Insurance theory and insurance contracts

1. Introduction

Insurance is a contract by which one of the parties (the insurer) undertakes, through a premium paid by the other party (the insured), to compensate for damage or fulfill the agreed benefit if the planned event occurs, as can be an accident or a fire, among others.

The insurance contract may have as its object all kinds of risks if there is an insurable interest, unless expressly prohibited by law. For example:

The risks of fires. The risks of crops. The life span of one or more individuals. The risks of the sea. The risks of transport by air or land.

The insurer is generally an insurance company organized in the form of a public limited company; But there are also cooperatives and mutual insurance companies, and even an official body - Caja de Ahorro y Seguro - carries out operations of this type. Also, in some provinces there are official insurance entities.

The insurance contract is consensual, bilateral and random. It is consensual because it is perfected by the mere consent of the parties and produces its effects since the convention has been made; It is bilateral since it gives rise to reciprocal rights and obligations between the insurer and the insured, and it is random because it refers to compensation for a loss or damage caused by an event or an uncertain fact, since it is not known if it will occur and in the opposite case - as happens with death - it is not known when this will happen.

2. Classification of insurance

Insurance can be classified in various ways. In the first place, depending on whether they are in charge of the State, in its role of guardianship or private insurance activity, they are divided into social insurance and private insurance.

d Social insurance: The purpose of social insurance is to protect the working class against certain risks, such as death, accidents, disability, illness, unemployment or maternity. Their premiums are compulsory and are in charge of the insured and employers, and in some cases the State also contributes with its contribution to finance the compensation. Another of its characteristics is the lack of a policy, with the rights and obligations of the parties, since these insurances are established by laws and regulated by decrees, where those rights and obligations are specified.

The insured establishes the beneficiary of the insurance, and if that designation is lacking, his legal heirs will be beneficiaries, as if it were a community asset, in the order and in the proportion established by the Civil Code. Consequently, when the insured person dies, the National Savings and Insurance Fund pays the amount of the insurance to the beneficiaries instituted by him or to their heirs.

The pension fund pension system is not technically insurance, although its purposes are similar. It allows retirees to enjoy an income and covers the risks of abandonment in which the spouse and minor children of a person entitled to retirement, ordinary or extraordinary, may remain on the date of her death.

Private insurance: These insurances are those that the insured voluntarily hires to cover certain risks, by paying a premium that is at his / her exclusive expense. In addition to these characteristics we can point out:

Private insurance is specified with the issuance of a policy - the instrument of the insurance contract - which contains the rights and obligations of the insured and insurer. In our country private insurance is operated, mostly by private companies, mutuals and cooperatives. But also the State, through the National Savings and Insurance Fund, makes different types of insurance. And in some provinces there are official insurers.

According to their object, private insurance can be classified as insurance on people and insurance on things.

Personal insurance: Personal insurance includes life insurance, accident insurance and health insurance. In reality, they constitute a single group called life insurance, since accident and illness insurance is but one variant of life insurance.

3. Classification of life insurance, according to the risk they cover

Insurance in the event of death: In insurance of this type, upon the death of the insured, the insurer pays the beneficiary instituted by him the amount of the insurance. Life insurance: In these insurances, the insurance company pays the insured the amount of the insurance, provided that he or she lives at the expiration of a certain period of time. The payment of a periodic rent can also be agreed for as long as the insured person lives, starting from a date established in advance. Mixed insurance: They constitute a combination of death and life insurance. Therefore, the insurance amount is paid to the beneficiaries if the insured dies before the contract expires, and it is given to him if he survives that date.

Depending on whether they cover one or more heads

Head insurance: The insurance is paid when the insured person dies. On two or more heads: Through this contract the life of two or more people is insured and the insurance is paid when one of them dies in favor of the other or others.

Attentive to the number of people covered by the policy

Individual insurance: These are the contracts by means of which a person is insured with death, life or mixed insurance. Group insurance: These contracts insure the lives of many people. The insurance is paid upon their death, to the instituted beneficiaries.

According to the additional clauses

Insurance with additional clauses: According to these clauses the policy may provide other benefits. Insurance without additional clauses: These are those whose policies only provide for death, life or mixed insurance.

4. Sure about things

Fire insurance: This insurance covers personal and real property against the risk of fire. The insurance company compensates the insured for the damage suffered by the property covered by the insurance, due to a fire, of course provided that this was not intentional. Hail insurance: Plantations can be very damaged, with the fall of hail, so this insurance provides a truly useful service to farmers who have insured their crops against this risk. It only compensates for the damage caused by hail without taking into account the losses that may have been caused by rain or wind. Automobile insurance:

Civil liability: For injuries caused to third parties and for damages caused to their property. If the owner of the insured motor vehicle causes personal injury or the death of a third party due to accidents, the company responds up to a certain amount. Compensation for property damage is lower.

Fire, accident and theft: the policy protects the owner of the vehicle against these risks according to the insured amount. In the case of accidents, the insurance covers the damages suffered by the motor vehicle.

d Transport insurance: It can be maritime, pluvial, land and air, and covers the risks that weigh on the means of transport, the transported effects and the passengers. The company compensates the owner of the means of transport for damages that they may suffer in the fulfillment of their mission due to various accidents, according to the insured capital. This insurance also covers damage or injuries that

passengers may suffer as a result of transport accidents.

Glass insurance: This insurance provides compensation in favor of a person or company for the damages that the breakage of the glass of your business or property may cause. Theft insurance: Covers the loss that a person may experience due to robbery or theft. Credit insurance: Covers the loss caused to a person or company by the insolvency of its borrowers. By means of a certain premium, the insurance company undertakes to compensate you for that loss and replaces it in the actions that can be tried to pursue the collection of the debt. Employee fidelity insurance: It is taken by companies to cover the losses that they may suffer due to the infidelity of their employees in the event of malicious maneuvers.

5. Legal provisions

Fair Regime: Law 17,418 of 1967, incorporated into the Commercial Code in replacement of its previous provisions, currently regulates the insurance contract. It does so on a publishing basis, establishing a large number of provisions that cannot be modified by the parties (or that can only be modified for the benefit of the policyholder) and regulatory, contemplating in detail all aspects of the contract.

The most significant legal provisions that currently govern insurance are the following:

1. Reluctance:

Any false statement known by the insured, even made in good faith, which in the opinion of experts would have prevented the contract or modified its conditions, if the insurer had been satisfied of the true state of risk, renders the insurance null.

2. Policy:

It is the instrument of the insurance contract and must contain the following information: ˛ The names and addresses of the parties. ˛ The interest or the insured person. ˛ The risks assumed. ˛ The moment from which these are assumed and the term. the cousin. ˛ The sum insured. ˛ The general conditions of the contract.

According to this list, the policies consist of two parts. In the first, the particular clauses of the contract are inserted. The second contains the general conditions of the insurance in question. These conditions are uniform for all contracts, are included on the back of the policy and must be approved by the Superintendency of Insurance of the nation.

3. Premium:

It is the price of the insurance and must be paid at the insurer's address or at the place agreed between the parties. It is owed from the conclusion of the contract but is not due except against the delivery of the policy.

4. Aggravation of risk:

Any aggravation of the assumed risk that, in the judgment of experts, would have prevented the insurance or modified its conditions, is a special cause for termination of the insurance contract. The insured has to report the aggravation of the risk to the insurer. If this is due to an act of the insured, the coverage is suspended and the insurer has to notify, within 7 days, its decision to rescind. If the aggravation results from an event outside the insured, the decision to terminate must be notified within 30 days.

5. Expiration of the insurer's obligation:

In property damage insurance, the credit in favor of the insured must be paid within 15 days, once the amount of compensation has been fixed or the compensation offered has been accepted by the insured. In personal insurance, payment is made within 15 days of notification of the claim. When the insurer has estimated the damage recognized by the insured's right, a payment on account can be claimed if the procedure to establish the benefit has not been completed one month after notification of the claim. The payment on account cannot be less than half of the benefit recognized by the insured.

6 . Fire insurance:

The insurer must compensate the damage caused to the goods by the direct or indirect action of the fire, as well as by the necessary measures to extinguish it or other similar ones. The damage caused by an explosion or lightning has been equated to that caused by fires.

The amount of compensation is determined by the following rules: ˛ For buildings, by their value at the time of the loss. ˛ For the goods made by the insured, according to the manufacturing cost. For other merchandise, for the purchase price. ˛ For the animals, for the value they had when the accident occurred; for raw materials, harvested fruits and other natural products according to the average prices on the day of the loss. ˛ For household furnishings and other objects of use, tools and machines, due to their value at the time of the accident.

7. Hail insurance:

The insurer responds in this type of insurance for damages caused exclusively by hail to the insured fruits and products. To value the damage, the value that the fruits and products would have had at harvest time is computed if the loss had not occurred.

8. Animal insurance:

In the animal mortality insurance, the insurer compensates the damage caused by the death of the insured animal or animals, or by their total and permanent disability, if so agreed. The insured loses the right to be compensated if he seriously mistreated or neglected the animal.

9. Life insurance:

This insurance can be held over the life of the contractor or of a third party. Changes of profession or activity of the insured authorize the termination of the contract. Voluntary suicide frees the insurer, unless the contract has been in force uninterrupted for three years. In insurance on the life of a third party, the insurer is released if the death has been intentionally caused by an illegal act of the contractor. The insurer is released if the person whose life is insured dies in a criminal enterprise or due to the legitimate application of the death penalty.

10. Reinsurance:

The insurer can insure the risks assumed, that is, the law empowers the insurer to reinsure the insurance it has taken out.

6. Superintendency of Insurance of the Nation

This body, created in 1937, validated in 1938, depends on the Ministry of the Economy. The recital of this decree contains the reasons on which the creation of the Superintendency was founded, namely: ˛ Insurance companies are essentially financial entities, which receive savings from the public to manage the reserves pre-established by actuarial calculations. ˛ These reserves must be invested with exceptional prudence and security. ˛ It is the duty of the state to examine the possibility of carrying out the calculations and insurance plans, the placement of reserves, the periodic results of these administrations and the correct publicity of all those data that demonstrate the development and status of said companies so that its prestige is undoubted and stimulates the hiring of new insurance.˛ Insurance companies require the State to carry out a specialized inspection. ˛ Regarding its objectives, the following purposes and attributions have been assigned to the superintendency: Control and supervise the organization, operation, solvency and liquidation of insurance companies, in everything related to their economic regime, and especially regarding the insurance plans, rates, contract models, balances, functions and conduct of agents or intermediaries and publicity in general.and especially on insurance plans, rates, contract models, balances, functions and conduct of agents or intermediaries and publicity in general.and especially on insurance plans, rates, contract models, balances, functions and conduct of agents or intermediaries and publicity in general.

7. Elements of the insurance contract

The Insurer: Only public limited companies, cooperatives and mutual insurance companies can act as insurers. You can also insure the state.

Insurers must be authorized to operate by the Superintendency of Insurance of the Nation. This institution supervises them, establishes the conditions of the policies and the amount of the premiums, determines the investments and reserves that must be made, and controls their administration and economic and financial situation.

The Insured: The law distinguishes the persons of the policyholder, the insured and the beneficiary.

The policyholder is the person who enters into the contract. The insured is the holder of the insurable interest. The beneficiary is the one who will receive the compensation.

The policyholder differs from the insured when he stipulates the insurance on behalf of a third party or on behalf of "who may concern".

For their part, the insured and the beneficiary generally coincide. They are separated for example in life insurance, when you insure your own life for the benefit of another person.

The policy: It is the written instrument in which the conditions of the contract are stated. Although it is not essential for the contract to exist, the insurance practice has imposed it without exceptions.

It can be issued to order or to the bearer, except in personal insurance, in which it must be nominative.

The text is, in general, uniform for the different types of insurance. Additional and special clauses and modifications to the content of the policy are called endorsements and are drawn up on a separate sheet, which is attached to it.

Term: If the term of the contract is not determined in the contract, it is presumed to be one year, unless due to the nature of the risk the premium is calculated for a different time.

The insurer's obligations begin at twelve hours on the established day and end at twelve hours on the last day of the term.

Despite the agreed term, any of the parties may terminate the contract before its expiration, with reimbursement to the holder of the proportional premium for the period not elapsed.

8. Obligations arising from the contract

Pay the premium: The policyholder must pay the established premium plus the taxes, fees, stamps and other surcharges established or authorized by the regulations of the insurance activity.

The total amount that the policyholder must pay constitutes the insurance premium.

If the premium is not paid on time, the insurer is not responsible for the loss occurred before payment.

The premium may vary over the course of the contract, increasing or decreasing when the contemplated risk increases or decreases.

Report the risk status: The policyholder must accurately describe the contemplated risk, in relation to the thing or person on which the insurable interest rests.

It is called reluctance to make false statements or silence known circumstances, which in the opinion of experts would have prevented the contract, or modified its conditions. The reluctance gives the insurer the right to cancel the contract.

Report the aggravation of the risk: The policyholder must report all the facts, their own or those of others, that may aggravate the contemplated risk, increasing the possibility of a claim.

Report the claim: The policyholder must report the claim within three days of the claim. You must report and prove the damages you have suffered and allow the insurer to verify the occurrence of the event and the damages caused.

Salvage: The policyholder must do everything necessary to avoid or reduce damage.

9. Obligations of the insurer

Reimburse expenses: You must reimburse the expenses incurred in compliance with the rescue obligation, provided they have not been manifestly misguided or unnecessary.

Pay the compensation: It is determined according to the type of insurance contracted, the damage actually suffered and the amount insured.

In damage insurance, the compensation can never exceed the damage actually suffered, even if the insured amount is higher. The insurance is to repair a loss, not to obtain profit.

In personal insurance, the benefit is limited to the agreed sum.

The compensation must be paid within fifteen days after the amount is set (in damage insurance) or after the loss occurred (in personal insurance).

10. The organization and administration of insurance companies

Premiums: It is the price of the insurance that the insured pays to the insurer as consideration for the risk assumed by the insurer and the commitment that is its consequence.

There are different types of premiums:

Natural premium Pure premium Commercial premium Level premium Single premium Periodic premium

Natural premium: In life insurance it is the premium that depends on the mathematical calculation of risk. For this reason, the higher the risk, the higher the natural premium, and vice versa.

Pure premium: It is the risk premium of the other insurance lines.

Commercial premium: this is the premium actually paid by the insured and is made up of two parts: the natural or pure premium on the one hand and the operating expenses and the insurer's profit on the other. The most important of these expenses are:

• Commission in favor of the producers who place the insurance.

• Collection commission paid to employees for the receipt of premiums.

• Administration and advertising expenses.

• Surcharge for splitting the premium. The premium can be divided into periodic installments, and this gives rise to a surcharge, as is often the case with forward sales.

• Safety margin. It is a surcharge to anticipate any increase in expenses and in particular the possibility of increased risk.

Levelized premium: The simple application of the natural premium to calculate the commercial premium would make life insurance prohibitive, after a certain age. In this case, the commercial premium would increase continuously and there would come a time when the insured would withdraw from the contract given the high price that he would have to pay for his insurance. For this reason, it has been necessary to level the premiums so that the commercial premium is the same, in life insurance, throughout the term of the contract.

Single premium: it is what the insured must pay when it is done in a single opportunity.

Periodic premiums: the single premium is paid with partial payments, thus offering the insured a possibility that can decide the concentration of these operations.

Risk: It is one of the main factors in the insurance business. It is the object of the insurance as a measure of prevention of an uncertain event, which if it occurs forces the insurer to pay the agreed compensation. In risk insurance it is always uncertain. Even the death of a person, which fatally has to happen sooner or later, is an uncertain event that can be assured, because it is not known when it will happen.

In the case of an uncertain event, there is no doubt that it cannot depend on the will of the insured, since then there would be no possibility of insurance. Risks on things also present a certain regularity that makes them a matter of insurance. The insurance practice has established standards to measure such risks and calculate the standards that the insurer must perceive.

The risk determines the premium to be charged, and consequently, for risks aggravated in relation to normal risks, the premium will be higher. In the insurance policy, the risk assumed by the insurer must be defined very clearly, as it is an element of capital importance in this contract.

In addition, it is necessary that the object of the insurance is properly characterized so that the insurer knows to what extent the risk it runs.

11. Functional organization of insurance companies

Most insurance companies are public limited companies in which the sovereign body is the Shareholders' Meeting and its governing body is the Board of Directors or Board of Directors appointed by the shareholders meeting in meeting.

The General Management reports directly to the board of directors, which, like any company, is the executive body in charge of leading the company in accordance with the resolutions adopted by it.

12. Acceptance of insurance and issuance of policies

The issuance of the policies is carried out through the following steps:

1. Insurance application.

2. Verification of all the data that appear in the application.

3. Acceptance of insurance.

4. Issuance of the policy.

The insurance application is the proof by which the insurer requests a certain insurance from the company. For this reason, it contains the necessary data so that the insurer knows exactly the risk that must be run when contracting the insurance. The main data are:

Date. Insurable identification data. Purpose and risk of the insurance. Description of the thing to be insured. Insurance amount.

The health declaration reduces the costs of issuing the policy, because it is less onerous to verify that declaration than to do the comprehensive medical review, and it significantly simplifies the management before the insurable to induce them to take out life insurance. Once the application is accepted, the policy is issued in accordance with the data of that one and it is delivered to the interested party.

13. Active and passive reinsurance

Reinsurance is a contract by means of which an insurer who has directly taken out insurance transfers part of it to another insurer, who, consequently, takes the responsibility of paying the proportion that corresponds to it in the event of the risks foreseen in the contracted insurance.

The risks that an insurance company can technically assume have a limit, after which the need to carry out reinsurance is imposed to transfer that excess of risks to other companies.

The fundamental rule to establish the limit of risks that they can assume is found in the uniformity of the capital insured by each company.

To avoid the imbalance that the lack of uniform capital can produce, companies reinsure the part of the insurance that exceeds the normal limit of the insured capital.

The limit of the risks that an insurance company can run is called full. The company that cedes the excess of its plenum is called the cedant and makes a passive reinsurance. The company that takes the reinsurance is called the transferee and makes an active reinsurance.

In turn, an active reinsurance may be the subject of a new reinsurance in another company. This reinsurance is called retrocession. Generally, the ceding companies pay the assignees the same premium that they charge to the insured and receive from them a higher commission than that which they must pay to their agents or brokers.

In our country reinsurance is regulated by the INDER (National Reinsurance Institute), which monopolizes the reinsurance of national companies and 30% approx. of foreign companies. In turn, the INDER may retrograde its reinsurance to national or foreign companies operating in our country or to foreign insurers.

14. Cancellations

Policies issued are canceled when the insurance contract is terminated. This usually occurs in the following cases:

Failure to pay the premium. Change of owner of the insured item. Reluctance. Insured fraud.

With the cancellation of the policy, the insurance company is only entitled to receive the premium corresponding to the risk it has run.

15. Settlement of claims

The settlement of claims begins with the communication that the insured or the beneficiary of the insurance must formulate to the insurance company, so that it can pay the insured capital. For the settlement of claims, three stages are necessary:

1. The verification of the claim.

2. Your assessment.

3. The settlement, to proceed with its payment.

In order to properly verify the claim, the insurer requires a series of tests for this purpose and takes all the steps it deems appropriate to make sure that the event is covered by the insurance.

The valuation of the damages suffered by the insured in the insurance on things is of the utmost importance, because the amount of compensation not only depends on the insured capital, but also on the value of the things on the day of the loss. The valuation of the insured assets requires the intervention of experts or liquidating experts.

16. Reservations

Insurance company reserves are of two kinds. Those of the first group are constituted with liquid and realized profits, as is the case in all companies, for example, Legal Reserve, Optional Reserve, General Pension Reserve, etc.

The other group is made up of the technical reserves of the insurance operation.

The reserves of the first group are intended to increase the company's means of action, prevent future bankruptcies or make subsequent distributions among the partners or shareholders. On the other hand, technical reserves do not respond to these purposes and represent a liability or commitment in charge of the insurance company, which clearly shows the essential difference that exists between both types of reserves.

Reserve for ongoing risk: A certain portion of the premiums received in each year in eventual insurance is transferred to this reserve. For each of the insurance lines operated, a reserve of this nature is used, both for direct insurance and for reinsurance taken out.

The insured, when taking out insurance, acquires the obligation to pay the respective premium in advance. Do it immediately or in installments, the truth is that the company has a mass of assets with which it must face the claims corresponding to the policies issued. Claims that occur in the year the policy is issued are paid with that mass of values. But you may find claims in the subsequent exercise. Therefore, to meet your payment, it is necessary to reserve a certain proportion of the premiums for each year, which is credited to the Reserve for Risks in Progress of each one of the eventual insurance.

The following rules apply to the constitution of reserves of this type:

• In general, 80% of the premiums, net of cancellations and reinsurance, which are representative of the risk not incurred at the end of the year, should be reserved for eventual risk insurance.

• In maritime insurance that is contracted per trip, the reservation is made up of the total premiums, net of reinsurance and cancellations, corresponding to the last two months of each year.

• In fidelity and guarantee insurance, 40% of the net premiums for each year must be reserved and an additional 15% over the average net premiums of the last three years.

Mathematical Reserve: It is constituted for life insurance. Theoretically, the premiums of these insurances, given their nature, should rise continuously, due to the greater probability of death of the insured as time passes. But if this were done, life insurance would be prohibitive after a certain age. To avoid this inconvenience, insurance companies receive level or medium premiums. It means that an insured person in the beginning will pay premiums in excess of what corresponds according to their probability of death, and will pay lower premiums after a certain age. The amount paid in excess during these first years constitutes the savings premium. With this and the part that is taken from the risk premium, as well as with the accumulated interest, the mathematical reserve of the insurance is formed.

Reserve for Pending Claims: This reserve is credited with the amount of reported claims that remain in the liquidation process and that for that reason have not yet been paid, whether they are direct insurance or reinsurance.

Life Insured Accumulation Fund: The items to be distributed among the Life Section insureds are credited to this fund as a complementary benefit, according to the conditions stipulated in the policies. These items may be profits of said Section or income from these that are affected for that purpose.

Summary:

About insurance companies and the legal regimes that control them in Argentina. It includes classification and definition of the most used terms within the insurance activity.

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