Risks faced by people fall into these categories
- Personal Risk
- Property Risk
- Liability Risk
Common ways to deal with risk
- Avoidance of Risk
- Controlling of Risk
- Retention of Risk
- Transfer of Risk
Risk control
Taking measures to reduce the frequency and severity of losses. (alarm systems)
Avoidance of Risk
All chance of financial loss eliminated. (rent rather than own building) generally one exposure is replaced with another.
Risk Retention
Self insuring - suitable for large corporation - more cost effective than other options available to them
Transfer of Risk
The transfer of risk through insurance is the most popular and practical means of dealing with risk.
Major function of Insurance
Spread the losses of the few among the many
Definition of Insurance
The undertaking by one person to indemnify another person against loss or liability for loss n respect of a certain risk or peril to which the object of the insurance may be exposed.. or to pay a sum of money or other thing of value upon the happening of a certain event.
Two types of risk
- Speculative Risk
- Pure risk
Speculative Risk
- Possibility of either financial loss or gain. (investments, gambling)
- Insurers will not provide insurance for speculative risk, as the interests of society would not be served if people were able to profit from these losses
Pure Risk
- Possibility of financial loss which does not offer a chance of financial gain.
- No opportunity for people to profit from a loss
- Only pure risk is insurable.
Five elements of a contract
- Agreement
- Consideration
- Legality of Object
- Legal Capacity of Parties to Contract
- Genuine Intention
Define Contract
An agreement between two or more persons which creates an obligation to do or not to do a particular thing.
For an agreement to exist, there must be:
- An offer made
- An unequivocal and unconditional acceptance of the terms of that offer.
Consideration
An exchange of something of value between the parties.
- A return promise
- An act performed
- An agreement not to act
Legal Capacity to Contract
Law enforces only those contracts of persons it recognizes as being competent. Incompetents are protected in law from exploitation.
- Minors
- Mental Incompetents
- Persons under the influence
- Trade Names
To prove Genuine Intention, it is necessary to show that the agreement between the parties was not affected by:
- Fraud
- Duress
- Concealment
- Mistake
Elements unique to insurance contracts
- Insurable interest
- Utmost good faith
- Indemnity
Define void contract
one which is unable in law to support the purpose for which it was intended
Define voidable contract
one which is void as to the wrongdoer but not void as to the wronged party, unless he elects to so treat it.
Depreciation is influenced by the following factors:
- Condition of the object
- Resale value
- Normal life expectancy
Define insurable interest
Someone has insurable interest when they can show that they would suffer financially from a loss.
Define utmost good faith
-Complete honesty of all parties critical to the contract
Indemnity
-Ensures that people receive the actual amount of their loss, no more and no less.
