The seven basic principles of insurance are:
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Utmost Good Faith (Uberrimae Fidei): Both parties (the insurer and the insured) must disclose all material facts honestly. The insured must inform the insurer of any risks that might affect the policy.
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Insurable Interest: The insured must have a financial interest in the property or person covered by the insurance. If the insured has no insurable interest, the policy is void.
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Indemnity: The principle of indemnity ensures that an insured party is restored to the same financial position after a loss, without making a profit from the insurance claim.
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Subrogation: After the insurer compensates the insured for a loss, the insurer has the right to pursue any third party responsible for the loss in order to recover the amount paid out.
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Contribution: If the insured has multiple policies covering the same risk, the insurer can only pay a portion of the loss in proportion to the coverage. No more than the actual loss will be compensated.
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Loss Minimization: The insured is required to take reasonable steps to minimize the loss or damage and prevent further risk. Failure to do so could result in a reduction of the claim.
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Proximate Cause: Insurance covers losses that are directly caused by an insured peril. The cause of the loss must be closely linked to the event specified in the policy for the claim to be valid.
The 20 basic principles of insurance are:
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Utmost Good Faith (Uberrimae Fidei): Both the insurer and the insured must act honestly and disclose all material facts truthfully.
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Insurable Interest: The insured must have a financial interest in the subject matter of the insurance policy. Without this, the contract is void.
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Indemnity: The principle that the insured should be restored to the same financial position as before the loss, but not be allowed to profit from the claim.
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Subrogation: After compensating the insured for a loss, the insurer has the right to pursue any third party responsible for the damage to recover the amount paid out.
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Contribution: If multiple insurance policies cover the same risk, the insured can only claim compensation up to the amount of the loss, with the insurers sharing the liability.
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Loss Minimization: The insured must take all reasonable steps to reduce the risk of loss or damage. Failure to do so can reduce the claim amount.
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Proximate Cause: The loss must be directly caused by an insured peril. The chain of causality must be clear for the claim to be valid.
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Risk Pooling: Insurance involves the pooling of funds from many policyholders to cover the losses of a few. This spreads risk across a large group.
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Principle of Causa Proxima (Nearest Cause): The most immediate cause of the loss is considered the proximate cause, and this determines the payout under the insurance policy.
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Reinsurance: Insurance companies transfer some of their risk to other insurers to reduce their exposure to large claims. This helps manage risk across the industry.
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Fortuitous Event: Insurance only covers losses that arise from random or unexpected events, not from deliberate actions or predictable occurrences.
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Equitable Risk Transfer: Insurance is a fair way of transferring financial risk from the individual to the insurer, with a fair exchange (premium) for coverage.
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Principle of Full Disclosure: Both parties must disclose all relevant facts. Failure to disclose essential information can lead to the voidance of the insurance contract.
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Principle of Adequacy of Premium: The premium paid by the insured should be sufficient to cover the potential risk and provide a reasonable return to the insurer.
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Cash Value: This refers to the value of an insurance policy that accumulates over time, especially in life insurance policies with savings or investment components.
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Principle of Proportional Payment: In the case of partial losses, the amount paid will be in proportion to the value of the property insured.
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Principle of Premium Payment: The insurance policy is considered valid only if the premium is paid on time, as per the terms of the policy.
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Principle of Law of Large Numbers: The larger the number of policies, the more predictable the risk, allowing the insurer to set premiums accurately.
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Principle of Underwriting: Insurance companies assess the risk of insuring a person or entity and determine whether to accept the risk and at what price (premium).
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Principle of Insurance Fraud Prevention: Insurance policies include safeguards to prevent fraud by ensuring that both the insurer and insured comply with legal and ethical standards.
These principles guide how the insurance industry operates and ensures fairness, transparency, and financial protection for both insurers and policyholders.
