CHARACTERISTICS OF AN INSURANCE CONTRACT - 1

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There are Three main characteristics of the contract of Insurance. They are :

1. Insurability
2. Legality
3. Indemnification.

INSURABILITY

The risk which can be shared by the Private Insurance Companies typically has seven characteristics. They are explained in the following seven points :

• As the Insurance company operates through pooling of resources, the majority of the insurance policy providers provide policies to individual members of the large classes. Thereby accumulating large amount of resources from large number of people and indemnifying those small group of people who have actually suffered losses during the period of the policy.
• The loss takes place within a definite time at a known place and due to a known cause. The most classic example is the death of a person whose life is ensured by the Life Insurance policy.
• The event that constitutes the trigger of an Insurance Claims shouldn't be influenced by the person who has taken the policy.  The loss occurred should be pure. speculative Transactions like Buying lottery tickets are not pure and hence cannot be insured.
• The Size of the loss which is insured should be large enough to be meaningful to the insured. An item which is insured is usually of great significance and Value to the person who buys the insurance.
• The premium to be paid is usually nominal and is affordable most of the times. The premium amount is very high in cases where the chances of Loss are very high and the insurance company is taking huge risk by the issue of the insurance policy.
• The loss which took place must be capable of being ascertained and the value must be able to be arrived at by basic and simple calculations. The policy must be capable of being estimated.
• The Insurance loses are usually independent and one loss doesnt lead to another loss. There is usually no connection between two losses which are covered by the insurance policy and the individual losses are not huge enough to bankrupt the insurance company Itself. In case of Huge amount of Insurance policy the Insurance Companies usually tie up with another Insurance company.