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Ten Commandments for Those Who Seek Insurance Covers

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Ten Commandments for Those Who Seek Insurance Covers:

We summarize the following 10 commandments, the leading reasons for easy reference, convincing an individual or firm or Company who search for various Insurance Covers:

  1. Thou shalt take care of the unforeseen losses causing financial harm which thou are not able to bear: The first and foremost reason is to get protection against the unforeseen losses causing financial harm which he/she is not able to bear. Hence, one must be aware of his/her insurance needs. Predictable losses, political risks, commercial risks, economic risks and like are not covered by insurance companies.
  2. Thou shalt know thine adequate insurance requirements: Insurance is not sold like hot cakes or jalebi. Neither the supply of nor the demand for insurance is elastic, i.e. price changes do not produce proportionate effects on the quantity sold. The result of such price inelasticity is a less-than-optional welfare distribution when prices are arbitrarily changed up or down. The market demand for insurance is relatively inelastic as there is no close substitute available and the small variations in premium rates do not disturb the choice of the insured because of the lack of the objectivity essential to realize the extent of risks involved. In case of life insurance, where it takes a form of savings, there are close substitutes, e.g. an individual may invest in mutual funds or Unit Trust of India for an anticipated return instead of paying the premium for life insurance. So, one has to make out his/her own conscious efforts as well even in absence of any outer motivation or insurance advertisements.
  3. Thou shalt choose a rational approach to find adequate insurance covers: Commission is a key motivating factor for agents. If there is no or less commission, there are chances that they take least interest to introduce even the best insurance policy to clients. For that reason, one requires to get adequate insurance information from all possible sources like web sites, articles, direct contact with insurance officials in their offices. One may also ask details about a particular insurance product/policy from the insurer directly from their office or through email.
  4. Thou shalt make out best efforts: Non-life insurance, being intangible service in nature, often covers the tangible properties against unforeseen losses. It is quite possible, you can only know about the insurer’s quality of service through word-of-mouth publicity which may be an individual’s own experience or prejudiced opinion, may not be the same kind of experience of others. So, one has to make out his/her own efforts to know about insurance as well even if he/she does not face any loss.
  5. Thou shalt take care of the merit of Insurance: Low rate or price doesn’t mean good insurance company or good policy or good service: one has to have a comparative study of insurance products, various companies and their financial strengths for better agent, for better insurance company, for better price and for better policy. The American Society for Quality Control has defined the customer-centric definition of quality as: “The totality of features & characteristics of a product or a service that bear on its ability to satisfy stated or implied needs.” It is this ability of settling claims, as promised in the policy by an insurance company, which defines whether it is a good company or not, and delivering good service or not. However, there is no absolute definition of high quality or poor quality. Insurance market is now free in India since 2000. Hence, there are many options available – excellent, good and bad as well. So, one has to explore & choose the best. In a free market due to globalization & liberalization, one may have many better choices after a comparative study. The market has now become customer centric market. Now, customer has got freedom to choose any insurance company, and even can get desirable rate of premium and also desired insurance product according to his/her needs. Market can only be explored well by customer if he is properly aware or well educated.
  6. Thou shalt be aware of various Insurance products with comparative study: There is heterogeneity in specification of service. Reliable & adequate information is not available easily. There may be a difference of interpretation or understanding in respect of an insurance policy. Normally, there is a huge gap between what is promised or told and what is written or fulfilled. The experience of purchasing insurance is not like washing machine is being demonstrated before purchase. Goods are sold to customers but selling or purchasing goods or household items are tangible in nature. You can always get it tested by operating it or touching it but one cannot have the same experience in case of service. One should know that agents are not always adequately aware of their own products, particular their terms & conditions in entirety. Many times, they provide inadequate or incorrect information and that makes the difference. When you have a claim only then they are judged whether they were right or not. So, one has to study the insurance products according to his/her actual needs.
  7. Thou shalt take care of thine assets/properties to be duly covered: It is equally important that one should know the value of his/her property to be adequately covered under the insurance policy. For that, he/she must understand the meaning and effect of under insurance clause and depreciation. Maximum amount covered in general insurance policy is called sum insured. This is the maximum liability of the insurance company under a policy upto which insured is indemnified.

There are various methods commonly used to fix the value of property (i.e. Sum to be insured), such examples are given in Table-B below:

Table -B : Fixing Sum Insured:
1 Fire insurance (stocks): Market value (i.e. present value less depreciation for age & / or usage.
2 Fire Insurance (Building, Plant & Machinery, Furniture, Fixture, & Fittings): Cost of Replacement or Reinstatement value (i.e. present cost of replacement without depreciation).
3 Engineering insurance: Present day replacement value
4 Miscellaneous insurance: Generally Market value
5 Marine insurance : Agreed value
6 Marine hull insurance: Agreed value

Reinstatement value: the basis of loss settlement is the value of new property without taking any depreciation into account. Market value: this value takes into account both depreciation due to age & or usage and appreciation due to inflation. Generally, there are two types of options for having sum insured. In first case, it is almost fixed on the basis of market value of the property, e.g. Fire, Engineering, Motor (sum insured is called ‘Insured Declared Value’ in short IDV). In second case, it is opted or fixed upto some extent by client, e.g. in Personal Accident Insurance (sum insured is called ‘Capital Sum Insured’), Mediclaim Insurance, Marine Insurance, and various Liability Insurances. Insurance policy can also be issued on the basis of ‘First Loss’. It is a type of partial insurance (which covers less than the full value of goods or property at risk) where both the insured and the insurer acknowledge that the ‘subject to average rule does not apply. These policies cover only the estimated largest possible loss, and are used commonly in the burglary or theft insurance where the possibility of total loss is extremely remote (such as in case of a large store, a huge machine)

8. Thou shalt take care of thy legal liabilities: you are very much concerned about those factors affecting your claim amount, such as under insurance clause, depreciation, exclusions, excess etc. In a way, one may understandingly make himself free from unnecessary resentment for legitimate reduction in claim amount or delay or non settlement of his claim. In case of a non-life insurance policy, the difference between the premium paid and sum insured (the maximum liability in case of total loss) is huge. Comparatively, in life insurance, the difference between the total premium paid and maturity amount is low. In non-life insurance, one is deeply concerned with the sum insured at the time of total loss claim and not with the nonrefundable premium. Moreover, this difference is extremely huge in case of motor vehicle third party legal liability. At present, it is unlimited. One cannot think about its limit. That is, if one has paid an amount, say of Rs. 1,850 for ‘Act Only Policy’ for 1000 cc private car (commonly known as third party insurance), the MACT courts may fix the statutory liability to any extent (but it would be maximum of Rs 10 Lakhs as proposed in the new amendments of 2018 against him/her due to an accident by his/her car and the excess amount of compensation which may go beyond 10 lakhs, if any awarded by the Tribunal, will have to be recovered from the owner or driver of the offending vehicle car in case of third party death). You see, one has escaped from his legal liability upto 10 lakhs by paying just a negligible amount. This is the beauty of pooling in Non-life insurance. In the new proposed Act, the liability of the insurer to satisfy third party claims can be fixed by the Central Government through making rule beyond 10 lakhs. However, in the current Act, the statutory liability is unlimited.

9. Thou shalt not pamper in temptation of moral hazards: Insurance industry has a situation of asymmetrical information. Insurance industry in all countries has been trying to overcome this kind of problem. The buyers and sellers of insurance may have different amounts of information about the risks that are being insured against. This leads to a problem of ‘adverse selection’ which refers to the tendency for people who are more at risk than the average to purchase insurance and for those who are less at risk than the average to reject insurance. This problem would be serious if all people were charged the same rate as the customer with the average risk. One has to understand where he stands. Two people cannot enter into a contract contingent on the occurrence of a certain event or state if only one of them in fact will know that the event has occurred. A particular example of this is sometimes known as “moral hazard” in the insurance and economic literature. The very existence of insurance will change individual behavior in the direction of less care in avoiding risks. The insurance policy that would be called for by an optimal allocation of risk bearing would only cover unavoidable risks and would distinguish their effects from those due to behavior of the individual. But in fact all the insurer can observe is a result, for example, a fire or the success or failure of a business, and cannot decompose it into exogenous and endogenous components. Contingent contracts, to speak generally, can be written only on mutually observed events, not on aspects of the state of the world which may be known to one but not both of the parties. So, one has to reduce the vide gap of asymmetrical information by getting adequate insurance information from the possible reliable sources and equally providing own relevant information to the insurance company in order to get best insurance rate & policy.

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10. Thou shalt be aware of thy rights & duties: In case of exigency, one must be aware of his/her rights & duties to fight with or avoid injustice. This is the age of consumerism and global market with many choices and options. Consumers have to be aware of their rights and knowledge of the products which they are going to buy so that they can compare and choose the best suited one – agent, insurance company, policy and rate as well.

For one’s insurance requirements of risk transfer, dependency merely on insurance agents & advertisements does not serve the purpose as the insurance, particularly non-life insurance, is being more complex. Hence, one cannot escape without being aware of insurance concept and its products. If someone is having a good communication skill and also good knowledge of various insurance products, then, it also opens a unique opportunity for him or her to become an agent & to earn commission at home.

For insurance needs, the customer requires a little bit more conscious efforts to be educated on it. One may search and contact the best insurance company having good financial strength, good market experience, good results and having variety of products with adequate required covers and speedy claim settlement.

So, one has to check what are the basic terms & conditions of the policy. Whether it satisfies his/her requirements for which he/she has purchased the insurance policy. Mere purchase of insurance policy does not make you feel its intangible character, it is felt only when you prefer a claim on an insurance company. But, just because it cannot be felt or many times you don’t face any risk which may cause a claim doesn’t mean that you have now become risk proof and need not require insurance further or any more.


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