he can ask for the surrender value. He ceases payment and receives, not a proportion of the sum assured, but a proportion of the premiums. Not all policies allow a surrender value but where one is possible it may be less than the aggregate amount of all premiums paid, unless the policy has been in force for
many years, when the surrender value may be more than the premiums paid.

 Paid-up policies

    An alternative to the surrender value with some policies is the paid-up Policy. In this case the premiums cease; the policy continues but on maturity a smaller sum than would originally have been paid will be due to the policyholder. Depending on the policy and the company concerned these paid-up policies mayor may not continue to participate in Profits.

 Tax relief

     When the policyholder is paying income tax he may be entitled to income tax relief on the life assurance premiums if the policy was taken out before March 1984. Relief is granted provided:

(a) the policy qualifies for tax relief; the rules for qualification are fairly complex but the majority of policies were eligible;

(b) the policy is on the life of the income tax payer or that of his or

her spouse; and

(c) the premiums are paid by the income tax payer or his/her spouse.

     Prior to 6th April 1979 a person paid the full, gross, premium and subsequently received the appropriate tax relief in the form of an allowance included in his tax coding. Following the Finance Act 1976 the system changed from 6th April 1979 and now each person pays the net premium, after tax relief, to the insurance company and the company claims the balance, representing the tax relief, from the Inland Revenue. The rate of relief is 15 per cent of gross premium payable subject to premiums not exceeding £1,500 or one-sixth of income, whichever is the higher. Those who not taxpayers benefit from this system as everyone, regardless of whether they pay income tax or not, enjoys the benefit of the relief.

 Since March 1984 this relief is no longer allowable on new contracts.
    Investments

    We have already identified the life assurance industry as being of con-siderable size. This was evidenced by the number of policies in force and the value of premiums paid each year. These vast amounts of money are held by companies to meet future liabilities and, are termed long-term funds. The total value of such funds for long-term assurance in 1982 was some £82,047 million.

    These funds do not lie dormant waiting on claims coming in. They are invested to provide income for the companies and so assist Policy holders and shareholders. Not only do these two groups benefit but the country as a whole benefits as the funds are invested in many forms that encourage expansion of industry and promote job employment. A look around any town or city will show how many new building projects are being sponsored by life assurance companies.

 

 

 

           
Insurance allow someone who undergoes a harm or accident to be remunerated for the special effects of their bad luck. It allows you shelter yourself to oppose the danger of everyday in your strength, financial situation and home.

The commercially insurable dangers usually share seven common characteristics.

 1. An excess is consistent for coverage units   
                  
The enormous mainstream of insurance policies is afforded for exclusive members of outsized classes. Automobile insurance, for instance, about one hundred seventy-five million automobiles enclosed in 2004 at the United States. 

2. The continuation of a large number of identical experience thing permits insurers to advantage from the supposed ‘law of large numbers,’ which achieve conditions, as the number of contact units, improves the definite results increasing all time likely to turn into secure to predictable results. There are executions to this condition. Lloyd's from London is well known for assuring the life or health of sports figures, actresses and actors. ‘Satellite Launch’ insurance surrounds the actions that are uncommon. Large profitable property plans may assure outstanding belongings for which there are no “homogeneous” contact units. Even though failing on this norm, many contact, as these are usually well thought-out to be insurable.  

3. Definite Loss  
The experience that provides rise to the harm that is a theme to insurance is not less than principle, take position at an identified time, in a recognized position, and from a recognized reason. The common example is death of an assured on a life insurance policy. Worker injuries, automobile accidents, and fire may all simply meet up this reason. Other kinds of sufferers may only be significant in conjecture. Industrial disease, such as, may occupy prolonged contact to damaging situation where no exact time, place or reason is particular. Causes of a loss, place, the time, and ideally should be obvious enough that a sensible person, with satisfactory information, could independently confirm all three elements. 


 4. Accidental Loss      
  The event that comprise the cause of profess should be accidental, or in any case outside the organization of the recipient of the insurance. The harm should be ‘real’ in the intellect that it results from an incident for which there is just the prospect for expense. Events that surround approximate elements, for instance usual business chance, are not regarded as insurable. 

 5. Large Loss
The sort of harm must be significant from the viewpoint of the assured. Insurance percentages require covering both the probable charge of losses, and the charge of concerning and managing the policy, controlling losses, and providing the capital required to sensibly and promise that the insurer would be able to give claims. For minor losses, these later costs may be more than a few times the range of the probable cost of sufferers. There is small position in paying such expenses unless the defense has offered genuine value to a purchaser.

        Sum insured
The sum insured is: The maximum liability of the insurer;
The amount upon which the premium is based by the application of the rate for the risk.
 
It should be noted that in property insurances it is not the amount which the insurers promise to pay in the event of loss (as the loss may only be partial) nor, except in a few rare cases, is it an admission of the value of the property insured.
Valued policies. The exceptions just mentioned are where, because of the unique type of property involved, it might be difficult to arrive at a value after loss. In order to avoid disputes the parties agree on the value inception, and the sum insured represents this agreed value. In the
 
event of total loss the insurers undertake to pay that value. In the case of practical loss the claim is settled on an indemnity basis (see Chapter Nine) for other property losses. Examples of policies of this type are those insuring works of art and vintage motor cars.
Life and personal accident policies. Such policies on one's own life or the life of one's spouse are not contracts of indemnity (see Chapter Nine) in that the assured is assumed to have an unlimited interest in the e assured. There can therefore be no question of the assured losing s than the sum assured in the event of death, and so in the event of a .aim the full sum assured is paid. 
 
             How to assess the level of the sum insured
 
 In compiling the basic rate for a property insurance the insurer assumes at the sums insured represent the values at risk and calculates the past aims costs as a percentage of these sums or values. If the insured fixes .e sum insured at less than the value at risk, then the application of the normal or basic will result in that insured making a lower
contribution to the general fund than is commensurate with the risk being run. This may not be apparent at first, but if the reader will consider for a moment that the probability of a total loss is much less than the probability of a partial loss, then it can be seen that whereas the insurer will be fully liable for the numerous partial losses, the low sum insured only limits his liability in the event of a rare total loss. This aspect of under-insurance is dealt with later under the heading of Claims but it may be advisable to illustrate the effect on the premium of   Under-insurance.
 
Example
Value at risk: £10,000
 
Policy (a) full sum insured: £10,000
 
Premium £10,000 x rate (say £0.25%) = £25.00 Policy (b) sum insured: £7,500
Premium £7,500 x £0.25% = £18.75
 
In each case the vast majority of claims will be less than £7,500 each and the reduction of £6.25 in premium is statistically very much higher than is warranted by the likely incidence of claims over £7,500. From the insured's point of view a much more serious matter is that he is totally uninsured for the last £2,500 of value, and as will be seen later he is likely to be required to bear 25 per cent of all losses up to £7,500 due to the operation of average.
The sum insured should be fixed at a level which represents the Insured?s insurable interest (see Chapter Eight) or potential loss subject to the terms of the contract arranged, e.g. strict indemnity or reinstatement (new for old) as described in Chapter Nine.
 
Finally the insured must be aware that the value of property to him is continually changing, particularly in times of high inflation levels, and frequent adjustments in his sums insured will be required.
 
First loss insurances. Sometimes the value at risk is very high compared with any likely single loss and the insured would be reluctant to insure for full value. It is unlikely that thieves could empty a warehouse full of wines and spirits valued at £2,500,000 and the insured may only wish cover for £500,000 representing the maximum first loss which he feels he could lose. In these circumstances insurers would be prepared to issue a "first loss policy" with a sum insured of £500,000 based on a value at risk of £2,500,000, at 80 per cent or 90 per cent of the premium required for a full-value sum insured. 
 
                              Limits of liability
With the exception of employers' liability insurances, which usually give unlimited liability, it is usual for liability policies to have a limit of liability for anyone occurrence and either to be unlimited for anyone year or to have an aggregate limit of liability anyone year.
 
The insurers will pay up to this occurrence limit in aggregate for all claims intimated and arising out of the one event. In fixing the occurrence limit the insured must be conscious of the number of claims which could be received from various parties and the ever-increasing level of court awards for injuries received.

As we all know about that, insurance business has been divided into seven classes of long term business and seventeen classes of general business, by statute. This is substantially different from the divisions known by many who have spent some years in insurance companies where the traditional division was between fire, marine, accident and life assurance.

The increasing complexities and sophistication of covers expanded these four divisions with some forms of insurance crossing lines of classification. In this post I will combine classes and deal with insurance business under seven headings, namely fire and other damage to property, liability, surety ship credit and pecuniary, motor, marine and aviation, accident and health, and life assurance.

The use of the word "insurance" often related to something which might happen, e.g. fire insurance; assurance related to something which would happen, e.g. death, and therefore life assurance. The words insured, assured, insurer and assure had similar connotations. Today these words are used loosely and no importance is attached to the difference.

Fire and other loss of or damage to property Historical perspective

Protection against damage to property has been sought by man from earliest times. Physical protection has always been possible but financial protection became more and more important when towns and villages grew up and people depended on each other for their well-being.

Early records show that compensation in the event of fire was one of the first forms of insurance and losses were normally paid in a charitable way from donations, by guilds of craftsmen or churches. Gradually the need arose for a far more formal means of providing compensation and this came to a head in the case of fire damage after the Great Fire of London in 1666.

Early fire insurance companies

Some early documents provide evidence of the existence of fire insurance in 1667 but the Fire Office, set up in 1680, is generally regarded as being the first fire insurance company. In 1705 the Fire Office changed its name to the Phoenix as this was the symbol represented on the company's fire mark. These fire marks, normally made of metal, bore the insignia of the fire insurance company and were nailed to an outside wall. They performed two very valuable functions. The first was that they were a cheap and prominent form of advertising and the second, of more importance to the owner of the property and thereby providing the incentive to display them, was that they indicated to the fire brigade that the house was insured. It has to be remembered that fire brigades were controlled by, mainly; the insurance companies and each ran independently. It was important therefore to display the fire marks so as to guide the fire brigade to the insured building. Following an abortive attempt at municipal insurance by the Corporation of London during the period 1681-2 a second company, the Friendly Society, was founded in 1683.

The fourth office appropriately titled "The Amicable Contributors for Insuring Houses from Loss by Fire" came along in 1696 and soon became known as the Hand-in-Hand. It transacted business successfully until 1905 when it was absorbed by the Commercial Union. Later companies were the Sun Fire Office (1710), the Union (1714), and the Westminster (1717).

    When one talks about a market place, a vision of a Saturday market in a country town, or a cattle market, or of some similar meeting place, springs to mind. Most of us have seen pictures in books, or in the media, of markets being held for the sale of grain, tobacco leaf, or stocks and shares.

    In the market for insurance, however, there is no single place in the country or in a town where the buyers, sellers and middlemen meet to transact insurance.  Insurance as a service industry

   This article discusses in the various parts of the insurance market, but before dealing with these aspects in depth, it may be advisable to comment briefly on some of the terms used.

 The insured
  The buyer of insurance, whether a private individual or a large corporation, is called the insured. It is the buyer's financial risk which is being assured by the insurer in return for a  premium.                                                 

 The insurer
   The seller or supplier of insurance is called the insurer, and insurers can be divided into two broad classes.

 Companies
 These may transact one form of insurance only, e.g. life business or they may transact many forms of cover, e.g. motor, fire, liability and perhaps life business.

  Lloyd's
  This is an association of individual underwriting members who form themselves into groups or syndicates but each retains their individuality

The intermediary

  A buyer of insurance (the insured) may approach a company direct, but the majority of business is placed through intermediaries. Indeed a buyer can place business at Lloyd's only through an intermediary called a Lloyd's broker. Intermediaries can be classified as follows.

 Broker
 An individual or firm whose full time occupation is the placing of business with insurance companies on behalf of clients. 

Lloyd's broker
  Similar to a broker but in addition business can be placed at Lloyd's as the firm have been approved by the committee of  Lloyd's.

 Agent
 Someone who places insurance with companies but whose main occupation is in some field which brings him into contact with members of the public who require insurance. Examples of this class are solicitors, accountants, garage proprietors and the like.

 Insurance/assurance

   Reference was made in this article two to the words "insurance" and "assurance". The use of either word in the title of an insurer does not give an indication of the business they transact. Hence the Royal Insurance Group and the Commercial Union Assurance Group both transact life and non-life business.

 

       It will be apparent from a study of this article that there are many different interests among insurers and their intermediaries, and a study of  article. Two will have shown that these insurers have many and varied interests over many types of insurance. It is only natural that over the years several central associations have become established to represent common interests among insurers.                            

Marine insurance organizations

Several organizations have been formed to represent the interests of underwriters in the various marine markets. These organizations work closely with each other while representing the particular interest of their members.

   Lloyd's Underwriters' Association. As the name indicates this association is concerned with technical and other matters affecting Lloyd's marine market.

   The Institute of London Underwriters. This is a forum for the company marine insurance underwriters. The Institute operates a policy signing office similar to that in operation at Lloyd's. In order to simplify the placing of business among various companies and in claims settlements, it is desirable that all policies covering one type of risk have similar clauses and wordings. The standard clauses used by its members, known as the "institute clauses", are now used by the British market as a whole.

   Liverpool Underwriters' Association. This Association represents the interests of marine insurers, brokers and loss adjusters operating in the Liverpool marine insurance market. It provides a shipping intelligence service and produces statistics on maritime losses.

 Organizations associated with fire and  fire  insurance          
   These organizations are all concerned with protection against fire damage, or with the transaction of fire insurance, although there is some interdependency.

Fire Offices' Committee (FOC). This is an association of many of the leading company fire insurers in Great Britain. It forms the "tariff" group of companies whose aim is to pool statistical information and so obtain as sound a statistical footing as possible on which to base rating requirements for the future. It also publishes for its members a very detailed scale of minimum (but not maximum) rates for many types of trade, thus establishing a sound economical base to the fire insurance market. As in marine insurance, it is desirable to have standard policy

 

The role of the underwriter
  The underwriter must endeavor to arrange the terms and conditions of the cover and its price, at levels which reflect the degree of risk which the case brings to the fund by way of potential frequency and potential severity of loss. These terms and costs should be equitable vis-à-vis the risks presented by other clients for the same type of insurance, they should be reasonable in order that the company will attract new business, and they should be such that a reasonable profit may be expected from the pool of all similar risks underwritten by the company.  
 In order to come to decisions regarding these terms and conditions, the underwriter assesses two aspects of hazard-physical and moral.

Physical hazard
   Physical hazard relates to the physical or tangible aspects of the subject matter of the insurance which are likely to influence the occurrence of losses. Aspects which are likely to increase the likelihood of loss, or of its severity compared with a normal case in that class, are termed poor or unfavorable physical hazards. Similarly, aspects which are likely to reduce the incidence of loss or reduce the potential severity can be regarded as good physical features. Perhaps the easiest way in which to understand these features is to give examples from several classes of insurance.

 
 Fire insurance
 Methods of construction which are liable to add fuel to a fire rather than contain it, such as timber walls or thatched roofs would be bad features. The storage of dangerous chemicals, oils, packaging materials, or the use of naked lights such as blow-torches or even smoking, is other examples.

    Good physical features would include brick or concrete fire-stop walls and metal fire doors, automatic sprinkler and alarm systems, and the segregation of dangerous processes and goods from the less dangerous areas of a factory. However, the accidental leakage of water from a sprinkler system may do more damage to some commodities than a fire would, e.g. tightly packed paper products such as books.
 
 Theft insurance
   A building having lightweight construction walls or roofs such as timber, asbestos, or corrugated iron, or normal window catches and rim latches on doors would present several poor features offering little resistance to a potential intruder. Alternatively if the contents of a building are attractive to thieves, e.g. jewellery, wines and spirits, tobaccos, non-ferrous metals, etc., the case would be regarded as being heavy in physical hazard. Combined with poor building construction it might well be uninsurable.

   Strong building construction, security locks and bolts and intruder alarm systems can greatly improve what would otherwise be a poor physical risk.

 Motor insurance
   The use of a vehicle in areas of high traffic density such as London, Glasgow and similar large cities increases the likelihood of an accident. The use of a vehicle for certain trades is likely to mean that it is on the road for most of the day with similar consequences; examples are vehicles used by taxi-drivers or sales representatives. Cars which are costly to repair, such as a Rolls-Royce or a Mercedes, could be regarded as presenting

 

  This problem of the lack of past statistics is only one side of a very complex problem. Regardless of whether previous statistics are available there is one other very important aspect in the measurement of risk and; that is the attitude which different people have to the same situation.

 These two factors--our view of money based on our own wealth and our view of likelihood-represent the main psychological aspects of risk measurement and go a long way to explaining the desire for insurance, as we shall see.

Frequency and severity
What do we mean when we say that some event is very risky? Following our definition we could expand this to say that there is a high level of uncertainty of loss. Whether we use the former or the latter there is still some confusion in meaning.

Take as an example the risk of fire damage in a storeroom at a factory. A person may refer to the prospect of fire damage as being ?very risky", but does he mean that there is a very strong likelihood of a fire or that it is unlikely that there will be a fire but if it happens it will  result in a very high financial loss? In other words when we talk of risk we must be clear in our minds that it incorporates both the frequency with which an event may take place and the severity of each incident that does occur. The operation of a chemical plant is very risky, not because such plants have frequent losses but because when a loss does take place it involves very substantial sums of money. The explosion at the Flixborough plant in 1974 is a good example of this point. The opposite could be the case where a large department store considers the breakage of glass windows to be very risky. They are not referring to the cost of each broken window but to the frequency with which windows are broken and the fact that in aggregate, in total, the cost of broken glass is high.