How Well Does Insurance Contract Regulation Work - Research Paper Example

How well does insurance contract regulation work? Insurance Insurance is a type of risk management technique principally used to mitigate or hedge against the risk of an unprecedented loss. Insurance is described as the fair transfer of the risk of a loss from one party or entity to another; this is carried out in exchange for a payment. There are two parties involved, the insurer which is the insurance company proffering or selling the insurance and the insured, widely known as policyholder, an entity or a person buying the insurance policy. The payment settled out for the insurance policy according to the density of insurance amount coverage is called the premium. An insurance policy is documented properly and the insured is handed over a contract which signifies the terms and conditions under which the insurance policy will be processed and the circumstances under which the financial compensation will be carried out1. Insurance has gained wide popularity after big global incidents and financial crises such as the 9/11 catastrophe and the financial meltdown of 2008/09. These events have spread a wing of insecurity among people in many areas of their lives, be it their life, their finances, their property or their relatives. This has escalated the demand of insurance all over the world and insurance companies have shown fruitful results in their financial statements. To have a clear and comprehensive description and analysis of insurance and its operation, the economics of insurance have to be taken into account and the understanding of insurance law and insurance contract regulation and its working is essential2. Insurance Law As every law in the world, there is a separate and credible law for insurance. Insurance law is a name designated towards the acts of law covering insurance comprising of insurance claims and policies. It contains all the principles of insurance including claim technicalities, compensation conditions, policy termination circumstances, indemnity, so on and so forth. Insurance law is based mainly on Insurance Contracts Regulations 1985 which have been established using the Insurance Contracts Act 1984. The presence and importance of insurance contracts regulations is utmost and considering a serious and delicate contract like insurance, a set of stringent regulations based on solid laws must be existent and implementable3. Insurance contracts regulations assist in numerous ways to the insurer as well as the insured and it created a specific, planned, professional progress way for the insurance policy throughout its tenor. Insurance Contracts Regulations As mentioned above about the imperativeness of concrete insurance contracts regulations, its working makes life easy for each and every middleman in the insurance issuing and retrieving policy. Insurance contracts regulations help in identifying the roles and discretions of the insurer and the insured or the policyholder and also clarifying the circumstances when these parties could be declared fraudulent or deprived of rights. These contract regulations can be bifurcated into three subdivisions, regulation pertaining to the business of insurance, regulation concerning the contents of an insurance policy and regulation directed towards managing and ordering of claims. In managing situations of controversies in cases of insurance policies, law courts refer to insurance contracts regulations and its applications in precedents to help solve lawsuit cases4. The existing and contemporarily used Insurance Contracts Regulations are that of 1985 which have been developed and amended as per the Insurance Contracts Acts 1984. These regulations assist in marking out the circumstances in which the insurance claims will be exercised and to what extent and to whom. To check out how well the insurance contract regulations work, the discussion of the Insurance Contract Regulations 1985 is essential5. Working of the Insurance Contracts Regulations Insurance Contract Regulations, regardless of which year they have been approved or published, always work for the benefit and smooth contract of insurance and its involved parties. It works on several types of insurance policies and gives lawful light on their technicalities and considerations. These regulations assure that the parties, the insurer, the insured and others related are progressing on the basis of solid and utmost good faith and not with fraudulent ideas and plans6. If we take on discussing particularly the Insurance Contracts Regulations 1985 developed in Australia and according to its laws, it is formulated on the basis of mainly three parts; Preliminary, Standard Cover and Miscellaneous. These divisions help in discussing about each situation directly and effectively. In the Preliminary part, there is an interpretation discussed about the circumstances eligible for claiming of insurance for the insured, the contents which are eligible for insurance, relevant and eligible contracts of insurance, the risk and application of expropriation towards the insured, the details about the correct insured person and its member of nomination also and so on. These points help in knowing and fighting for the right insurance claim over the right set of property or other assets7. Circumstances when insurance claims are applicable comprise of accidental damage caused to eligible contents of insurance and accidental injury caused to the insured person which must be unintended and not due to a disease or illness. Such clear regulations help considerably in progressing smoothly throughout an insurance policy and avoid end contradictions about whether an insurance claim is applicable on an asset or not. If an insured property is not being claimed by the insurer or it has been seized, there is a clear interpretation for expropriation and seizure of property in the regulations which can be referred easily8. Contents applicable for insurance Insurance Contract Regulations include the contents list on which insurance claims are applicable and they include: CONTENTS APPLICABLE FOR INSURANCE CLAIMS9 Contents Furniture, fixtures, furnishings and carpets Household items Clothing and other personal belongings Other items including a picture, a fur, jewellery ornaments and pieces, documents and collections of any type, silver or gold pieces Swimming pools related to residential facet only The above contents applicable are based on the Insurance Contracts Act 1984. Moreover, insurance directed towards home-building for the insured is based on the following principles which help lawyers and policyholders to clearly analyze their insurance policies: A building or property used basically and principally for residential purposes. Commercial buildings and other properties do not come under insurance claims as they reap out money for the insured which is beyond and out of the definition of insurance grants Furnishings external to the building or house, design enhancements and others done for familial purposes and not for non-residential motives are eligible for insurance claims Fixed wall structures, fixed ceiling and fixed floor enhancements other than moveable carpets are also relevant to insurance Gates in the house or building and fences are applicable as well Exclusion from building insurance claims The following properties are not insurable according to insurance contract regulations 1985: EXCLUSION FROM BUILDING INSURANCE CLAIMS Contents A hotel A motel A boarding house A property that is in during the progress of construction Any type of moveable or detachable temporary building A caravan, whether site-fixed or moveable A building or house that is rented out by the insured and which is not the principle residence of the insured Insured Person The regulations of an insurance contract such as of 1985 work to clearly define an insured person and its eligibility. An insured person under an insurance contract is one who has an insurance cover for his or her death, illness, injury or disease. This cover is variable according to the insurance contract. Eligible contracts of insurance As per the Insurance Contracts Regulation 1985, a contract of insurance is eligible if it is for new business, and it is completely in a faction of contracts that is classified as a class of contracts in relation to which Division 1 of Part V of the Insurance Contracts Act 1984 is applicable10. Prescribe rate of insurance or the premium As per the regulations, the prescribed rate of interest is 11% per annum. This is applicable on the assets mentioned under the insurance contract. Coming on to Part II of the regulations which entails the heading of Standard Cover, different types of insurance covers are discussed and pertaining to them, their prescribed contracts, events, exclusions and minimum amounts have been listed as well. Different assets of insurance covers and their specifications The Standard Cover section of Part II lists the following insurance types along with their specifications; they are listed namely according to divisions: Division 1 - Motor vehicle insurance: Applicable when in loss of, or damage to a motor vehicle of the insured or the liability for the loss or damage or devastation caused to the insured’s property due to the resulting impact of the motor vehicle with some other thing. The exclusions to such insurance comprise of depreciation, loss of value caused through wear and tear or rust and corrosion, breakdown due to electrical or mechanical breakdowns, etc11. Division 2 - Home buildings insurance: This insurance cover is applicable for a natural insured person whose home building has been damaged or devastated due to unforeseen circumstances such as fire or bombing explosions, natural disasters, theft, intentional acts or public riots. The exclusions to such insurance cover are somewhat similar to the previous one except erosion through insects, war or warlike influences resulting in damages and destruction to the home building. Division 3 - Home contents insurance: The prescribed insurance contract in this case is when there is a damage caused to the contents of a home or residential building including its furnishings, clothing, household items, etc. The exclusions to this type of insurance cover are almost the same with the addition of expropriation of the contents. Division 4 - Sickness and accident insurance: Here, insured or one of the insured persons will be eligible to attain a sickness and accident insurance if he or she is suffering from an illness or disease or with an injury. Deaths resulting from a self-imposed injury and through war or warlike activities are excluded from an insurance contract of sickness and accident insurance nature12. Division 5 - Consumer credit insurance: This is becoming one of the most used insurance covers as consumers’ living standards are rising and they are in need of more funds to support their living. Their loans can be shared through a consumer credit insurance policy which will be relevant in cases of death of the insured or sickness, major injury or unemployment of the insured. The exclusions for this type of insurance cover are the same as the sickness and accident insurance one. Division 6 - Travel insurance: This insurance cover is applicable when a natural insured person bears a financial loss due to travel fares incurred through any type of transport accommodation facilities used, loss of or damage to personal items at the time of travel and if the insured is caught up with an illness or disease while on the stated journey. Financial loss caused due to expropriation and war or warlike actions is excluded from a valid travel insurance contract13. Additionally, another division in part II is as follows: Division 7 - Limits on minimum amounts The above insurance cover types are always listed in insurance contract regulations with their prescribed contracts eligibility as to when they can be applicable, their prescribed events particularly relating to the country, their exclusions that cannot be covered under an insurance contract and the minimum amounts accepted for the respective insurance cover. The description of claims is also mentioned in the regulations set as this is in any insurance contract regulations set all over the world; this is another fact that proves that regulations work well in enhancing and succeeding insurance contracts14. Disclosure and Non-Disclosure terms It has been noted that in regulations of insurance contracts all over the world about policyholders to disclose every possible piece of information to the insurer, negation of which can lead to the reduction in the liability insurance by the insurer or even its cancellation. Insurance Contracts of General and Life Insurance genre are also discussed in insurance contract regulations and relating to them, disclosure and non-disclosure terms are also discussed15. Flexible Insurance Contracts Nowadays, insurance contracts are being designed with the consent of both the insurer and the insured with flexibility and quick amendments in the policy according to prevailing situations in favor of the insured. These can be changed as the lifestyle of the insured changes; the changes can be in the form of the total amount of insurance, its premium charges, its tenor, the premium payment schedule, etc. There is a part for this in regulations and insurance contracts can be made including such chances for amendments. These policies can also be transferred to other nominees named at the time of insurance contract formulation with the insurer and the charges and documents will then be shifted on the name of the nominee or nominees16. How well does insurance contract regulation work in different countries? Let’s get a glimpse of the insurance regulations and its working in different countries and states. European Union With around 27 member states with their own insurance regulators, the European Union has formed a prudential uniform rule throughout the union applicable in all the member states. Under this regime, any insurer all over the union can provide with insurance coverage services without being questioned by the respective state provided that the insurance contract is as per the E. U. prudential regime. Often, this type of cross-border service sharing is known as ‘passporting’17. United States United States is among those countries which are under highly regulated jurisdictions and their range of regulation goes beyond the laws set upon insurance companies and their capital sufficiency. Matters such as whether the insured is safe from any acts of bad faith from the insurer, a too high or unduly premium and establishing contract on the basis of meeting with minimum standard are of quite importance in this huge economy. Even though the cases of bad faith in the insurance sector are of low range, they are documented and regulated very stringently. Bad faith convicted companies face fines by the regulatory body and/or the insured and in case of rigorous complains, the insurer entity’s license can also be revoked18. In the United States, insurance contracts are regulated under the McCarran-Ferguson Act. Australia In Australia, insurance contracts are regulated under the Insurance Contracts Regulations 1985 made on the basis of Insurance Contracts Act 1984. China The insurance sector of China, the second biggest economy of the world, is being regulated broadly by China Insurance Regulatory Commission (CIRC) which possesses considerable authority19. India Insurance Regulatory and Development Authority (IRDA) regulates insurance contracts in India according to the IRDA Act of 1999. World’s Biggest Insurance Public Companies According to The Forbes list of Global 2000 World’s Biggest Public companies as of the year 2011, American International Group or AIG has been considered the 29th biggest public company around the world working in the industry of diversified insurance and with the following financial indicators: FINANCIAL INDICATORS (Forbes 2011) Sales US$ 77.3 billion Profits US$ 7.8 billion Assets US$ 683.4 billion Market Value US$ 67.1 billion China’s leading insurance company, China Life Insurance is also considered one of the biggest insurance companies of the world with a market value of more than US$ 118 billion as of 201020. Conclusion Having talked about the importance and contents of insurance contract regulations all over the world, it is clear that their working is quite appreciable and they lead to positive and effective results and relationships between the insurer and the insured. In this way, the extent of related crimes and frauds have fallen and a proper platform has been designed which is being followed in almost every country in this world according to its respective rules. Insurance is picking up its pace in the world market with emerging economies growing towards this profitable and demanding sector. The situation as of the year 2010 when the United States and Japan constituted around 40% of the total world insurance much greater than their small 7% share of world population and emerging economies taking up a massive 85% share of world population with only 15% of total global insurance is prone to a rapid change. Considering the importance of the insurance sector, the benefits of insurance contracts regulations must be analyzed and policies and contracts be made accordingly. References Boop G. Business Insurance - What is Self-Insurance? 2012. February 03, 2012 Business.gov. Liability Insurance. 2012. February 03, 2012 CIRC. 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February 03, 2012 NAMIC (National Association of Mutual Insurance Companies). Insurance Regulation. 2005. February 03, 2012 Rejda G. E. Principles of Risk Management and Insurance (8th Ed.). 2002. February 03, 2012 Sants H. The future of insurance regulation. 2011. February 03, 2012 Viral V. A. Systemic Risk and the Regulation of Insurance Companies. 2011. February 03, 2012 Wise Geek. What is Insurance Law? 2011. February 03, 2012 Read More