Insurance is a very significant part of our lives.

It is what guards us, secures

us, and even our loved ones from any sort of mishap. There are many sorts
of insurances available out there. And you can get many for yourself, as per
your need, as well.

Why do we Need Insurance?

Life is uncertain; there are no guarantees or predictions about what will
happen in one's life. Similarly, businesses also don't have any guarantee as
they face many unexpected losses or damages in the long run. Assets like
cars, bikes, etc. also don't have any certainty in their lifetime, they can get
stolen or damaged in the long run. One can fight all these risks with an
insurance cover.

Insurance Definition
Insurance is generally defined as a contract which is also called a policy. An
insurance policy is a contract in which an individual or an organization gets
financial protection and compensation for any damages by the insurer of
the insurance company. In simpler words, one can answer what is an
insurance policy as a form of protection from any unexpected loss or
damage. From this paragraph, one can get a clear overview of insurance
meaning.

Principles of Insurance
To ensure the proper functioning of the insurance contract, the insurer and
the insured have to follow the following principles.

• Utmost Good Faith

• Direct Cause
• Insurable Interest
• Indemnity
• Subrogation
• Contribution
• Minimizing the loss
• Principle of Utmost Good Faith
• The fundamental principle is that both the parties in an insurance contract should act in
good faith towards each other, i.e. they must provide clear and concise information
related to the terms and conditions of the contract.
• The Insured should provide all the information related to the subject matter, and the
insurer must give precise details regarding the contract.
• Example – Jacob took a health insurance policy. At the time of taking insurance, he was
a smoker and failed to disclose this fact. Later, he got cancer. In such a situation, the
Insurance company will not be liable to bear the financial burden as Jacob concealed
important facts.
• Principle of Proximate Cause
• This is also called the principle of ‘Causa Proxima’ or the nearest cause. This principle
applies when the loss is the result of two or more causes. The insurance company will
find the nearest cause of loss to the property. If the proximate cause is the one in which
the property is insured, then the company must pay compensation. If it is not a cause the
property is insured against, then no payment will be made by the insured.
• Example –
• Due to fire, a wall of a building was damaged, and the municipal authority ordered it to be
demolished. While demolition the adjoining building was damaged. The owner of the
adjoining building claimed the loss under the fire policy. The court held that fire is the
nearest cause of loss to the adjoining building, and the claim is payable as the falling of
the wall is an inevitable result of the fire.
• In the same example, the wall of the building damaged due to fire, fell down due to storm
before it could be repaired and damaged an adjoining building. The owner of the
adjoining building claimed the loss under the fire policy. In this case, the fire was a
remote cause, and the storm was the proximate cause; hence the claim is not payable
under the fire policy.
• Principle of Insurable interest
• This principle says that the individual (insured) must have an insurable interest in the
subject matter. Insurable interest means that the subject matter for which the individual
enters the insurance contract must provide some financial gain to the insured and also
lead to a financial loss if there is any damage, destruction or loss.
• Example – the owner of a vegetable cart has an insurable interest in the cart because he
is earning money from it. However, if he sells the cart, he will no longer have an insurable
interest in it.
• To claim the amount of insurance, the insured must be the owner of the subject matter
both at the time of entering the contract and at the time of the accident.
• Principle of Indemnity
• This principle says that insurance is done only for the coverage of the loss; hence insured
should not make any profit from the insurance contract. In other words, the insured
should be compensated the amount equal to the actual loss and not the amount
exceeding the loss. The purpose of the indemnity principle is to set back the insured at
the same financial position as he was before the loss occurred. Principle of indemnity is
observed strictly for property insurance and not applicable for the life insurance contract.
• Example – The owner of a commercial building enters an insurance contract to recover
the costs for any loss or damage in future. If the building sustains structural damages
from fire, then the insurer will indemnify the owner for the costs to repair the building by
way of reimbursing the owner for the exact amount spent on repair or by reconstructing
the damaged areas using its own authorized contractors.
 •
• Principle of Subrogation
• Subrogation means one party stands in for another. As per this principle, after the
insured, i.e. the individual has been compensated for the incurred loss to him on the
subject matter that was insured, the rights of the ownership of that property goes to the
insurer, i.e. the company.
• Subrogation gives the right to the insurance company to claim the amount of loss from
the third-party responsible for the same.
• Example – If Mr A gets injured in a road accident, due to reckless driving of a third party,
the company with which Mr A took the accidental insurance will compensate the loss
occurred to Mr A and will also sue the third party to recover the money paid as claim.
• Principle of Contribution
• Contribution principle applies when the insured takes more than one insurance policy for
the same subject matter. It states the same thing as in the principle of indemnity, i.e. the
insured cannot make a profit by claiming the loss of one subject matter from different
policies or companies.
• Example – A property worth Rs. 5 Lakhs is insured with Company A for Rs. 3 lakhs and
with company B for Rs.1 lakhs. The owner in case of damage to the property for 3 lakhs
can claim the full amount from Company A but then he cannot claim any amount from
Company B. Now, Company A can claim the proportional amount reimbursed value from
Company B.
• Principle of Loss Minimisation
• This principle says that as an owner, it is obligatory on the part of the insurer to take
necessary steps to minimise the loss to the insured property. The principle does not
allow the owner to be irresponsible or negligent just because the subject matter is
insured.
• Example – If a fire breaks out in your factory, you should take reasonable steps to put out
the fire. You cannot just stand back and allow the fire to burn down the factory because
you know that the insurance company will compensate for it.

Importance of Insurance
Insurance plays a major role in the insured’s life. Here are a few pointers
that will show how:
 • The insured’s family is protected with the help of insurance at the
time something unexpected happens. Their family doesn't have to
worry about the monetary aspects of the finances in this case.

• We all know that unexpected events can occur at any time and are a
part of life. In case of any injury, illness, or death, finances are the last
thing that they need to worry about. This way, their emotional stress
is also reduced to an extent.

• Insurance is a great financial security to an individual's family. An

insurance policy gives the family the coverage needed as well as the
courage to move on.

• Insurance is peace of mind for the insured in case of theft or medical

emergency. This way they would not have to go and arrange money
or go into a panic mode.

• The funds which are provided by the insurance company are well
enough for managing the school fees of the insured children. It also
takes care of their standard of living.

Functions of Insurance
The functions of insurance can be listed as follows:

• They provide certainty to the insured.

• They ensure the protection of the family.
• They are risk-sharing policies.
• They prevent the damages that can come from loss.
• It provides capital.
• It’s known for improving efficiency.
• It helps in boosting the economy.

Types of Insurance
After having gone through the following points, one can get an answer to
the question of how many types of insurance are there?

Health Insurance
Health insurance is a contract that is formed between a health insurer and
a policyholder. This policyholder is also known as the insured person. In this
contract, the health insurer agrees to pay the full medical cost of the
insured or just a portion of it.

Car Insurance
Vehicle insurance covers cars, motorcycles, trucks and all the other vehicles
running on the road. This insurance is meant for giving protection against
any physical damage or bodily injury that the vehicle suffers from
recklessness or an accident. All the cost incurred to repair the vehicle is met
by the insurance company.

Life Insurance
Life insurance is a contract in which the beneficiary is paid a fixed amount
of money by the insurer after the death of the insured. The beneficiary uses
this money to clear out the debts of the insured and also to meet his/her
financial expenses after the death of the insured. The beneficiary is usually
the spouse of the deceased. The beneficiary name is mentioned in the
contract.

Homeowners Insurance
Homeowners' insurance protects one's house from the uncertainty of any
damages. The insurance covers the house the insured person resides in
and other associated structures connected to the house such as the
balcony, garage and porch. The insurer will provide the amount incurred to
repair any damage in the house or its associated structures.

Umbrella Insurance
Umbrella insurance is also known as liability insurance. It covers the cost
that is incurred in excess of other insurance policies. It gives a person extra
coverage on another type of insurance policy that he/she is in.

Renters Insurance
Renters insurance is meant for tenants who use it to protect their personal
property from any damage or theft. The insurance covers all the assets
owned by the tenants. This is done because the landlord doesn’t take any
responsibility for the assets of the tenant. Nowadays, landlords are not
allowing tenants who don't have renters insurance.

Travel Insurance
Travel insurance is good for those people who travel a lot. It covers trip
cancellations, lost or misplaced luggage, travel accidents and even medical
expenses.

Pet Insurance
Pet insurance is meant for meeting all the expenses that are incurred
concerning the sickness and accidents of the pet. All the medical expenses
of the pet are taken care of by the insurer.

All these insurances are provided by different types of insurance

companies.

What Is Reinsurance?
A reinsurance, in its most basic sense, is insurance for insurers. It is the process
through which insurers minimise the possibility of paying high amounts of money, in
case of an insurance claim, by transferring a part of their risk portfolio to other
parties.

Functions of Reinsurance
While the main function of any reinsurance company is to reduce the risk associated
with the insurance claims. There are a few other functions that a reinsurance
company performs.

Income Smoothing
By absorbing big losses, reinsurance may make an insurance company’s results more
predictable. This will very certainly lower the amount of cash required to offer
coverage. The risks are spread out, with the reinsurer or reinsurers covering a portion
of the insurance company’s losses. Because the cedent’s losses are restricted, income
smoothing occurs. This ensures that claim payouts are consistent and that
indemnification expenses are kept to a minimum.

Risk Transfer
The risk is transferred from the main insurance company to the reinsurer, which
helps the insurance company manage portfolios better.
Offering Expertise
In the case of a specific risk, the insurance company may desire to use the experience
of a reinsurer, or the reinsurer’s ability to determine a suitable premium. In order to
safeguard their own interests, the reinsurer will want to apply this knowledge to
underwriting. This is particularly true in the field of facultative reinsurance.

Expanding Portfolio
The reinsurer helps insurance companies expanding their portfolio by taking over
some part of the risk. This helps both the insurer and the reinsurer.

Assurance Of Claim Settlement

The involvement of a reinsurer also offers an assurance of claim settlement to the
policyholders in case of a catastrophic event.

Objective of Reinsurance
The objective of the reinsurer is very similar to that of any insurance provider. It gives
the insurer the surety that no matter what happens, you are insured.

Following are the objectives of reinsurance

• Risk is distributed to guarantee that a claim is covered.

• It gives a high level of underwriting stability during the claim period.
• Financial obligations that exceed the insurance firm’s capability are
outsourced to another company with the necessary resources. As a result,
the ceding business is only left with the financial responsibility that it can
meet.
• Profiting from a premium on the net amount.
• To settle their claims, the real insured individual must work with just one
insurance provider.
• Enhance the risk exposure capacity.

Reinsurance Advantages
Apart from the main risk-bearing advantage. Following are the main advantages of
reinsurance.
 1. Insurance funds protected: In the case of reinsurance, the insurance
funds are protected and kept safe in case of any unforeseen claim. It also
helps the insurance company manage their funds better.

• Encourages new underwriters: Having reinsurance encourages insurance

companies to have new underwriters. Which further leads to an increase and
expansion in business.

• It provides a limit on the quantum of liabilities: By sharing the risk, the

reinsurance also helps in reducing the size and number of liabilities that any
insurance company has to bear. Which also helps in bettering the operations
of the said insurer.

• It further increases the goodwill of the main insurer: A reinsurer helps in

building goodwill for the insurance company. The better the claim settlement,
the better the business in the future as a rule.

• Stability to profits: With the addition of a reinsurer, profit is stable for

insurance companies.

What is Coinsurance?
Coinsurance, as the name suggests, is the participation of one or more
insurance companies to cover for the same risk. The risk covered
under coinsurance is the same for all the participants and is agreed
upon under mutual agreement. Each participant insurer accepts a
pre-determined share under the insurance cover. The share that every
participant owns under coinsurance is referred to as ‘quota share’.

Coinsurance commonly comes into picture when the volume of

business to be covered is beyond the capacity of a single insurance
provider, for example, industrial fire insurance or marine hull
insurance, etc. Under Coinsurance, the risk is directly divided amongst
the insurers as per the pre-determined agreement. Under
Coinsurance, multiple insurance companies are direct insurers
covering the original risk. The policyholder has a separate insurance
contract with each of the insurers. Therefore, in the event of loss, the
insured can file the claim against each insurer limited to the insurer’s
share. In other words, under a coinsurance contract, all the co-insurers
are not jointly but severally liable i.e. each insurer is liable only for own
quota share. To simplify the handling of the coinsurance agreement,
one of the direct insurers having the highest quota share is named as
‘leading insurer’.
The essential difference between Reinsurance and Coinsurance:

1. Reinsurance is providing insurance for the risk that has been already taken up
by an insurance company. While Coinsurance refers to sharing one risk
amongst multiple insurance companies.
2. Reinsurance is considered as the transfer a part of the risk taken by the direct
insurer to another or second insurer. The second insurer is known as the
‘reinsurer’. While in coinsurance all the parties to the agreement are direct
insurers
3. Under reinsurance, the reinsurer has no direct connection to the policyholder
or insured, while under coinsurance all insurers have a direct connection with
the policyholder or insured.
4. Reinsurance is designed to limit the spread of risk associated with direct
insurance. While coinsurance is designed to cover the risk that exceeds the
capacity of one insurance company.