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09. Insurance
✓ Define Insurance?
Insurance is an agreement between the insured and the insurer whereas the insured pays
premium payment and the insurer agrees to pay compensation that are occurred from the risk.

✓ Underlying principle of insurance is “Pooling of Risks”. What does pooling of risks mean?
Pooling of risk means the concept of collecting premium from every customers in which a fund is
developed and pays compensation only for those who face the risk

✓ What is risk ?
Probability of being harmed is called Risk. E.g. Disaster, Death, Accidents

✓ What are the three main features of Risk?

1. Hazard – cause of the loss or damage E.g. Tsunami
2. Size – Magnitude of the result E.g. 2 million were killed
3. Uncertainty – probability or lack of knowledge on future E.g. Unpredictable

✓ Criteria for insurable risks. (VCUP) → Car Accident

1. Verifiability – analyze cause, action and time
2. Casualty – probability
3. Un connectedness – independent loss
4. Predictability – value of the damage

✓ Uninsurable risks
• Risks determined on personal capabilities (exam failure, love failure)
• Losses incurred due to wrong management decisions
• Losses which can’t be forecasted financially
• Losses incurred due to the changes in technology
• Losses due to natural causes (Deprecation, Evaporation)

✓ Insurable risks
• Own life
• Spouse’s life
• Risk from accidents
• Fire and damage to building

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✓ Benefits of Insurance to Business

• Encourages to engage in foreign trade
• Provides compensation at a situation of product failure , employee accidents
• Business risk can be divided

✓ Benefits of Insurance to Economy

• Creation of job opportunities
• Investments of insurance companies facilitate economic development
• Public education and awareness will improve

✓ Parties of Insurance
1st Party (Insured) – Individual Covered by the Insurance Coverage E.g. Tikiri
2nd Party (Insurer) – Insurance company E.g. Ceylinco Insurance
3rd Party – All external persons and property E.g. Maarie

✓ Insurance Proposal
Proposal made by the insured to insurer for getting insurance coverage.
E.g. (Refer the Diagram)

✓ Insurance Agreement
Written agreement between the insured and insurer after accepting the proposal by Insurer
E.g. (Refer the Diagram)

✓ Insurance policy
Certificate issued by the insurer to insured after the agreement as a receipt to insurance agreement.
E.g. (Refer the Diagram)

✓ Requirements of a contract
• Idea • Consideration
• Offer • Legal obligations
• Acceptance • Legality

✓ Principles of Insurance
1. Insurable interest
2. Utmost good faith
3. Proximate cause
4. Indemnity
a. Contribution
b. Subrogation

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1. Insurable Interest
Having the legal right to insure a property .

✓ What are the two ways of getting insurable interest?

1. Being the owner of the property or life
Examples –
1. One’s own life
2. One’s own property

2. Existence of the life or property gives economic advantage and absence creates an economic loss
Examples-
1. Spouse’s life
2. Creditor can insure the debtor
3. A film director can insure the actor

2. Utmost Good Faith

Both insured and insurer had to disclose all true facts in an insurance agreement.

✓ Facts that should be revealed by the Insured Person

With regard to life insurance
➢ Personal information(Age, Gender)
➢ Health Status
➢ Income Status
➢ Asset Status
➢ Dependency Status
With Regards to Property Insurance
➢ Market price of assets
➢ Vehicle models
➢ Manufactured Year
➢ Proof of ownership

✓ Facts that should be revealed by the Insurer

➢ Nature of the policy
➢ Benefits
➢ Premiums
➢ Maturity
➢ Terms and conditions

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✓ Ways of Breaching the Utmost good faith

➢ Non disclosure
➢ Misrepresentation
➢ Absolutism (Innocent)

✓ Actions to be taken when an insurer breaches its utmost good faith

➢ Suing
➢ Cancellation of agreement
➢ Refusing to pay compensation

3. Proximate Cause
The payment of compensation is made only if the said reason is covered by the policy.
E.g. A building with fire insurance cannot be compensated when it is destroyed by tsunami.

4. Indemnity
• Only the losses will be compensated by the insurance company.
• It is not applicable for life insurance since there is no value for life.
• This prevents insured from earning profits.
E.g. If the value of damage of car is Rs200,000 , insurance company will pay only Rs 200,000

I. Contribution
When a property has been insured in several insurance companies and if a damage has occurred to
it, payment of compensation by all the insurance companies for it by contributing.
E.g. A car being insured in Company A and B will get compensation from both companies during a
loss.

II. Subrogation
When the insurance company has settled the loss for the damage caused to the insured property,
transfer of other advantages and rights from external parties that the insured can obtain, to the
insurer is known as subrogation
E.g. (Refer the diagram)

Other Concepts of Insurance

➢ Ex-gratia Payment
Compensation that is paid out of compassion even though agreement is invalid.
• When insured misunderstood the agreement
• When insurer didn’t provide sufficient information
E.g. Loss estimated to be Rs 500,000 but only paid with Rs 200,000

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➢ Re-Insurance
Insuring back a risk that is undertaken by an insurance company by itself under another insurance
company or many .
E.g. Banda’s BMW is insured in Ceylinco Insurance and Ceylinco has insured in AIA.

Benefits of Re-Insurance
1. Any value can be insured
2. Guarantee of payments
3. Low premiums

➢ Dual Insurance
Insuring a property in more than one insurance company at once by an insured.
E.g. Kishen’s Car has been insured in Company A and B

➢ Underwriting
Risk of the given property is accepted by many insurance firms and they issue a joint policy.

➢ Under Insurance
When the insured value is less than the market value of the asset. Compensation will be lower than the
damage.
E.g. Market Value Rs 10 million > Insured Value Rs 8 million

➢ Over Insurance
When the insured value is more than the market value of the asset. Compensation will be equal to the
damage.
E.g. Market Value Rs 10 million < Insured Value Rs 12 million

➢ Types of Insurance Policies

1. Life 6. Employer liability
2. Fire 7. Goods in transit
3. Theft and burglary 8. Cash in transit
4. Natural disaster 9. Public liability
5. Marine 10. Motor vehicle

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➢ Differences between Insurance and Assurance

Insurance Assurance
Covers damage to property Covers loss to life
Indemnity applies No indemnity
Short term Long term
Risk in uncertain Risk is certain
Not a saving Similar to saving
Can be transferred Cannot be transferred

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MINDMAP

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QUESTIONS TIME
1. Select from the following, a risk that a person cannot insure:
1. Losses due to economic recession. 3. The risk of his own life
2. Potential risk from accidents. 4. All of the above.

2. As per the indemnity principle, earning profit from the insurance is prevented.(True/ False)

3. Malika, a young entrepreneur, who graduated recently observed a gap in the market for eco friendly
cleaning services in Sri Lanka. Her entrepreneurial spirit drives innovation. She launched "Eco-
Clean", a company dedicated to use sustainable products and practices for commercial buildings.
This contributes to a more sustainable future and economic growth. Eco-Clean succeeds by utilizing
various supportive services. Banks offered loans for expansion, allowing Malika to invest in
equipment and promotional activities. Eco-clean’s strong online presence and partnerships with
green building initiatives attract new clients and raise brand awareness. Further, Malika is searching
for legal advices to ensure compliance with environmental regulations, while insurance protects
against potential risks of the business. However, according to the business management knowledge
she gained at her university, she knew that navigating the business world requires a keen
understanding of stakeholders and their influences. Accordingly, she gathered data on her
stakeholders and their impact. She understood that eco-conscious businesses are drawn to Eco-
Clean's environmental focus, leading to increased brand reputation and client loyalty. Yet,
dissatisfied clients can damage their reputation through negative reviews. There is a need for a well-
trained and motivated workforce to ensure efficient cleaning and customer satisfaction. However,
there is a possible threat of high employees’ turnover rate, due to the economic conditions of the
country, which can disrupt operations and impact quality. Most of her suppliers are reliable
suppliers of eco-friendly cleaning products. Nevertheless, unreliable suppliers can lead to stock
shortages and service disruptions.
d) Explain two(02) reasons why insurance is important for Eco-Clean. (04 marks)

4. Explain two(02) advantages gained by XYZ Ltd. by having an insurance policy for its factory
employees. (04 marks)

5. Explain the term “Insurable Interest” with reference to the insurance policy of the factory
employees. (03 marks)

6. Identify three(03) criteria for accepting insurance as a risk.(03 marks)

7. Explain briefly what is meant by “Dual Insurance”.(02 marks)

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8. Principle of indemnity in insurance creates profits from insurance.(True /False)

9. Identify the type of insurance policy which Nevil can insure his fleet of vehicles. (02 marks)

10. Explain two(02) reasons why insurance is important for a business organization. (04 marks)

11. Indemnity principle is considered only for life insurance.(True/False)

12. By obtaining an insurance cover, an individual can insure:

(1) risk of non-receipt of credit from a debtor.
(2) the business losses to be incurred in the future.
(3) the losses due to a decision of managers.
(4) the losses due to market change.

13. Which one of the following is not a principle of insurance?

(1) Indemnity
(2) Proximate Cause
(3) Confidentiality
(4) Insurable Interest

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