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What are the principles of general insurance?

The principles of general insurance are essential guidelines and standards that underpin the non-life insurance industry. These principles help insurance companies operate efficiently and provide reliable coverage to policyholders. Here are the fundamental principles of general insurance:

  1. Utmost Good Faith (Uberrimae Fidei): Both the insurer and the insured must act in utmost good faith. The insured must provide complete and accurate information about the risk they want to insure, and the insurer must honestly represent their policies and pricing.

  2. Insurable Interest: The insured must demonstrate a genuine interest in the subject matter of the insurance policy. This means they must benefit from the insured property or suffer a loss if the insured event occurs.

  3. Indemnity: General insurance aims to provide indemnity, which means returning the insured to the financial position they were in before the loss occurred. It prevents the insured from profiting from the insurance payout.

  4. Contribution: If the insured has similar insurance policies with different insurers for the same risk, they can claim a proportionate amount from each insurer. This ensures that the insured does not receive more than the actual loss.

  5. Subrogation: After settling a claim, the insurer acquires the right to take legal action against any third party responsible for the loss. Subrogation helps insurance companies recover their costs and prevents double recovery by the insured.

  6. Causa Proxima (Nearest Cause): When multiple causes contribute to a loss, the proximate or nearest cause determines whether the insurance policy covers the claim. Insurance generally covers the most immediate and direct cause.

  7. Mitigation: The insured must take reasonable steps to mitigate the loss or damage. Failure to do so may affect the claim amount.

  8. Double Insurance: When an insured event is covered by multiple insurance policies, the principle of double insurance comes into play. The insured cannot profit from the double insurance but can choose which policy to claim against.

  9. Reinsurance: Insurance companies often spread their risk by purchasing reinsurance from other insurers. Reinsurance allows the primary insurer to handle large or catastrophic losses more effectively.

  10. Adverse Selection: Insurance companies must guard against adverse selection, where high-risk individuals or properties are more likely to seek coverage. Insurers use underwriting to assess risk accurately.

These principles are the foundation of general insurance and ensure that the industry operates fairly, transparently, and in the best interests of both insurers and insured parties. Understanding these principles is essential for anyone considering or working in the insurance field.

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