The Indemnity Principle

The principle behind general insurance is that the insured person, in return for paying the agreed premium, shall be `indemnified' should he suffer the loss insured against. To be indemnified means to be placed as nearly as possible in the same position as he would have been in had the loss not occurred. In other words, he is to be 'compensated'. He cannot gain by insurance: the maximum claim he can make will be the actual loss he has suffered. So if the peril being insured against is that of having one's £80 bicycle stolen, the compensation he will receive, should that event occur three years later, will be limited to the cost price today of a new bicycle less wear and tear over three years - in other words, to the price of a second-hand bike, say £40.

It therefore follows that, since the value of the article is likely to be worth successively less each year, the premium payable should fall each year. Provided that premium rates remain the same, this is exactly what has happened in the past.

New for old

However, in the current inflationary conditions, when the cost of replacing an article is likely to be a great deal higher than the original cost of the damaged or lost article, it is possible to arrange a 'new-for-old' contract of insurance. Under this scheme the annual premium will be related to the current new replacement cost, so will naturally rise each year. In return, your insurance claim, should you suffer the loss of the insured item, will amount to the sum needed to buy a new replacement instead of a second-hand bicycle of the same age and condition as the lost one.


Insurance

Insurance is a system under which a large number of people pay a regular sum of money into a common pool, the money being used for the purpose of compensating those of them who suffer a loss. In other words, insurance is a scientifically planned method of sharing a financial risk.

Suppose that in a given year 10,000 people buy new bicycles each costing £80. No purchaser, let us say, is willing to risk having his bicycle stolen and having to find the money to buy another one. To meet this problem an organisation has been set up whereby each owner may pay into a fund £1 a year, and in return the... see: Insurance


Refunds, Personal And Business Finance 2017

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