DEFINITION OF INSURANCE
Insurance can be seen as a wiseman arrangement of transferring a future loss to someone else by the way of paying a peanut now.
It can also be defined as the agreement whereby one party promises to pay (indemnify) another party a sum of money in the event of his suffering a specific loss or damage.
From the legal point of view, insurance is a contract whereby one person called the “Insurer” undertakes, in return for the agreed consideration called the premium, to pay another person called the “Insured” a sum of money or its equivalent, on the happening of a specific event.
Insurance is an agreement or transaction whereby a party called the “Insurer” undertakes to indemnify or reimburse the other party, called the “”Insured” in the event of a loss.
Insurance is a business that exists in order to ensure the success and survival of other businesses. From all the definitions and viewpoints, it can be deduced that for insurance contract to exist, the following factors must be recognized:
- There must be an object that needs an insurance protection. This object is called the subject matter of insurance, in insurance contract.
- The contractual relationship to be formed by the insurance companies and the insuring public must be based on the object.
- The insurance company must be ready to accept the object for an insurance protection.
- The insuring public must show interest in transferring the risk to which the object is exposed to, to an insurance company.
- The insurance company must be ready to compensate the insuring public following the happening of the event insured against.
- The insuring public must also be ready to pay a fee called premium to the insurance company in return for the financial compensation to be given by the insurance company in respect of the future loss of this subject matter (the object).
- The occurrence of future loss of the object must be due to causes covered by the policy.
INSURANCE AS A RISK TRANSFER MECHANISM
Insurance on its own does not cancel risk and neither is it a device for prevention of the occurrence of loss. Rather, it is a means of reducing the effect of loss by giving a financial assistance to those who suffered the loss.
Insurance is a risk transfer mechanism whereby an individual or business organization can shift some uncertainty and anxieties of life on their shoulder to others. The insurance company created a fund, whereby many people contributed into the fund in form of premium so that in the event of any loss, those that are involved will be compensated from the fund.
The payment of certain amount of money (premium) to the fund created has made an individual or business enterprise qualify to enjoy the benefit of compensation from the fund if he suffers loss that is covered under the fund. This simply means an individual or business enterprise has transferred the loss that could be suffered by him to the fund created.
INSURANCE AS A POOLING OF RISKS
The main principle of insurance is pooling of risks. The insurance company takes up the responsibility of settling possible losses from the risks he accepted. The insurer collects premium from people who suffer similar risks to create a common fund, out of which compensation will be paid to those who suffer losses. Suppose an insurer takes car theft risk from 1,000 car owners, each having a car worth 31.5 million. The insurer will have to settle the insured whose car has been stolen from the car fund created by all the 1,000 car owners.
It is important to know that there is no pooling of risks if there is no transfer of risk from one party to another. There are parties that transfer the risks and another party to who true risks is transferred to. The larger the number of parties that transfer same types of risk, the better the conduct of insurance for both parties.
INSURANCE AS A RISK REDUCTION MECHANISM
Insurance warns individuals and business owners to embrace appropriate devices to prevent an unfortunate aftermath of risk. It has been said that risk is not eliminated totally, but it can be prevented from happening or reduced if necessary steps are taken from the early stage.
Insurance experts advise individuals or enterprises on how to prevent loss from occurring.
A contract is an agreement enforceable by law made between two or more parties by which rights and obligations are created. To constitute a binding contract of insurance, there must be an agreement with regards to the essential terms and conditions of the contract. The parties must intend to create legal relations and there must bea concluded bargain in which all essential conditions have been settled.
Since, insurance is a legally enforceable contract, each party to the contract i.e. the insurer and insured must conduct themselves, according to the terms and conditions guiding the contract. Failure by any of the parties to observe the provisions of the contract offers, the other party has the right to seek legal redress for compensation.
PARTIES TO AN INSURANCE CONTRACT
The capacity to enter into a contract of insurance is the same as capacity to enter into any other commercial transaction. Any person has the capacity to enter into a contract of insurance provided the rules relating to age, mental capacities, etc are satisfied. The parties to insurance contract are:
- The Insured: This is the party that seeks for an insurance protection from an insurance company. At the inception of contract before acceptance, they are known as proposer while after the acceptance and consideration paid, they are called “The Insured”.
- The Insurer: This is the party that provides insurance protection to the insured and compensates the insured against the specific loss insured against.
- The Intermediaries: They are the link between the insurer and the insured. They are called agents, insurance consultants or insurance brokers. They are responsible for the creation of constructional relationship between the two parties (the insured and the insurer) to a valid insurance contract. The remuneration received for the services provided by these intermediaries is called commission.