Insurance:
Insurance is a risk transfer mechanism. It’s a method of shifting
the responsibility for losses to specialists (insurance companies) who
handle the risk by spreading it over a large number of people or firms.
A system of protection against loss in which a number of individuals agree
to pay certain sums of money, called premiums, to create a pool of money
which will use the contribution of these individual to pay the losses
of the few caused by events such as fire, accident, illness, or death.
History:
(courtesy: Mr. M. A. Chishti)
History is important for the study of any subject. It is all the more
essential in insurance because the essentials of the insurance idea are
written in the pages of history. Fortunately, insurance has a rich and
interesting history. Its history reflects several periods of human civilization.
Its beginning was simple and development gradual. As the trade and industry
developed, the need of insurance was also felt and the institution of
insurance was invented, as the adage goes: “Necessity is the mother of
invention”.
Contracts, known as bottomry, were used by money lenders to shift the
burden of risk from owners of ships or cargoes to themselves. The loan
was cancelled, if the ship or cargo was lost during a voyage. The change
for the bottomry loan, if the voyage was successful, was very high because
it included the amount of interes and cost of risk. The contract of bottomry
loan in fact sowed the seed of the insurance idea.
According to extant records, loans in the form of bottomry were known
to the merchants of Babylon during 4000-3000 B.C. It is also recorded
that bottomry was practiced by the Hindus in 6000 B.C. Even in ancient
Europe, the Greeks and the Romans also adopted this commercial practice.
Therefore, the origin of insurance is very old and man, somehow or the
other, has continued his earnest efforts to tide over all hurdles that
came in his way to make his life easy and comfortable.
Although marine insurance originated in Italy, its practice gradually
spread to other trade centres of Europe. In Bruges there is a record of
a court judgement in an insurance dispute in 1377 A.D., while in 1435
A.D. an ordinance regulating marine insurance was issued in Barcelona.
Similarly, an ordinance of Florence, dated 1523 A.D. codifies the practice
of Italian insurance. By this time, with the waning importance of Mediterranean
trade after the discovery of America, Antwerp became a leading insurance
market, yielding place to London in later days.
Marine insurance is the first category of insurance business that was
developed. In England, the earliest records of marine insurance come to
us from the court of Admirality. In due course of time, insurance became
international in its character. In 1563 A.D., an Antwerp merchant insured
three ships on a voyage from Havre to Central America. This policy, in
French, was shared by thirty seven British underwriters. This policy,
in French, was shared by thirty seven British underwriters. This participation
of the English underwriters confirms the rapid insurance growth in London.
In 1570 A.D., London’s own bourse which was erected by Sir Thomas Gresham,
was named the Royal Exchange by Queen Elizabeth I, of England.
Until 1720 A.D., marine insurance was entirely in the hands of individual
underwriters, whose main business was trade and commerce and insurance
was a side-line. These individuals were either available in the Royal
Exchange or in one of the nearby coffee houses, of which Edward Lloyd’s,
who originally started his business in Tower Street in the City of London,
moved later on to Lombard Street. Very soon, Lombard Street became the
big centre of marine insurance. Lloyd’s Coffee House was the centre for
sales of ships and their cargoes. In this Coffee House, businessmen would
come for coffee and sit down to talk about their business and would exchange
information about the movements of ships. Lloyds thought why not start
a short newsletter so that the people would have the latest information
about the movements of vessels. So, he issued the newsletter. When the
demand for the newsletter increased, he thought why not open a common
fund in which all businessmen would participate and deposit monies according
to their resources. This was the beginning of insurance. Edward Lloyds
died in 1713 A.D. but the coffee house was carried on by his family. In
this coffee-house, the individual insurers, or underwriters concerned
with marine insurance, used to congregate to do insurance business. Gradually,
a corporate spirit was developed among them. In 1772, the underwriters
set up the committee of Lloyd’s to govern their affairs. In 1733, the
proprietor of the above coffee-house began the publication of Lloyd’s
List, which gave the movements of ships and other matters of trading interest.
Lloyd’s List is still published as a daily newspaper from London.
In 1871, Lloyd’s Act was passed to incorporate the Society of Lloyd’s
or the Corporation of Lloyd’s as it is now called.
The students of insurance should keep this fact in mind that Lloyd’s does
not itself grant insurance as insurance companies do. The policyholder
who has a Lloyd’s policy is insured “at Lloyd’s” not with Lloyd’s. “i.e.
Lloyd’s is like a vast market-place of insurance where individual underwriters
sit to accept risks of insurance. The liability to meet claims under the
policy rests solely with those underwriters who are committed by any one
policy, each for his own share of the risk.
An insurance broker must be accredited to Lloyd’s before he can place
business there and inscribe on his note-paper after his address the world
“and at Lloyd’s”. Firms of Lloyd’s brokers may be either one-man business,
partnerships, or limited companies, and at least one of the partners or
directors is required to be either a member i.e. an underwriting member
of, or an annual subscriber to, Lloyd’s. The firm must make a substantial
deposit with Lloyd’s and it is held as security for fulfiloment of the
firm’s obligations to underwriters. At Lloyd’s the broker is treated in
law as the agent of the proposer, but not of the underwriter.
The place where Edward Lloyd’s Coffee house was situated, was taken over
by the government as a national asset and today one reads these words
on the brass plaque “Lloyd’s Coffee House 1691-1785”.
Lloyd’s is not now an insurance company but an insurance corporation and
it is said that it is the biggest insurance organization in the world
and participates in the business of every insurance company of every country.
In other words, where there is insurance, there is Lloyd’s.
This organization after its establishment in 1688 made such rapid strides
that, after about a century, when in 1799 a ship laden with gold and silver
bullion sank, the Lloyd’s paid up its insured value of a million pound
sterling. The biggest marine loss suffered by this organization was in
1975 when, due to the sinking of 802,502 tonnes of cargo and ship, it
paid 122 million pounds sterling within a year.
The Earthquake fire in San Francisco in 1906 resulted in the payment by
Lloyd’s of 25 million pounds.
In 1970, one aeroplane was hijacked and destroyed by fire. Lloyd’s paid
twelve and a half million pounds.
In 1974, a Turkish Airlines DC-10 crashed near Paris, and Lloyd’s paid
its full insured value of one hundred million pounds.
After Lloyd’s, hundreds of insurance companies have come into existence
many of whom have worldwide reputation and standing.
After the discovery of marine insurance other classes of insurance such
as fire, life, motor, accident etc. appeared in the market. When the Great
Fire of London occurred in 1666 A.D., no fire insurance existed. In the
same way, life insurance made its debut in 1553, when the life of one
William Gibbons was insured by sixteen individual underwriters in London.
How other classes of insurance came into existence would be elaborated
in other chapters of this book, when each class of insurance would be
dealt with.
IAP – CODE OF CONDUCT.
Pakistan is in the process of reshaping its economy to meet the challenges
of a global marketplace. The government has introduced a range of reforms
designed to promote and consolidate Pakistan’s position as an emerging
market in the region. The changes have resulted in a deregulated and liberalised
financial sector marketplace.
Although filing of rates is no longer required, there are, however, separate
parts in the Ordinance on Market Conduct & Intermediaries which lay
down the duties/responsibilities of Direct Insurance Companies and of
Intermediaries.The developments in the regulatory environment in Pakistan
are in line with those in the International markets. Compliance with regulations
is becoming exceedingly important.
Around the world, the insurance industry is built on a promise to its
customers – that it will be there when its customers need it, and
that it can, and will, honour its commitments. The insurance industry
is based on trust, much more so than many other industries. It is therefore
vital for individual companies and the industry as a whole to be perceived
as having the highest integrity and professional standards.
One of the priorities identified by the IAP for the current year is the
introduction of a Code of Conduct for its members characterized by the
following vision for the industry :
• A good public image and integrity
• Financial soundness and security
• Professional management and fair treatment of policyholders
• High standards in sales and servicing
• Transparency, cost-efficiency and product innovation.
A Code of Conduct, duly adopted by the IAP membership would contribute
not only to enhancing the image of the Insurance Industry locally, but
would also project the industry well in International forums and in global
dealings.
The code is also made available on IAP’s website.
Insurance Association of Pakistan
Applicability
Code of Conduct is applicable to Direct General Insurance Companies.
This Code does not apply to Reinsurers.
Following are the classes of business (as defined in the Insurance Ordinance
2000) to which the code applies:
• Fire and Property Damage business
• Marine, Aviation and Transport business
• Motor Third Party Compulsory business
• Liability business
• Workers’ Compensation business
• Credit and Suretyship business
• Accident & Health business
• Agriculture Insurance including Crop Insurance
• Miscellaneous business
Contents
1 Our commitments
2 Marketing
2.1 Advertising
2.2 Information about products and services
2.3 Protecting your interest
3 Helping you to find insurance that meets your needs
3.1 Explaining our service
3.2 Information on costs
4 Confirming your cover
5 Despatch of policy
6 Providing ongoing service to you
6.1 Changes to your policy
6.2 Notice of renewal
7 Claims
7.1 Information on claims procedures
7.2 If you make a claim
8 Documentation
8.1 Information in writing
8.2 Standards of written information
9 Complaints
9.1 Insurance Disputes resolution scheme
10 Other information
10.1 Copies of the code
10.2 More information
11 Disclaimer
Duty of utmost good faith.
A contract of insurance is a contract based on utmost good faith and
there shall be implied in such a contract a provision requiring each party
to it to act towards the other party, in respect of any matter arising
under or in relation to it, with the utmost good faith. Any breach of
duty of utmost good faith by either party to the contract renders the
contract void ab initio
1 Our commitments
We promise that we will:
• Act fairly and reasonably when we deal with you
• Make sure all the information we give you is clear and not misleading
• Give you enough information and help so that you can make an
informed decision before committing to buying an insurance policy
• Handle your claims fairly and promptly
• Handle your complaints fairly and promptly
2 Marketing
2.1 Advertising
We will make sure that all advertising and promotional materials are
clear, fair and not misleading.
2.2 Information about products and services
It is in your interest to ask for details of your cover. On our part
we will explain all the main features of the products and services that
we offer, including:
• All the important details of cover and benefits
• Any restrictions, warranties or exclusions
• Any significant conditions or obligations which you must meet
• The period of cover
2.3 Protecting your interest
In order to ensure that your interest as a general insurance customer
is protected, we advise you to deal only with:-
Insurers who are Members of the Insurance Association of Pakistan and
who have committed in writing to faithfully uphold and apply this Code
of Conduct ;
If you need any information, please contact the Insurance Association
of Pakistan.
3 Helping you to find insurance that meets your needs
3.1 Explaining our service
When you first become our customer we will give you enough information
and help so that you can make an informed decision before committing to
buying an insurance policy. We will explain:
• The type of products and services we offer
• The choice of products and services we offer you.
3.2 Information on costs
We will provide you with the full details of the costs of your insurance,
including:
• Separate insurance premiums for each of the individual products
or services we are offering
• Details of any fees and charges other than the insurance premium,
and the purpose of each fee or charge
• When you need to pay the premium, fees and charges, and an explanation
of how you can pay
4 Confirming cover
• We will give you enough information to check the details of
cover
• We will provide you with any certificates or documents you need
5 Despatch of policy
We will despatch complete policy documents to you promptly.
6 Providing ongoing service to you
We will answer any questions promptly and give help and advice to you
whenever needed.
6.1 Changes to your policy
We will deal with any changes to your insurance policy promptly including
the following:
• Give you written confirmation of any changes to your policy
promptly.
• Give you full details of any premiums or charges that you are
expected to pay or that will be returned to you
• Give you any certificates or documents that you need to have
by law
• Give you a receipt as proof of payment when payment is received
6.2 Notice of renewal
We will tell you when you need to renew your policy or when the policy
will end, at least 30 business days before expiry, to allow you to consider
and arrange continuing cover. We will:
• Explain the renewal terms (if offered)
• Tell you of any changes to the cover
• Bring to your attention the need to disclose material information
to insurers
• If we decide not to renew your policy, we will so inform you
• When your policy is renewed, we will send you the documentation
you are entitled to promptly.
7 Claims
We will handle claims fairly and promptly.
7.1 Information on claims procedures
When you first become a customer, we will explain to you:
• How to make a claim
• Our complaints procedures
7.2 If you make a claim
If you make a claim, we will follow set procedures and will advise you
on claims settlement.
• We will acknowledge your notification of a claim within 5 business
days
• If we need additional information we will contact you and request
that information promptly
• You will need to provide all information requested on the claim
form and supply all the necessary documents
• We will consider and handle your claim fairly and promptly,
and tell you how your claim is progressing.
• We will inform you of the identity and contact details of the
Surveyor/s
• If we cannot deal with all or any part of your claim, we will
tell you in writing and explain the reasons for denial
• Once we have agreed to settle your claim and on receipt of all
relevant documents, we will effect settlement promptly.
8 Documentation
8.1 Information in writing
We will give you any important information in writing
8.2 Standards of written information
We will make sure that all the written information and documents we send
you are clear and not misleading
9 Complaints
We will handle your complaints fairly and promptly
9.1 Insurance Disputes resolution scheme
For insurance disputes you may refer to :
The Insurance Tribunal or the Insurance Ombudsman , details of which are
on the IAP website.
10 Other information
10.1 Copies of the code
Copies of the General Insurance Code of Conduct are available free from
the IAP website at www.iap.net.pk or from the Insurance Association of
Pakistan
10.2 More information
If you have any questions about the code, please contact the Insurance
Association of Pakistan (IAP) at the address below.
The Insurance Association of Pakistan
1713-1715, 17th Floor,
Saima Trade Tower – A
I.I.Chundrigar Road,
P.O. Box No. 4932,
Karachi-74000 - Pakistan
Nothing in this code shall give any general insurance customer any right
or cause of action whatsoever against IAP or its Members.
CODE OF CONDUCT
AMONG MEMBERS OF INSURANCE ASSOCIATION OF PAKISTAN ( IAP )
In pursuance of IAP’s stated need and desire to enhance its public
image, and to strengthen the IAP as a common and unified platform to protect
and advance the private sector insurance industry interests as a whole,
it is imperative that minimum standards of ethical business practices
and behavior be codified for compliance by members of IAP.
Objectives:
1) To promote unity among members on industry issues.
2) To facilitate business dealings among members.
3) To strengthen the financial and capacity base of the industry as
a whole.
4) To foster best practices for fair competition.
5) To encourage candid and complete communication among members on business
related matters.
Standards for Business Practices and Behavior:
All members of IAP will be expected to observe the following:
1) All dealings and communication among members shall be based on the
principle of utmost good faith, in letter and spirit.
2) While every member has the right to promote its own company, products
and services, there should be no negative comment, innuendo or allusion
regarding another member.
3) Members shall protect each other’s interests as much as possible
and not seek to undermine another’s position with any individual,
body, organization, authority or agency.
4) Any departure from standard / generally accepted policy wordings,
warranties, conditions and exclusions shall be specifically highlighted
in all matters of co-insurance and re-insurance. Always a good practice,
this becomes more relevant with removal of tariffs and related standard
wordings.
5) All endorsements, adjustments or any other variations to cover, premium
or risk etc should be communicated to co-insurers immediately and not
later than 2 business days.
6) All claims and any progress thereon should be communicated to co-insurers
immediately and not later than 2 business days.
7) As liability for claims settlement by co-insurers is several, premium
receipts should follow the same principle and clients should be encouraged
and advised by the leaders to make payments accordingly.
8) If individual co-insurance premium payments are not practical for
the client / leader, premium receipts should be advised to the co-insurers
within 7 business days of receipt.
9) Every effort should be made to reconcile and clear old co-insurance
/ re-insurance balances by exchanging details of outstanding balances;
any adjustments / documentation required should be updated as a priority
to enable a new, more confidant start to exchange of business among
the members.
10) The principle of privileged exchange of information between insurers
should be recognized and respected by clients, agents, brokers, surveyors
/ loss adjusters, motor repair workshops, financial institutions and
similar others where the industry’s competitive pressures are
used in a manner prejudicial to the industry’s interests as a
whole. This should encourage and facilitate members to recognize and
avoid manipulation by outside interests that have exploited industry
vulnerabilities to their advantage.
Importance of Insurance?
(courtesy: Mr. M. A. Chishti)
Economic security is the most sought after assurance
of well being in the modern age of technology. An effective instrument
of ensuring security is Insurance-may it be the security of the dependants
of the bread-winner or it may be the security of goods lost by the natural,
accidental or circumstantial mishaps.
As man developed his arsenal or weaponry for the protection of his body,
he also developed means of economic and financial protection. It emerged
in the shape of life and non-life insurance.
The subject of life insurance is the human being and the object is to
provide financial security, to the dependants of the deceased, while the
subject of non-life or general insurance encompasses everything from a
pin to a jumbo jet, all goods and property – with the object of putting
a person back in the same financial position of the loss as he was at
the occurrence of the loss. It would, thus; be seen that insurance is
the most effective equipment to protect oneself against the horrendous
effects of personal or property loss due to disastrous events.
The desire of all people has always been, and will always remain, to live
a cleaner, healthier, comfortable and easy life. To fulfil this basic
need of human beings, enterprises produce and provide goods and services
and, in the process, make innovations and inventions. When you make innovations
and inventions, you take big risks. An onerous responsibility devolves
on the shoulders of innovators and inventors and, while doing this, they
play with the lives of people. A small error or lapse can cause numerous
side effects which may result in the death or disability of a large number.
The notorious case of Union Carbide, commonly known as Bhopal tragedy,
in India occurred in 1984, when poisonous gas escaped from the plant,
killing 3,300 people and injuring 200,000. The Supreme Court of India
settled this claim for an amount of US$470 million.
These types of instances speak of the importance of insurance. Had insurance
not been at the back of all these innovators, the world would never have
progressed in all walks of our lives. Once this insecurity factor was
taken care of, the entrepreneur started looking for new and more sophisticated
machines, robots and gadgets. Atomic energy was harnessed for the progress
of man. Booster rockets put the man on the moon. Computers enabled man
to acquire answers to the most complicated problems in minutes for which
an army of experts took days to solve. Deep seas were exploited and bowels
of the earth were torn apart fearlessly to extract wealth for the progress
of man. Concords and Jumbo jets were developed and the world shrank to
a small size. Medical sciences made tremendous advances and most of the
hydraheaded diseases, dreaded by man from times immemorial, have been
eradicated, expanding man’s life expectancy. All this happened because
of insurance support.
In all spheres of a man’s life, insurance is there to help and assist
him, be it motor insurance, or fire or life or any other class of insurance.
The helping hand of insurance is always there to protect and provide him
financial security.
Insurance is also an effective tool for mobilization of savings which
helps both in the control of inflation and in capital formation for the
development of the country. Thus, it plays a pivotal role in the economic
progress of a country.
In peace time, the coffers of insurance are open to trade and industry
which eventually contributes towards the progress of man. Insurance is
a great source of revenue to the national exchequer. In short, “Insurance
is among the most leading forces contributing towards economic, social
and technological progress of man”. In other words, progress of insurance
is linked with the progress of man.
During war, insurance plays its leading role as no other economic activity
can. Life insurance finances war efforts, marine insurance provides funds
for new ships whenever these vessels are sunk, while fire insurance makes
goods the losses sustained due to fire as a result of bombing.
Without insurance cover all industrial, economic and social activity of
the world will come to a grinding halt. Major trade and commercial contracts
will be abandoned, aeroplanes grounded, and vehicular traffic withdrawn
from roads. There will be an utter chaos. This shows that insurance is
a synonym of human progress, prosperity and civilization.
