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Insurance cannot be used to make a profit

Monday, December 06, 2010
By Manoj Aswani

I have a factory premises and warehouse which was constructed more than 40 years ago by my grandparents. It was insured for some years between 1990 to 1998 but after that I have not renewed it. Can I take an insurance policy now? If I want to make renovations and rebuild some of the sections, will the insurance company pay for the expenses?
Suraj Tandon, Juhu Santacruz West

To answer your first question, yes you can take a insurance policy from any of the general (non-life) insurance companies. However, if your sole purpose of taking the insurance policy is to renovate the place and claim the expenses from the insurance company then that is not allowed. In fact, that will make the contract of insurance as unfair. The Proposer should not put the insurer and the community of policyholders at a disadvantage knowingly.

Insurance is meant to compensate for losses. By implication, the mechanism of insurance cannot be used to make a profit. This is referred to as the Principle of Indemnity. In case there is some kind of unplanned or unforeseen event in the premises and that event results in a monetary loss to the policyholder or the company, then the insurance company will cover it subject to the scope of the policy.

Does every life insurance policy give bonus? What are the different kinds of Bonus given by the insurance company in a life insurance policy?
Deepika Sonawane, Orlem, Malad West

Bonus refers to surplus valuation of the policy. Not all life insurance policies give out bonus. Those policies which are ‘participating’ or ‘with profit’ policies are the life insurance policies which would give bonus. But because these policies pay bonus, the premium is also slightly higher than the ‘non-participating’ or ‘without profit’ policies. Declaring bonus depends on the insurance company. A common practice is the “Simple Reversionary Bonus” whereby the bonus is calculated as a simple bonus rate and is added to the sum assured. For example, if the bonus is at the rate of 8% and the sum assured is Rs. 100,000 then Rs. 8000 will be added to the Sum assured. Other practice is a “Compound Reversionary Bonus” where the bonus is added to the total of Sum Assured + Vested bonus. Basically, this bonus compounds every year.

My friend and I are of the same age and have the same net salary. When he applied for a life insurance policy he got a premium quote of Rs. 7,000. But when I applied for the same amount in the same insurance company, they gave me a quote of Rs. 8,900. Why is there such a huge difference? Is there a higher risk to my life than his? Do I have to bargain with them on premium amount?
Santan D’Costa, Dhobitalao

A life insurance premium calculation is a complex process. It is not determined by a lot of factors and associated risks. Age and income are considerations but they are not the only ones. Risk factors are normally referred to as ‘Hazards’ and there may be 3 types of hazards - 1) Physical, 2) Occupational and 3) Moral.

Physical hazards include factors like Age, Gender, Build, Physical condition, Physical impairments, Personal history, Family history and Extra perceived risks.
Occupational hazards are the ones that may arise from the nature of the job or the place where the job is carried out (mine, factory, circus, etc)
Moral hazard refers to the intention of the Proposer. If the risk underwriter of the insurance company feels that there is a mismatch in the lifestyle or income as compared to the premium payable or policy sought then he/she may levy a higher premium.

The reasons for a higher premium could be due to any of the above three reasons. In fact more often it is the presence of more than one reasons, that leads to a higher premium by the insurance company.

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