CHAPTER 1: INTRODUCTION I. INSURANCE 1. Insurance Definition - Insurance is a contract whereby, in return for the payment of premium by the insured, the insurers pay the financial losses suffered by the insured as a result of the occurrence of unforeseen events - The insured: người đc bảo hiểm the one who is insured against a kind of risk - The insurer: the one who promises to compensate in case the contracted risks happen to the insured (the party to an insurance arrangement who undertakes to indemnity for losses) -> the risk should be written/agreed upon in the contract. - Policyholder: the person/entity who buys the insurance and receives the indemnity on happening of unforeseen events - Premiums: the amount of money that the insurer pays to the insured on the happening of an uncertain event - Life Insurance Companies: Prudential, AIA, Sun Life, Bảo Việt 2. Nature of insurance - Payment of fortuitous losses: Insurance pays for losses that are unforeseen, unexpected, and occur as a result of chance. - Financial Protection: - only compensate in money, if the event is certain you can not buy insurance, it should be an uncertain event. - A person can avail of this protection by paying a premium to an insurance company - Risk transfer from the insured to the insurer: why “risk transfer” the potential loss from an adverse outcome faced by an individual or entity is shifted to a third party - Insurance works on the basic principle of risk-sharing: many insureds have the same risk when sharing the risk - Example 1 (house): 1000 houses in the village valued at 40000/house, each house owner contributes $300, houses burning in a year = 5, total annual loss = 200000. Assumption: all houses share a common fire risk - Example 2: things to ask premium, compensation, left and effect 3. The subject/matter insured: Đối tượng bảo hiểm - The person, group, or property for which an insurance policy is issued - Liability insurance: trách nhiệm dân sự với bên thứ 3 (ví dụ bảo hiểm xe máy để 50tr là chi trả cho người bị mình gây ra tại nạn) vì tính mạng, tài sản của mình mình được quyền lựa chọn, bên thứ 3 ko được quyền lựa chọn 4. Reinsurance and Co-insurance ● Reinsurance: Practice where an Insurance company (the insurer) transfers a portion of its risks to another (the re-insurer). Legal right of the policyholders (insureds) are in no way affected by reinsurance, and the insurer remains liable to the insureds for insurance policy benefits and claims. ○ ● Condition to use reinsurance: subject matter has a high value, high chance of risk happening Coinsurance: a risk-spreading procedure wherein the insured risk is distributed among two or more insurance companies, each bearing a proportional share of the risk and obligating itself directly to the common insured. ( the insured may sign many contracts with different insurers, and each insurer shares a part of the risk (risk distribution)) ○ Use case: health insurance -> Coinsurance is cost-sharing between an insurance company and the policy owner. ○ Example: In property insurance, it means buying a policy that covers a specified percentage of the replacement value. In health and dental insurance, coinsurance is the percentage of costs you cover out-ofpocket. The relationship between the insured and the insurer ● Reinsurance: 1 contract -> used cases: high insurance value + higher chance of risk happening ● Coinsurance: multiple contracts In the Coinsurance, can the risk the insurer 1 agreed in the contract 1 = the risk the insurer 2 agreed in the contract 2? -> a%+b%+c% = 100%? No -> a%=b%=c%? Yes, if a%+b%+c% is no more than 100% -> a%+b%+c% > 100%?? No nó giống case A > V thì sẽ trục lợi từ bảo hiểm ● Double Insurance: Mr. A involves in 3 insurance policies for this car at 3 insurance companies X, Y, and Z with insurance amounts are 300, 400, 500 million VND (insurance for the physical value of the car); Assuming that the value of the car is 500 million VND. Define the compensation of each insurer? ○ Company X= 500 * (300/1200) = 125 ○ Company Y = 500 * (400/1200) = 166.7 ○ Company Z = 500 * (500/1200) = 208.3 ○ Trong trường hợp ko phân biệt giữa"bảo hiểm toàn bộ" và " bào hiểm một phần" thì tính theo cách trên ○ 1200: tổng số tiền bảo hiểm của tất cả các hợp đồng 5. Insurance Value vs Insurance Amount ● Insurance Value (V): The term “value” refers to the value of the property, on the same basis used in indemnifying losses; that basis is usually actual cash value or replacement cost. ○ The replacement value of the property is equal to the amount it would cost to fully repair or replace the property if it must be reconstructed or purchased new. ○ Actual cash value: claims payment will be based on the cost of buying items in a similar condition to the ones you lost; deprecation will be factored into your payment. Example: A (Insurance Amount): you require only 15mil -> in case of loss of one part or entire loss, the maximum amount you receive is 15mil ● Insurance amount: a certain amount of insurance coverage that the insured requires in the insurance policy, it can be a part or an entire of insurance value (The maximum amount of compensation you would receive in case of risk happen) ○ Notice: the projected profit and shipping can be added to the insurance value, the maximum added to A is 30% ○ Example: ■ V= 30mil, 1% premium -> 300.000VND ■ A= 15mil, 1% premium -> 150.000VND ■ Buy insurance for damage with requiring cost: 1mil -> V/A = 50% -> Compensated amount: 50%*1mil = 500.000 6. Type of insurance: ● Private Insurance: Life and Health// Property and Liability. ○ Life insurance: pays death benefits to beneficiaries when the insured dies ○ Health insurance: covers medical expenses because of sickness or injury ○ Disability plans: pay income benefit ○ Property: indemnifies property owners against the loss or damage of real or personal property ○ Liability: covers the insured’s legal liability arising out of property damage or bodily injury to others ● Government Insurance: Social Insurance// Other Government Insurance. Insurance rate or also called premium: a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. ● Factors affected the insurance rate (premium) ○ The larger the number of people share the risks ○ Time period ○ Type/characteristic of person or property ○ Risk level associated with the insured person or property ○ ○ Market condition (supply & demand) The insurance's company underwriting standards II. RISK 1. Risk concept - The risk concept is used to describe all the accidental happenings (unforeseen, unexpected, unavoidable, already, do not know what will happen) which produce a monetary loss - Result of risk: loss -> uncertainty concerning the occurrence of a loss - chance of loss or the probability of risk occurrence: high probability - chance of premium: high 2. Methods of handling risk - Buy insurance - Avoidance: disadvantages are higher costs, missing opportunities, not all the risks should be avoided - Loss Control: consists of certain activities that reduce both the frequency and severity of losses - Loss prevention: reduce the frequency of a loss (e.g control weight, stop smoking, eat healthy diets) -> the risk may still happen - Loss reduction: reduce the severity of a loss -> the risk may still happen - Non-Insurance Transfer: transfer risk to someone rather than the insurer (insurance company) 3. Risk classification a. Characteristics of insurable risk (6 characteristics) ● A large number of exposure units: to predict average loss ● Accidental and unintentional loss: ○ to control moral hazard ○ to assure randomness ● Determinable and measurable loss: to facilitate loss adjustment -> Insurer must be able to determine if the loss is covered and if so, how much should be paid. ● No catastrophic loss: ○ to allow the pooling technique to work. ○ exposures to catastrophic loss can be managed by: ■ dispersing coverage over a large geographic area ■ using reinsurance ■ catastrophe bonds ● Calculable chance of loss: to establish an adequate premium. ● Economically feasible premium: ○ so people can afford to buy ○ The premium must be substantially less than the face value of the policy b. Type of risk ● ● ● ● i. Pure risk vs speculative risk Pure risk: as a situation in which there are only the possibilities of loss or no loss. Speculative risk: a situation in which either profit or loss is possible. Why do we need to distinguish between speculative risk vs pure risk ○ The insurer often focus on pure risk rather than speculative risk ○ The law of a large number of exposure units can be applied more easily to pure risks than to speculative risks to forecast the future average loss ○ Society can benefit from speculative risk even if the loss happened, however, it is harmed if a pure risk is present and a loss occurs. ii. Diversified vs Nondiversifield risk Diversified risk (nonsystematic risk): a risk that affects only individuals or small groups and not the entire economy -> can be reduced by diversification. ○ Example 1: higher risk when 100% investing in stock, lower risk when distributing to stock, bonds,... ○ Example 2: car thefts, robberies, and dwelling fires. Only individuals and business firms that experience such losses are affected, not the entire economy. ● ● ● ● ● Nondiversified risk (systematic risk): a risk that affects the entire economy or large numbers of persons or groups within the economy. It is a risk that cannot be eliminated or reduced by diversification. ○ Examples: inflation, cyclic unemployment, war, hurricanes, floods, and earthquakes iii. Personal, Property and Liability Risk Personal risk: directly affect an individual or family (premature risk, Insufficient income during retirement, Poor health, Unemployment) -> results in a reduction in income, assets,... Property risk: risks—the risk of having property damaged or lost from numerous causes. ○ Direct loss: financial loss from physical damage, destruction, or theft of the property. ○ Indirect or consequential loss: financial loss that results indirectly from the occurrence of a direct physical damage or theft loss. Example: nếu cháy nhà thì sẽ chủ nhà ngoài direct loss như giá trị nhà,xe thì chủ nhà có thể require additional expenses cho việc tìm chỗ ở khác, bệnh tật,... Liability risk: là một loại trong pure risk. Liability risks are important because: ○ there is no maximum upper limit with respect to the amount of the loss (tức là có thể bị kiện bao nhiêu thì kiện nếu mình gây ra tai nạn cho người dc bảo hiểm) Example: cash value of your car is 20.00$ and its maximum physical loss is 2000$. If you cause an accident that results in serious bodily injury to the other driver, you can be sued (bị kiện) for any amount—$50,000, $500,000, $1 million or more—by the person you have injured. ○ a lien can be placed on your income and financial assets to satisfy a legal judgment. ○ legal defense costs can be enormous. If you have no liability insurance, the cost of hiring an attorney to defend you can be staggering. If the suit goes to trial, attorney fees and other legal expenses can be substantial. ○ Enterprise risk: all major risks faced by a business firm. Such risks include pure risk, speculative risk, strategic risk, operational risk, and financial risk. ○ Strategic risk: uncertainty regarding the firm’s financial goals and objectives; for example, if a firm enters a new line of business, the line may be unprofitable. ○ Operational risk: the firm’s business operations. For example, a bank that offers online banking services may incur losses if “hackers” break into the bank’s computer. ○ Financial risk (changes in commodity prices, interest rates, values of money, exchange rate): Firms face a variety of pure risks that can have serious financial consequences if a loss occurs; Loss of business income: when a firm must shut down for some time. ○ Others: ■ ■ ■ ■ HR exposures: job-related injuries -> operational risk Foreign loss exposures: acts of terrorism -> financial risk Intangible property exposures: damages to the market reputation and public image of the company Government exposures: violation of safety standards c. Risk and Society ● Indemnification for Loss: Contributes to family and business stability ● Reduction of Worry and Fear: Insureds are less worried about losses ● Source of Investment Funds: Premiums may be invested, promoting economic growth ● Loss Prevention: Insurers support loss-prevention activities that reduce direct and indirect losses ● Enhancement of Credit: Insured individuals are better credit risks than individuals without insurance The burden of risk of society (3 majors) (1) without insurance, individuals and businesses have to maintain a large emergency of funds: nếu ko mua bảo hiểm cho căn nhà thì home owner phải spilt một phần income để phòng trừ trường hợp có risk cháy nhà xảy (2) the risk of liability lawsuit may discourage innovation, depriving society of certain goods and services: có nhiều công ty cung cấp vaccines cho trẻ em, nhưng mà liability risk khá lớn nên số lượng công ty cung cấp vaccine cho trẻ em cũng giảm -> discourage development of this services (3) risks cause worry and fear: lo lắng khi tham gia giao thông Social Costs of Insurance: ● Cost of Doing Business: ○ Insurers consume resources in providing insurance to society ○ An expense loading is the amount needed to pay all expenses, including commissions, general administrative expenses, state premium taxes, acquisition expenses, and an allowance for contingencies and profit. ● Cost of Fraudulent and Inflated Claims ○ Payment of fraudulent or inflated claims results in higher premiums to all insureds, thus reducing disposable income and consumption of other goods and services. CHAPTER 2: FUNDAMENTAL LEGAL PRINCIPLES Outline: ● Repayment of a random loss ● Utmost good faith ● Insurable interest ● Indemnity. ● Subrogation: nguyên tắc thể quyền 1. Repayment of random loss ● ● The timing and occurrence of the loss must be uncertain (you don’t know where, when) In which case can you know where and when the risk happens: ○ For life insurance, the insurer requires a health check before signing the contract ○ The insurer waits for a “certain time” for a certain type of disease until they compensate: e.g: cancer. Sau khi sign contract xong mà bên mua bảo hiểm phát hiện ung thư thì công ty bảo hiểm áp dụng thời gian chờ (normally 6 tháng) rồi mới compensate cho bên mua bảo hiểm ● Deductible amount (mức miễn trừ): only damage or loss over the amount of the deductible is covered by the insurance policy (remind the insured to be careful to protect themselves) V = 50mil A = 50mil => A=V -> The insurance company introduces the “deductible amount” value at 500k. In this case, the loss is 1mil so there are two cases of compensation ● Deductible amount: 500k ● Nondeductible amount: 1mil 2. Utmost good faith: nguyên tắc trung thực tuyệt đối ● Both parties must be honest ● The insurer must be honest: have to declare and give an explanation on the terms and conditions in the contract (maybe a kind of risk, exception, the time/period, the premium, the insurance rate) ● The insured must be honest on: materials & information ab subject matters that must be declared: property, accidents happen, the value of property ○ Material infor is that infor which enables the insurer to decide: ■ Whether he will accept the risk ■ If so, at what rate of premium and subject to what terms and conditions ○ Examples of materials facts ■ Of a house insurance ■ Of a person ● ■ Of a car ■ Of a camera Khi nào thì nguyên tắc trung thực tuyệt đối bị vi phạm (violated) ○ The insured: ■ Unintentional: buy 2hand car and buy insurance (2hand card can have some problems already), so if the accident happens the insured will imintentionally claim for the insurance ■ intentional: ○ The insurer: ● CHAPTER 3: MARINE INSURANCE I. Introduction 1. Definition of marine insurance ● Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport or property by which cargo is transferred, acquired, or held between the points of origin and final destination ● Marine risks happening to cargo during transportation: packaging, transport ○ Sinking ○ Burning ○ Collision ○ Fault of vessel management ○ Bursting of boilers ○ Latent defects in hull ○ Explosion ○ Water damage ○ Heavy weather ○ Ships sweat ○ Condensation ○ Improper stowage by carrier ○ Theft or pilferage ○ Non-delivery ○ Leakage or breakage ● The responsibility of the carrier is limited (basic liability with 17 exceptions bu Hague-Visby Rules) -> the burden will be on the cargo owner -> protect the cargo owner need to buy marine insurance ● The vessel faces lots of risk on the voyage (weather, sinking,...) -> high value of the ship 2. Needs for marine insurance ● Exporters and importers face all the time uncertainty of loss of their goods. ● Insurance is used to protect their financial interests against such risks and actual losses. ● Without adequate insurance and protection of the interests of those with goods in transit, international trade would be negatively affected. ● The liability of carriers to the goods is minimal/very limited. 3. History of marine insurance 4. Marine insurance market 5. Classification ● Marine cargo insurance (goods): the goods carried by sea and related reasonable costs ● Hull insurance (property + liability): material loss or damage to hull and machinery; collision liability ● Protection and indemnity insurance (liability insurance) ○ Protection: Risks that are connected with ownership of the vessel. E.g. Crew related claims. ○ Indemnity: Risks that are related to the hiring of the ship. E.g. Cargorelated claims. II. Marine Risk 1. Definition ● Marine risks are the risks that occur on the sea (collision, acts of god), of the sea (ship striking upon the rocks or other objects like an iceberg) and risk related to the ocean voyage (risk related to cargo transported by the car to the ship, socialpolitical actions,...) ● Risks are of many kinds, different risk means different loss, and different risks mean different causes 2. Types of marine risks a. Based on the causes ● Act of gods (natural): bad weather, earthquake, flood, tsunami,... ● Perils of the sea (natural): ship striking ● Risks caused by social-political actions (man-made): war, SRCC (Strikes, riots, and civil commotion: đình công, bạo loạn, nội chiến) ● Risks caused by particular actions of people (man-made): thieve, robber Search clauses of marine risk để xem kỹ hơn các loại risks b. Based on the insurance technique ● Insured common perils: insured in original insurance clauses ○ Main risks (6 risks): in any insurance clauses thì chỉ cover 6 cái main risks (chắc chắn sẽ được cover) -> the loss will be substantial. ○ Auxiliary risks: theft, rain, leakage, breakage, dampness, heating, hooking, rusting -> will be insured if you require ● ● Relatively excluded perils: risks that are not included in standard insurance clauses: War, SRCC Absolutely excluded perils: are not insured in any circumstances Loss damage or expenses attributable to the wilful misconduct of the assured ○ ○ ○ ○ ○ ○ Ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject - matter insured: (the nature of the subject matter inherent vice) Loss damage or expenses By insufficiency or unsuitability of the packing: Caused by delay: even the delay caused by the act of gods and cause the damage to the goods -> you will not be insured From insolvency or financial default of the shipowner: From the use of any weapon of war employing atomic or nuclear fission an/or fusion or other like reaction or radioactive force or matter:
