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Insurance: Definition, Function, Purpose and Principles Of Insurance




Definition of Insurance

Insurance is a term used to refer to an action, system, or business in which financial protection (or financial compensation) for life, property, health, etc., is reimbursed for unforeseen events such as death, loss , damage or illness, which involves regular premium payments within a certain period of time in exchange for a policy that guarantees such protection.


According to the provisions of Article 246 of the Criminal Code, insurance or coverage is an agreement whereby the insurer binds himself to the insured by receiving a premium to provide compensation to him due to loss, damage or loss of expected profits that he may suffer as a result of an event (uncertain event).


According to the provisions of Law No. 2 of 1992 dated February 11, 1992 concerning Insurance Business ("Insurance Law"), Insurance or coverage is an agreement between two or more parties whereby the insurer binds himself to the insured by receiving insurance premiums to provide reimbursement to the insured due to loss, damage or loss of expected profits, or legal liability to third parties that may be suffered by the insured arising from an uncertain event, or to provide a payment based on the death or life of the insured person.


Based on the definition above, insurance is a form of agreement which must fulfill the conditions as stated in Article 1320 of the Civil Code, but with the characteristic that insurance is a chancy agreement as stated in Article 1774 of the Civil Code.


Insurance companies have different characteristics from non-insurance companies, such as underwriting activities - accounting, claims, and reinsurance - retrocession. Underwriting is the process of assessing/assessing and classifying the degree of risk associated with the prospective insured, as well as making a decision to accept or reject the risk.


Actuarial (actuarial) is a function in an insurance company that applies mathematical principles to insurance, including calculating/taking into account the premium price list and ensuring the health of the company from a financial point of view.


Claims are expenses that become the liability of the insurance company to the policyholder in connection with the insurance agreement between the insurance company and the consumer (policyholder) as a result of the event that is insured or when it is due.


Reinsurance is a party that receives reinsurance from an insurance coverage. Retrocession is the transfer of risk from a reinsurance company to another reinsurance company.


Function and Purpose of Insurance

Aside from being a form of risk control (financially), insurance also has various benefits which are classified into several functions as follows:

Main Function (Primary)

Risk Transfer

As a means or mechanism for transferring possible risks/losses (chance of loss) from the insured as an "Original Risk Bearer" to one or several insurers (a risk transfer mechanism). So that the uncertainty in the form of the possibility of a loss as a result of an unexpected event, will turn into insurance protection that is certain (certainty) turning the loss into compensation or compensation for claims with premium payment terms.



As a collection of funds from the public (policy holders) that will be paid to those who experience a disaster, the funds collected are in the form of premiums or insurance fees paid by the insured to the insurer, managed in such a way that the funds are growing, which will later be used for pay for losses that may be suffered by one of the insureds.


Balanced Premium

To regulate in such a way that the premium payments made by each insured are balanced and reasonable compared to the risk transferred to the insurer (equitable premium). And the size of the premium that must be paid by the insured is calculated based on a premium rate (rate of premium) multiplied by the Sum Insured.


Insurance Purpose

The purpose of insurance is as follows:

• Provide guarantees of protection from risks of loss suffered by one party.

• Increasing efficiency, because there is no need to specifically provide security and supervision to provide protection which takes up a lot of manpower, time and money

• Equitable distribution of costs, that is, it is sufficient to pay only a certain amount of money and there is no need to replace/pay for the losses incurred, the amount of which is uncertain and uncertain.

• The basis for the bank to provide credit because the bank requires guarantees for protection of the collateral provided by the borrower.

• As savings, because the amount paid to the insurer will be returned in a larger amount. This specifically applies to life insurance.


Basic Principles of Insurance

In the world of insurance, there are 6 basic principles that must be met, namely insurable interest, utmost good faith, proximate cause, indemnity, subrogation and contribution.


Insurable interest

Is the right to insure, which arises from a financial relationship between the insured and the insured and legally recognized. So, you are said to have an interest in the insured object if you suffer a financial loss in the event of a disaster which results in loss or damage to the object.


This financial interest allows you to insure your property or interests. If a disaster occurs on the insured object and it is proven that you have no financial interest in the object, then you are not entitled to receive compensation.

Utmost Good Faith

Is an action to disclose accurately and completely, all material facts regarding something that will be insured whether requested or not. This means that the insurer must honestly explain everything clearly about the extent of the terms and conditions of the insurance and the insured must also provide clear and correct information on the insured object or interest.


In essence, you are obliged to provide information as clearly and thoroughly as possible regarding all important facts relating to the insured object. This principle also explains the guaranteed and excluded risks, all terms and conditions of coverage clearly and thoroughly.


Proximate Cause

It is an active, efficient cause that creates a chain of events that gives rise to an effect without the intervention of something initiated and actively initiated by a new and independent source. So if the insured interest experiences a disaster or accident, first of all look for active and efficient causes that drive an uninterrupted series of events so that in the end the disaster or accident occurs. A principle used to search for causes of losses that are active and efficient is: "Unbroken Chain of Events", namely a series of unbroken chain of events.



Is a mechanism where the insurer provides financial compensation in an effort to place the insured in the financial position he had just before the loss occurred (Commercial Code articles 252, 253 and emphasized in article 278).



Is the transfer of claim rights from the insured to the insurer after the claim is paid. The principle of subrogation is regulated in article 284 of the Commercial Code, which reads: "If an insurer has paid full compensation to the insured, then the insurer will replace the position of the insured in all matters to sue third parties who have caused losses to the insured".



It is the right of the insurer to invite other insurers who are equally responsible, but do not have to have the same obligations towards the insured to participate in providing indemnity. You can just insure the same property with several insurance companies. However, if there is a loss to the insured object, the contribution principle automatically applies.


Insurance policy

According to the provisions of Article 225 of the Criminal Code, the insurance agreement must be made in writing in the form of a deed called a policy which contains agreements, special conditions and special promises which form the basis for fulfilling the rights and obligations of the parties (guarantor and insured) in achieving the insurance objectives. Thus the insurance policy is written evidence or a letter of agreement between the parties entering into an insurance agreement. With the existence of an insurance policy, the agreement between the two parties gets legal force.


• According to the provisions of article 256 of the Criminal Code, every policy except for life insurance must contain the following special conditions:

• Day and date of making the insurance agreement

• Name of the insured, for himself or a third party

• A clear description of the insured object

• Amount insured (sum insured)

• The dangers / events borne by the insurer

• When the danger starts and ends which is the responsibility of the insurer

• Insurance premium

• Generally all conditions that need to be known by the insurer and all special promises made between the parties.