Wednesday, October 29, 2008

Principle of Indemnity

Someone asked me the following in one of my posting.

"If you have 2 insurance plans covering the same thing, in the event of an accident, we can only claim from 1? Not 2? Then is there a value in buying 2 similar insurances?"

It is quite true that some people purchased 2 similar insurances that works under the Principle of Indemnity. This principle works in some policies such as Hospital & Surgical Policies, Home Insurance, Marine Insurance, etc.

It is not uncommon to see Singaporeans having overlapping policies because many of them bought their policies via telemarketers, roadshows and never allowing a Financial Planner to go through their policies. Its either over-insuring or under-insuring such as having 2 H&S insurances, 2 personal accident plan that cover medical reimbursement, etc

So what do we mean by Principle of Indemnity?
The principle of indemnity in insurance is to compensate the insured by placing him in the same financial position after the loss as before. Under this principle, an insured person cannot make a profit as a result of his loss.

Does this applies to our life policies?
No. Policies that pay on death from illness or accidents, Critical Illnesses or ptd are benefit policies, not contract of indemnity policies. Generally, a person can effect any sums assured so long as he can afford the premiums and the insurer is prepared to underwrite the risk. i.e, if you have 5 life policies covering $200k each, you are able to claim from all insurers.
* Nevertheless, do note that some insurers may set a restrictions on the total payout from all insurers especially on Critical Illnesses or PTD.

Why the double standards?
I can purchase a $1 million life insurance policy, but that does not imply that my life is worth $1 million. Because I can't calculate my own life's net worth and fix a price on it. For an indemnity policy, a value can normally be attached to it. The actual loss can be calculated and the insurer can control the claims better.

I can afford 2 insurances, why not 2 claims?
If we allow everyone to make a profit out from a Indemnity policy, there will be abuse to the insurance scheme and premium will generally goes up. Eventually the poor and needy will not longer be able to afford an insurance. Imagine that I incurred $50k for a medical bill and 3 insurers paid out $50k each, won't the 3 insurers have to raise premium next year to cover this loss? This is whats happening in US healthcare system where there are so much debate in every presidential elections.


SGDividends said...

Hey Adrian,

Thanks for the clarification and this informative article. Now then we know...

Hey really great to have such people like you around...shine the light :)

Anonymous said...

With regards to the limits of Death/TPD/CI cover that a person may buy, there's a portion on the application form that you've to fill your existing coverage and policies. The underwriters do pay attention to that.

No reason why someone who earns <$2k per mth would need big sum coverage!