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Principles of Insurance

This article is going to focus on the details regarding insurance, its definition, how it works and what are its characteristics. The article will further explain a few principles of insurance.

What is Insurance?

Insurance is a legal method of protection from financial loss. The insurance acts as a shield or protection in general from the uncertain occurrence of loss. It is a part of the Risk management system that companies and organisations have to minimise uncertain losses. There are different parties involved in the insurance process namely i) insurer and ii) policyholder.

The insurer who is also called an insurance carrier is a person who provides insurance to the people who want it. Policyholders are people who take insurance policies from the insurers. There is a third commonly used term in the insurance business ‘insured’, that is a person or party covered in the insurance.

The insurance policy helps in a guaranteed payment on the loss of the insured object. The amount of insurance on the insured object is usually not in full amounts or face value rather a short lump sum of money.

The damaged object may not be financial or have any financial value but it has to be considered in regards to a fixed financial amount for availing the insurance. The policyholder must have an existing relationship with the insured object or person before any damages occurred to the said person or object.

Characteristics of Insurance


It is a form of legal binding of insuring, in which the insurer agrees to pay the insured for the loss that is mentioned in the agreement and the insured agrees to pay a definite rate of premium which is mentioned in this agreement for the promise of the insurer.

It is a type of agreement in which one party agrees to pay up in case of loss delt by another party.


In an insurance agreement, dealing with and safeguarding the risk is the core objective of the contract. For example paying an insured amount in case of death of to assured, loss by fire or happening of marine perils.

The risk is undertaken by the insurer to compensate the insured for the happening of the risk mentioned in the policy. The insurance company bears the risk and makes good the loss.

It helps in stabilising the business or person as it was before the accident happened, it provides a relief to the insured that if any accident happens, the insured will undertake his problem.


Insurance is a helping device of bearing the burden of risk of a person on the backs of many. All the policyholders help the premium out of which the person who suffers a loss is financed or is paid up, insurance is an instrument to share the monetary loss of a group of people among many other groups.


On the happening of a specified event, the insurance company is bound to make good the loss to the insured. Death is not an expected occurrence in life so it can be insured too, but it is not so in marine, fire or accidental insurance.

In life insurance agreed fixed amount is paid in indemnity insurance (fire, marine, etc). The amount of insurance money is uncertain depending upon the severity of the damage.

Types of Insurance

  • Life insurance – This is a type of insurance that guarantees monetary benefits on death if the covered person dies during a definite policy term. Once the term expires, the insured has the option to either make it anew for another term, convert the insurance to hard coverage, or allow the life insurance to terminate.

  • Motor insurance – It is a specific type of insurance made for vehicular safety. Vehicles being an asset may suffer from unknown damage like theft and physical damage.

  • Health Insurance –  It is a specific type of insurance made for human life safety. Humans being an asset to society may suffer from unknown damage like worsening of health conditions and physical damage. These can be covered using the medical insurance given by health insurance policies.

  • Property Insurance – The property insurance covers property damage and liabilities with the property in question.

Principles of Insurance

The various principles of insurance include- 

  • Good Faith – Good faith is essential for giving and getting insurance. The Insured and the insurer should be able to trust each other with property or money and should have clear terms and conditions as the entire purpose of insurance is to ensure the insured about their asset.

  • Insurable Interest – Insurable interest refers to the importance of the property or asset the insured aims to insure. The insured must have a financial stake in the property and it should bring some sort of profit or income for the insured.

  • Contribution Loss Minimization – The contribution loss minimization refers to the regulation that the insured must do everything in their capacity to minimize damage during any unforeseen incident.

Proximate Cause – Causa Proxima or Proximate cause refers to the rule that even if a single asset or property has gone through multiple damages, only the latest cause of damage of an insured property will be covered by the insurer.


The above article talks about insurance, its definition, characteristics and types in detail. The article basically tells us that insurance is a safeguard for loss on assets by being insured a certain amount.


Frequently asked questions

Get answers to the most common queries related to the Bank Examination Preparation.

What is maturity age?

Ans. Maturity age is the age of the life assured by the policymakers at which the policy discontinues.

Who is a nominee?

Ans. A nominee is a person who is supposed to receive all the benefits after the incident occurs on which insurance was taken....Read full

What is a premium?

Ans. A premium is an amount that is paid to the life insurance policy for the continuation of the policy.