The Contract of Conventional Insurance

As stated above that the purpose of all insurances is to seek protection against all kinds of risk to which man is exposed. The purpose of insured is to prepare himself against probable hazard and loss in his life and trade. He tries to shift the burden of the probable loss on to shoulders of others, who are prepared to take the risk for some financial gains to themselves.
All insurance contracts are based on the law of large numbers and the mathematics of probability. In a large homogeneous population it is possible to estimate the normal frequency of common events, such as deaths and accidents. Losses can be predicted with reasonable accuracy, and this accuracy increases as the size of group expands .
All insurance contracts are made on the principle of uncertainty, uncertain events, which involve speculation as well as risk . Both the insurer and the insured enter into contract of mutual risk, the former risking a loss and the latter risking his premiums.
The agreements between the insurer and the insured in insurance contract are embodied in a formal document, called a policy which, afterwards, the insurer is legally bound issue to the insured on the receipt of premium and the insured is legally obligated to pay the premium monthly or annually appropriate with previous agreement between the parties.
The insurance contract is not like the contract of other service companies. It has characteristics as below:
a. Future contract, because the benefits of this contract just appear when the loss is paid in next day,
b. Contingent contract, because the loss happens uncertainly and it undertakes based on probable perils,
c. Service contract, because the insurance provides the services, benefit understanding and suggestions.
d. Risk contract, the base of insurance contract is the uncertainty with the probable loss of perils. The insurance shifts the risks of this loss on to company’s shoulder as the professional risk bearer .
a. Policy
Policy is a formal document contains the agreements between the insurer and the insured in insurance contract . The policy can be the small sheet of paper contains the concise and simple agreement, or be the long and hard document. All of both documents state dues and obligations of both parties.
The policy plays an important part in the insurance contract, whether in the beginning step, during the contract or in the covering of insurance. For the insured, the policy is the basis evidence to propose the indemnity demand when the insured hazard causes the loss. And for the insurer, the policy is the basis to know the insured’s responsibility toward the hazard .
Except life insurance policy, every policies must contains of eight main points, they are:
1. The day of the insurance covering
2. The name of the insured who agrees the insurance covering
3. The clear explanation about the assured goods
4. The amount of money for how many times the insurance is held
5. The assured perils and hazards
6. The beginning time and the end of the insurance
7. The amount of premium
8. The matters that normally must be well known by insurer, and the certain promises and clauses between the insured and the insurer .
Globally, the eight main points above are divided into four parts, they are :

1. Declaration.
The declaration is a statement made by insurance applicant, who basically furnishes all such information and documentary evidences about his identity, the value of the goods, and everything related to the covering of insurance contract as the insurer may requires. This information must be appropriated with the utmost good faith principle. The insurance applicant gives this information by filling up the application form or questionnaire, and then he signs it up.
2. Insurance clause.
The insurance clause is the main part of the policy. It contains of the provision of whatsoever risks determined in the policy, the requested requirements and the column for the insurer’s liabilities.
3. Exclusions.
In the sections of the exclusions, the policy determines whatever the excluded matters, whether disasters or hazards, subjects or losses. Hence, the insured must know and understand precisely whatever excluded in the recovering of the purposed policy.


4. Conditions.
In this part of the policy, be explained all about dues and duties of the parties, whether insurer or insured. These conditions normally contains of premium payment, risks alteration, insured’s duties toward the incidents, report of losses, indemnity, etc.
Thus, except the application form, the insurer is who makes the standardization policy. Then this policy offered to the insured in order to examine the requirements and clauses carefully. If the insured agrees all terms, the policy will be finished and signed up, and after 24 hours it will be returned back to the insured.
But, practically this short time hardly can be fulfilled, because the insurer must complete the mails and process the received data. So, before the policy can be returned to the insured, temporarily the insured will receive the “cover note” or “bider”, it is a temporary contract of insurance recovering before the policy can be returned .
b. Premium
The premium is the price at which the insurer is prepared to take risks and bear the burden of the probable loss involved in the contract of insurance. The premium is the obligation of the insured against the services of the insurer in an agreed period of time .
On the basis of law of averages, the insurer finds through experience an amount of premium with calculating the details as below:
1. The reasonable amount sufficient to cover the risks,
2. Other charges, including policy and administration expenses,
3. The tip for agents, if the insurance held through the agency,
4. The profits from the investment of accumulated funds .
The contract of insurance becomes effective only when the premium is paid by the insured and received by the insurer. If it is not so, the insurance is unavailable . Thus, the premium must be paid completely during the contract. At the sort-range insurance such as travel insurance, the premium is paid on the beginning of contract. But, at the long-range insurance, the premium can be paid monthly on the previous agreed date, started on the first month periodically. The amount of premium and its payment date are clearly embodied in the policy.
Once the premium is paid by the insured and risk assumed by the insurer, there shall be no apportionment or return of premium afterwards, even though the subject-matter of the risk may vanish before the period of cover has elapsed.