Principles of Insurance

• Law of large numbers
• Principle of indemnity
• Uberrimae Fides (Utmost good faith)
• Insurable Interest

Law Of Large Numbers

The law of large numbers basically relies on the principle that the larger the pool, the more predictable the amount of losses will be in a given period. Since not all members of the pool are the same age or in the same health condition, we can assume not all of them will be making a claim at the same time.

Principle of Indemnity:

Insurance is meant to compensate losses. By implication the mechanism of Insurance cannot be used to make profit. This broadly is Principle of indemnity. The amount paid as a claim cannot exceed the amount of loss incurred. Insurance should place the insured in the same financial position after a loss as he enjoyed before it, not better

Uberrimae Fides (latin word for utmost good faith) or Principle of Utmost Good Faith

Each party must disclose every material fact known to him. Disclose all the facts accurately and fully that can affect the risk on Life Assured. Whether requested or not

Material Fact - Any fact which influences the judgment of a prudent insurer in fixing the premium or in determining if he will take the risk

Insurable Interest

Exists when a person stands to lose if the event “insured against” occurs and it must exist at the time of entering into the contract

Following relationship hold Insurable Interest:

• A person has unlimited insurable interest on his own life
• Spouses have insurable interest on each other.
• Father / Mother have insurable interest on their children
• Creditor on the life of Debtor to the extent of debt
• Partners in partnership firm to the extent of their share holding
• Employer on the Employee (Keyman, Employer-Employee)