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Features of Insurance Scheme

Features of Insurance Scheme

Features of Insurance Scheme: There are basic theories upon which insurance scheme works. Though the basic theories are applicable in all classes of insurance, there are some special features each class of insurance exhibit. The basic theory guiding the insurance operation is founded on the truism concerning the law of large number.

Features of Insurance Scheme

following basic features must be in place:

  1. A large number of people must have the same kind of risk which they wish to transfer and are capable of transferring to the insurers.
  1. And the possibility of the insured event happening should be so low as to ensure acceptable market premium, that is, the premium or the price which most prospective insured shall be able to pay for the insurance protection and at which price the insurer will be able to discharge its obligations to the insured and its other constituencies (shareholders, creditors, regulatory authorities employees and others);
  2. And more importantly, both the insurer and the insured must have the legal to transact insurance business.

Types of insurance contracts.

The description of modern insurance business can be portrayed in the nature of the insurance contract performance by insurer, that is the nature of the expected claims payable or benefits due to the insured if the insured event occur within the specified contract period. Thus there are indemnity contracts and non-indemnity contracts which can be called benefit insurance policies.

Indemnity Contracts.

Indemnity contracts refer to those types of insurance contracts whereby, the nature of the subject-matter of insurance, the insurer is equitably expected to restore the insured to his financial position immediately before the loss or the happening of the insured perils. Insurances subject to indemnity are usually for a period of one month. There could be shorter than one month.

The indemnity insurance suggests strongly the basis of insurance being described as a pool of risks. In other words, the insured pay relatively small amounts called premium in relation to the sum insured to the insurer who accumulates them in a fund class by class.

The insurable risks of the respective insured are pooled according to the type of risks, and those insured who suffer financial

 arising from the insured perils are compensated or indemnified from the fund. The insurer is liable to indemnify even if the fund is insufficient since he must be a limited liability company. The insurer is the custodian of the insurance fund, and administers it in line with legal insurance principles and practices as shall always be implied or expressed in the insurance policy. The insured or the policyholders who should constitute a sizeable large number of homogenous exposure units are the members of the insurance scheme and invariably potential candidates for indemnity.

In indemnity insurances the insured perils may not occur at least within the contractual period. The satisfaction or value received by the insured who did not suffer loss during the currency of the contracts is the confidence and peace of mind resulting in active enterprising and effective concentration needed for enhanced productivity. However, should any insured suffer loss, arising from the insured perils, he is indemnified subject to the contractual terms. An amount of money that will restore him to the position he enjoyed immediately before the loss is paid them.

Limitation of indemnity.

There are contractual terms that limit indemnity. Those that limit indemnity are usually expressed in the policy document. Some of the factors are discussed in brief as follows:

The sum insured: this represents the maximum amount the policyholders can recover from the insurer if the insured perils happen. The insured cannot recover limit of liability. The insured do state the sum insured before the commencement of the insurance.

Average: the word average means two things in insurance depending on whether the discussion is dealing with marine insurance or non-marine property insurance. In marine insurance, average means “partial loss” and this can be qualified either as particular average or general average. The particular average relates to partial loss affecting one particular interest in marine venture say the owner of a ship. The general average refers to partial loss sustained and shared among the persons interested in the marine venture threatened by a total loss. This later case involves willful act like jettisoning deck cargo to save the ship from threats of total loss. The general average applies only if the Voyage is saved.

Excess Clause and Franchise Clause: the excess clause means that the insured is required to bear the first Nx of any claim. But, if the insurance is subject to franchise, the insurer will not be liable to any claim or loss not exceeding Nx; for losses exceeding the Nx the insurer undertakes to pay the full amount limited only by the principle.

Non-indemnity insurance.

Non-indemnity insurance contracts refer to those insurance contracts in which the insured events are certain to happen, though on uncertain date and time. They are mainly life assurances like Endowment Assurance. Whole life assurance and Term assurance. The risks insured against in such insurance contracts are usually inherent and contingent upon human life, and the amounts paid as benefits are not the economic value of what have been lost due to happening of the unwanted events. Stated differently, the exact amount payable in events of the insured risks happening can hardly be measured in financial terms because the value of life, limb and health cannot be accurately stated in monetary terms. A sum assured or its equivalent or known benefits are paid to the beneficiaries should the contingency insured against occur. Honestly, another name for this type is called Benefit Policies.

In non-indemnity insurance contracts, insurer’s liabilities are negotiable or fixed at the Inception of the contract. A little variation on the benefits payable will exist if the insurance is with-profit participation in which case the amount payable will increase with the declared bonus from the agreed benefits in event of the insured events occurring.

Non-indemnity insurance contract include virtually all life assurances and personal Accident Insurances. They promises or guarantee the payment of contractual sums if the in accordance with the contractual terms.

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