Transcript Finance 341

Lecture Five:
Analysis Insurance Contracts
Learning Objectives
Identify the characteristics of an
insurance contract
Identify the basic parts of any
insurance contract
Explain the meaning of an “insured” in
an insurance contract
Explain how coinsurance works in a
property insurance contract
Explain how coinsurance works in a
health insurance contract
Describe the common types of
deductibles that appear in insurance
contracts
Explain what happens when more
than one insurance contract covers the
same loss
Main Contents
An Insurance Contract and Its
Characteristics
Basic Parts of An Insurance Contract
Definition of the “Insured”
Endorsements and Riders
Deductibles
Coinsurance
Other Insurance Provisions
What’s an Insurance Contract?
Definition of an insurance
contract
An insurance contract is a legally binding agreement
creating rights and duties for the two parties of the
insurer and the insured. The insured should pay
premium to the insurer, the insurer should pay the loss
of the insured under the agreement.
我国《保险法》第十条（2002年10月28日通过）规定：
保险合同是投保人与保险人约定保险权利与义务关系的
协议。投保人是指与保险人订立保险合同并按照保险合
同负有支付保险费义务的人；保险人是指与投保人订立
保险合同，并承担赔偿或者给付责任的保险公司。
Definition of an insurance
contract
It is a legally valid agreement between
two parties (the insurer and the insured)
On one hand, an insurance contract has
common features with other contracts;
on the other, it has more characteristics
Characteristics of an Insurance
Contract
Bilateral Contract
Aleatory Contract
Indemnity Contract
Conditional contract
Personal contract
Adhesion contract
Bilateral contract (双务性）
Some contracts are Unilateral(双务性）, that
is, only one party makes a enforceable promise,
the other party do not need.
Most commercial contracts are Bilateral (单务
性）, that is each party makes a legally
enforceable promise to the other party. If one
party fails to perform, the other party can insist
on performance or can sue for damages because
of the breach of contract.
Unilateral
or
How about insurance contract
Bilateral ?
??
an insurance contract is a Bilateral
Contract, that is both parties should
make enforceable promises Some
scholars (Wei Huanlin, Sun Qixiang, etc.)
The insured should pay the premiums to the
insurer, the insurer should pay the loss under
the contract.
an insurance contract is a Unilateral
Contract. (text P39)
Aleatory Contract（射幸性）
An insurance contracts is aleatory. This means the
parties to the contract know in advance the value they
exchange will be unequal.
The insured pays the premium, and collects a large sum
if a large loss occurs or collect nothing if no loss occurs.
The opposite is true to the insurer. In most instances, it
collects a premium and pays nothing. In a few cases, it
collects a small premium and pays a large amount.
The aleatory feature of insurance policies differs from
other business contract.
Indemnity Contract（补偿性）
indemnity means the insured should be in the
same financial condition as before the loss.
an insurance contract provide compensation for
an insured’s losses. The insured, however,
should not profit from an insurance transaction.
Insurers enforce the principle of indemnity
through the insurable interest requirement,
actual cash value settlements, and the
operation of subrogation clauses.
This mainly is used to property insurance. Life
insurance contract can not follow the principle.
Conditional contract(条件性）
An insurance contract is conditional contract .
This means the contract can enforce only if all the
fact meets the conditions stipulated in the
contract.
Common policy conditions include notifying the
insurer if a loss occurs, protecting the property
after a loss, filing a proof of loss with the insurer,
and cooperating with the insurer in the event of a
liability suit.
Only the insured do as the contract required, he
or she can get the loss compensation, otherwise
will not. (examples)
Personal contract（个人性）
An insurance contract is a personal contract.
This means the loss of the insured subjects is
the loss for the insured himself/or herself.
Because each person has his or her
characteristics based on her own conditions.
The insurance contract , the premium is
decided on his or her conditions, no other
substitute.
The insured can transfer his or her insured
subject, but the insurance contract can not
transfer automatically. Only if there are
stipulations in the contract. (examples)
Adhesion contract（附和性）
An insurance contract is adhesion contract. That is the
insurer list out the main contents and conditions of the
contract, the insured in most case can only follow.
Because the unequal knowledge and unequal bargaining
power between the insurers and the insured, the insurers
has more power, this give the insurers a significant
advantage over the insured. (example：霸王条款)
The insurance law emphasize that the language and
conditions in an insurance contract should be easy to
understand, should not be ambiguous. (examples)
Not all the insurance contract are adhesion. Some special
contract can make based on the two parities’ agreement.
(examples)
Basic Parts of An Insurance
Contract
Although insurance contracts are not
identical, they generally contain the
following parts:
Declarations
Definitions
Insuring agreement
Exclusion
Conditions
Miscellaneous provisions
Declarations
Declaration is the first part of an
insurance contract.
Providing information about the property
or activity to be insured
Declaration is used for underwriting and
rating purposes.
Declarations
In property insurance, the declarations
contain such information as the following:








the identification of the insurer
name of the insured
location of the property
period of protection
amount of insurance
amount of premium
size of the deductible
other relevant information
Declarations
In life insurance, the declarations contain
such information as the following:







the insured’s name
age
gender
premium amount
issue date
policy number
other relevant information
Definitions
Insurance contracts typically contain such
key word as “ We”, “our”, “us”, referring
to the insurer ; “you”, “your” , referring
to the insured”. ( using quotation
marks).
Insuring Agreement
Insuring Agreement is the heart of an
insurance contract.
Insuring Agreement summarizes the
major promises of the insurer. That’s the
insurer agrees to do certain things under
the contract.
There are two basic forms of an insuring
agreement in property and liability insurance:
Insuring Agreement
Named perils coverage: only those perils
specifically named in the policy are
covered. If the peril is not named, it is
not covered.
“all-risks” coverage: an open policy,
under which all losses are covered except
those losses specifically excluded. If the
loss is not excluded, then it is covered.
Exclusions
Exclusions are another basic part of any
insurance contract. There are three major
types of exclusions as follows:
•
•
•
excluded peril
excluded losses
excluded property
Reasons for exclusions:
•
•
•
•
•
some perils considered uninsurable
presence of extraordinary hazards
coverage provided by other contracts
moral hazard problems
coverage not needed by the typical insured
Conditions
Conditions sections is another
important part of any insurance
contract.
Conditions section impose certain
duties on the insured. If the policy
conditions are not met, the insure can
refuse to pay the claim.
Common policy conditions include:
Conditions
 notifying the insurer if a loss occurs
 protecting the property after a loss
 preparing an inventory of damaged
personal property
 cooperating with the insurer in a
liability suit.
Miscellaneous Provisions
Insurance contracts also contain a number of
miscellaneous provisions.
In property and liability insurance, some
miscellaneous provisions refer to cancellation,
subrogation, requirements if a loss occurs,
assignment of the policy, and other-insurance
provisions
In life and health insurance, typical provision
include the grace period, reinstatement of a
lapsed policy, and misstatement of age.
我国《保险法》规定保险合同应该包括下列各项
内容
保险人名称和住所；
投保人，被保险人名称和住所，以及人身保险的
受益人的名称和住所
保险标的；
保险责任和责任免除；
保险期间和保险责任开始时间；
保险价值；
保险金额；
保险费以及支付办法；
保险金赔偿或者给付办法，
违约责任和争议处理；
订立合同的年，月，日。
The forms of an insurance contract
There are four kinds of insurance contract
forms as the following:
Application Form
Binder/slip
Premium receipt
Insurance Policy
Definition of the “insured”
In an insurance contract, the insured is
typically defined under the policy:
only one person (most insurance)
named insured ( husband and spouse)
more than one person (in homeowners
policy, parents, any person under 21, full
time students under 24)
Endorsements and Riders
In insurance contracts frequently
contain endorsements and riders:
 In property and liability insurance, an
endorsement or rider is a
provision/document that add to, deletes
from or modifies the original
provision/policy.
 An endorsement attached to a contract
generally takes precedence over any
conflicting terms, unless it is contrary to a
law or regulation.
Deductibles
A deductible is another common policy
provision
A deductible is a provision by which a
specified amount is subtracted from the
total loss payment
Deductibles typically are found in property,
health, and auto insurance contracts.
Deductibles are not used in life insurance or
in a personal liability insurance
Deductibles
purpose of deductibles
To eliminate small claims
To reduce premiums
To reduce moral and morale hazard
Deductibles
Deductibles in property insurance
Straight deductible:
Aggregate deductible
Deductibles in health insurance
Calendar-year deductible
Corridor deductible
Elimination (Waiting) period
Coinsurance
nature of coinsurance
Purpose of coinsurance
Nature of Coinsurance
Coinsurance is a contractual provision
that often appears in property insurance
contracts.
It is especially true of commercial
property insurance contracts.
A coinsurance clause in a property
insurance contract requires the insured
to insure the property for a stated
percentage of its insurable value.
Nature of Coinsurance
The coinsurance formula is as
follows:
Amountof insurace carried
 Loss  Amountof recovery
Amountof insurancerequired
Purpose of Coinsurance
The fundamental purpose of coinsurance
is to achieve equity in rating.
Examples： the exhibits on PP51
In property insurance:
 以实际损失为限
 以可保利益为限
 以保险金额为限
Coinsurance in Health
Insurance
Health insurance contracts frequently
contain a coinsurance clause
Major medical policies typically have a
coinsurance provision that requires the
insured to pay a certain percentage
( 20%-25%) of covered medical
expenses in excess of the deductible.
The purposes are (1) to reduce
premiums and (2) to prevent
overutilization of policy benefits.
Other Insurance Provisions
Pro Rata Liability
Contribution by Equal Shares
Primary and Excess Insurance

Examples： the exhibits on PP54
Changes and termination of
insurance contract
The changes of insurance contract
the changes of the subject
the changes of the contents
the changes of effects
Termination of insurance contract
finished the performance
expiration
against the terms of the contract
Disputes settlement
The principle of explanation
Techniques to dealing with contract disputes
negotiation（协商）
conciliation（调解）
arbitration （仲裁）
legal action （诉讼）
Summary
An insurance contract is a legally binding agreement
creating rights and duties for the two parties of the
insurer and the insured.
The insurance contract has its own characteristics:
Bilateral contract
Aleatory Contract
Indemnity Contract
Conditional contract
Adhesion contract
Personal contract
Insurance interests are essential in both underwriting
and indemnity stages.
Summary
In any insurance contract, it includes both
the main provisions and additional
provisions. They both are forceful.
Review questions
1. Describe the basic parts of an insurance
contract.
2. Identify the major types of exclusions typically
found in insurance contracts. Why are
exclusions used by insurers.
3. How can an insurance contract cover other
persons eve though they are not specifically
named in the policy?
4. Why do deductibles appear in insurance
contracts? Identify some common deductibles
that are found in insurance contract?