RISK – is simply the possibility of a loss
– a risk in which there is only a possibility of loss or no loss—there is no possibility of gain
– insurable, because the law of large numbers can be applied to estimate future losses, which allows insurance companies to calculate what premium to charge based on expected losses
Law of Large Numbers
a method used by insurance companies to derive risk statistics to more accurately predict future losses
– differs from pure risk because there is the possibility of profit or loss, such as investing in financial markets
– uninsurable, because they are undertaken willingly for the hope of profit
– generally involve a greater frequency of loss than a pure risk, since profit is the only other possibility
PERIL – the direct cause of loss
HAZARD – a condition that increases the possibility of loss
– a physical condition that increases the possibility of a loss
– physical source that causes accident
– loss that results from dishonesty
– occurs as a result of an individual’s decision to do something wrong
– increases the possibility of a loss that results from the insured worrying less about losses
– individual’s careless action
RISK MANAGEMENT – methods used to deal with uncertainty of loss
seeks to avoid compromising events entirely
the elimination of hazards, activities and exposures that can negatively affect an individual’s / organization’s assets
use of risk control techniques to lessen severity or frequency of possible risk
also known as “loss control”
choosing to be financially responsible for the risk
planned acceptance of losses by deductibles, deliberate noninsurance, and loss-sensitive plans where some, but not all, risk is consciously retained rather than transferred
also known as “risk distribution”
a method in which the cost of the consequences of a risk is distributed among several participants
- Risk Transfer
- involves the contractual shifting of a pure risk from one party to another
INSURABLE INTEREST – exists when loss or damage to something would cause the person to suffer a financial loss or certain other kinds of losses.
The loss must be due to chance. Regular recurring losses such as shoplifting in a supermarket are built into the price and would not be insurable as it is not fortuitous.
The loss must be definite and measurable. This means that there must be bills to establish “proof of loss,” not just casual references.
The loss must be predictable, meaning it must be of such a nature that its frequency and average severity can be readily determined to establish the required premium.
The loss cannot be catastrophic. All the individual losses are personal catastrophes. The reference here is to national or area disasters, such as floods, riots, wars, earthquakes, etc. These events will often have coverage amount limitations in the property and casualty insurance areas.
The loss exposures must be large. To avoid adverse selection, there must be enough exposure to losses for the frequency to be predictable and to be grouped for the purpose of establishing rates.
The loss exposures must be randomly selected. Concentration of risks by area, age groups, occupations, economic status, etc., can lead to “adverse selection”. A prominent example of the failure to avoid concentrations of risks is demonstrated by the efforts of numerous home insurers to reduce their risks, after Hurricane Andrew and several other smaller hurricanes.
insuring of risks that are more prone to losses than average risks
PRINCIPLE OF INDEMNIFICATION – one of the basic tenets of insurance, that the insured should not profit from a loss or damage but should be returned (as near as possible) to the same financial position that existed before the loss or damage occurred.
LIMIT OF LIABILITY – places a value on the maximum amount an insurer will pay under an insurance policy
FIRE INSURANCE – a contract of indemnity against loss or damage of the properties arising from fire during an agreed period of time and up to a specified amount
TYPES OF INSURANCE POLICY
Types of fire insurance policy on the basis of risk covered
Comprehensive policy – covers other risks of loss caused by burglary, riots, arson, civil commotion, explosions, civil war, accidents and others in addition to the risk of loss caused by fire in one single policy.
Blanket policy – used to insure properties located at one or different locations against the risk of fire. The insured may have different properties at different locations.
Consequential loss policy – meant for indemnifying the loss caused not directly by fire but incidental to the event of fire. Under this type of fire insurance policy, the insurance company not only compensate the loss caused by fire, but also other indirect losses such as loss of net profit due to expenses like salaries, interest, increased cost of advertising and hiring of temporary premises.
Types of fire insurance policy on the basis of indemnity
Valued policy – a fire insurance policy is valued when the insured amount payable as indemnity to the policyholder is valued at the outset while issuing the policy.
Valuable policy – contrary to valued policy, is one in which the amount to be indemnified is valued after the event of fire. In this type of fire insurance policy, property is not valued at the time of taking policy. It is valued later when the incidence of fire occurs and damage is caused.
Average policy – fire insurance policy which is termed with the average clause in its indemnification. Under this policy, the insurer does not undertake to indemnify the actual loss if the insured property is under-insured. Rather, it is the average value of the actual loss relative to the actual value of the property insured, which is paid by the insurance company as compensation.
Specific policy – like the average policy, defines the risk coverage when under-insurance takes place. It is a policy in that it undertakes to indemnify the actual loss only within the extent of value insured.
Reinstatement policy – the insurance company undertakes to replace the property damaged by fire. In this policy, the actual loss is not indemnified in monetary terms but insured goods or property is replaced.
Types of fire insurance policy on the basis of value of stock
Floating policy – is one by which one or several kinds of goods lying at different locations are insured under one policy and fore one premium.
Excess policy – is supplementary fire insurance policy, which is purchased to cover additional risks beyond the coverage of original first loss policy. In such a case, a first loss policy is purchased for minimum stock value and additionally an excess policy is purchased for an anticipated increase in the total value of stock. This fire insurance policy is purchase by such merchants whose stocks fluctuate from time to time.
Declaration policy – is issued for the maximum value of stock to be insured. At the beginning of contract, three-fourths of the premium payable is charged from the insured in advance. Every month, the policyholder is required to declare the value of present stock. In case of loss by fire, the compensation is made on the basis of the declared value. At the end of the insured period, based on the values of stock declared, the total of premium payable is worked out as average.
MARINE INSURANCE POLICY – a contract whereby the insurer indemnifies the loss caused by perils of the sea. The duration of its effectiveness, insurable interest of the insured and the principle of utmost good faith are, among others, necessary elements in a marine insurance policy. Besides, the value of the object must be clearly described for the sake of indemnity. It is also necessary that obligations and liabilities to be taken by the insurer must be declared in the policy.
The subject matter of marine insurance policy generally includes ship, cargo, and freight. However, two additional elements i.e. terms of time factor and valuation of object are also considered as legal requirements for the insurance policy.
TYPES OF MARINE INSURANCE POLICY
Types of marine insurance policy on the basis of hull
Loss may occur in or to the ship if any event happens in sea routes. The ship may be totally or partially damaged. In any case, the loss is very big one. Since the ship is very valuable, it becomes necessary to insure it.
The insurance of ship is called hull insurance policy. Generally, hull insurance is entered for a specified period; and if any loss incurs within the period, the insurer indemnifies the loss. The following are the types of marine insurance policy on the basis of hull:
Single vessel policy
Single vessel policy covers only one ship. Thus the shipping company possessing many ships may enter into contract with the insurance company for each ship separately.
A shipping company may own a number of ships. The insurance company may insure all the hips under a single policy, which is known as fleet policy. Fleet policy allows the shipping company to include several ships of a particular route under a single policy.
The ships under construction are insured under construction policy. This policy covers the ship that is under construction in the yard, and is not allowed for normal sailing in the ship, except for trail sailing.
Types of marine insurance policy on the basis of cargo
In marine insurance, not only ships but also cargo is insured against the loss caused by sea perils. When the owner, consignor or sender insures the cargo against the marine loss, it is called cargo policy. The cargo insurance policy is of three types:
As its name suggests, the name and registration number of a particular ship, and the quantity of each type of goods on board are written clearly in such a policy. If any loss occurs to the goods on board as specified in the policy, the insurance company is liable for the loss.
Floating policy is also known as running cargo policy. It describes the general terms and leaves the amount of each shipment and particulars to be declared later on. This policy is taken out for a round large sum, which is specified at each declaration and is attached to each shipment. It is a protection for the risk of loss of cargo, the value of which may change from one shipment to another.
All risk policy
All risk policy covers all risks associated with the cargo from go-down to go-down. Besides, the risks of sea perils, other risks of loss caused by out-break of war, strikes, negligence and so on are also covered under this policy.
Types of marine insurance policy on the basis of freight
The freight is carriage payable to the shipping company by the owners of the goods upon the arrival of ship at the port of destination. A shipping company can purchase the freight policy in order to have protection against the loss of freight and other contingent liabilities. Generally, freight insurance policies are of two types:
With cargo freight policy
It is a contract between the shipping company and the insurance company for the protection of cargo as well as freight from any unseen risks. Under this policy, the insurance company indemnifies the loss of cargo as well as the loss of freight of the cargo to the shipping company.
Without cargo freight policy
If the contract between the shipping company and the insurance company takes place only for the protection of freight of cargo from any contingent loss, such a contract is called without cargo freight policy.
Types of marine insurance policy on the basis of term
The marine insurance policy can be classified on the basis of term of period for the voyage:
Time policy provides the insured to cover all marine risks for a specified period of time not exceeding 12 months.
A voyage policy covers all marine risks involved in a particular sea voyage, irrespective of the time taken to accomplish the voyage. Therefore, the policy is issued to cover the voyage from the port of origin to the port of destination.
Mixed policy is a combination of both time and voyage policy. This policy therefore combines the elements of both time and voyage policy. This policy is taken by the insured for specified time and voyage.
Types of marine insurance policy on the basis of valuation
On basis of valuation of objects being shipped, there are two types of marine insurance policy:
In this policy, the value of objects insured is fixed in advance at a time when the contract is consented. If any loss occurs, the same will be indemnified on the same basis.
Under this policy, the value of the object is not specified. The value of the object is to be calculated after considering many expenses during the period. Thus, the value for indemnity is ascertained if and when the loss actually occurs.
TYPES OF RISKS COVERED BY MODERN MARINE INSURANCE
The marine insurance covers many risks. The types of risks covered by modern marine insurance are as follows:
Perils of the sea
Perils of sea refer to any type of incident of contingent accidents or casualties at the sea. In course of the voyage, the ship may be damaged due to sea storm, sea pirates, tsunami and accidents of any kind. These all risks are covered by marine insurance.
It is likely that fire may occur in the ship, when it is voyage. Inflammable items such as coal, oil, electricity and others are required in larger quantity for the operation of ship. Thus, fire may be included as risk in marine insurance.
The goods may be stolen during a sea voyage. Therefore, theft is one of the risks associated with the sea transportation. For the purpose of marine insurance, the thieves must not be the captain and his crew themselves or the people traveling by the ship. They must be outsiders, who use force for stealing goods.
The shipping companies may have to face many risks during the war period. There may exist a risk of loss of ship, cargo and freight due to attacks and counter defensive operations. War risks are insurable in marine insurance.
Marine insurance indemnifies the subject-matter (cargo) of the parties right from the go-down of the exporting country to the go-down of the importing country against any risk of loss. The risks of loss associated with other means of transportation such as railways, roadways and others, warehouses, ports of both the countries and others are included and covered under marine insurance.
Jettison means throwing overboard a part of cargo or any other goods in order to reduce the weight in the ship. Some of the cargo is deliberately thrown away with the object of preventing the ship from further damage. Loss caused by this method is one kind of marine risk and it can be covered under the marine insurance policy.