Note : This chapter of the Guide is only intended as a guide to better understanding of your policy and of the actions that you must take in various situations. You must refer to your Policy wording and Schedule for precise details of your cover and all terms, conditions, limitations and exclusions applicable to it.
To more fully understand what Insurance is and why it is so necessary, it is first of all important to understand what is meant by the term Risk. We can readily identify with the risks of everyday life such as crossing the road or even just getting up in the morning, they are a routine part of our lives. There are, however, some risks we encounter which could impose upon us financial responsibilities of such consequence that we would be unable to meet the cost in the event of their happening.
Such responsibilities could arise out of loss or damage to property or the incurrence of a legal liability. It is this serious financial burden which insurance seeks to alleviate. It should be emphasised however, that while risk attaches to all aspects of our lives, insurance does not seek to protect you against all such risks - you will still take the “risk” of getting up in the morning!
Principles of Insurance
Insurance is intended to cover the risk of fortuitous loss, that is to say the loss that may happen and not the one which will inevitably happen. The Insurance Company (the Insurer) accepts a premium to provide cover for such losses. From the accumulated premiums the Insurer creates a fund from which it compensates those who are unfortunate enough to suffer a loss.
The word Indemnity occurs in your insurance policy as a promise made by the Insurer to you (the Insured). In the event of a certain event happening the Insurer promises that it will indemnify you, which means that it undertakes to place you in the same financial position after the loss as you were immediately before, subject to certain exclusions and limitations of liability contained in your policy.
For example, if the School burns down insurance will pay for the cost of rebuilding. Likewise if, as a result of a School Activity you incur a legal liability, the Insurer will undertake to pay legal costs and expenses and damages which may be agreed with the approval of the Insurer or awarded by a court.
Premium is the charge that you pay to the Insurer for the financial protection of insurance. The premium recognises risk as having a potentially high cost with a low chance of probability. In other words, the premium takes into consideration the fact that not every School will have a claim.
Premiums are calculated by taking into consideration a number of factors:-
1. The statistical cost of claims.
Over a period of time the Insurer will accumulate detailed statistics of the type and cost of claims, including trends. For example, the number and cost of Professional Indemnity and Employment Practices Liability claims have increased over the last five years.
2. Costs of Administration
The cost of administration refers to the overheads incurred by any organisation or company in carrying out their day-to-day activities, such as employment costs, heating and maintenance. In the case of an Insurer these would also include the costs of issuing policies and other documentation, dealing with enquiries from policyholders and prospective clients, and the handling of claims.
The need for profit by an Insurer, particularly when Schools in general find themselves under financial constraint requires some additional amplification.
Insurers, like very many other businesses, have shareholders who invest funds in the business of the Insurer. Under insurance law a certain minimum level of funds, known as a Solvency Margin, must be maintained by the Insurer for them to be allowed to continue to operate the business. Usually shareholders maintain a multiple of this solvency margin, X2 or X3, for prudent management reasons.
Profit is therefore required to provide a return to shareholders. Given the risk which is inherent in the insurance business, the return needs to be in excess of that which is available from a risk free investment, such as Government Gilts, otherwise it would be safer for shareholders to invest their funds elsewhere for the same level of return.
So far we have dealt with Risk, the general principles of Insurance and the component parts of Premium. The acceptance of the risk by the Insurer constitutes a contract between the Insured and the Insurer. An insurance Policy is evidence of the contract between the parties and seeks to draw together all these factors.
The Policy outlines what risks are covered and those which are excluded and what limits there are to the Insurer’s liability.
The contract between the Insurer and the Insured is for a period of one year and is renewed each year by payment of a renewal premium.