(a) Explain the term "risk" in insurance. (b) List and explain five features of insurance contracts.

Answer Details

(a) Meaning of risk in insurance

In insurance, risk refers to the uncertainty of loss, that is the possibility that an unfavourable or adverse event may happen and cause a financial loss. It may also refer to the peril insured against, the property or person exposed to loss, or the chance that the event insured against will occur. Insurance exists to transfer this uncertainty of loss from the individual to the insurer in return for a premium.

(b) Five features of insurance contracts

1. Utmost good faith (uberrimae fidei): Both parties, especially the proposer, must disclose fully and truthfully all material facts affecting the risk.
2. Insurable interest: The insured must have a legal or financial interest in the subject matter, so that he stands to lose if it is damaged or destroyed.
3. Indemnity: The insurer undertakes to restore the insured to the financial position he occupied just before the loss, no more and no less (except for life and personal accident).
4. Offer and acceptance (consensus): Like every valid contract, there must be a definite offer by one party (usually the proposal) and unqualified acceptance by the other, supported by consideration (the premium).
5. Proximate cause: The insurer is liable only for a loss brought about by the nearest, most effective cause that is insured under the policy, not a remote cause.