1

MODULE 2: PRINCIPLES
AND PRACTICES OF
INSURANCE

Module 2: Principles and

Practices of Insurance

PRINCIPLES & PRACTICES OF

INSURANCE: CONTRACT OF
INSURANCE REGULATORY BODYIRDA:-FUNCTIONS, POWERS, AND
ROLE. DIFFERENT CLASSIFICATIONS
OF INSURANCE.

CONTRACT OF
INSURANCE

Parties and participators

Insurer: insurance company

Counterpart: policyholder
Other participators: the insured, beneficiary, insurance
agent and insurance broker

Life insurance:

(1) Insurance contract whose payment of insurance indemnity is made

conditional upon the death of the insured is subject to the consent of
the insured.
(2) Policyholder cannot purchase life insurance whose indemnity
payment is made conditional upon the death of the insured without
civil competence, and the insurer may not underwrite such
insurance. Parents may do so for their children not coming of age,
but lump sum settlement upon death of the insured shall not exceed
the limit set by competent government departments.

Insurance agent and broker: associated parties of insurance contract

Insurance agent and broker

Service object

Scope

Scope of business

Principal

Agent

Insurer

Unit & individual

Narrow

Insurer

Broker

Policyholder

Unit only

Broader

Policyholder

Subject matters
Life insurance contracts: lifespan and human body
Property insurance: property and relevant benefits
Marine insurance:
(1) vessel
(2) cargo
(3) income from operation of vessel
(4) expected profit on goods
(5) mariners wages and other remuneration
(6) liability to third party
(7) other property which may sustain loss from marine peril and
liabilities and expenses

Formation and
form
Formation

Proposal by insurance agent: invitation to do business, not offer

Offer: prospective policyholder signs application form
Offeror: the insured; offeree: insurer
Standard form: courts and arbitration tribunals make
interpretations advantageous to the policyholder and the
beneficiary, if any disputes about terms of insurance contract

4 documents relevant to insurance contract:

(1) Insurance application
(2) Insurance policy: formal contract
(3) Preliminary insurance agreement: usually used by insurance agent
in negotiating with the client
(4) Insurance proof: simplified insurance policy issued by insurer to
show that the agreement is formed. It is used to insure the
transportation of goods.

Form
11 minimal terms:
(1) name and domicile of the insurer
(2) name and domicile of the insured and policyholder, and
name and domicile of the beneficiary in life insurance
(3) subject matter
(4) insurance coverage and their exemptions
(5) insurance period and commencement of insurance
liability
(6) insurable value
(7) insured value
(8) premium and its method of payment
(9) insurance indemnity and its payment
(10) liabilities for breach of contract and dispute settlement
(11) time of contract execution

Marine insurance contracts principal terms

and conditions:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)

name of the insurer

name of the insured
subject matter
insurable value
insured value
perils insured against and perils exempted
period
insurance premium

Modification and
assignment
Modification

By separate agreement
Endorsement or placement of rider on the original policy
Life insurance:
the insured or policyholder may change beneficiary and notify
the insurer in writing
Property insurance:
degree of risk increases, or remarkably reduces or insurable
value decreases, the party concerned may request the other to
change rate of premium

Assignme
Only effective upon consent of the insurer
nt
Illustration:
If A sells his house to B, there is an un-expired insurance on the house. It is not
possible simply to impose the new owner of the house on the insurer, since the
new owner may have habits affecting the house that alter the risk of insuring
it. B must re-negotiate with the insurer, if consented by the insurer, the
contract is assigned upon consent. If not, B has to enter into new insurance
contract possibly at different premium rate.
Contracts for marine insurance of cargo: it may be assigned by the insured by
endorsement or otherwise, and the rights and obligations are assigned
accordingly. If insurance premium remain unpaid up to the time of
assignment, the insured and the assignee are jointly liable for such payment.
Insurers consent required, if insurance contract is assigned as a consequence
of transfer of ownership of vessel insured. It should be terminated upon the
transfer of its ownership without such consent.

Illustration: Policy is not assigned along

with the sale of the truck
On 1 August 1995 X Transport Company insured its Jiefang truck
for a term of 1 year with the insurer. The insured vale is RMB
20000. In February 1996 X Company sold the Jiefang truck to
Mr. Ma and handled registration with the car registry organs. In
order to save time they did not notify the insurer nor change the
policyholder. In the mid-March 1996 Mr. Mas truck collided with
others car, which was badly damaged. Mr. Ma was ordered to
compensate the other car owner RMB 15000 as damages. After
paying the compensation he claimed insurance indemnity from
the insurer, which rejected his claim. He sued the insurer in the
court, which held that the truck sale was not approved by the
insurer and the insurance liability terminated upon the truck sale.
In other words the policy was not assigned to Mr. Ma
automatically, thus the insurer would not be liable for insurance
indemnity.

Performa
Policyholders obligations
nce
Payment of premium

Life insurance: by lump sum payment or installments

Marine insurance: insurer may refuse to issue the policy
or other insurance certificate before payment of premium
Illustration: Failure of premium payment does not entail the discharge
On 2 March 1996 M Shipping Company insured its Pigeon vessel for total loss insurance for a
term of 1 year. The insured value is Rs. 50,00,000, and the premium is Rs. 50,000 to be paid in
two installments on 1 May and 1 August respectively. After executing the insurance contract M
Company paid the first installment in time, but failed to pay the second one. It did not pay in
defiance of the insurers repeated push. On 13 December 1996 the Pigeon vessel hit on the reef
and sank into the sea. The next day M Company paid the premium in arrears and
simultaneously claimed insurance indemnity for total loss, which was rejected by the insurer on
the ground that the insurer decided to discharge the contract due to M Companys failure of
premium payment. M Company sued the insurer in the court, which held that though M
Company should be liable for violation of contract, such violation could not constitute the cause
for the insurers unilateral discharge of the contract. The court thus ordered the insurer to pay
the insurance indemnity Rs. 50,00,000, and M Company to pay the remaining premium Rs.
25,000 plus bank interest.

Disclosure and prompt

notice
Truly disclosure of material conditions that policyholder knew or

ought to have known in its ordinary business practice, and such

conditions may have a bearing on the insurer in determining the
premium or whether to accept such insurance.
Else, insurer may discharge contract, or request amendment to
terms and condition or demand an increase of insurance premium

After occurrence of insurance contingence:

policyholder, insured and beneficiary promptly notify the insurer of
insurance contingence

Non-life insurance: the insured and beneficiary exercise rights to

claim insurance indemnity within 2 years from it has knowledge of
occurrence of insurance contingence
Life insurance: the insured and beneficiary shall do so within 5
years from it has knowledge of occurrence of insurance
contingence

Mitigation of
damages

The insured: take measures to mitigate losses

Insurer: assume reasonable and necessary cost for adopting such

measures

Abandonment

Property insurance:
if insurer has paid indemnity in full
insured value is equivalent to the insurable value
remaining value of the damaged subject matter belong to insurer
if insured value is lower than insurable value, insurer is entitled to
subject matter proportionate to ratio of the insured value to
insurable value
Marine insurance:
subject matter has become a constructive total loss
the insured requests indemnification from insurer for value in full
subject matter shall be abandoned to the insurer

Assignment of right of
recourse
Property insurance:

insurance contingence by fault of third party, insurer

is entitled to subrogation against such third party
if the insured has obtained damages from wrongdoer,
insurer may deduct that sum in calculation of
insurance indemnity
if the insured waive rights to claim damages against
such third party before insurer pays insurance
indemnity, insurer exempt from insurance indemnity
if insured do so after receiving insurance
compensation, waiver is null and void

Illustration: Policyholder may claim the remaining

loss from
wrongdoer

On 2 December 1995 A Company shipped 40 sets of freezers through

B Transport Company with a total value of RMB 132000. A
Company insured the goods with an insured value of RMB 50000. In
the course of transportation the truck of B Company crashed into a
deep valley destroying all the goods. The insurer paid A Company the
indemnity for total loss with RMB 50000, and obtained a
compensation of RMB 50000 from B Company by exercising the
subrogation right. However A Company claimed all the loss from B
Company, which rejected such claim on the ground that it had
compensated the insurer RMB 50000. Thus A company requested B
Company to pay the total loss of RMB 132000 in the court, which
held that B Company should be liable for compensation, but the
indemnity RMB 50000 obtained from the insurer should be deducted.
The court ordered B Company to compensate A Companys
remaining loss, i.e. RMB 82000.

Insurers
obligations
Payment of insurance indemnity after occurrence of insurance
contingence

If it belongs to insurance coverage, insurer shall pay it to the

insured or beneficiary within 10 days from they have reached
agreement on such matter
If it contains fixed amount of insurance indemnity, insurer shall
pay the same amount so specified to the insured or the
beneficiary
Failure to provide insurance indemnity, liable for resulting losses
of insured or beneficiary
If the insured or beneficiary's request does not fall within
insurance coverage, insurer shall notify the insured or beneficiary
in writing of rejection of payment
If insurer cannot decide on the amount of indemnity within 60
days from receiving the insured or beneficiary's request and
supporting certification and materials, it shall pre-pay minimum
amount determinable by such certification and materials

Discharge of
contract
Policyholder: may discharge the insurance contract after its conclusion.
Insurer: cannot discharge the contract after conclusion of such contract
unless otherwise provided by the law or the contract.
Contracts for insurance of cargo and transportation vehicles:
neither party may do so, if tahe insurance liability has commenced.

5 statutory causes for discharge:

(1) policyholder willfully conceals facts and fails to disclose affecting insurers
decision on whether to accept the insurance and its rate of premium
(2) the insured or beneficiaries falsify occurrence of insurance contingence,
which have not occurred and claim for indemnity
(3) policyholder or insured fails to perform the duty of protecting safety of
subject matters
(4) during term of insurance contract risk of subject matters substantially
increase but insured fails to promptly notify insurer
(5) if the age of the insured stated by the policyholder is not true and true age
does not conform to the age limit agreed in the contract except for the
situation where the time is more than two years from conclusion of contract

IRDA

20

Insurance Regulatory Body

IRDA
The IRDA (Insurance Regulatory and Development Authority) is the
national regulatory body for Insurance industry (both Life and Non-Life
Insurance Companies) under the auspices of Government of India,
situated at Hyderabad. IRDA was established by an act enacted in Indian
Parliament known as IRDA Act 1999 and was amended in 2002 to
incorporate some emerging requirements as well as to overcome some
deficiencies in the entire process. The mission of IRDA as stated in the act
is as follows:a) To protect the interests of the policyholders
b) To promote, regulate and ensure orderly growth of the
insurance industry and for matters connected therewith or
incidental thereto
c) Conduction of insurance businesses across India in an ethical
manner.

21

Duties, Powers and

Functions
of
IRDA
The duties, powers and functions of
IRDA have been specified under
Section 14 of IRDA Act, 1999.The IRDA
Authority has the duty to promote,
regulate and ensure orderly growth of the
insurance and re-insurance businesses
across India, subject to the provisions of
this Act and any other additional law that
is being enforced.

22

Duties, Powers and Functions of

IRDA (Contd.)

Without prejudice to the generality of the provisions

contained in sub-section (1) of IRDA Act, the powers
and functions of the Authority shall include:
Issuing a certificate of registration to the applicant as
well as modify, renew, withdraw, suspend or cancel
any such registration that is deemed unfit.
Protecting the interests of the policyholders in
matters concerning assigning of insurance policy,
nomination by policyholders, settlement of insurance
claim, insurable interest, surrender value of policy and
other terms and conditions based on contracts of
insurance.
Specifying requisite qualifications, practical training

23

Duties, Powers and Functions

of IRDA (Contd.)

Specifying the code of conduct for surveyors and loss assessors.

Promotion of efficiency in the conduct of insurance business.
Promoting and regulating professional organizations connected
with the insurance and re-insurance business across India.
Levying fees, commission and other charges for carrying out the
purposes of this Act.
Calling for data or information from, undertaking inspection of,
conducting enquiries and investigations, conducting audit of the
insurers, intermediaries, insurance intermediaries and other
organizations connected with the insurance business.
Under section 64U of the Insurance Act, 1938 (4 of 1938),
controlling and regulation of the rates, advantages, terms and

24

Duties, Powers and Functions

of
IRDA
(Contd.)
conditions
etc. that
may be offered by insurers (or Insurance
Companies) in respect of general insurance business not so
controlled and regulated by the Tariff Advisory Committee.
Specifying the manner and form in which books of account shall be
maintained and statement of accounts, financial statements etc
shall be rendered by insurers and other insurance intermediaries.
Keeping a tab, exercising control and regulating investment of
funds by insurance companies.
Regulating the maintenance of margin of solvency by the Insurers.
Adjudication of disputes between insurers and intermediaries or
insurance intermediaries, hospitals, healthcare organizations or
with customers.

25

Duties, Powers and Functions

of
IRDA
(Contd.)
To effectively supervise the functioning of the Tariff
Advisory Committee.
Specifying the percentage of premium income of the
insurer to finance schemes for promoting and regulating
professional organizations referred to in clause (f);
Specifying the percentage of life insurance business and
general (or non-life) insurance business to be
undertaken by the insurance company in the rural or
social sector.
Exercising any such other powers that may be
prescribed with passage of time.

Module 2: Principles and

Practices of Insurance
LIFE INSURANCE: NATURE AND
SIGNIFICANCE OF LIFE INSURANCE,
ESSENTIALS OF LIFE INSURANCE
CONTRACTS, TYPES OF LIFE
INSURANCE POLICIES & PRODUCTS.

26

NATURE AND
SIGNIFICANCE OF LIFE
INSURANCE

Life Insurance defined

28

Life insurance provides a death

benefit in return for small periodic
payments called premiums

29

NATURE AND SIGNIFICANCE OF

LIFE INSURANCE

Life insurance provides protection against the

risks of premature death and disability.
Often more than one person benefits from the
generation of income, particularly within
families.
Consideration is needed of the consequences of
an income prematurely ceasing.

Who would be affected?

To what financial extent will they be affected?
What insurance cover could be used to cushion
those financial consequences?

Life Insurance Basics

Life insurance is an agreement between you

(the policy owner) and an insurer.
Under the terms of a life insurance policy, the
insurer promises to pay a certain sum to a person
you choose (your beneficiary) upon your death, in
exchange for your premium payments.
Proper life insurance coverage should provide you
with peace of mind, since you know that those
you care about will be financially protected after
you die.

The many uses of life insurance

One of the most common reasons for buying life

insurance is to replace the loss of income that
would occur in the event of your death.
When you die and your paychecks stop, your
family may be left with limited resources.
Proceeds from a life insurance policy make cash
available
to
support
your
family
almost
immediately upon your death.

Causes of Death
32

Death and disability are not predictable

events. From time to time stories surface
of a person dropping dead who was very
fit, who exercised daily, and who was
last person one would expect to die
prematurely.
Prediction of premature death is not
possible.

Causes of Death
33

Principal causes of death

Cancer
Heart attack
Accidents are a much less common cause
of death than illness

In the event of your death, a life insurance policy could help:

In the event of your death, a life insurance policy could help:

Distribute money to your beneficiaries.

Pay off your mortgage so that the house is
free and clear of debt.
Provide for your childrens college education.
Pay for the final expenses of a funeral or
estate settlement costs.
Provide an emergency fund to handle an
unexpected financial crisis.
Provide for settlement of your personal debts.

What is the Purpose of Life

Insurance?

To protect people who depend on you from

financial loss related to your death

78% of all American households have it

To make charitable bequests upon your

death
To save money for retirement or childrens
education
To leave as part of your estate
To pay off a mortgage or other debts at
the time of death

Uses for Life Insurance

Life insurance can pay any

debts that you may leave
behind.
Life insurance can pay off
mortgages, car loans, and
credit card debts, leaving
other
remaining
assets
intact for your family.
Life insurance proceeds can
also be used to pay for final
expenses and estate taxes.
Finally, life insurance can
create an estate for your
heirs.

How Much Life Insurance Do You

Need

Your life insurance needs will depend on a

number of factors, including:

whether you're married

the size of your family
the nature of your financial obligations
your career stage

your goals.

For example, when you're young, you may not

have a great need for life insurance.
However, as you take on more responsibilities
and your family grows, your need for life
insurance increases.

The Principle of Life

Insurance

Mortality tables provide

odds on your dying,
based on your age and
sex
Your premium is based
on the projections for the
payouts for persons who
die

ESSENTIALS OF LIFE
INSURANCE
CONTRACTS

40

Essential aspects life insurance

contract

Offer and acceptance

Legal purpose
Competent parties
Consideration

Life Insurance Contract

A life insurance contract is made

up:
of

legal provisions
your application (which identifies
who you are and your medical
declarations)
and a policy specifications page that
describes
the
policy
you
have
selected, including any options and
riders that you have purchased in
return for an additional premium.

Life Insurance Contract

Provisions
describe
the
conditions,
rights, and obligations of the parties
to
the
contract
(e.g.,
the
grace
period
for
payment
of
premiums,
suicide and incontestability clauses).

The policy specifications page describes the

amount to be paid upon your death and the
amount of premiums required to keep the
policy in effect.
Also stated are any riders and options added
to the standard policy.

Life Insurance Contract

Provisions

Naming your beneficiary (one or more)

Length of grace period for late payments
Reinstatement of a lapsed policy if it has
not been turned in for cash
Suicide clause during first two years
Automatic premium loans
uses the accumulated cash value
to pay the premium if you do not

Life Insurance Contract

Provisions

(continued)

Misstatement of age provision

Policy loan provision
can borrow against your cash value
Rider to add or alter benefits
cost of living protection
Waiver of premium disability benefit
Accidental death benefit
pays twice the policy face amount
Guaranteed insurability option
Accelerated benefits

TYPES OF LIFE
INSURANCE POLICIES
& PRODUCTS.

Types of Life Insurance

Policies

Term life insurance

protection for a specified period of time

if you dont pay premiums, coverage
stops
renewability option
at the end of the term you can renew
the policy without having a physical

Types of Life Insurance

Policies

Term life insurance (continued)

conversion option
can change your policy from term to a
whole life policy without a physical
decreasing term insurance
your premium stays the same, but the
amount of coverage decreases as you
age
12-8

Term Life Insurance

Term life insurance is , you get "pure" life insurance coverage.

Term insurance provides a death benefit for only a specific period of
time.
If you die during the coverage period, your beneficiary (the person
you named to collect the insurance proceeds) receives the death
benefit (the face amount of the policy).
If you live past the term period, your coverage ends, and you get
nothing back.
Term policies are available for periods of 1 to 30 years or more and
may, in some cases, be renewed until you reach age 95.
Premium payments may be increasing, as with annually renewable
1-year (period) term, or level (equal) for up to 30-year term periods.

Term Insurance Costs

You
may
be
term
without
higher rate.

able
to
renew
the
policy
regard
to
your
health,

for
but

a
new
at
a

Your
premium
goes
toward
administrative
expenses,
company
profit,
and
a
reserve
account
that
pays
claims
to
those
who
die
during the term period.

As you get older, the chance that you will die increases. To cover this
increasing risk, premiums will rise at regular intervals.

Premiums that were quite inexpensive at the time you initially

purchased your term policy become much more expensive as you get
older.

Most term insurance also has a conversion feature that allows you to
switch your coverage to some type of permanent insurance without
answering health questions.

Types of Life Insurance(continued)

Policies

Whole life insurance

you pay a premium as long as you live

amount of premium depends on your age
when you start the policy
provides death benefits and accumulates a
cash value
you can borrow against the cash value or
draw it out at retirement
look carefully at the rate of return your
money earns

Whole Life Insurance

Whole life insurance is a type of cash value

insurance.
Unlike term insurance, which provides coverage
for a particular period of time, permanent
insurance provides coverage for your entire life.
You generally make level (equal) premium payments
for life.
The death benefit & cash value are predetermined
and guaranteed.
The policy owner's only action after purchase of the
policy
is
to
pay
the
fixed premium.

Whole Life Policy Options

Nonforfeiture clause
if you stop paying premiums you can
use the cash value in a variety of ways.
Limited payment policy
pay higher premiums during your
earning years only, keeping lifetime
coverage
Variable life policy
minimum death benefit guaranteed, but
can be more depending on how your
premium dollars are invested

Whole Life Policy Options

(continued)

Adjustable
you can change your premium
amount and thus your coverage
Universal life
lets you pay premiums in almost
any amount
combines term insurance and
investment elements

Permanent Life Insurance

Permanent
insurance
policies
provide
protection for your entire life, provided
you pay the premium to keep the policy
in force.
Premium payments are greater than necessary to
provide a life insurance benefit in the beginning
of the policy, so that a cash reserve can be
accumulated to make up the shortfall in
premiums necessary to provide the insurance in
the later years.
Should you discontinue the policy, this reserve,
known as the cash value, is returned to you.

Other Types of Life Insurance

Policies

Group life insurance

often through an employer
no physical required
usually term insurance
Credit life insurance
debt is paid off if you die
mortgage, car, furniture
also protects lenders
expensive protection

Life Insurance Products

56

Pure Term

Term Plans

Pure Endowment

Endowment
Whole Life
Money back

Pure Term
57

Policy issued for 10 years

death

Payout
to family

Year 1
2
3
4
5
6
7
8
9
Insured person survives till end of policy term =No payout

This is a plan to cover the risk of Early Death

10

Pure Endowment
58

No Payout
to family

Year 1

7
8
death

Pay out only if Insured person survives till end of policy term

This is a plan to cover the risk of Living too Long

10

Traditional Products
59

Term Plan
death

Policy issued for 10 years

Year 1

Year 1

Payout
to family

Insured person survives till end of policy term NO PAYOUT

10

60

Endowment is a combination of pure

term and pure endowment for the
entire policy duration
death

Policy issued for 10 years

Year 1

Payout
To
family

Endowment would cover the risk of Early Death also the risk of Living too Long

Year 1

10

Insured person survives till end of policy term =Payout to policy holder

61

Money Back is combination of pure term for the

policy duration and pure endowment for short
periods within the policy term

Policy issued for 20 years

with money back at 5th, 10th,
15th & 20th yr.
Yr 0
2
4
Pure Term Plan from year 1 to year 20
16
18
20
PLUS

death
6

20

Pure Endowment Plan

from year
11 to year 15

10

14

Pure Endowment
Plan from year
16 to year 20

payout

12

payout

Pure Endowment
Plan from year
6 to year 10

Payout at regular intervals in case

insured survives

payout

Yr 0
15

payout

Pure Endowment Plan from

year 1 to year 5

Payout to family in case of death and also

Unit Linked Insurance Plan

62

ULIP is life insurance solution that provides

the benefits of protection and flexibility
in investment.
The investment is denoted as units and is
represented by the value that it has
attained called as Net Asset Value (NAV).

ULIP- A transparent product

63

In ULIP the premium components are clearly

expressed under following categories
Expenses- The administration and
management charges deducted from the
premium
Investment- The amount available to
invest in a fund of clients choice
Mortality- The mortality charges deducted
from the premium

Types of life insurance policies

The two basic types of life insurance are term life and
permanent (cash value) life.

Term policies provide life insurance protection for a specific period of time.

If you die during the coverage period, your beneficiary receives the policy death benefit.

If you live to the end of the term, the policy simply terminates, unless you renew for a new
period.

Summary of Policy Types

Slide 65

66

Module 2: Principles and

Practices of Insurance

67

GENERAL INSURANCE: NATURE AND

SIGNIFICANCE OF GENERAL
INSURANCE, ESSENTIALS OF GENERAL
INSURANCE CONTRACTS, CLAIMS
MANAGEMENT, RISK ASSESSMENT &
UNDERWRITING, PREMIUM SETTING,
COMPARISON OF LIFE INSURANCE
WITH OTHER INSURANCES.

NATURE AND
SIGNIFICANCE OF
GENERAL INSURANCE

69

Concept of General
Insurance
General insurance includes insurance
policies that protect your property and
your financialrisk, including motor
vehicle, home building and contents and
travel insurance. It excludes life insurance
and health insurance products.

Defining General
Insurance

General insurance or non-life insurance policies,

including automobile and homeowners policies,
provide payments depending on the loss from a
particular financial event.

General insurance typically comprises any

insurance that is not determined to be life
insurance.

It is called property and casualty insurance in the

U.S. and Non-Life Insurance in Continental
Europe.

Classification

Commercial lines: products are usually designed for

relatively small legal entities. These would include workers'
comp (employers liability), public liability, product liability,
commercial fleet and other general insurance products sold
in a relatively standard fashion to many organizations. There
are many companies that supply comprehensive commercial
insurance packages for a wide range of different industries,
including shops, restaurants and hotels.

Personal lines: products are designed to be sold in large

quantities. This would include autos (private car),
homeowners (household), pet insurance, creditor insurance
and others.

Nature and Significance of

General Insurance

72

Life is full of risks. Thats what makes it so interesting

and exciting. But some unexpected events can really
set you back.
Generalinsurancehelps us protect ourselves and
the things we value, such as our homes, our cars and
our valuables, from the financial impact of risks, big
and small from fire, flood, storm and earthquake, to
theft, car accidents, travel mishaps and even from
the costs of legal action against us. And we can
choose the types of risks we wish to coverby choosing
the right kind ofpolicywith the features we need.

73

In general, insurance works by spreading the cost of

unexpected risks among a large number of people in
the same region who share similar risks.
When you take out an insurance policy, you pay a
monthly or annualpremium. That money joins the
premiums of many thousands of other policyholders
and goes into a bigpool of funds.
With any luck, you will never need to draw on that
pool. But if you happen to be one of the unlucky ones
affected by an unexpected calamity, perhaps through
severe weather or accident, that pool of funds can be
used to

74

help you up to the limit you have selected

in your policy.
If things go wrong, yourinsurermay
either repair or replace the items that
have been lost or damaged, depending on
the terms of your policy. You may also
have the choice of receiving a
cash settlementfor the amount of
money agreed in your policy.