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Fundamental principle of Insurance:

The basic principle of insurance is that an individual or a business concern chooses to spend a
definitely known sum in place of a possible huge amount involved in an indefinite future loss.
Thus insurance is the substitution of a small periodic payment (premium) for a risk of large
possible loss. The loss of risk still remains but the loss is spread over a large number of
policyholders exposed to the same risk. The premium paid by them are pooled out of which the
loss sustained by any policy holder is compensated. Thus, risks are shared with others. From the
analysis of past events the insurer (an insurance company or an underwriter) knows the probable
losses caused by each type of risk covered by insurance.

Insurance, therefore, is a form of risk management primarily used to safe guard against the risk
of potential financial loss. Ideally, insurance is defined as the equitable transfer of the risk of a
potential loss, from one entity to another, in exchange for a reasonable fee. Insurance company,
therefore, is an association, corporation or an organisation engaged in the business of paying all
legitimate claims that may arise, in exchange for a fee (known as premium).

Insurance is a social device in which a group of individuals (insured) transfers risk to another
party (insurer) in order to combine loss experience, which provides for payment of losses from
funds contributed (premium) by all members. Insurance is meant to protect the insured, against
uncertain events, which may cause disadvantage to him.

Principles of Insurance:
The principles of insurance are the rules of action or conduct adopted by the stakeholders
involved in the insurance business. The specific principles of utmost significance to a valid
insurance contract consist of the following:
(i) Utmost good faith: A contract of insurance is a contract of uberrimae fidei i.e., a contract
found on utmost good faith. Both the insurer and then insured should display good faith towards
each other in regard to the contract. It is the duty of the insured to voluntarily make full, accurate
disclosure of all facts, material to the risk being proposed and the insurer to make clear all the
terms and conditions in the insurance contract. Thus, it is binding on the proposer to disclose all
material facts about the subject matter of the proposed insurance. Any fact, which is likely to
affect the mind of a prudent insurer in deciding to accept the proposal of insurance or in fixing
the rate of premium, is material for this purpose. Failure to make disclosure of material facts by
the insured makes the contract of insurance voidable at the discretion of the insurer.
Examples of facts to be disclosed
Fire insurance: Construction of building, fire detection and fire fighting equipment; nature