IIQE Paper 3 English Quiz 27

The definition captures the original, basic intention of life insurance – to provide for one’s family and perhaps others in the event of death, especially premature death.

As life insurance became more established, it was realized what a useful tool it was for a number of situations, which would include:
• Temporary needs/threats
• Savings
• Investment
• Retirement

Savings refers to providing for one’s family and oneself, as a long-term exercise, becomes more and more relevant as society evolves from a tribal, clan, family orientated community to relatively affluent individual independence.

Investment can be defined as a process of purchasing an asset, with an expectation that it will in the future provide an income or appreciate. The accumulation of wealth and safeguarding it from the ravages of inflation become realistic goals as living standards rise. It differs from arbitrage, in which profit is generated without investing capital or bearing risk.

Retirement refers to a provision for one’s own later years that becomes increasingly necessary, especially in a changing cultural and social environment. On the other hand, retirement planning is the process of determining retirement income goals, and the actions and decisions necessary to achieve those goals.

The modern scene tends to look upon available life insurance products from the perspective of meeting various needs. Personal needs include:
• Final (end of life) expenses
• Educational funds
• Dependents’ living expenses
• Retirement income
• Mortgage repayment fund
• Emergencies fund (usually needed to meet unexpected expenses)
• Disability income

In the Core Subject for this Insurance Intermediaries Quality Assurance Scheme, “Principles and Practice of Insurance”, it includes:
• Insurable Interest
• Utmost Good Faith
• Proximate Cause
• Indemnity
• Contribution
• Subrogation

The modern scene tends to look upon available life insurance products from the perspective of meeting various needs. In business needs it includes:
• Key persons
• Business owners
• Partnerships
• Employee benefits

Proximate cause is concerned with how the actual loss or damage happened to the insured party and whether it is a result of an insured peril. It also refers to determining the effective cause of a loss in the context of insurance claims.

The application of proximate cause is very much concerned with different kinds of perils. It includes insured perils, excepted (or excluded) perils, uninsured perils.

An excluded peril is a peril not covered in an insurance policy. If one of these operates with a claim, the insurer is not liable for the whole of or part of the loss, depending on the specifics of the exclusion.

Property insurance can either be named or comprehensive. In a named perils policy, only the perils specified in the contract are covered. An insured peril is an event that can cause damage or loss to property but is covered by an insurance policy that pays for the loss or damage if it occurs.

Principle of Proximate Cause
Proximate cause is a key principle of insurance and is concerned with how the loss or damage actually occurred and whether it is indeed a result of an insured peril. Suicide is a life policy exclusion, and the principle of the proximate cause will be an important tool to determine whether death arose from suicide or not.

Insurable interest is the basis of all insurance policies. It is a method of pooled risk exposure that protects policyholders from financial losses. To exercise it, the policyholder would buy insurance on the item or entity in question.

Indemnity refers to the insurer providing an exact financial compensation. Insurance companies provide coverage in exchange for premiums paid by the insured parties. These policies are commonly designed to protect professionals and business owners when they are found to be at fault for a specific event such as misjudgment or malpractice.

Indemnity corollaries
This principle is a corollary to the principle of indemnity in the sense that it prevents the insured to be benefited by loss after receiving the loss from the insurer, A corollary is a sub-principle, and indemnity has two corollaries, contribution, and subrogation.

Principle of Contribution
In the principle of contribution, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. An individual may have more than one policy on the same property and in case there was a loss and he was to claim from all the Insurers then he would be obviously making a profit out of the loss which is against the principle of Indemnity.

Principle of Subrogation
When the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer. According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.

In simple terms, insurable interest is such a relationship with the subject matter of insurance that is recognized at law or in equity as giving rise to a right to ensure that person’s life. Its key points include:
• Statutory requirement
• Effect of lack of insurable interest
• Insurable interest in oneself and in a spouse
• Insurable interest in others
• Blood relationships and family members
• Statutory extension of insurable interest

Insurable interest in oneself and in a spouse
In the insurable interest in oneself and in spouse the exceptions of insurable interests founded on judicial presumptions or statute, as case law reveals, there must be an interest which is capable of valuation in money.

In the insurable interest in others, with the exceptions of insurable interests founded on judicial presumptions, as case law reveals, there must be an interest that is capable of valuation in money. It includes debtors, business partners, and contractual relationships.

Statutory requirement
In life insurance, it is the requirement for an insurable interest is derived from section 64B of the Insurance Ordinance. The purpose of statutory reserves is to help ensure that insurance companies have adequate liquidity available to honor all of the legitimate claims made by their policyholders.

It is a term used in accounting to describe the opposite of a creditor. If a person owes them money, they may insure his life for the amount of the loan, plus accrued interests. The party to whom the money is owed might be a supplier, bank, or other lenders who is referred to as the creditor.

Contractual relationships
If another person’s services have been engaged under contract that person’s death may cause the other contracting party to suffer financially and that potential loss is insurable.

Blood relationships and family members
In some countries, a family relationship prescribed by the relevant law (brother, sister, parent, child, grandparent, grandchild, etc.) is sufficient to constitute an insurable interest.

Effect of lack of insurable interest
Section 64B renders a contract of life insurance void where the person for whose use or benefit or on whose account it is made has no interest. The policyholder, who was also the beneficiary of a life insurance policy, brought an action against the insurer for policy proceeds, which the insurer was withholding pending its investigation as to whether the policyholder had an insurable interest in the subject of the life insurance policy.

In Hong Kong, by virtue of Section 64A of the Insurance Ordinance, a parent or guardian of a minor is given an insurable interest in that young person. It means that, apart from one’s spouse, only the relationships just mentioned constitute an insurable interest arising from blood or family connection. An insurance effected on the basis of any other blood or family relationship is technically void.

Sections 64C and 64D of the Insurance Ordinance
These Sections have two other important provisions:
• The person interested in the life insured, or for whose use or benefit or on whose account the contract is entered into, must be named in the contract.
• No more than the amount of the interest the insured has in the life insured is recoverable under the contract.

Utmost good faith requires the applicant to disclose all material facts, whether the insurer requests them or not. It is legally defined as ‘every circumstance which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will accept the risk’. It is also anything that may influence the judgment of a prudent insurance underwriter in deciding whether to accept a risk and if so at what premium and terms.

An insurable interest is only needed when the contract begins and becomes irrelevant thereafter. The legal consequences of this are:
• Divorce
• Debts
• Assignment