Insurance: Definition, Function, Purpose and Principles Of Insurance
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.
Fundraising
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.
Indemnity
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).
Subrogation
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".
Contribution
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.