Insurance

RIA SANTOS FAJILAGO

ASSOCIATE PROFESSOR III
DEPARTMENT OF BANKING AND FINANCE
COLLEGE OF ACCOUNTANCY AND FINANCE
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
 2
Insurance Defined
Insurance refers to a contractual arrangement in which one party, i.e. insurance company
or the insurer, agrees to compensate the loss or damage sustained to another party, i.e. the
insured, by paying a definite amount, in exchange for an adequate consideration called as
premium.

Insurance is a contract, represented by a policy, in which an individual or entity receives

financial protection or reimbursement against losses from an insurance company. The
company pools clients' risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both big and small,
that may result from damage to the insured or her property, or from liability for damage or
injury caused to a third party.
 3
Life Insurance
 Life insurance is a contract between an insurer and a policyholder in which the
insurer guarantees payment of a death benefit to named beneficiaries upon
the death of the insured. The insurance company promises a death benefit in
consideration of the payment of premium by the insured.
 The purpose of life insurance is to provide financial protection to surviving
dependents after the death of an insured. It is essential for applicants to
analyze their financial situation and determine the standard of living needed for
their surviving dependents before purchasing a life insurance policy.
 Life insurance agents or brokers are instrumental in assessing needs and
establishing the type of life insurance most suitable to address those needs.
Several life insurance channels are available including whole life, term life,
universal life, and variable universal life (VUL) policies. It is prudent to re-
evaluate life insurance needs annually, or after significant life events like
marriage, divorce, the birth or adoption of a child, and major purchases, like a
house.
 4
Components of a Life Insurance Policy
 Death benefit is the amount of money the insurance company guarantees to the
beneficiaries identified in the policy upon the death of the insured. The insured will choose
their desired death benefit amount based on estimated future needs of surviving heirs. The
insurance company will determine whether there is an insurable interest and if the insured
qualifies for the coverage based on the company's underwriting requirements.
 Premium payments are set using actuarially based statistics. The insurer will determine the cost
of insurance (COI), or the amount required to cover mortality costs, administrative fees, and
other policy maintenance fees. Other factors that influence the premium are the insured’s
age, medical history, occupational hazards, and personal risk propensity. The insurer will
remain obligated to pay the death benefit if premiums are submitted as required. With term
policies, the premium amount includes the cost of insurance (COI). For permanent or universal
policies, the premium amount consists of the COI and a cash value amount.
 Cash value of permanent or universal life insurance is a component which serves two
purposes. It is a savings account, which can be used by the policyholder, during the life of the
insured, with cash accumulated on a tax-deferred basis. Some policies may have restrictions
on withdrawals depending on the use of the money withdrawn. The second purpose of the
cash value is to offset the rising cost or to provide insurance as the insured ages.
 5

Non-Life Insurance
We define Insurance as “ a contract whereby one undertakes for a consideration
to indemnify another against loss, damage or liability arising from an unknown or
contingent event”.
It is a social device wherein the losses of a few are distributed among the many
which otherwise would be borne by the few.
It is a scheme whereby one substitutes a small definite loss for a large but uncertain
loss under an arrangement in which the fortunate many who escape loss will
compensate the unfortunate few.
 6
Non-Life Insurance
An insurance contract is an agreement under which one party is obligated to
make good the loss suffered by a second party through the occurrence of a
designated event.

The event must be a fortuitous one or beyond the control of either party.

A contract of insurance is an agreement, whereby one party on the one hand

called the Insurer undertakes for a consideration called the premium to indemnify,
one or more parties called the Insured against loss, damage or liability arising from
an unknown or contingent event.
MAJOR CLASSES OF GENERAL INSURANCE
or non-Life Insurance 7

a) Fire e) Aviation
b) Marine aa. Hull
aa. Marine Cargo bb. Liabilities
bb. Marine Hull f ) Engineering Insurance

c ) Motor Car aa. Contractors All Risks

aa. Private Car bb. Erection All Risks

cc. Machinery Breakdown
bb. Commercial Vehicle
g ) Miscellaneous Casualty Lines
cc. Land Transportation
Operator aa. Comprehensive General Liability
dd. Motorcycle bb. Scheduled Property Floater
ee. Motor Trade h) Bonds
d ) Personal Accident aa. Surety
bb. Fidelity
 8
History of Insurance in the Philippines
 During the Pre-Hispanic Era, the concept of insurance as we know it today is
non-existent. The Pre-Hispanic Filipinos, relying mostly on hunting and gathering
for their subsistence, did not have the need for it as they are more concerned
on how they will survive. Thus, every loss of a family or tribe member was borne
alone by the person, family, or tribe where the deceased belonged to.

 When the Spaniards came and colonized our country, insurance, in its present
concept, was introduced in the Philippines. The Lloyd’s of London, simply known
as Lloyd’s, is an insurance market located in London’s primary financial district,
the City of London. It introduced the concept of insurance to the Philippines by
appointing Strachman, Murray & Co., Inc. as its representative in the country.
The Insurance Commission of the 9
Philippines
The Insurance Commission is a government agency under the Department of
Finance.

The Commission supervises and regulates the operations of life and non-life
companies, mutual benefit associations, and trusts for charitable uses.

It issues licenses to insurance agents, general agents, resident agents, underwriters,

brokers, adjusters and actuaries. It has also the authority to suspend or revoke such
licenses.
 Functions of the Insurance Commission
10
 Promulgation and implementation of policies, rules and regulations governing the
operations of entities engaged in insurance, pre-need, and HMO activities as well as
benevolent features
 Licensing of insurance, reinsurance companies, its intermediaries, mutual benefit
associations, trusts for charitable uses, pre-need companies, pre-need
intermediaries, and HMO companies
 Conducting insurance agent’s examinations, as well as processing of reinsurance
treaties and request for investments of insurance companies
 Examination/verification of the financial condition and methods of doing business of
entities engaged in insurance business, pre-need, mutual benefit associations, trusts
for charitable uses, and HMO companies
 Evaluation and preparation of statistical reports, studies, researches, annual reports,
and position papers relative to insurance, pre-need matters, and HMO matters
 Review of premium rates imposed by life and non-life companies, mutual benefit
associations; statistical reports of adjusters to determine compliance with
established standards.
 Adjudication of claims and complaints involving loss, damage or liability incurred by
an insurer under any kind of policy or contract of insurance or suretyship;
 Review and approval of all life and non-life policies, pre-need, and HMO plans
before sale to prospective clients.
 11
Advantages of life insurance

 It provides income while your family is adjusting

 It funds specific financial goals
 It covers medical and funeral expenses
 It pays for taxes and debt
Purpose of Life Insurance 12

The primary purpose of life insurance is to protect survivors who depend on the
insured person, also called the policy owner, for financial support.
Unlike the beneficiaries of other types of insurance, the beneficiaries of life
insurance — people who receive the benefits — aren’t the insured person. His or
her survivors are the beneficiaries. There can be more than one beneficiary of an
insurance policy.
A key to the amount of life insurance a person needs is the amount of additional
money the survivors will need to maintain their quality of life if the insured person
dies.
Life insurance can also be a valuable financial tool for planning what will happen
to your remaining money after you die, which is called estate planning.
It can help in transferring ownership of a business after you die, which is referred
to as business succession planning.
Contribution of Insurance to the
13
welfare of the country
 Wealth of the society is protected: The loss of a particular wealth can be protected
with insurance. Life insurance provides for loss of human wealth. The human force, if
it is strong, educated and care-free, will generate more income. Similarly, the loss of
damage of property at fire, accident etc., can well indemnified by property
insurance, cattle, crop, profit and machines are also protected against their
accidental and economical losses. With the advancement of the society, the
wealth or the property of the society attracts more hazard and so new types of
insurance are also invented to protect them against possible losses. Through the
prevention of economic losses, insurance protects the society against degradation.
Through stabilization and expansion of business and industry, the economic security
is maximized. The present, future and potential human and the property resources
are well protected.
 Economic Growth of the country: For the economic growth of the country,
insurance provides protection against loss of property and adequate capital to
produce more wealth. Welfare of employees creates a conducive atmosphere to
work. Adequate capital from insurers accelerates production cycle. Similarly in
business, too, the property and human materials are protected against certain
losses, capital and credit are expanded with the help of insurance. Thus, the
insurance meets all the requirements for the economic growth of a country.
 14
Law of Probability

 the theory of probability (also known as probability theory or theoretical

probability) is a statistical method used to predict the likelihood of a future
outcome. This method is used by insurance companies as a basis for crafting a
policy or arriving at a premium rate.
 The theory of probability aims to establish patterns for the occurrence of various
types of events by using mathematical or statistical methods.
 Insurance companies use this approach to draft and price policies. When
issuing health insurance, for instance, the policy given to a smoker is likely more
expensive than the one issued to a non-smoker. Statistical figures show a
stronger association with a variety of health risks for habitual smokers or those
with a history of smoking. Insuring a smoker, then, is a greater financial risk given
their higher probability of serious illness and, hence, of filing a claim.
Theory of Cooperative sharing 15

Cooperative insurance is when a group sharing a common trait, often a risk factor
for which they are insuring, but not always, get together to, in essence, sell
insurance to each other.
For example, a group of 100 teachers will get together, and each share in P200 a
month for 1,000,000 coverage. If there are no losses, once a reasonable reserve is
established, they will pay less, down to potentially a very small amount to cover
the cost of keeping the books and other such administrative costs. If there is a
large claim, they may have to pay more until they are "caught up". Each
participant is an equal owner or proportional owner (So, either everyone owns
1/100th of the company, or the guy who pays 5% of the premiums, because he
has the biggest policy, owns 5% of the company.) depending on how the
Cooperative is set up.
 16
PHILIPPINES LIFE EXPECTANCY
HISTORY
World Rank

Year Male Female All M F All

1960 51.6 55.3 53.4 85 83 85
1970 55.7 59.2 57.4 88 90 89
1980 59.4 63.3 61.3 95 97 96
1990 63.6 67.8 65.6 102 107 106
2000 63.9 69.9 66.8 110 113 111
2010 64.8 71.2 67.9 118 116 121
2016 66.2 72.6 69.3 126 118 123
 17
Basic Plans
 Health Insurance
 This is the big one. In 2009, over 60 percent of all personal bankruptcies were related
to health insurance costs.
 When purchasing health insurance, consider the following:
 Needs: Young and healthy single people require less coverage than those with
young families, the elderly, or those with chronic health issues. Do you plan on using
your insurance a lot? If so, you’re going to want a low deductible and copays.
 Doctors: One of the first questions you should ask about a plan is if it allows you to
keep your current physician.
 Cost: You can obviously only afford so much, so know what you can afford.
Shopping for plans with higher copays and deductibles will save you money on your
premium.
Basic Plans
 Car Insurance 18
 Not only will you want car insurance, nearly every state requires that you have it.
 For those with an older car, no more than the bare minimum may be required.
 However, if you have a newer car or a car with a high value, you will also want to
insure it against theft.
 The main types of car insurance are:
 Liability: Liability coverage comes in two forms: bodily injury and property damage
liability. These cover damage to others and their property. They do not cover the
driver or passengers.
 Personal Injury Protection: This type of coverage will cover medical expenses
related to driver and passenger injuries.
 Collision: Get collision insurance if you want your insurance to cover the cost of
damage done to your car, whether you are at fault or not.
 Comprehensive: Collision only covers damage done in an accident. For example, if
a tree falls on your car and destroys it, you’ll need comprehensive insurance to get
compensation.
 Uninsured or Underinsured Motorist: This covers you in the event that the person who
hits your car does not have enough insurance to cover the damage — or any
coverage at all.
 19
Basic Plans
 Homeowner’s or Renter’s Insurance
 Renter’s insurance covers you against damage or theft of personal items in an
apartment. For urbanites, the low cost of renter’s insurance can be well worth
the peace of mind that it provides.
 Homeowner’s insurance is absolutely essential. It protects your most valuable
asset against damage and theft.
 However, sometimes homeowner’s insurance isn’t enough to fully protect your
home.
 Ask your insurance agent if you need additional insurance against flooding,
earthquakes, fires and other disasters that might not be covered under
standard plans.
 20
Basic Plans
 Life Insurance
 No one likes to think about it, but life insurance is an essential component of
protecting your family in the event that you pass before your time.
 There are costs associated with dying, such as burial and mortuary fees. Further,
if you are the primary breadwinner, life insurance will help your family to offset
the lost income.
 The latter is the main reason that people get health insurance. The single and
childless might not need life insurance, but everyone else should invest in a
policy now.
 21
Basic plans
 Disability Insurance
 Disability insurance is actually quite a bit like life insurance. It reimburses you for
income lost during periods of time that you are not able to work.
 having this insurance makes good financial sense for the single and married,
parents and non-parents.
 Disability insurance can cover permanent, temporary, partial and total
disability.
 No one knows what tomorrow might bring and disability insurance is relatively
cheap — far less than the cost of not having it if something goes wrong.
Characteristics of a life insurance 22

plan
Here are the main characteristics of permanent life insurance
 Permanent insurance protection
 More expensive to own
 Builds cash value
 Loans are permitted against the policy
 Favorable tax treatment of policy earnings
 Level premiums
Characteristics of a life insurance 23

plan
Here are the main characteristics of term life insurance
 Temporary insurance protection
 Low cost
 No cash value
 Usually renewable
 Sometimes convertible to permanent life insurance
 24
Risk selection

 Risk selection is one of the ways insurance companies screen insurance applicants.
It involves classifying applicants using underwriting principles and determining the
amount of premium they should offer to a given applicant.
 This is the screening process that is used generally in the insurance industry. The
underwriter decides what the insurer should cover and what they should exclude.
They also slot the applicant into a group according to the risk they pose to the
insurance company. The basic groups are:
Standard: the applicant is offered the basic rate
Substandard: the applicant is deemed a higher than usual risk and is offered a
more expensive premium
Preferred: the applicant is considered a low risk and is offered a premium discount
accordingly
 25
Policy Provisions

SECTION 48. The written instrument, in which a contract of insurance

is set forth, is called a policy of insurance.

SECTION 49. A policy of insurance must specify:brary

(a) The parties between whom the contract is made;

(b) The amount to be insured except in the cases of open or running policies;
(c) The rate of premium;
(d) The property or life insured;
(e) The interest of the insured in property insured, if he is not the absolute owner
thereof;
(f) The risks insured against; and
(g) The period during which the insurance is to continue.
 26

Legal Aspects
 insurance contract is a legal document that outlines the rights and obligations of
the insured and insurer. He tells students that he teaches this class by sharing stories,
discussing scenarios, and defining terms as they relate to life and property insurance
contracts.
 Characteristics of the Insurance Contract
Aleatory contract - the insured pays premiums in return for coverage. Sometimes
the insured pays a small amount before the insurer covers a claim and other times the
insured pays premiums for decades and never files a claim.
Unilateral contract - the insured promises to pay premiums and report a claim; in
return the insurer will pay the claim.
Contract of adhesion - the insurer sets the terms and conditions of the contract and
the insured has little to no authority to make changes.
Conditional contract - the insured and insurer are obligated to perform a duty
under the contract.
 27
Governing Law
REFERENCES 28

 https://businessjargons.com/insurance.html
 https://www.investopedia.com/terms/l/lifeinsurance.asp
 https://www.insurance.gov.ph/faqs/
 https://www.slideshare.net/junfalcon/introduction-to-non-life-insurance-short-
course?from_action=save
 https://www.worldlifeexpectancy.com/country-health-profile/philippines
 https://www.doh.gov.ph/mortality
 https://www.mbaknol.com/investment-management/the-role-and-importance-of-insurance/
 http://insrancetrusts.blogspot.com/2011/12/types-of-risk.html
 http://insrancetrusts.blogspot.com/2011/12/types-of-risk.html
 https://www.insuranceopedia.com/definition/4025/risk-selection