An Introduction to

Insurance
Laws
Dr. Naresh Mahipal

6960

CENTRAL LAW PUBLICATIONS

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 THE RISK 69

(3) Accidentalloss
The event that constitutes the trigger of a claim should be fortuitous,
Chapter3 or at least outside the control of the beneficiary of the insurance. The loss
should be pure, in the sense that it results from an event for which there is
THE RISK only the opportunity for cost. Events that contain speculative elements, such
as ordinary businessrisks or even purchasinga lottery ticket, are generally not
considered insurable.
MEANING OFRISK
We all anticipate countless risks in (4) Large loss
there liesa plenty of risk. Risk is closely our daily life. In life and The size of the loss must be meaningful from the perspective of the
can connected with loss. Every busines
in loss of one or other kind.
death, fire, earthquakes and soThere be loss due risk insured. Insurance premiumns need to cover both the expected cost of losses,
risk cannot be perils of sea, results
on. The to plus the cost of issuing and administering the policy, adjusting losses, and
but lossil ness,can
be. The function of
he anticipates by insurance is to protect the insured eliminated supplying the capital needed toreasonably assure that the insurer willbe able
other at the timne spreading the loss to persons who from variety of eok risks
to pay claims. For small losses these latter costs may be several times the size
of loss by agreed to co-operate of the expected cost of losses. There is hardly any point in paying such costs
anvbodyof them is exposed tomaking risk, contributions to the commnon
fund. Whas
unless the protection offered has real value to a buyer.
fund. In other words, risk of such loss is made good out of
the
Insurance cannot arrest risk
financial loss to a person is assumed by commer (5) Affordable premium
loss and thus protects the from taking place but another If the likelihood of an insured event is so high, or the cost. of the event
for ascertaining the insured from sufferings. The guarantees
type of
the pavment of
so large, that the resulting premium is large relative to the amount of
premium rate. risk is the base protection offered, it is not likely that the insurance will be purchased, even
CHARACTERISTICS OF RISK on offer. Further, as the accounting profession formally recognízes in financial
Risk which can be accounting standards, the premium cannot be so large that there is not a
reasonable chance of a significant loss to the insurer. If there is no such chance
common characteristics:1insured by insurance companies typically share seven of loss, the transaction may have the form of insurance, but not the substan ce.
(1) Large number of (6) Calculable loss
similar
Since insurance operates exposure units There are two elements that must be at least estimable, if not formally
insurance policies are providedthrough pooling
for individual resources, ofthe majority of
calculable : the probability of loss, and the attendant cost. Probability of loss is
generally an empirical exercise, while cost has more to do with the ability of a
allowing insurers to benefit members large classes,
from the law of large numbers reasonable person in possession of a copy of the insurance policy and a proof of
losses are similar to the actual in which predicted
losses.
which is famous for insuring the life or Exceptions include Lloyd's of London, loss associated with a claim presented under that policy to make a
reasonably
definite and objective evaluation of the amount of the loss
famous individuals. However, all health will of actors, sports figures and
other result of the claim. recoverable as a
which may lead todifferent exposures have particular differences,
premium rates. (7) Limited risk of catastrophically large losses
(2) Definite loss
Insurable losses are ideally independent and non-catastrophic, meaning
The loss takes place at a that the losses do not happen all at once and individual
cause. The classic example is known death
time, in a known place, and from a known
of an insured person on a
losses are not severe
enough to bankrupt the insurer; insurers may prefer to limit their exposure to
policy. Fire, automobile life insurance a loss from a single event to some small portion of their capital
criterion. Other types ofaccidents, and worker injuries may alleasily
losses may only be definite in theory. meet this constrains insurers' ability to sell earthquake insurance as well base. Capital
as wind
disease, for instance, may involve prolonged Occupational insurance in hurricane zones. In the U.S., flood risk is insured by the federal
where no specific time, exposure to injurious conditions government. In commercial fire insurance it is possible to find single properties
cause of a loss should beplace or cause is identifiable.
clear enough that a Ideally, the time, place and whose total exposed value is well in excess of any individual insurer's
capital
information, could objectively verify reasonable
all three elements. person, with Sumoc constraint. Such properties are generally shared among several insurers,
are insured by a single insurer who syndicates the risk into the or
1. Mehr and Camack, oedoolo reinsurance
Principles of Insurance, Gth Ed:, (1976) market.
(68 ) 34-37.e