Chapter I: General information about insurance

Chapter I: General Information on Insurance

Economic analysis today focuses on these policy concerns.

economic and financial, but its main objective remains the interpretation of the role of
insurance as a risk coverage technique and its relevance in the face of
the uncertainty.1

Insurance is a service that provides a benefit when an event occurs.

the presentation, generally financial, can be intended for an individual, a
association or a company, in exchange for the collection of a fee or premium.2

In this first chapter, we will strive to provide clarification on the

field of study through a presentation of the technical foundations on which it is based
insurance.

The analysis of this discipline will involve a fairly broad definition of

the insurance operation, including the elements explaining the origin of the development
of insurance and the role it depends on, in economic and social terms
as a means of protection and a tool for prevention against chance and uncertainty.

We will continue with a second title the elements of an operation

of insurance that will encompass the various terms and characteristics dedicated to the profession

insurance, which will first go through the presentation of the insurance contract,
then the different elements during the execution of an insurance operation and
finally these different actors.

The third title is a presentation of the different basic techniques on

on which the insurance industry rests, based on the principle of mutualization and
made accessible by the law of large numbers, as well as the calculation methods of
primes.

1
Lambert DENIS-CLAIR, "insurance economics", ed Armand Colin/Masson, Paris, 1996, p. 21.
2
Ali HASSID, "Introduction to the Study of Insurance", ENAL Publishing, Algiers, 1988, p. 84. 5
Chapter I: General Information on Insurance

Section 1: The fundamental concepts of insurance

Insurance is as old as the need that individuals demonstrate to protect themselves.
to protect against the risks to which they are exposed.

In this section, we first focus on providing a historical overview, with

all the developments around the world, and then we will move on to the different
concepts of insurance.

1- Historical evolution of insurance

The emergence of the insurance sector is based on a process of
development of exchange mechanisms and prevention against random risk,
become an increasingly dedicated service to supporting developments
economic and social changes of the last centuries.
Insurance is an organized operation, consisting of elements and rules.
technique, and as it is situated in the tertiary sector of the economy.1

The birth of insurance took quite a long time. Insurance had to

die over the centuries to become a complete system capable of
respond to the protection needs of individuals.2

In order to protect himself against the uncertainties of life, man turns to different
means that it is not a question of talking about insurance but rather about the mechanism
of insurance. The first means was one with a societal character, it concerns the
solidarity among the members of the group. Its principle consists of providing help or
assistance to people who are facing risks. On the other hand, the second
means relied on individual effort, that is to say it is up to the victim to constitute a
savings in advance to face the risks that will arise in the future.

1
F.CUILBAULT, ELIASHBERG.C, LATRASSE.M, "the major principles of insurance", 6thedition
The Argus, Paris, 2003, p.50.
2
Kafia BENAHMED, "Essay on the analysis of the relationship between insurance and economic growth in Algeria"
Master's thesis, MFB option, Mouloud Mammeri University of Tizi-Ouzou, 2014, p. 32.
6
Chapter I: General information about insurance

Marine Insurance
It is in the field of marine risks that the concept of insurance emerged.
The first form of insurance contracts was practiced by the Greeks and Romans.
Indeed, every sea voyage was considered an adventure; it is about the
very risky shipments since they were subject to shipwreck, theft, and
hacking. To this end, shipowners have come up with the idea of addressing a holder of
capital (banker) who will lend them a certain amount of money to finance their
maritime shipments that often cost a lot (this money was used for the purchase of
shipments: goods and slaves). If the ship arrived at its port, the banker
an interest rate of 30% to 50% was reimbursed, in addition to the loan amount1. If the
the ship was sinking, the shipowners had nothing to repay the banker.

However, since this loan is pure speculation, it has been banned by the church.
romaine in 1234. To circumvent this ban, this contract was replaced as early as the 14th century.th

century by true maritime conventions; bankers and shipowners have

I imagined another loan agreement, changing the name: loan by guarantee and rate.
interest by premium. Except that in this agreement, the banker agrees to guarantee the
ship and the cargo in exchange for a sum of money provided in advance.

Marine insurance was born and continues to develop in the ports of the
Mediterranean then from the Atlantic. The oldest maritime insurance contract has been.
written in Genoa in 1347, it is intended to guarantee the transport of goods against
the risks of a trip. It was in Genoa that the first company was founded
insurance in 14242.

1-2-Terrestrial Insurance

Land insurance appeared in England at the end of the 17th century.e

century, in the form of fire insurance.

1
J-F BIGOT, "Insurance Law: Companies and Insurance Organizations", 2èmeDELTA, Paris, 2000, p.7.
2
C PARTRAT, BESSON J-L, "Non-life insurance: Modeling, Simulation", Economica, Paris, 2005,
p.45. 7
Chapter I: General information about insurance

1-2-1-Fire insurance

Fire insurance was created following the great fire of

London, September 2, 16661At 1 a.m., the fire breaks out in a
bakery and spreads from house to house, it is only after 4 days that we
will manage to stop it. This fire has destroyed more than 13,000 houses and nearly 100 churches2.
Following this disaster, the English authorities established the 'fire office' in 1667 which
favored the birth in 1696 of several companies including the 'HAND in
HAND, the first fire insurance company3.

Moreover, fire insurance has developed in other countries. France

was the second country interested in this sector, through the creation of funds
emergency services, called fire offices4The first office made its appearance
in Paris in 1717, it is a municipal organization in the form of a fund
of assistance rather than insurance. In addition to the contributions of the members, the
The resources of this fund mainly come from public subsidies and
private gifts.”} JSON

Life insurance

Life insurance saw its birth in the 17th century.ecentury in Italy, through the
tontine system. As was the case in maritime insurance, insurance on the
life also appeared in connection with maritime navigation. It is the derivative
of the first contracts concluded, in order to guarantee the lives of the slaves transported as
what goods.

In succession, from the first half of the 15th century, contracts are concluded.
ensuring life in itself, and outside of any navigation risk5.

1
J-F BIGOT, op.cit, p.12.
2
IBID, p. 14.
3
F.CUILBAULT, ELIASHBERG C, LATRASSE M, cited work, p.15.
4
Madouda HADDAD: "Export Credit Insurance Outside Hydrocarbons in Algeria", thesis of
Master in Economic Science, GE option, Mouloud Mammeri University, Tizi-Ouzou, 2006, P. 16.
5
M FONTAINE, 'Insurance Law',2théd DOBOECK & LARCIER, Brussels, p.11. 8
Chapter I: General information about insurance

The tontine is defined as 'a particular form of mutual insurance society.'

on the life whose purpose is to distribute among the members of an association, to
the expiration of this one, the funds resulting from the capitalization of their contribution; the
funds are distributed among the survivors of the associations in the event of life or among the

rights of the deceased's association in case of death1

The operating principle of this system is based on the payment of

identical contributions by groups of people in the form of an association
(tontinière), thus creating a sort of investment fund. The amounts paid are
capitalized and distributed among the survivors.

2 - Definitions of insurance

The word insurance is of Latin origin: securus which means sure, from which comes the
term Assecuratio (safety, guarantee, certainty, assurance...). Hence, the old
Southern French adopted the term Insurance, while retaining the same
consonances found in the terms: security, safety, assistance.2

In general, insurance is defined as a gathering of

people, fearing the arrival of a detrimental event, pool resources to
to allow those affected by this event to cope with the damage
resulting3.

In economic terms, insurance is defined as "a service that

provides a service in the event of a risk occurring4The service, generally
financial, may be intended for an individual, an association or a business, in
exchange of the perception of a contribution or premium.
Legally, insurance is defined according to article 02 of the ordinance.
95/07 (modified by art. 2 L 06-04), and article 619 of the Algerian civil code as "a

1
Madouda HADDAD, op.cit, p. 17.
2
L MEZDAD: 'Attempt to analyze the insurance sector and its contribution to financial intermediation'
national", master's thesis in economics, MFB option, A. Mira Bejaia University, 2006, p. 7.
3
F CUILBAULT, ELIASHBERG C, LATRASSE M, cited work, p.49.
4
Invalid input. Please provide text for translation.
012.
9
Chapter I: General information about insurances

contract by which the insurer is obliged in exchange for premiums or other payments
financial (contributions), to be provided to the insurer, or to the third party beneficiary for whose benefit

insurance is taken out, a sum of money, a pension or another benefit

monetary, in case of realization of the risk provided for in the contract1.

Insurance from a technical point of view is defined as 'a

operation by which an insurer organizes a group of insured individuals in mutuality
exposed to the realization of a risk of the same nature, and compensates those among them
2
having suffered damage and this thanks to the mass of premiums collected.

Moreover, several authors have provided more precise definitions of the concept.
insurance. For example, according to Mr. Joseph Hémard: "Insurance is an operation
by which one party (the insured) has a promise made to them, for a consideration (the
prime), for him or for a third party, in the event of the occurrence of a risk, a service by
another party (the insurer), which takes on a set of risks, them
compensate in accordance with the laws of statistics3.

Despite the diversity of definitions of insurance, it leads us to

understand a single principle. It is that of guarantee (through a presentation) the
person exposed to the risk 'insured by another person (insurer) in exchange for the
payment of an amount of money called insurance premium.

3- The classifications of insurance.

3-1-Individual and collective insurance

An interesting distinction is made between two forms of insurance, which

nevertheless share the common point of being high-level protection techniques
dimension, individual insurance and group insurance.

1
Article 2 of Ordinance No. 95-07 of January 25, 1995 relating to insurance, p.170.
2
Y LAMBERT-FAIVER, "insurance law", 11meDalloz edition, Paris, 2001, p. 38.
3
Françoise CHAPUISAT, "insurance law" 1eraUniversity Press edition of France, Paris, p.7.
10
Chapter I: General Information on Insurance

The so-called individual insurance is simple in its principle: it consists of a

membership made by a person with an insurer in order to obtain a
coverage against one or more risks (for example: insuring your home).1

This form of insurance is similar to the mutualist technique given

individual memberships.

The so-called collective insurance is a broader technique: it leads to

grouping together with the same insurer individuals who are confronted with the
same concerns and who have identical financial capabilities2They
aim to complete the social coverage of both employees and self-employed individuals. Furthermore,
They play a crucial role in terms of lending or credit.

3-2- Property insurance and personal insurance

Property insurance is based on the indemnity principle according to which
insurance should not be a source of enrichment in other words,
The insurance must restore the insured property to its condition before the loss.

Liability insurance covers the financial consequences of the

Civil liability of the insured due to damages caused to third parties. Example:
the driver's car insurance.

3-2-1- Property insurance

Property insurance aims to compensate for the consequences of a

damaging event affecting the insured's property.3The insurances of
Damages are either property insurance or liability insurance.4

It entitles one to compensation, usually equal to the amount of the damage.

due to an accidental and involuntary event (accident insurance), referred to as a claim:
Third party insurance: civil liability, etc.…

1
F CUILBAULT, ELIASHBERG C, LATRASSE M, cited work, p.369.
2
IBID, p.369.
3
IBID, p. 70.
4
Pierre-Henri DADE, Daniel HUET, "the property damage insurance of the business", ed largus, 1999,
paris, p. 7.
11
 Chapter I: General information about insurance

Property insurance: against accidents, fires, thefts (automobile, home,...)

It is the IARD (Fire, accident and various risks)
Insurance in construction: Damage insurance for the work and insurance
decadal.
Diagram No. 1: Property Insurance

PROPERTY INSURANCE
PREJUDICE reference value
Heritage
Directly indirectly
Insurance of Assurance of
THINGS OR GOODS CIVIL LIABILITY
Such as: the buildings A) Liability Insurance
Movable property civil
Automobiles Such as for the company:
Who can be insured by Exploitation
contract: RC products or works
Fire Car
Machine breakage
B) Non-material damages
Volume
Following damage to a property or to
Water damage
commitment of responsibility
Other damage
Such as loss of profit.
Insurance of THINGS OR PROPERTY
Source: Pierre-Henri DADE, Daniel HUET, "property damage insurance for businesses"
ed. L’argus, Paris, 1999, p. 9.
Damage Insurance Rule1:

compensatory principle.
loss with multiple insurance covering the same property in the same
interest: cumulative settlement.
Proportional capital rules possible.
subrogation possible.

1
Pierre-Henri DADE, Daniel HUET, op. cit, p. 10. 12
Chapter I: General Information on Insurance

3-2-2- Personal insurance

Personal insurance is a precautionary agreement between the insured and
the insurer, and by which the insurer undertakes to pay the subscriber or beneficiary
designated a fixed amount in the form of capital or an annuity in the event of realization
of the event provided for in the contract (art 60 of ordinance 95/07).1

Personal insurance can take the form of: individual or collective.

(Group insurance (article 62 of ordinance 95/07)2.

In the context of personal insurance, the insurer pays a beneficiary

a fixed fee set when the contract is concluded (for example in
life insurance3.

Diagram No. 2: 'Personal Insurance'

PERSON INSURANCE
Prevention operation regarding certain events

Death the bodily injury the disease retirement

RISKS

Death Temporary incapacity disability survival

Source: Pierre-Henri DADE, Daniel HUET, "property damage insurance for businesses"
The Argus, Paris, 1999, p 10.

Characteristics:
no subrogation;
freely fixed capitals.

1
Article 60 of ordinance no. 95-07 of January 25, 1995 concerning insurance.
2
Article 62 of ordinance n°95-07 of January 25, 1995 relating to insurance.
3
Pierre-Henri DADE, Daniel HUET, op.cit, p.8. 13
Chapter I: General information about insurance

Consequences:
no compensation principle;
no cumulative regulation;
no proportional capital rule.
3-3-Capitalization-managed insurance and distribution-managed insurance
The distinction between managed insurances according to the mechanism of
capitalization and according to the distribution technique is based on a financial criterion:

When the insurer merely distributes among the insured the mass of claims,
contributions (or payments) made by all members of the mutual fund.1
Car insurance is an example.

On the other hand, when the insurer must set aside all or part of the premiums to make
in light of its commitments in the future and furthermore the bonuses must accrue interest
2
composed, it is a capitalized insurance: life insurance on
is a revealing example.

The role of insurance

Insurance is not limited to intervening when events occur.
unfortunate situations that individuals are exposed to, but it offers other utilities on
the social, economic and financial plan.

4-1-The social role of insurance

The social role of insurance is, above all, to provide security to individuals.
As a result, insurance is there to repair the damage and to help people live.
better in a world where risks cannot be avoided.

Furthermore, it is the duty of income guarantee insurance for a household having

lost the head of the family, financing medical treatments for the sick

1
F CUILBAULT, ELIASHBERG C, LATRASSE M, op.cit, p.69.
2
IBID, p.70. 14
Chapter I: General information about insurance

to recover health1, and to the contribution of improving the standard of living of

retirees.

From there, insurance is seen as an act of high social prevention because

that it meets the needs of individuals looking to protect themselves against risks of
the life that can affect their person or their property.

The example of social security insurance (CNR, CASNOS, etc.).

4-2-The economic role of insurance

The insurance sector contributes to all economic activities of

the company. This role can present itself as follows:

4-2-1-Insurance is a tool for protecting wealth

Insurance allows policyholders to protect themselves in case of the occurrence of certain events.

events that may affect their property.2

Other economic roles can be cited as examples, such as the guarantee of
investments and capital placements.

4-2-2-Insurance is a savings mechanism

The insurance sector collects the savings of policyholders in the form of premiums.
This savings will be redistributed in the form of benefits to the victims and others.
beneficiaries of insurance contracts.

As a result, insurance plays the role of a financial distribution. However,

during the period between the collection of premiums and the distribution of benefits,
The insurer must set aside the premiums collected from the insured in order to be able to
3
to have it available in case of the occurrence of disasters.

Savings constitute funds (provisions) that must be sufficient at all times.

to enable him to fulfill his commitments to the insured and the

1
Saïd OUBAZIZ, "institutional reforms in the insurance sector", master's thesis in
Economic science, option ME, Mouloud Mammeri University, Tizi-Ouzou, 2012, p. 14.
2
F CUILBAULT, ELIASHBERG C, LATRASSE M, op.cit, p.18.
3
Lambert DENIS-CLAIR, op.cit, p.63. 15
Chapter I: General information about insurance

beneficiaries of insurance contracts. These funds are thus savings intended to make
in the face of potential disasters that have not yet occurred.

4-2-3-Insurance is an instrument for encouraging credit

Insurance is a crucial element for credit institutions. For
to benefit from a bank loan, the banker requires a guarantee which can take the form of
in the form of an insurance by which he guarantees the repayment at maturity and
in case of insolvency.

For example, in the case of subscribing to a life insurance contract, it is the company
of insurance that takes care of debt repayment. Ultimately, the subscription
of an insurance contract, particularly life insurance, makes it easy to obtain a
credit and accelerate the borrowing operation.

4-3-The financial role of insurance

The insurance sector is one of the most important sectors in
the economy of a country, it contributes not only to the protection of heritage, but
also due to its principle of reversing the production cycle, the insurance activity
allows for generating significant financial masses that insurance companies
injecting into the economic sphere.1
Thus, insurance plays a role as a financial intermediary and indeed contributes to
national investment.

Section 2: The elements of an insurance operation

Insurance is based on several terminologies and characteristics specific to
actuarial profession, with concepts that characterize an insurance contract and the
different elements and actors of an insurance operation.

1- The principle of inversion of the production cycle

The principle that distinguishes the insurance sector from others

sectors is the inversion of its production cycle.

1
Lambert DENIS-CLAIR, op. cit, p.111. 16
Chapter I: General information about insurance

In any economic activity, the selling price of a good is determined based on

its cost price. In insurance, on the contrary, the insurer sells a product that it does not
does not know the cost price since it cannot determine in advance the existence and the
amount of future claims.

This inversion provides cash flow advantages since the insurer receives its
remuneration (the bonus) before performing his service in case of a disaster. However,
by selling the promise of compensation, the insurer cannot assess with
exact amount of the compensation to be paid (the actual cost of the loss) in case
of guaranteed risk realization. This constitutes the inherent disadvantage of inversion.
of the production cycle.

2- The insurance contract

A contract is defined as "an agreement between two or more people that

oblige the insurer to cover the risk, the policyholder to pay the premium1.By
For example, in a sales contract, the seller agrees to deliver the item, and the buyer agrees to accept it.

pay the agreed price.

The insurance contract is an agreement made between an insurer and an insured to

guarantee a risk: the insurer accepts the coverage of the risk, the policyholder commits
to pay the agreed premium. This is a legal link binding the insurer and the insured.
respectively, to guarantee the risk and to pay the premium.

2-1- The characteristics of an insurance contract

Just like other private contracts (contracts made between individuals), the
The insurance contract is governed by the civil code and has certain characteristics that are
following:2

2-1-1- The synallagmatic nature: this contract is synallagmatic because it

involves reciprocal commitments from both parties, the commitment of the insurer
is linked to that of the subscriber, and vice versa.

1
F CUILBAULT, ELIASHBERG C, LATRASSE M, cited work, p.86.
2
IBID, p.88. 17
Chapter I: General information about insurance

2-1-2- The consensual character: this character is consensual because it is reputed

concludes as soon as the agreement of the parties intervenes. This means that the existence
The insurance contract is not linked to the completion of formalities.

2-1-3- The random character: this character is inherent to the very nature of
insurance, and to the definition of risk. This characteristic applies to the very object of
insurance contract: the guaranteed risk; only a random risk can be the subject of a
assurance.

2-1-4- The character of good faith: this character is fundamental in insurance,

it signifies the absolute necessity of loyalty from the insured to maintain fairness of the
contractual relationship, whereas the insurer is generally required to make
trust in its statements, without being able to verify them at the time of signing the contract.

2-2- The steps in forming an insurance contract

For it to be established, an insurance contract goes through four important steps.

who are the following1:

2-2-1- Information notice: it is a document provided by the insurer to the insured.

indicating the price and the guarantees. In other words, it is the set of information
what the insurer gives to the insured regarding the insurance product. This document
allows the product consumer to better understand the costs of basic guarantees
and extensions to promote competition.

2-2-2-Proposition: is a printed form filled out and signed by the future subscriber, the
proposing, by which the latter asks the insurer to guarantee the risk he describes
by answering the questionnaire.
The proposal serves as the basis for drafting the insurance policy, but also acts as
reference in case of disputes regarding the initial statements of risk.

2-2-3- Cover note: is a document intended to certify that the risk

is covered from the indicated date. It is an immediate, provisional guarantee, in

1
F CUILBAULT, ELIASHBERG C, LATRASSE M, cited work, p.90. 18
Chapter I: General information on insurance

pending the drafting of the final police report. Its duration is limited to 1 or 2 months.
more.

2-2-4-Insurance policy: is the materialization of the insurance contract at

through a printed document that the insurer gives to the insured. It serves as proof of the

insurance contract, this is how it is mandatory and required by the code of

assurances.
This printed document contains general terms and specific conditions.

The regulatory conditions of an insurance contract:

The insurance contract has two conditions1:

2-3-1-General conditions:

In a very simple way, they relate to insurance products, they are

common to all insured of the same type of contract and refer to the code of
insurances. They identify the covered risk and indicate the risks that are excluded,
the duration of the contract and the formalities in case of a disaster.

2-3-2-Special conditions:

The special conditions relate to the insured, or they adapt the

contract related to this situation. They indicate the name of the insured, their address, the
retained guarantees and their amount, the profession of the subscriber's activity or of
beneficiary, the specific nature of the guaranteed object, the extent of the guarantee, the amount of the
premium, the subscription date, the frequency, and the duration of the contract.

3-The elements and actors of an insurance operation:

Insurance is defined as the commitment made by an insurer to an insured,

to guarantee it in the event of a risk affecting his person, his wealth, or
its decisions. This operation relies on the existence of a certain number of elements,
conditions for its completion. Thus, the insurance operation relies on
the existence of a risk, the payment of a premium, and the promise of compensation from
damage through the performance.

1
The provided text is not translatable content. 19
Chapter I: General Information about Insurance

3-1-The elements of an insurance operation

As we have already mentioned, an insurance operation is characterized

by the following elements:

3-1-1- The risk

The term 'risk' leads us to the apprehension of 'danger or a

possible disadvantage1But in terms of insurance, this formulation of the property to
insuring constitutes, according to Ali Hassid, "a future and uncertain event..., it depends

only by chance2.
Insurance agrees to insure properties and individuals against events
random events such as fire, accidents, and any other disaster that occurs such as the
natural disasters as the subject of the insurance contract.
It is necessary to clarify that the insurability of a risk is subject to conditions.
following3:
The risk must be future (the event must not have already occurred);
The risk must be random, that is to say it depends on chance.
uncertain but still likely). The problem of uncertainty raises the question of the
different aspects that it can take. It can cover:4
The very occurrence of the event but when this occurrence is certain:
The event that will occur cannot be identified as either a fire or a theft.
The date of the event: The date of death is unknown.
Its realization must be independent of the will of the contracting parties (if
if one party can influence its implementation, it is no longer a risk
assurable).

3-1-2- The premium or the contribution

The premium can be defined as 'the sum of money that the insured must pay in'
counterpart of the guarantee granted to him by the insurer to cover a risk5. In
In other words, the premium is the contribution paid by the insured to the insurer in exchange for

1
LAROUSSE P, AUGé C, "Petit LAROUSSE", ed. Librairie Larousse, Paris, 1972, p.395.
2
Ali HASSID, op.cit, p. 85.
3
Julien MOLARD, "Property Insurance", ed. SEFI, Paris, 2010, p. 9.
4
Françoise CHAPUISAT, op.cit, p. 12.
5
Ali HASSID, op.cit, p. 93. 20
Chapter I: General information on insurance

of the guarantee that is granted to it. The premium is distinctly separate from the contribution. A

the premium is paid by the insured to the commercial insurer, who practices insurance at
but profitable and manages fixed premiums. Thus, the insurer that makes profits it
dispose, and the one who incurs losses bears them.

On the other hand, when the insurance organization is a mutual company or in a mutual form
In mutual insurance, the premium is called a contribution. Indeed, the contribution is practiced by the

mutuality; a civil society of individuals whose purpose is to provide insurance and not
no profits. At the end of each fiscal year, the mutual society keeps accounts, if the
contributions paid by members during the year are sufficient to cover the
losses, we close the fiscal year. If the contributions exceed the losses, we reimburse the
difference, but if the volume of claims is greater than that of the premiums, the company
then proceeds to a reminder of contributions.

3-1-3 - The service

The benefit is the sum of money that the insurer is obligated to pay.
the insured in the event of the occurrence of a guaranteed risk. There are two types of benefits1:
Compensations: which are determined after the occurrence of the disaster,
function of its importance. This type of service is practiced in the case of
damage insurance.
Fixed-rate services: which are determined upon the subscription of the contract,
before the occurrence of the claim (for example: life insurance).

The disaster

In theory, the word 'loss' is the logical consequence of a specific risk.2.

The loss is the realization of a risk covered by the insurance contract.

A loss gives rise to the obligation for an insurance company to fulfill the guarantee.
provided in an insurance contract.

1
F CUILBAULT, ELIASHBERG C, LATRASSE M, op.cit, p. 52.
2
T TAURON, 'the insurances' éd Publibook, Paris, 2004, p. 68. 21
Chapter I: General information about insurance

3-1-5 - Compensation within mutuality

Mutuality is "the basic principle of insurance according to which contributions

contributions paid by each member of a group of people (the insured) are
used and theoretically sufficient for the compensation of some of them that
prove to be victims of the insured event1.
For this purpose, the role of the insurer is to pool the risks: to bring them together,
distribute and compensate them by relying on mathematical laws applied to
the collected statistics.

Mutuality is the group of people who mutually contribute for a

same risk.
Insurance is therefore the organization of solidarity among the insured against the
the occurrence of the same risk. Indeed, insurance is based on the mechanism of
solidarity: good risks pay for bad risks.
The mechanism of solidarity on which insurance is based can be explained as follows2:
If the volume of claims is significant or each claim costs more,
The entire mutuality will have to bear a higher contribution.
If there are fewer risks, each person's contribution will decrease.
If there is cheating, that is to say if insured persons do not declare the severity of
their risks or exaggerate the importance of a loss, the entire mutuality in
will rise.
In summary, insurance operations are based on the principle of
compensation within the mutuality means that all the people who form
this mutuality contributes collectively, through their payments, to the compensation
of those who will have been affected.

3-2- The actors of an insurance operation

An insurance operation involves several parties: an insurer, a

insured and possibly third parties:3

1
URL provided does not contain text to translate.
2
F
CUILBAULTE, ELIASHBERG C, LATRASSE M, cited work, p. 53.
3
Unable to access or translate the content from the provided URL. 22
Chapter I: General information about insurance

3-2-1- The insured

It is the natural or legal person threatened by the covered risk, either in its
person, either in their assets. Very often, the qualities of the subscriber and
of the insured are confused (person who insures their vehicle against theft). It happens
however, the insured person may be different from the policyholder. Thus, the person who ensures the

the life of others is considered as the subscriber but others are the insured.

3-2-2- The subscriber

The insurance policy (the insurance contract) is signed by him or on his behalf.
and he commits to the payment of premiums. This is a natural or legal person.
Incapable persons cannot be a subscriber to an insurance contract except for
the specific hypotheses reserved by the legal regime of incapacitated adults.
Often, it is the insured person themselves who takes out a contract for their own account.

3-2-3- The beneficiary

The beneficiary is any natural or legal person in favor of whom

the insurance has been taken out, that is to say the person receiving the benefit of the contract in
case of risk realization.

3-2-4- The third

The third-party beneficiary is first found in insurance for the account of

of others. In this hypothesis, the subscriber takes out the insurance contract for the benefit
a third party who will receive the insurance compensation when the disaster occurs. It is
undoubtedly the example of the family man who subscribes to a life insurance policy for his
or their partners and children.
Insurance for the account of others can, however, be stipulated when 'others'
is not determined at the time of the conclusion of the contract. This is referred to as insurance.

for whose account it will belong.

In insurance for the account of others, the third-party beneficiary is not a party.
under the contract but has a direct action against the insurer when the
risk occurs. This contractual action subjects him to the reservations and

23
Chapter I: General Information on Insurance

exceptions that the insurer could invoke against the policyholder.

In insurance, the third party can also be the victim; this is the case of the person who
suffer the damage while the author of the harmful act had taken out a
liability insurance.

3-2-5- The insurer

The insurer is the one who is obligated to pay the compensation.1or the insurer is here

insurance company or the individual with whom the insurance contract is made
is subscribed, and commits to providing the services planned in case of realization of the
risk. It is generally a commercial or civil company (mutual). The insurer
is a company subject to state control and whose legal status and method of
operations are regulated.
The insurer intervenes with the insured through a network of
distribution :2

A- Insurance companies

These companies are subject to the rule of specialty, meaning that they do not
can only carry out insurance operations. These are divided into branches,
and an approval is granted by the Treasury Directorate of the Ministry of Economy to
the company to allow him to practice insurance in this branch. We separate:
The companies that are accredited to manage the branches according to a system of
distribution.
And companies that are authorized to manage branches according to a system of
capitalization.
The first ones organize their activities within the framework of a fiscal year, the
profits perceived during this period being pooled and redistributed for
compensate for the occurred losses. This concerns damage insurance and two
insurance of individuals (accident and illness). While the second ones capitalize

1
N MRABET: 'Insurance Technique', Virtual University of Tunis, 2007, P. 13, In http://www.pf-
mh.uvt.rnu.tn
2
Françoise CHAPUISAT, op.cit, p.19. 24
Chapter I: General information about insurance

the premiums that are individualized and allow the creation of a provision
mathematics in contracts having the nature of a savings operation. Are
thus managed are life insurances (except for those known as 'temporary death' insurances).
Insurance companies can only take one of the following two forms:
these are public limited companies or mutual insurance companies.

A-1-Anonymous companies

Commercial insurance companies are necessarily corporations.

anonymously, some are more specialized in business risks, and some
large companies create insurance companies in the form of subsidiaries,
captive insurers, designed to manage and insure their own risks.

A-2-Mutual insurance companies

These are insurance companies in civil form. According to Françoise Chapuisat

Mutual insurance companies have a non-commercial purpose. They are
formed to cover the risks brought by their members. In exchange for the
payment of a fixed or variable contribution, they guarantee them the
full settlement of the commitments they undertake. However, companies
mutual insurance companies engaged in life insurance operations or
capitalization cannot receive variable contributions.
These companies operate without share capital and that the conditions for distribution between
the members of the excess revenues recorded at the end of the fiscal year are provided for in
the statuses.

B- Insurance intermediaries

Insurance intermediaries are responsible for distributing products.

insurance to the public. Their intervention is not essential but their
professional skills allow the candidate for insurance to be informed and
advised effectively. The two major players in this category remain the agents
generals on one hand, insurance brokers on the other:

25
Chapter I: General information about insurance

B-1- General agents

The general agent is the representative of an insurance company that he represents.

among the public. The presence of general insurance agents is made necessary by
the fact that insurance companies are rarely in direct contact with clients.

In practice, this link between the insurer and the client is facilitated by the installation
of a network of general agents tasked with offering insurance contracts
in the name of the company. They are subject to an exclusivity obligation towards the
company that mandated them but the latter is civilly liable for mistakes and
negligences of the general insurance agent.

B-2- Insurance brokers

They are merchants mandated by their clients to search and negotiate.

for them the contracts best suited to their needs. The broker is normally
linked to no particular company, which should guarantee him total
independence during these negotiations.

So, the insurance broker is an independent who compares all the offers.
of markets to offer them to these clients. He is tasked by these clients to find
with different companies the contracts best suited to their needs and also
those presenting the best costs. He therefore has the obligation to advise his best.
clients. He represents the interests of the insured with the companies and he is the
owner of their client portfolio.

C- The State

The insurance activity is of great interest to the State, which is why measures have been taken.

place, to complete the responsibilities of the Minister of Economy, a commission of

insurance control and a national insurance council. The whole of this
the device intervenes at every moment of the life of the insurance company and works
in the form of controls:

26
Chapter I: General information on insurance

C-1-Administrative control

The area in which state control is fundamental is that of

the administrative approval since companies practicing insurance cannot
function only after having received it. Approval is requested by the company to operate.
in one or more branches of insurance and of course, it sees its activity
limited to the sectors for which authorization has been granted. Any company
an insurance company can establish a branch operating within the territory
insurance for which it has received approval from the regulatory authorities of its
state of origin.

C-2- Financial control

It falls under the jurisdiction of the insurance control commission and it is

permanent. This commission has very significant powers. It is represented, on
the field, by the body of insurance controllers. They monitor that
the coverage of regulated commitments and the solvency margin remain at a
sufficient level so as not to jeopardize the rights of the insured that the commission has
for the purpose of protection.

When it seems to him that these interests are threatened, the commission can issue a warning.
the company or to whom to send the injunction to take measures to allow it
financial recovery.

The basic techniques of insurance

The insurer organizes and manages a risk mutuality that it takes on.
counterpart of the contribution paid by the insured. The determination of the latter is
one of the essential tasks of the insurer. Pricing or setting the price of
Insurance is established based on statistics of frequency and costs of damages.
occurring to the insured population.

27
Chapter I: General information about insurance

Based on the principle of reversing the production cycle of the insurance sector,
the insurance compensation will only be determined after a period that separates the date of
subscription of the insurance contract and that of the occurrence of the claim.

The way to set insurance premiums is based on parameters.

following:
The law of large numbers representing the foundation of mutualization
risks;
The statistics of the past, that is to say, the history of previous claims.
containing data related to frequencies and average costs of
disasters;
The forecasts of the probability of occurrence of claims.
The method of calculating primes.

1- The law of large numbers

The insurer's outcome will thus be uncertain; they hope to make profits but
can also incur losses. To avoid this latter case, the insurance technique
based on statistical methods, relying on a law called the law of
large numbers.

This law was stated by the Swiss mathematician Jacques Bernoulli in the 18th century.
century, and whose grace is attributed to the French mathematician Blaise Pascal of the 17th century.

century, which concluded that chance obeys laws (his demonstration was
contained in his work entitled The Geometry of Chance, published in 16541.

The law of large numbers states that: 'the larger the number
of experiments conducted, the results of these experiments get closer to the
theoretical probability of the occurrence of an event. In other words, if we
has studies covering a very large number of cases, we know in a way
sufficiently precise, the probability of occurrence of an event.

1
Y LAMBERT-FAIVER, op.cit, p. 39. 28
Chapter I: General information about insurance

The law of large numbers can be explained, for example, by the rolling of dice: the
the result of a single roll of dice depends on chance, but if the dice are rolled a lot
number of times, a certain regularity manifests itself.1

The law of large numbers is essential in insurance; it allows for

insurers know the probability of an event occurring (the frequency) which is
determined from these statistics when insurers gather a large number
of statistics relating to a large number of risks. As these statistics
allow to indicate how many risks occurred in the past, they allow
also, not only to determine the frequency of the risk but also the cost of a
disaster.

The law of large numbers is of extreme importance for insurers;

on one hand, in the establishment of pricing, when the statistics refer to a
a large number of observations, they are more precise and more reliable; on the other hand,
when the number of clients is large, the results of the insurers approach the
statistical forecasts.

However, the insurability of claims: the technical knowledge of the risk

permitted by these statistics and the applicability of the law of large numbers obey
certain conditions that risks must meet. Thus, there must be
homogeneous, dispersed, and numerous risks; otherwise, the insurer must reinsure.

To determine the amount of the loss incurred, the insurer must have a
technical knowledge of risk. The latter is primarily based on a calculation
which is based on two supports: a study of past results and a projection of these
results in the future. To perform this scientific calculation, the insurer resorts to a
discipline of economics; it is statistics. This is how he wins.
the organization of mutuality through the laws of statistics.

1
Madouda HADDAD, op.cit, p. 21.
29
Chapter I: General information on insurance

2- The statistics of the past

In order to manage risk and establish forecasts for the future, the insurer has
resorting to past statistics because the information, in the form of statistics,
related to past experiences, allow him to calculate what premium requested at
each insured to be able to pay for the damages that will be caused by the realization
of risk.1

However, these statistics allow for the understanding of risks as long as

that they relate to numerous and comparable risks. It is thanks to these statistics
that the insurer can calculate the premiums and distribute the risks. Indeed, with some
statistical studies involving a very large number of cases and over long periods
the insurer can anticipate the probability of the occurrence of an event in a way
sufficiently certain and in order to draw quantifiable conclusions.

For example, in property insurance, these statistics allow

to indicate the number of fire incidents that occur in a population
of insured, and how much they have cost overall and on average. In the insurances
they indicate the number of deaths occurring at a certain age as well as the average age of
death of a male or female population at a given time (table of
mortality.

3- The probability forecasts of the occurrence of claims

To sell an insurance product, it is mandatory to determine its price.

given that the latter may or may not be paid in the future. The forecasts
in insurance, it involves making probability calculations based on the information
statistics. These calculations are intended to establish insurance premium rates while taking into account

frequency account of the risks incurred: accident, fire, theft...

1
Kafia BENAHMED, op.cit, p. 19. 30
Chapter I: General information about insurance

4- The mechanisms of insurance

The insurance activity is based on the principle of risk sharing;
Insurance allows for the sharing of risks among a multitude of people; each
The insured receives compensation based on the nature and extent of the damage.
However, for these risks to be insurable, they must meet the requirements of
following conditions:

4-1- Homogeneous Risks

All information related to risks must be similar and categorized.

in groups according to the type of risk, that is to say, the risks must be of the same nature
and presenting approximately the same characteristics (same chances
of realization) than those observed for the establishment of statistics (Carlot, 2013,
p.6).1

4-2- Dispersed risks

It is important to avoid grouping risks that are likely to materialize at the same time.
time and in the same place: in this case, compensation could not take place. If we
insure against hail all agricultural operators in the same region, the very least
Hail damage can destroy the crops of all insured parties and lead to
catastrophic consequences for the insurer2.

This dispersion of risks is imposed by the very principle of mutuality:

it is a condition of the even balance of the common fund. If the risks
were not dispersed, that is to say if they were likely to reach the entirety or
even simply the majority of those concerned under identical conditions, it would be
impossible for the company to compensate them, to split them.

1
J-F CARLOT: "the role of insurance in risk management: concept, history, interest, mechanism,"
course support on insurance law, p. 6, In http://www.jurisques.com
2
http://www.lafinancepourtous.com/Decryptages/Dossiers/Assurance/Understanding-the-mechanism-of-the-
assurance. 31
Chapter I: General Information about Insurance

4-3- Numerous risks

Insurance finally relies on the frequency of risks. In order to be assessed
technically, risks must have a certain frequency, that is to say be
susceptible of occurring often enough for numerous observations
allow to establish a probability law1Since in insurance, it is always
with the premiums that the claims are settled, a certain number is obviously required
losses to determine by correspondence, the importance of premiums.

5- Pricing in insurance: steps for calculating the premium

Insurance premiums are calculated based on risk, that is to say according to

the probability that a person files a claim. The higher the risk is
The higher the risk, the higher the premium. The lower the risk, the lower the premium.

Indeed, to assess the amount of claims, it prices the contracts at the level of
the pure premium, but considering the losses incurred (all the costs related to
the insurance operation), especially in case of insufficient equity, the insurer
will immediately lead to bankruptcy.

Thus, to protect itself, it therefore adds to its premium all the expenses incurred.
to have the whole supported by the insured. To do this, the final amount paid
The insured's obligation to the insurer will be determined according to the following steps:

5-1- The pure premium

The pure premium is the minimum amount an insurer can request to not
not, statistically, to inevitably go bankrupt2.

The principles of calculating an insurance premium are the set of methods that
allow an insurance company to calculate the premium that must be paid by
an insured person to be guaranteed a risk; The calculation of the premium is based on:

1
http://www.lafinancepourtous.com/Decryptages/Dossiers/Assurance/Understanding-the-mechanism-of-insurance.
2
Invalid URL format provided. Please provide text for translation.
32
Chapter I: General information about insurance

On technical parameters;
On commercial parameters;
Including taxes.

This calculation is generally performed by actuaries.

The pure premium of a risk is the premium that allows the insurer to settle the
disasters affecting the mutual insurance of policyholders. It is also referred to as risk premium.
or even balance premium (or even technical premium).
Mathematically, the pure premium is the product of the frequency of the risk by the cost.
means of the disaster.1

Prime pure = Frequency x Average cost

The frequency is the number of times the risk occurs, that is to say the
probability of occurrence of the risk.
The average cost is the amount of the claim over a given period.

5-2 The net premium

Also called commercial premium, the net premium is the premium shown on
the rates of insurance companies. It is the sum of the pure premium and the
downloads.

Net Prime = Pure Prime + Charges

The shipments cover all commissions and all insurance costs. It does so
there are two types: acquisition loads that make up the commissions of
intermediaries in particular, and management charges: operating expenses of
the insurance company, the collection of premiums, the investment of assets, and
remuneration of contributors (general agents and brokers).

1
F CUILBAULT, ELIASHBERG C, LATRASSE M, op.cit, p. 55.
33
Chapter I: General information about insurance

In addition to these two types of loading, the security loading that allows for
the insurer's ability to withstand the natural volatility of claims can be included in the calculation
from the premium. As a result, all costs are included in the total premium, which is
communicated to the client.

5-3 The total premium

It is the amount actually paid by the subscriber. It is equal to

the addition of the net premium, taxes, and additional fees.

Total premium (premium including tax) = Net premium + Taxes + Additional fees

Ancillary fees are police fees or establishment fees, they are

flat-rate and determined based on the importance of the net bonus1The taxes are
indirect taxes collected by the State, calculated on the net premium and expenses
accessories also vary according to the nature of the insured risk.

1
F CUILBAULT, ELIASHBERG C, LATRASSE M, cited work p. 56.
34
Chapter I: General information about insurance

Diagram No. 3: The different insurance premiums

Prime pure (Frequency x Average cost)

+
Acquisition and management loading

Prime Nette

Accessory Fees

Taxes

Prime total (total prime)

Developed by non care.

35
Chapter I: General Information about Insurance

Conclusion
We dedicated this chapter to the study of the general and theoretical framework of
insurance and the fundamental laws of insurance. This study allows us to make the
synthesis following:

Insurance is an essential economic activity for proper functioning.

and the development of the country's economic environment. This sector also allows
to individuals to protect their assets, this is what is impossible to obtain at
the individual scale.

The insurance sector has a capacity to mobilize savings quite

consequent thanks to the inversion of its production cycle and to the knowledge of
mechanism of insurance.

The insurance product is sold by insurance companies in the form of

of a contract, generally made between the insurer and the insured. It is most often
disseminated through intermediaries. This is a complex product, which is based on the
promise made by the insurer to fulfill the benefits provided by the policy in case of
realization of a determined risk. However, such a guarantee is accompanied by
Conditions and restrictions that the insured should be well aware of.

36