(a) What is credit? (b) List and explain six principles of insurance.

Answer Details

(a) Credit

Credit is an arrangement whereby goods, services or money are supplied to a person on trust, allowing him to pay for them at a later agreed date rather than immediately. It is a means of buying now and paying later.

(b) Principles of insurance

1. Utmost good faith (uberrimae fidei): Both parties, especially the insured, must disclose all material facts about the risk honestly and completely; concealment of a material fact makes the contract void.
2. Insurable interest: The insured must have a lawful financial interest in the subject matter, such that he would suffer a loss if it were damaged or destroyed.
3. Indemnity: The insured is placed back in the same financial position he was in before the loss, no more and no less, so that he does not profit from the loss. (This does not apply to life assurance.)
4. Subrogation: After the insured has been fully compensated, the insurer takes over any rights or remains of the damaged property so that the insured does not gain twice for the same loss.
5. Contribution: Where the same risk is insured with more than one insurer, each insurer contributes proportionately to the loss so that the insured recovers only the actual amount of the loss once.
6. Proximate cause: The insurer is liable only for a loss caused directly by the risk insured against, and not by a remote or excluded cause.