Risk Management and Insurance

 

Policies in insurance

The term policy of insurance is derived from the Italian word 'disecuranza' which signifies a bill of security or indemnity. The policy is always considered as the security for the payment of the premium. It contains only the promise of the underwriters without anything in the nature of counter promise on the part of the insured. (FARLEX)

Generally, an insurance policy is assembled with a combination of various standard forms. It includes a declarations page, coverage form, and endorsements. Sometimes a cause of loss form is also required. In order to protect the property, we can contact an insurance carrier to acquire an insurance policy that can protect things from damages.

An insurance policy is a legally binding contract between an insurance company and the person who buys the policy, known as "policyholder", who is also the person insured. The insurance company agrees to pay for certain types of loss or damage as specified by the contract. The term insurance policy refers specifically to the written contract.

Types of policies of insurance

The different types of life insurance include the following policies.

Term Life Insurance

Term insurance provides protection for a specified period of time. This period can be for one year or provide coverage for a specific number of years such as 5, 10, 20 years. In some cases, the life insurance mortality table lasts up to the oldest age. Policies are sold with various premium guarantees. It refers longer the guarantee, the higher the initial premium. If a person dies during the term period, the company will pay the face amount of the policy to his beneficiary. If he lives beyond the term period he had selected, no benefit is payable. According to the rule, the term policies offer a death benefit with no saving element or cash value. This policy has some basic features, which are given as follows:

1. Temporary protection
   The temporary protection of this policy may be 1 year, 5 years, 10 years or 20 years. The protection expires at the end of the period unless the policy is renewed.
   
   
2. Convertible
   Most of the policy can be convertible which means the term policy can be exchanged. The policies may be exchanged for a cash- value policy without evidence of insurability.
   
   
3. Renewal
   The policy can be renewed for an additional period without evidence of insurability. Most of the term policies are renewal.
   
   
4. No cash surrender value
   The term policy provides protection after the death of the insured in a specified time period. It does not provide the amount after the period expired.

Whole Life Policy

A whole life policy is a type of permanent insurance. It is a combine life coverage with an investment fund. It provides for the payment of the fresh amount of the policy. A whole life insurance policy covers the life of the policyholder. The main feature of a whole life policy is that the validity of the policy will not be defined. The individual enjoys the life cover throughout his life. The policyholder pays the regular premium until his death and the corpus is paid out to the family. Generally, this policy is a policy purchased by the person to protect the family or dependence. The amount of premiums of this policy is lower as compared to other policies.
There are three types of whole life insurance which are as follows:

1. Ordinary whole life policy
   Ordinary whole life policy provides lifetime protection to a certain age and claim is certain. This policy is useful to provide lump-sum continuing income to beneficiaries.
   
   
2. Limited payment whole life insurance
   Whole life insurance provides lifetime protection with a single premium. This policy is a single premium. If the company provides lifetime protection but the amount of premium is paid for a certain period of time is known as limited payment whole life insurance.
   
   
3. Convertible whole life insurance
   The main purpose of convertible whole life policy is to provide maximum protection at minimum cost. It brings flexibility in life insurance.

Endowment Plans

An endowment policy is an insurance contract designed to pay a lump sum after a specific term or on death. Here, the maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness. The insurance protection provided by endowment policies is usually small so that the protection needs are sufficiently covered by the policy. This type of life insurance policy is often carried out by Nepalese insurance companies. Premium is generally payable from the date of the issue till the date of maturity. Endowment policies are basically of two types. They are with profit and without profit. The many variations of endowment plans are structured to meet the need of child education, whole life protection, and pension, among others.

1. Ordinary endowment policy
   This policy is purchased for a fixed period of time. The insured pays the amount of premium for the specified time period and the insurer provides compensation to the dependents.
   
   
2. Double endowment policy
   In this policy, the insurance company compensates the amount if the insured dies within the period.
   
   
3. Joint life endowment policy
   In this policy, the amount is paid to the survivor after the death of the person. If both of them are alive until the policy period, the amount is refunded. It is generally purchased by the married couple.
   
   
4. Pure endowment policy
   This policy will be refunded if the insured is alive until the expiry period. No one will compensate if the insured dies.
   
   
5. Deferred endowment policy
   In this policy, the amount of policy is paid after the expiry of the policy period.

Unit Linked Insurance Plans

A unit-linked insurance plan is a type of insurance vehicle in which net asset values are purchased by the policyholder. It helps in the contributions towards another investment vehicle. Unit-linked insurance plans allow for the coverage of an insurance policy. It helps to provide an option to invest in any number of qualified investments, such as stock, bonds or mutual funds. In certain areas, ULIPs differ from traditional endowment plans. As the name suggests, the performance of ULIP is linked to markets. Individuals can choose the allocation for investments in stock or debt markets. The value of the investment portfolio is captured by the net asset value. ( HDFC life)

Money Back Policy

In a money-back plan, the insured person gets a percentage of sum assured at regular intervals. The person will not get the lump sum amount at the end of the term. In this policy, the sum assured by the company will be paid in installments at periodic intervals. However, the full sum of assured is payable without any deduction in the event of death. The bonus additions to the policy will be reckoned and they are payable at the end of the selected term of years or at the Life Assured's death.

Meaning of Fire Insurance

Fire insurance is a specialized form of insurance. It is designed to cover the cost of replacement, reconstruction or repair beyond what is covered by the property insurance policy. Fire insurance is insurance that is used to cover damage to property caused by fire.

Fire insurance is the most important type of insurance which provides security against the risk of fire. In fire insurance, there is a contract between insured and insurer. The insured has to pay the premium at a fixed rate to the insurer and the insurer compensates the insured amount to the insured party if the property of the insured is lost due to the reason of fire. The insurer doesn’t compensate more than the insured amount even if the loss is estimated more than the insured amount. The concept of fire insurance was developed before the concept of life insurance.

Fire insurance is defined as ‘an agreement’ where one party in return for a consideration undertakes to indemnify the other party against financial loss. It may sustain by reason of certain subject-matter being damaged or destroyed by fire or other defined perils up to an agreed amount. (Agrawal)

Policies of Fire Insurance

A. On the Basis of Indemnity

On the basis of indemnity, fire insurance policies are classified as follows:

1. Valued Policy
   In this policy, the value of the subject-matter is agreed upon at the time of taking up the policy. These policies are generally issued for those goods or property whose value cannot be determined after their loss or damage. These goods include works of art, jewelry, paintings, etc. The policy is named as a valued policy when the agreed value of subject matter is mentioned in the policy. This value may not necessarily be the actual value of the property. In the event of loss of the fire, the insurer pays the admitted value of the property.
   
   
2. Specific Policy
   Under this policy, the risk is insured for a specific sum. In the case of loss of property, the insurer will pay the loss amount if it is less than the specified amount. This policy is used when insurance of property is made less than the actual amount. A specific policy is an example of underinsurance. The insurer inserts an average clause in such a policy so that in the event of loss, he only bears the rateable proportion of such loss.
   
   
3. Average Policy
   A policy that incorporates the average clause and both insured and insurer bear the amount of loss on the proportionate basis are known as the average policy. The compensation payable is proportionately reduced if the value of the policy is less than the value of the property. Suppose, a person takes up a fire insurance policy of Rs. 30,000 and the value of the property are Rs. 40,000. If there is a loss of property worth Rs. 20,000, the underwriter pays compensation of Rs. 10,000 that is 50%. It discourages the insured to get the under-valued policy.
   
   
4. Valuable Policy
   Under this policy, the property whose value may be difficult to determine after their loss and damages, the market value of the property at that time will be taken as the basis for the valuation and compensation of loss. This policy really follows the principle of indemnity.
   
   
5. Replacement Policy
   Under this policy insurance company pays more than the actual value of the property destroyed by fire in order to cover the cost of replacement of the said property. The market value of the property at that time will be taken as the basis for the valuation and compensation of loss. This type of policy is not very common these days.

B. On the Basis of Goods

1. Floating Policy
   A floating policy is that which covers the fluctuating risk of several goods lying in different localities for supply to various markets. Such a policy is usually taken out under one sum and one premium by the businessman. A floating policy is used to cover the risk of goods lying at different places. The goods should belong to the same person and one policy will cover the risk of all these goods.
   
   
2. Adjustable Policy
   According to the changes in the stock, the insured amount is also changed. The premium is calculated according to the insured amount and the insured amount changed. Under this policy, the insured amount is based on the value of existing stock in the beginning and late excited according to information received on the changes of stock.
   
   
3. Excess Policy
   An excess policy is supplementary of the fire insurance policy. It is purchased to cover additional risks beyond the coverage of the original loss policy. The kind of fire policy is purchased by such merchants whose stock fluctuates from time to time. In this policy, the actual value of the excess stock is declared in a certain period of time.
   
   
4. Declaration Policy
   Under this policy, the insurance of the maximum amount of goods is made on the basis of past experience. The three-fourths of the premium payable is charged from the insured in advance, at the beginning of the contract. Every month the policyholder is required to declare the value of the present stock.

C. On the Basis of Risk Covered

1. Comprehensive Policy
   A policy may be issued to cover risks like fire, explosion, lightning, burglary, riots, labor disturbances, etc. This is called a comprehensive policy or all-risk policy. After purchasing this policy, the insured gets the protection of properties against losses during a specified period. The premium rate is higher in such a policy.
   
   
2. Consequential Loss Policy
   It is a policy under which the insurer agrees to pay the insured for the loss of profits which he suffers to his business caused by fire. It is also known as loss of profit insurance. The consequential loss policy provides indemnity to the insured for loss of income, payment of expenditure like rent, salary, etc.
   
   
3. Blanket Policy
   Under the blanket policy, all the fixed and current assets of a manufacturer or a trade of different buildings can be covered by one policy at the same premium. An insured can include all types of properties with the house including furniture, machine, and other goods. (tyrocity.com)(Money Matters)

Procedures of effecting fire insurance policies

The following steps are observed while effecting fire insurance policy:

1. Filling up Proposal Form
   The insurance company provides a proposal form that must be filled by the client. Many questions are included in it. Generally, name, age, address, occupation, father’s name, gender, nominee’s name, etc. are expressed in the form. Likewise, the value and nature of the property, the method of paying the premium are also listed. To take a fire insurance policy, a person has to select and contact fire insurance. While filling up the proposal form, the principles of good faith must be observed and he has to fill up the form with utmost good faith.
   
   
2. Evidence of Respectability
   Evidence of respectability recommends that an individual is respected personnel and has a good character. The proposer may submit this report only if necessary. Since the insurance policy covers a high degree of moral hazards, these considerations are to be kept in mind. Evidence of respectability recommends that an individual is respected personnel and has a good character. The proposer may submit this report only if necessary.
   
   
3. Survey of the Property
   All people are not honest therefore insurance company appoints the survey. To survey the property, the server evaluates the proposed property in the form of the amount and the server prepares a survey report. This report is submitted to the office of the insurance company. The proposed property to be insured is surveyed by an expert called the surveyor. They survey the property and estimate the degree of risks involved in such property. On the basis of the report of the surveyor, the insurer accepts or rejects the policy.
   
   
4. Accepting Proposal and Issuing of Cover Note
   After the receipt of the surveyor’s report, it is scrutinized to see whether risks are acceptable. The insurance companies make the decision about accepting or rejecting the proposal only after studying all the information about the proposal from the report of the survey. It must be very careful. If any negative information is found they should be rejected.
   
   
5. Issue of Final Policy
   The insurance company prepares and issues a legal and formal document of insurance. The policy document is prepared after the issue of the cover note. It is a duly stamped document that contains terms and conditions of the insurance. This policy serves as evidence of insurance between the insured and the insurer.

Marine Insurance

Marine Insurance is one of the oldest forms of insurance. It is the insurance against loss by damage or destruction of cargo, freight, and merchandise. It is the means or instruments of transportation and communication whether on land, sea, or air. (Webster)

Marine insurance is very important because through marine insurance the shipowners and transporters can be sure of claiming damages considering the mode of transportation used. The four transportation modes are – road, rail, air, and water. A contract is made between the insurance companies and insured against a certain amount of premium to protect from the risk of waterways, which is known as Marine insurance. It is concerned with overseas trade. International trade involves the transportation of goods from one country to another country by ships. The persons who are importing the goods will like to ensure the safe arrival of their goods. The shipping company wants the safety of the ship. So marine insurance ensures the coverage of all types of risks which occur during the transit.

Marine insurance is a safe haven for shipping corporations and transporters because it helps to reduce the aspect of financial loss due to the loss of important cargo. It also helps to bring together the transporting companies and the receiving parties, the duty, dedication and the straightforwardness of the insurance companies. (Marine insight)

Nature of Marine Insurance

Marine insurance has been defined as a contract between an insurer and the insured whereby the insurer undertakes to indemnify the insured in a manner so, the interest thereby will be agreed. It is the contracts of insurance upon vessels of any description, including cargoes, freights & other interests which may be legally insured. Whatever be the transit by land, water or both and whether or not including warehouse risk or similar risk included among the risks insured against in marine insurance policies. It has two branches:

1. Ocean Marine Insurance
   Marine Insurance was started during the middle ages in Italy and then in England. Ocean marine insurance covers the perils of the sea. Travelers continue to monitor the ever-changing landscape of the ocean marine industry to stay in step with the needs. Ocean Marine Insurance is one of the strongest companies in the marketplace today.
   
   
2. Inland Marine Insurance
   Marine insurance is one of the oldest forms of insurance. Inland marine insurance is related to the inland risks on the land. It has developed with the expansion of trade. In modern times marine insurance business is well organized and is carried on scientific lines. Inland marine insurance is available stand-alone or can be packaged with other coverages. 

Subject Matter of Marine Insurance

Marine insurance may cover three types of things:

1. Cargo Insurance
   The person who is importing and the person who is sending the goods are interested in the safety of goods during the sea journey. The goods to be insured are called ‘cargo’. It is insured by the owner and insurance of goods shipped through waterways is known as cargo insurance. Any loss of goods during the journey is indemnified by the insurance company. The goods or cargoes shipped to a foreign country are exposed to the perils of the seas. The goods are generally insured according to their value and some percentage of profit can also be included in the value. The policies of cargo may be special, reporting and floating. The special policy is only for one shipment.
   
   
2. Hull Insurance
   The ship is a very important subject matter of marine insurance. The word Hull refers to the body of the ship or vessel. The ship exposes a number of risks like a cyclone, collision, and arrest by foreign naval power. The insurance which protects the shipowner against the loss of the ship is known as hull insurance. In Hull Insurance, the ship is insured against any type of danger. If the ship is damaged, the owner of the ship gets indemnity from the insurance company. The ship may be insured for a particular trip or for a particular period.
   
   
3. Freight Insurance
   The shipping company has an interest in freight. Freight insurance is one of the subject matters of marine insurance. The freight may be paid in advance or on the arrival of goods. If the goods are lost during transit, the shipping company will not get freight. The shipping company may ensure the freight to be received which is known as freight insurance. When the cargo pays freight at the time of shipment of goods, the shipowner losses the freight. They do not reach the port of destination. The shipowner guards against a possible loss of freight by freight insurance. 

Principles of Marine Insurance

Some of the principles related to marine insurance are as follows:

1. Utmost Good Faith
   The marine contract is based on utmost good faith on the part of both the parties. It is one of the important principles of marine insurance. The insured should give full information about the subject matter to the insurer. He should not withhold any information. This principle is based on the insured than on the underwriter. A party should act in good faith otherwise, the other party may cancel the contract.
   
   
2. Insurable Interest
   The insured should have an interest in the subject matter when it is to be insured which means insurable interest. At the time of acquiring a marine insurable policy, the insured may not have an insurable interest. He should have a reasonable expectation of acquiring such interest. He should be benefited by the safe arrival of commodities. He should get the compensation amount of the loss or damage of goods. The insured must get an insurable interest at the time of loss or damage otherwise, he will not be able to claim compensation.
   
   
3. Indemnity
   The principle of indemnity means that the insured will be compensated only to the extent of loss suffered. There is an exception to the principle of indemnity in marine insurance. Some profit margin is also allowed to be included in the value of the goods. But, he will not be allowed to earn profit from marine insurance. The assumption is that the insured will earn a profit when goods reach their destination. At the time of taking up the policy, the money value of the subject matter is decided. Sometimes the value is calculated at the time of loss also.
   
   
4. Cause Proxima
   This word is derived from the Latin word which means the nearest or proximate cause. This principle helps to decide the actual cause of loss when a number of causes have contributed to the loss. To fix the responsibility of the insurer the immediate cause of a loss should be determined. The remote cause of a loss is not important in determining the liability.

Types and Policies of Marine Insurance

Marine insurance is such insurance that provides compensation of losses on the hull, cargo, passenger and third party liabilities due to marine risks. There is a definite categorization of various types of marine insurance and different types of marine insurance policies according to the needs, requirements, and specifications of the transporter.

Different types of Marine Insurance are as follows:

1. Hull Insurance:
   Hull insurance is the insurance against loss caused by damage or destruction of waterborne craft or aircraft to the owner. It is the insurance of the ship which includes all the articles and pieces of furniture in the ship. Hull and machinery insurance can be done to protect the shipowner and investment in the ship. If the ship is damaged, the owner of the ship gets indemnity from the insurance company. This type of marine insurance is usually, taken out by the owner of the ship in order to avoid any loss of the ship in case of any mishaps occurring.
   
   
2. Cargo Insurance:
   The goods sent through the waterway are known as cargo. Cargo insurance is also called marine cargo insurance. It covers physical damage or loss of your goods while in transit by land, sea, and air. It also offers considerable opportunities and cost advantages if managed correctly. It is insured by the owner and insurance of goods shipped through waterways is known as cargo insurance. If the cargo is ruined, the owner gets the indemnity from the insurance company.
   
   
3. Marine Liability Insurance:
   Liability insurance is that type of marine insurance where compensation is bought to provide any liability occurring on account of a ship crashing or colliding. In the course of the marine adventure, one ship may collide with another ship. The goods of another ship may lose. Marine insurance provides the compensation of such liabilities nowadays if insurance has made insurance of such liabilities. A crew member traveling with expensive items, such as laptop computers, gold watches, etc. should make sure that he has such items separately insured.
   
   
4. Freight Insurance:
   To transfer the goods from one port to another, the amount paid to the owner of the ship is called freight. The payment of such freight can be made in two ways: either in advance or after the ship reaches its destination safely. Freight insurance offers and provides protection to merchant vessels’ corporations. It stands for the chance of losing money in the form of freight, in case the cargo is lost due to the ship meeting in an accident. This type of marine insurance solves the problem of companies losing money because of a few unprecedented events and accidents occurring. (MARINE INSIGHT)

Different Types of Marine Insurance Policies

1. Voyage Policy:
   This policy gives more importance to the voyage. A voyage policy is that kind of marine insurance policy that is valid for a particular voyage. It covers the risk from the port of departure up to the port of destination. This type of policy is considered more useful for cargo. The insurance company should give indemnity for loss/ damage of any property of the insured during the period of the voyage. The liability of the insurer continues during the landing and re-shipping of the goods. The policy ends when the ship reaches the port of arrival. This type of policy is purchased generally for cargo. Under this policy "from" and " to" has great importance.
   
   
2. Time Policy:
   The policy which is issued for a fixed period of time is known as time policy. A marine insurance policy is valid for a specified time period generally valid for a year. All the marine perils during that period are insured. This type of policy is suitable for full insurance. The policy is generally taken for one year although it may be for less than one year. But there is no restriction to make this type of policy for less than one year. This policy is more commonly used for hull insurance than for cargo insurance. The ship is insured for a fixed period irrespective of voyages. The policy is generally issued for one year. For example, a period of time from 12 March 2015 to 11th December 2015. This policy is effective for this period.
   
   
3. Mixed Policy:
   The joint form of voyage policy and time policy is called a mixed policy. In this policy, the elements of voyage policy and of time policy are combined. The reference is made a certain period after completion of the voyage. The meaning of the mixed policy is that a new policy takes birth from the combination of the fundamental things of time and the place policy. Generally, this policy is used for ship insurance. For example, a mixed policy is a policy that states the ship should reach from 1st December 2015, from Paris to October 2015 in New York. Policy expires whichever is met first.
   
   
4. Open or Un-valued Policy:
   In this type of marine insurance policy, the value of the cargo and consignment is not put down in the policy beforehand. The value thus left to be decided later on is called the unvalued or open policy. The insurable value of the policy includes the price of the insured's property, investment price, incidental expenditure, and all the expenditure as well. The unvalued policy is not used in practice so much. This policy is used only in freight insurance.
   
   
5. Valued Policy
   The opposite of an open marine insurance policy is a valued policy. In this type of policy, the value of the cargo and consignment is ascertained and mentioned in the policy document beforehand, thus, making clear about the value of the reimbursements in case of any loss to the cargo and consignment. Under this policy, the value of the policy is decided at the time of the contract. Generally, the insured amount in this type of policy includes the price of cargo, ship, freight and approximate profit. Thus the value which is mentioned in the policy is the insured amount.
   
   
6. Port Risk Policy:
   The Port Risk Policy is taken out in order to ensure the safety of the ship while it is stationed in a port. It covers the risks when a ship is anchored in a port. It is an ocean marine insurance designed to protect a vessel that is portside for a long period of time. Coverage terminates as soon as the vessel leaves port.
   
   
7. Wage Policy:
   Wage policy is one where there are no fixed terms of reimbursements mentioned. This is a policy held by a person who does not have an insurable interest in the insured subject. He simply bets or gambles with the underwriter. The policy is not enforced by law.
   
   
8. Floating Policy:
   The floating policy is also called a declaration policy. This policy is useful for the merchant who delivers cargo regularly. When a person ships goods regularly in a particular geographical area, he will have to purchase a marine policy every time. It involves a lot of time and formalities. He purchases a policy for a lump sum amount without mentioning the value of goods and the name of the ship, etc. It is the agreement between the insurer and insured that the insured declares a number of goods on the basis of shipment documents.
   
   
9. Named Policy
   The policy which is issued by mentioning the name of the ship and price of the cargo is called named policy. This type of policy has been receiving popularity in marine insurance.
   
   
10. Block Policy
    It is the policy that takes the risk in the block that is from sea route and land route. It does not only protect from the risk of the marine route but also covers the risk that occurred on the land too. It takes the risk of transportation from the place of the seller to the place of the buyer. It is a very useful policy for landlocked countries