Principles of Insurance

Core Principles of Insurance

• Insurance is governed by five guiding rules or principles that individuals must follow when taking out a policy:
  • Principle of insurable interest
  • Principle of indemnity
  • Principle what most good fate
  • Principle subrogation
  • Principle of contribution

Principle of Insurable Interest

• To insure an item, the policyholder must benefit from its existence and financially suffer from its loss.
• You can insure your own house but not your neighbor's house, as you do not suffer a financial loss if the neighbor's property is robbed.

Principle of Indemnity

• An individual cannot profit from insurance; they can only recoup what has actually been lost.
• If a phone valued at $500\text{ euro}$ is lost or stolen, the maximum compensation received will be $500\text{ euro}$.

Principle what Most Good Fate

• This principle requires total honesty when applying for insurance.
• All relevant facts must be disclosed on the proposal form (application form).
• Example: If a person smokes but does not declare it on a health insurance proposal form, the company may refuse to pay a claim for a smoking-related illness due to the undeclared higher risk.

Principle Subrogation

• Once an insurance company pays compensation for an insured item, the ownership of that item passes to the company.
• If a car is written off, the insurance company provides money for a new car and takes ownership of the damaged vehicle to sell for scrap or spare parts. The insured cannot keep both the compensation and the scrap value.

Principle of Contribution

• This applies when the same risk is insured with more than one insurance company.
• If a claim is made, the insurance companies will split the cost of the payout rather than providing double compensation.
• There is no benefit to insuring the same item twice, as each company will only pay a portion of the total loss.