Principles of Non-Life Insurance and Policy Terms for NISM

Understand Principles of Non-Life Insurance and Policy Terms

Key formulas to remember

Indemnity payout (basic)

Claim payable = lower of (actual loss, sum insured)

Before any deductible. You cannot gain from a loss.

Payout with deductible

Claim payable = (Loss − Deductible), limited to sum insured

This assumes the deductible is applied to the loss before the cap. The order depends on the policy wording, and some policies apply the deductible after the sum insured cap. Check the wording.

Contribution (ratable proportion)

Insurer's share = (Its sum insured ÷ Total sum insured of all policies) × Loss

Used when the policies cover the same risk and same interest. Each share is also limited to that insurer's sum insured.

Average (underinsurance)

Claim = (Sum insured ÷ Value of property at loss) × Loss

Applies only if the policy has an average clause. If the sum insured is less than the value, you bear part of the loss.

Subrogation limit

Insurer's recovery ≤ amount paid to the insured

Any surplus recovered above the insurer's payment belongs to the insured.

How to solve Principles of Non-Life Insurance and Policy Terms questions

1. 1Read the facts and name what is being tested: interest, disclosure, loss limit, multiple policies or recovery from a third party.
2. 2Match it to the principle. Hiding facts means utmost good faith. Claim above loss means indemnity. Two policies means contribution. Third party at fault means subrogation.
3. 3For a numerical question, write down the actual loss, sum insured, deductible and any average clause.
4. 4Apply the deductible and the sum insured cap in the order the policy wording gives. If the question does not say, apply the deductible to the loss first, then cap at the sum insured.
5. 5If there is more than one policy, split the loss in proportion to the sums insured, and cap each share.
6. 6If there is underinsurance and an average clause, scale the claim by sum insured ÷ value.
7. 7Check the answer is not above the actual loss and not above the sum insured.
8. 8Eliminate options that confuse the principles, such as contribution described as recovery from a third party.

Quickest way: Trigger-word matching

Common mistakes in Principles of Non-Life Insurance and Policy Terms

• Mixing up contribution and subrogation.

  Both follow a claim payment and both stop you profiting.

  Fix: Contribution is among insurers (many policies). Subrogation is against a third party who caused the loss.

• Paying the full sum insured as the claim.

  Students treat the sum insured as a promised amount.

  Fix: It is only the maximum. Payout is the actual loss, up to the sum insured.

• Assuming one fixed order for the deductible and the sum insured cap.

  Students treat one order as a universal rule.

  Fix: The order depends on the policy wording. Follow the wording or the assumption given in the question. If neither is stated, apply the deductible to the loss first, then cap.

• Saying insurable interest is needed only at purchase in non-life.

  This is how life insurance is taught.

  Fix: In non-life, interest must exist at the time of loss. Life insurance needs it at inception.

• Splitting contribution equally between insurers.

  Ignoring the sums insured.

  Fix: Split in proportion to each sum insured, as per the formula.

• Thinking utmost good faith binds only the insured.

  Focus on proposal form disclosures.

  Fix: It binds both parties. The insurer must also explain terms fairly and not mislead.

Worked examples