Professional Documents
Culture Documents
Insurance
PREPARED BY:
Dedoro, Mary Antoniette
Dela Peña, Zandra Mari
Legaspi, Jovie Mayne
Martin, Michael Dan
Monedo, Jomie Elaine
Riano, Maria Erika
I. Root of Insurance – Financial Structure
II. Insurance
A. History
If risk is like a smouldering coal that may spark a fire at any moment, then insurance is our
fire extinguisher.
Countries and their citizens need something to spread risk among large numbers of people
and to move risk to entities that can handle it. This is how insurance emerged.
The first written insurance policy appeared in ancient times on a Babylonian obelisk
monument with the code of King Hammurabi carved into it. The "Hammurabi Code" was one
of the first forms of written laws. These ancient laws were extreme in most respects, but it
offered basic insurance in that a debtor didn't have to pay back his loans if some personal
catastrophe made it impossible (disability, death, flooding, etc.).
The practice of underwriting emerged in the London coffeehouse owned by Edward Lloyd,
later of Lloyd's of London, which was the primary meeting place for merchants, ship owners
and others seeking insurance.
The merchants and ship owners would go to Lloyd's and hand over a copy of the ship's cargo
to be read to the investors and underwriters who gathered there. The people interested in
taking on the risk would underwrite such cargo and take responsibility for a set premium. In
this way, a single voyage would have multiple underwriters, who would try to spread their
risk as well by taking shares in several different voyages.
By 1654, Blaise Pascal and Pierre de Fermat discovered a way to express probabilities and,
thereby, understand levels of risk. Pascal's triangle led to the first actuary tables that were,
and still are, used when calculating insurance rates. These formalized the practice of
underwriting and made insurance more affordable.
In 1666, the great fire of London destroyed around 14,000 buildings. As a response to the
chaos and outrage that followed the burning of London, groups of underwriters who had
dealt exclusively in marine insurance formed insurance companies that offered fire insurance.
Armed with Pascal's triangle, these companies quickly expanded their range of business and
later spread to Europe and the rest of the United States inclu ding the Philippines in March
1829.
B. Nature
We know every people need insurance. It is because the presence of risks. And the basic
definition of risk is “the chance of loss.”
Therefore, insurance is basically defined as the protection against a financial loss and
the reason why people buy insurance is because risk is present – the chance of loss or
uncertainty of loss.
There are 2 subcategories of risk, namely pure risk and speculative risk.
Pure risk is a type of risk where there is a chance of loss ONLY. No chance for gain.
This type of risk is insurable. Example of this risk is getting sick. Someone got
cancer. Obviously, the person wasn’t planning to get cancer. This is a non foreseen
thing. So the person going to need to have treatments and it’s expensive to have
those treatments. Pure risks are type of risks which have no potential for gain.
What does the person gain from getting cancer? NOTHING. Another example of
pure risk is a house getting burned down. What does a person gains from that?
Lightning strikes the house, it burnt down. NOTHING. This is why people buy
insurance – to cover the financial loss that will occur.
Speculative risk is a special type of risk where there is a chance for gain and a
potential for loss. This is not insurable. You can’t buy insurance for speculative
risks. Example of this is gambling, buying lottery tickets. So for instance, a person
buys a lottery ticket and the jackpot amounts to 100 million pesos. The person
buying the ticket could win by spending 20 pesos on the ticket or he could lose his
20 pesos. That risk is a speculative risk which is not insurable. If they were it would
be very risky. Agents do not insure risks with potentials for gain.
Through underwriting, the process by which insurers select the risks to insure and
decide how much in premiums to charge for accepting those risks;
Insurance policy - this is actually the legal contract or agreement between the
insurance company and the insured. These are legally enforceable contracts. The
insured receives a contract, called the insurance policy, which details the
conditions and circumstances under which the insured will be compensated.
Loss - is the reduction of the value of the asset. In order to be paid with the loss, a
claim must be submitted to the insurance company.
2. Types of Insurance
a) Life Insurance
Auto insurance
Home insurance
Casualty
Property
Liability
Credit
Other types
Insurance financing vehicles
Closed community self-insurance
3. Fire Insurance
a) Nature of Fire Insurance
Fire insurance protects homes against the threat of fire -- be that fire caused by
nature or arson. It, however, doesn't prevent all of the risks of fire, so it is
important to know what kind of protection one can get from fire insurance.
In general, basic fire insurance coverage only protects the value of the physical
house itself. It usually does not protect against any of the following: loss of
human life due to fire, loss of pets due to fire, medical expenses accrued due to
injuries sustained in fire, damage to the landscape, or damage to one's personal
belongings inside the house, garages and gazebos outside the house, and living
expenses to move somewhere else until the house is repaired. An extended
property insurance package can cover these things, but in general, the most
basic fire insurance coverage does not.
The following are the fundamental principles essential for a valid contract of fire
insurance.
2. Insurable Interest: In fire insurance the insurable interest must exist at the
time of effecting the insurance as well as at the time of the loss. The interest,
however, may be legal or equitable or may arise under a contract of purchase or
sale. The following have been held to have insurable interest in the subject
matter :
1. Owner
2. Mortgagee
3. Trustee
4. Executor
5. Warehouseman
6. Common
7. Bailee
8. Pledgee
9. Person in lawful possession
10. Finder
11. Insurer
12. Commission Agent where the agency is couppled with interest and
13. Tenants who are liable to pay rent after a fire.It should however, be
noted that persons can insure only to the extent of such limited
interest.
4. Loss Through Fire: Loss resulting from fire of some other cause which is the
proximate cause is the risk covered under a fire insurance contract. But where
the fire is caused by the insured himself or with his connivance or by the
operation of a peril specifically excluded under the policy like earthquake, the
loss will not be covered.
5. A Contract from Year to Year: A fire insurance policy is usually for one year
only and can be renewed after that.
Where the subject matter has been insured with more than one insurer, each
insurer has to meet the loss only rateably. If he has paid more than his share of
loss, he is entitled to recover the excess paid from his co insurers. Thus, the
principle of contribution applies in the case of fire insurance.
The insured must disclose all material facts in respect of the subject
matter. The contract shall be voidable in the event of misrepresentation
or non disclosing of an necessary facts.
2. Insurable interest
It is the essential for the insured to have insurable interest in the subject
matter of both when the policy is affected and when the loss takes
place.
3. Contract of indemnity
4. Personal contract
5. Duration
6. General conditions
7. Personal Right
The person whose name has been mentioned in the contract, is entitled
to receive the insured sum from the insurer at the event of loss by fire
on insured property.
8. Claim Limit
The actual market value of the goods or property destroyed by fire can
be claimed only by the insurer. In such type of contract there is no profit
motive.
It is essential part of the contract that the policy must describe the:
location of the property. It helps the insurer to determine the rate of
premium.
The insurance company may grant the protection against all direct loss
by fire lightning and other perils. The contract must specify the
description of loss in order to consider the approximate cause.
13. Subrogation
Under this principle the insurer after paying a loss has ful1 right and
privileges against third party in respect of loss so paid for. These rights
may be justified, the problem of subrogation arises when a fire is caused
by the negligence of the third party, for which negligence the party
whose property is destroyed by fire may recover under rules.
Specific policy
o In a specific policy the insurance company agrees to pay a specific amount
regardless of the value of the property. The indemnity is usually lower that
the actual property value. Sometimes, but not always, the policy may
include “the average clause,” which states that the insured is required to be
partially responsible for the loss. In that case, the policy is called an average
policy.
Comprehensive policy
o This type of fire policy covers all kinds of risks like fire, burglary, theft, riots,
and other third party risks. That's why it is often called “all-in-one policy.” If
you are insuring your business, the policy may cover the loss of profits for as
long as the business remains closed due to fire damage.
Valued policy
o A valued policy is not based on the principle of indemnity. Instead, in this
policy the indemnity is a fixed amount agreed upon at the time of signing
the contract. The insurance company pays that amount regardless of the
actual loss due to fire. The valued insurance policy is usually offered for such
items like jewelry, furs, or paintings, which value is difficult to estimate once
they are damaged or destroyed by fire.
Valuable policy
o As opposed to the valued policy, in a valuable policy the indemnity is
determined depending on the actual loss of the property and at the time
that loss occurred. It is usually calculated based on market value of the
property.
Floating policy
o A floating policy is considered in case of multiple properties that belong to
the same policyholder. It is often purchased by businesses that own more
than one warehouse or store where inventory changes frequently and their
merchandise and/or raw materials are at different locations.
Replacement policy
o A replacement policy, also called reinstatement policy, binds the insurer to
pay for replacing the damaged property. The insurance company reinstates
the property instead of paying out cash.
Fire insurance policies vary depending on the area of coverage. However, not
everything might be included in a general policy. There are some exclusions
like for example medical bills, loss of human life or pets, damage to the
landscape, etc. that may require an extended coverage to be purchased.
If you're like most homeowners, you have standard homeowners insurance that
acts as home fire insurance. Many times the insurance company will use the
exclusions or loopholes in your insurance policy contract to avoid paying claims.
Therefore, you should always review your policy contract very carefully, and
make sure that you understand any exclusion fully.
Besides the exclusions and loopholes that may actually allow the
insurance company not to pay at all, many insurance policies have
restrictions on what will and what will not be covered during the fire.
For example if you live in historic home or otherwise older home that
has very old or antique types of architecture and hand crafted items in
on the house, many insurance companies will not pay to have expensive
moldings, trim and other custom crafted items replaced. Rather, they
will pay to have simple prefabricated or commonly made ornaments,
fixtures or moldings installed. So, you should always check your policy to
make sure that the coverage will cover your home as it was before any
fire potential damage.
Denied Claims
Sometimes your fire insurance company simply denies your claim and
offers you no benefits at all. The only legal way to do this is to prove
that you have no coverage under your policy for the type of loss you
suffered. For example, Consumer Reports advises that owners of new
homes began reporting claims in 2008 about noxious fumes emanating
from drywall made in China, and their insurers largely denied these
claims under the policy clause excluding "faulty, defective, or
inadequate" materials.
Reduced Settlements
Claim Time
Inadequate Coverage
The worst time to realize your fire insurance policy does not adequately
protect your home and belongings after a loss occurs, but unfortunately
that is when many people make this discovery. People complain that
their policy limits do not provide enough money to fully rebuild or
replace damaged property, but this is not really the insurers' fault.
Insurance companies are bound to follow the terms of the insurance
contract, and that means capping their losses according to the limits
stated in the policy.
C. Accounting Treatment
1. Basic Concepts
o Insurance contracts are covered by IFRS 4
o IFRS 4 is equivalent to PFRS 4 in the Philippines
o IFRS 4 applies to insurance contracts and reinsurance contracts
o Accounting for Insurance contracts is effective on January 1, 2005
Terminologies:
Claims expenses:
A claim occurs when a policy falls due for payment. refers to the
amount payable by insurer to the insured when policy becomes due or
the mishappening occurs.
A claim arises when the loss occurs or the liability arises.
Commission expense
Premium income
2. Journal Entries
When the premium is actually received the following entries will be made:
Dr Cash xxx
Cr Policyholder/Intermediary Debtor xxx
Under these cases the cash is usually required when the policy proposal is made
and the accounting entry would be:
Dr Cash xxx
The company will then investigate and necessitate requirements prior to paying
the beneficiaries. Once the investigation is completed and the requirements are
received the following entries will be made:
Cr Cash xxx
The asset for the commission would be written off to the technical account over
an appropriate period.Traditionally in the UK the write off would be over 12
months, so the monthly entry required would be:
Cr Cash xxx
Acquisition of Insurance
Claim of Insurance
Settlement of Insurance