Legal considerations

When a company insures an individual entity, there are basic legal requirements. Several commonly cited legal principles of insurance include:

1. Indemnity – the insurance company indemnifies, or compensates, the insured in the case of certain losses only up to the insured's interest.

2. Insurable interest – the insured typically must directly suffer from the loss. Insurable interest must exist whether property insurance or insurance on a person is involved. The concept requires that the insured have a "stake" in the loss or damage to the life or property insured. What that "stake" is will be determined by the kind of insurance involved and the nature of the property ownership or relationship between the persons.

3. Utmost good faith – the insured and the insurer are bound by a good faith bond of honesty and fairness. Material facts must be disclosed.

4. Contribution – insurers which have similar obligations to the insured contribute in the indemnification, according to some method.

5. Subrogation – the insurance company acquires legal rights to pursue recoveries on behalf of the insured; for example, the insurer may sue those liable for insured's loss.

6. Causa proxima, or proximate cause – the cause of loss (the peril) must be covered under the insuring agreement of the policy, and the dominant cause must not be excluded.

III. Understanding main points. Answer the following questions:

1. What are the liabilities of the insurer and the insured under the insurance transaction?

2. Enumerate the common characteristics of insurable risk. Expand on them.

3. What are the legal considerations of insurance? Please expand.

IV. Understanding details. Support or refute the following statements:

1. Insurance rate is a factor used to appraise and control risk.

2. The law of large numbers, applied to insurance, means that all exposurers have particular differences thus receiving different premium rates.

3. Events containing speculative elements may be considered as “accidental loss”, but they are not subject to insurance.

4. The size of the premium is to be reasonable, otherwise the insurance won’t be bought.

5. Individual losses are normally not serious enough to erode the insurer’s ability to pay.

6. There must exist insurable interest in most insurable events.

V. Summarizing.

Give an outline of the major points of the text.

Write the summary of the text (200-250 words) and present it in class.

Section b

Language focus

1. a) Complete the texts using the words in the box in the correct form. Some words are redundant. After filling in the blanks continue the discussion of the major topic of this unit: “Insurance market”.

Indemnification

To "indemnify" means to make whole again, or to be reinstated to the position that one was in, to the extent possible, prior to the happening of a ___(1)___ or peril. Accordingly, life insurance is generally not considered to be indemnity insurance, but rather "contingent" insurance (i.e., a claim arises on the occurrence of a specified event). There are generally two types of insurance contracts that seek ___(2)___ an insured:

1. an "indemnity" policy, and

2. a "pay on behalf" or "on behalf of" policy.

The difference is significant on paper, but rarely ___(3)___ in practice.

An "indemnity" policy will never ___(4)___ until the insured has paid out of pocket to some third party; for example, a visitor to your home slips on a floor that you left wet and ___(5)___ you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitor's fall and then would be "indemnified" by the insurance carrier for the ___(6)___ (the $10,000).

Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the ___(7)___ (the homeowner in the above example) would not be out-of-pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language.

An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk ___(8)___ by an 'insurer', the insuring party, by means of a contract, called an insurance policy. Generally, an insurance contract includes, at a minimum, the following elements: identification of participating parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular ___(9)___ covered, the amount of ___(10)___ (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy.

b

margin, a contract, to entitle, a policy, the premium, a claim, anticipated losses, global insurance, to reserve, to specify, to absorb, to expose

)

When insured parties experience a loss for a specified peril, the coverage ___(1)___ the policyholder to make ___(2)___ against the insurer for the covered amount of loss as ___(3)___ by the policy. The fee paid by the insured to the insurer for assuming the risk is called ___(4)___. Insurance premiums from many insureds are used to fund accounts ___(5)___ for later payment of claims — in theory for a relatively few claimants — and for overhead costs. So long as an insurer maintains adequate funds set aside for ___(6)___ (called reserves), the remaining ___(7)___ is an insurer's profit.

Global insurance premiums grew by 3.4% in 2008 to reach $4.3 trillion. For the first time in the past three decades, premium income declined in inflation-adjusted terms, with non-life premiums falling by 0.8% and life premiums falling by 3.5%. The insurance industry ___(8)___ to the global economic downturn on the assets side by the decline in returns on investments and on the liabilities side by a rise in claims. So far the extent of losses on both sides has been limited although investment returns fell sharply following the bankruptcy of Lehman Brothers and bailout of AIG in September 2008. The financial crisis has shown that the insurance sector is sufficiently capitalised. The vast majority of insurance companies had enough capital ___(9)___ losses and only a small number turned to government for support.

Advanced economies account for the bulk of ___(10)___. With premium income of $1,753bn, Europe was the most important region in 2008, followed by North America $1,346bn and Asia $933bn. The top four countries generated more than a half of premiums. The US and Japan alone accounted for 40% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums. Their markets are however growing at a quicker pace.