InvestorQ : What are the different principles on which the insurance industry runs?
Tanu Shukla made post

What are the different principles on which the insurance industry runs?

Answer
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Anjana Aiyar answered.
5 months ago


The insurance industry runs on seven basic principles, they are:

Principle of Utmost Good Faith (Uberrimae Fidei): This principle means that a person taking insurance shall willingly disclose complete and true information to the insurer regarding the subject matter of insurance. This is the most basic and primary level of insurance principle and applies to all insurance policies. The insurer’s liability can be established only if no material fact is hidden or misrepresented by the insured. Therefore, violating this principle could impact the insurance claim process in the future.

Principle of Insurable Interest: According to this principle, the person who is getting insurance shall have some insurable interest in that thing which is getting insured. So there shall be some loss to the person if the insured object gets destroyed, otherwise, one cannot take insurance.

Principle of Indemnity: This principle states that the purpose of insurance is not to make a profit, but only to compensate the insured against the losses incurred. The only purpose of insurance is to restore the earlier position and not to make a better one. So, the compensation paid cannot exceed the actual loss incurred.

Principle of contribution: This is in addition to the above principle and states that the insurance company is liable to pay only their part of the contribution, i.e. which have been contracted.

Principle of Subrogation: As per this principle, once the insured is compensated for the loss incurred to him, he shall have not right over the asset which is insured. The insurer can exercise full right over such an asset. Also, by virtue of this principle, the insurance company can recover the damages from the party at fault and the insured shall have no right over such damages. For example, if a fire broke in your factory premises due to the negligence neighbor manufacturer, then the insurance company can file a case against such a neighbor manufacturer, just like the actual owner would have if there was no insurance.

Principle of loss minimization: According to this principle, it is the responsibility and duty of the insured to take the appropriate actions to minimize the loss, if it’s in their control. The insured person shall take all the necessary steps to prevent more loss as if no insurance is taken.

Principle of Causa Proxima (Nearest Cause): This principle states that if any loss is caused due to several reasons or causes, then the nearest or the closest cause should be considered for the purpose of deciding the liability of the insurer. Also, the nearest cause shall be insured by the insurer, then only the liability of the insurance company could be established. Therefore, the insurer will not be liable for the farthest cause.