Extracts from INSURANCE REINSURANCE by Dumitru

G.Badea, Economica Publishing House.

Chapter 1 - Risk in our society
1.3 Basic categories of risks
Risk can be classified into several distinct categories. The major categories of risk are as follows:
Pure and speculative risks
Fundamental and particular risks
Subjective and objective risks
1.3.1 Pure and speculative risks
Pure risk is defined as a situation in which there are only the possibilities of loss and no loss.
The only possible outcomes are adverse (loss) and neutral (no loss). Examples of pure risks include
premature death, job-related accidents, catastrophic medical expenses, and damage to property from fire,
lightning, flood or earthquake.
Speculative risk is defined as a situation in which either profit or loss is possible. For example
if you purchase 100 shares of common stock, you would profit if the price of the stock increases by t
would lose if the price declines. Other examples of speculative risks include betting on a horse race,
investing in real estate, and going into business for yourself. In these situations, both profit and loss are
possible.
1.3.2 Fundamental and particular risks
A fundamental risk is a risk that affects the entire economy or large numbers of persons or
groups within the economy. Examples include rapid inflation, cyclical unemployment, and war because
large numbers of individuals are affected.
The risk of natural disaster is another important fundamental risk. Hurricanes, tornadoes,
earthquakes, floods, and forest and grass fires can result in billions of dollars of property damage and
numerous deaths. For example, in 1999, hurricane Floyd caused $1.8 billion in insured damages and
became the fifth most costly catastrophe in the U.S. history. In 1998, Hurricane Georges caused insured
losses of $2.9 billion. In 1992, hurricane Andrew, the most costly natural disaster ever in United States,
devastated South Florida and caused insured damages of $15.5 billion, which resulted in the failure of a
number of property insurers.
Floods and earthquakes also cause enormous property damage. In 1997, raging flood waters
ravaged thousands of homes and buildings, which resulted in millions of dollars in property damage and
enormous personal hardship. In 1994, a major earthquake in California caused billions of dollars of
property damage and the loss of numerous lives. Grass and brush fires and mud slides also occur
frequently, often resulting in sever property damage, the loss of life and intense personal suffering.
In contrast to fundamental risk, a particular risk is a risk that affects only individuals and not
the entire community. Examples include car thefts, bank robberies, and dwelling fires. Only individuals
experiencing such losses are affected not the entire economy.

The distinction between a fundamental and a particular risk is important because government
assistance may be necessary to insure a fundamental risk. Social insurance and government insurance
programs, as well as government guarantees and subsidies, may be necessary to insure certain
fundamental risks. For example, the risk of unemployment generally is not insurable by private insurers
but can be insured publicly by state unemployment compensation programs. In addition, flood insurance
subsidized by the government is available to business firms and individuals in flood areas.
1.3.3 Subjective and objective risks
The human society continues to exist due mainly to one process: the production of goods and
services. During this process, man is using different tools and transforms the nature, establishing a
permanent contact between him and the natural forces. But in the same time, due to this inter-relation
between him and the nature, the man must face different events and phenomena that are bringing about
negative effects. Starting from the most dangerous ones, that are generated by the natural forces
hurricanes, earthquakes, tornadoes, windstorms, floods and arriving to all sort of results created by
man himself - motorist accidents, job accidents and diseases, economic fluctuations, wars, terrorists
attacks -, they all leave behind losses of human life, property destructions, and economic depression.
They all cause financial insecurity for the ones affected.
The subjective risks are the situations resulted from mans activity. The following calamities
are included in this category: fires and explosions, aviation accidents, maritime accidents, motor
accidents, workplace accidents; collapses of buildings a.s.o.
The objective risks are the risks that are independent of human activity. They are produced by
the natural forces and refer to calamities with powerful destructive effects. They are mainly the
following: drought, frost, hurricanes, floods, earthquakes, lightning, windstorms, fires, sliding of earth.
There are lots of natural causes that have as results the death, different illnesses, the aging of humans,
but in the same time, the distress of the natural cycle of plants and animals.
1.5 Methods of handling risk
As we stressed earlier, risk is a burden not only to the individual but to the society as well. Thus,
it is important tot examine some techniques for meeting the problem of risk. There are five major
methods of handling risk:
Avoidance
Loss control
Retention
Non-insurance transfers
Insurance
1.5.1 Avoidance
Avoidance is one method of handling risk. For example, you can avoid the risk of being mugged in a
high-crime rate area by staying out of the area; you can avoid the risk of divorce by not marrying; and a
business firm can avoid the risk of being sued for a defective product by not producing the product.
Avoiding the risks consists in taking certain measures capable of ceasing the occurrence of a certain risk
(e.g. in certain areas, giving up the breeding of plants which are sensitive to hail). In the same category,
there are a series of anticipatory measures able to prevent the transformation of some events from
possibility into reality.

Not all the risks should be avoided, however. For example, you can avoid the risk of death or
disability in a plane crash by refusing to fly. But is this choice practical or desirable? The alternatives
driving or taking a bus or train often are not appealing. Although the risk of a plane crash is present,
the safety record of commercial airlines is excellent, and flying is a reasonable risk to assume.
1.5.2 Loss control
Loss control is another important method for handling risk. Loss control consists of certain
activities that reduce both the frequency and severity of losses. Thus, loss control has two major
objectives: loss prevention and loss reduction.
Loss prevention
Loss prevention aims at reducing the probability of loss so that the frequency of losses is
reduced. Several examples of personal loss prevention can be given. Auto accidents can be reduces if
motorists take a safe-driving course and drive defensively. The number of heart attacks can be reduced if
individuals control their weight, give up smoking, and eat healthy diets.
Reducing the effect of drought implies the application of a complex program of irrigations and
land improvements, using agricultural techniques that correspond to the weather and soil conditions.
Preventing the floods claims dams building, creating water reservoirs capable to overtake the exceeding
quantities. For limiting the negative consequences of the earthquakes, the laws elaborated for this
purpose by the competent authorities must be taken into consideration.
Loss reduction
Strict loss-prevention efforts can reduce the frequency of losses, yet some losses will inevitably
occur. Thus, the second objective of loss control is to reduce the severity of a loss after it occurs. For
example, a department store can install a sprinkler system so that a fire will be promptly extinguished,
thereby reducing the loss; a plant can be constructed with fire-resistant materials to minimize fire
damage; fire doors and fire walls can be used to prevent a fire from spreading; and a community
warning system can reduce the number of injuries and deaths from an approaching tornado.
1.5.3 Retention
Retention is a third method of handling risk. An individual or a business firm retains all or part
of a given risk. Risk retention can be either active or passive.
Active retention
Active risk retention means that an individual is consciously aware of the risk and deliberately
plans to retain all or part of it. For example, a motorist may wish to retain the risk of a small collision
loss by purchasing an auto insurance policy with a $250 or higher deductible. A homeowner may retain
a small part of the risk of damage to the home by purchasing a homeowners policy with a substantial
deductible. A business firm may deliberately retain the risk of petty thefts by employees, shoplifting, or
the spoilage of perishable goods. In these cases, a conscious decision is made to retain part or all of a
given risk.
Passive retention
Risk can also be retained passively. Certain risks may be unknowingly retained because of
ignorance, indifference or laziness. Passive retention is very dangerous if the risk retained has the
potential for destroying you financially. For example, many workers with earned incomes are not
insured against the risk of long-term total and permanent disability under either an individual or a group
disability income plan. However, the adverse financial consequences of total and permanent disability

generally are more severe than premature death. Therefore, people who are not insured against this risk
are using the technique of risk retention in a most dangerous and inappropriate manner.
1.5.4 Non-insurance transfers
Non-insurance transfers are another technique for handling risk. The risk is transferred to a party
other than an insurance company. A risk can be transferred by several methods, among which are the
following:
Transfer of risk by contracts
Hedging price risks
Incorporation of a business firm
Building protection funds against natural disasters
Transfer of risk by contracts
Unwanted risks can be transferred by contracts. For example, the risk of a defective television or
stereo set can be transferred to the retailer by purchasing a service contract, which makes the retailer
responsible for all repairs after the warranty expires. The risk of a rent increase can be transferred to the
landlord by a long-term lease. The risk of a price increase in construction costs can be transferred to the
builder by having a fixed price in the contract.
Finally, a risk can be transferred by a hold-harmless clause. For example, if a manufacturer of
scaffolds inserts a hold-harmless clause in a contract with a retailer, the retailer agrees to hold the
manufacturer harmless in case a scaffold collapses and someone is injured.
Hedging price risks
Hedging price risks is another example of risk transfer. Hedging is a technique for transferring
the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on
an organized exchange, such as the New York Stock Exchange.
1.5.5 Insurance
For most people, insurance is the most practical method for handling a major risk. Although
private insurance has several characteristics, three major characteristics should be emphasized.
First, risk transfer is used because a pure risk is transferred to the insurer. Second, the pooling
technique is used to spread the losses of the few over the entire group so that average loss is substituted
for actual loss. Finally, the risk may be reduced by application of the law of large numbers by which an
insurer can predict future loss experience with greater accuracy.
Insurance funds represent the most important form of constituting the fund meant to cover the
damage produced by calamities and accidents, by means of a specialized organization that may be an
insurance company or a mutual insurance company. This form is both decentralized - using the
contribution of insured natural or legal persons (by premiums) and centralized in order to cover the
damage suffered by the insured; the losses due to natural or technical calamities are supported by all the
participants to the fund.

Chapter 2 Risk management

2.1 Introduction
Risk management is a process to identify loss exposures faced by an organization and to select
the most appropriate techniques for treating such exposures. In the past, risk managers generally
considered only pure loss exposures faced by the firm. However, newer forms of risk management are
emerging that consider certain speculative risks as well. This chapter discusses first the treatment of pure
risks or pure loss exposures and second, the management of speculative risks in a modern risk
management program interest rate, currency exchange and commodity risk.
2.3 The risk management process
The modern paradigm for risk management is a five step process. The steps of the process are the
following:
1.
2.
3.
4.
5.

Program development
Risk analysis
Solution analysis
Decision making
System administration

2.3.1 Program development

Arguably the most important part of risk management. This initial step provides the direction and
the guidance for the entire risk management program.
This step includes three stages:
Planning
First the risk manager creates the risk management goals that are synchronized with the entire
organization. The risk management goals should blend with the firms mission and strategies.
Organizing
Next the risk manager sets up the department. The position of the risk manager is critical to get
the support and cooperation of the other departments. For this reason, many suggest the risk manager
should hold a Chief Risk Officer position at the vice-presidential level.
Writing
To assure communication and coordination with all other departments the risk manager must
write a report detailing the standard operating procedures. This will serve as a foundation and a
benchmark by which to judge the programs success.
2.3.2 Risk analysis
Given a direction and a purpose, the next step is to identify, measure and evaluate the multiple
risks that constrain the firm from achieving the goals.
Identify potential losses

No risk can be proactively managed unless it is first identified. Risk managers have several tools
at their disposal to create this list. The list includes all major and minor loss exposures. Important loss
exposures relates to the following:
o Property loss exposures
Building, plants, other structures
Furniture, equipment, supplies
Electronic data processing equipment, software
Inventory, accounts receivable
o Liability loss exposures
Defective products
Environmental pollution
Discrimination against employees
Liability arising from company vehicles
o Business income loss exposures
Loss of income from a covered loss
Continuing expenses after a loss
Contingent business income losses
o Human resources loss exposures
Death or disability of key employees
Retirement or unemployment
Job-related injuries or diseases
o Crime loss exposures
Fraud, embezzlement
Holdups, robberies
Employee theft and dishonesty
o Employee benefit loss exposures
Failure to comply with government regulations
Group life and health and retirement plan exposures
Risk managers have several tools at their disposal to create this list. They include the following:
Risk analysis questionnaires. Questionnaires require the risk manager to answer numerous
questions that identify major and minor loss exposures.
Physical inspection. A physical inspection of company plants and operations can identify major
loss exposures.
Flowcharts. Flowcharts that show the flow of production and delivery can reveal production
bottlenecks where a loss can have severe financial consequences for the firm.
Financial statements. Analysis of financial statements can identify the major assets that must be
protected.
Historical loss data. Historical and departmental loss data over time can be invaluable in
identifying major loss exposures.

Measure the potential losses

An old adage suggests, If you can measure, you can manage it. Risk managers have developed
a sophisticated set of statistical methods to measure risks. These include measures of central tendency,

distribution, and risk. Sometimes this process is referred to as risk mapping or risk profiling.
Essentially the risk manager is calculating the price of risk.
Evaluate the potential losses
Once each risk has been identified and measured, the risk manager is able to evaluate the extend
to which they constrain the firm from its goals. Because the firm has limited resources, the risk manager
must prioritize the list of risks.
This step involves an estimation of the potential frequency and severity of the loss. Loss
frequency refers to the probable number of losses that may occur during some given time period. Loss
severity refers to the probable size of the losses that may occur.
Once the risk manager estimates the frequency and severity of loss for each type of loss
exposure, the various loss exposures can be ranked according to their relative importance. For example,
a loss exposure with the potential for bankrupting the firm is much more important in a risk management
program than an exposure with a small loss potential.
In addition, the relative frequency and severity of each loss exposure must be estimated so that
the risk manager can select the most appropriate technique, or combination of techniques, for handling
each exposure. For example, if certain losses occur regularly and are fairly predictable, they can be
budgeted out of a firms income and treated as a normal operating expense. If the annual loss experience
of a certain type of exposure fluctuates widely, however, an entirely different approach is required.
2.3.3 Solution analysis
The risk manager has a large variety of tools available to treat the risks. Choosing the appropriate
combination of tools can provide the firm with a competitive advantage.
At this stage, there are three phases:
Identify possible solutions
Measure possible solutions
Evaluate possible solutions
2.3.3.1 Identify possible solutions
Once again the first thing a risk manager needs to do is to be sure to identify all possible
solutions to risks. This brain-storming activity will assure that no alternative risk control or risk
financing options are overlooked.
A common technique to identify the tools is to use the risk management solution tree (see
Exhibit 2.1).
This step in the risk management process is to select the most appropriate techniques or treating
loss exposures. These techniques can be classified broadly as either risk control or risk financing. Risk
control refers to techniques that reduce the frequency and severity of accidental losses. Risk financing
refers to techniques that provide for the funding of accidental losses after they control. Many risk
managers use a combination of techniques for treating each loss exposure.
a) Risk control
As noted above, risk control encompasses techniques that prevent losses from occurring or
reduce the severity of a loss after it occurs. Major risk control techniques include the following:
Avoidance

Loss control
EXHIBIT 2.1 Risk management solution tree
IDENTIFY the risk

AVOID

Not AVOID

CONTROL

Prevention

Not CONTROL

Reduction

RISK FINANCING

Retention

Transfer

Avoidance
Avoidance means a certain loss exposure is never acquired, or an exiting loss exposure is
abandoned. For example, flood losses can be avoided by not building a new plant in a flood plain. A
pharmaceutical firm that markets a drug with dangerous side effects can withdraw the drug from the
market.
The major advantage of avoidance is that the chance of loss is reduced to zero if the loss
exposure is never acquired. In addition, if an existing loss exposure is abandoned, the chance of loss is
reduced or eliminated because the activity or product that could produce a loss has been abandoned.
Abandonment, however, may still leave the firm with a residual liability exposure from the sale
of previous products.
Avoidance, however, has two major disadvantages. First, the firm may not be able to avoid all
losses. For example, a company may not be able to avoid the premature death of a key executive.
Second, it may not feasible or practical to avoid the exposure. For example, a paint factory can avoid
losses arising from the production of paint. Without paint production, however, the firm will not be in
business.
Loss control
Loss control has two dimensions: loss prevention and loss reduction. Loss prevention refers to
measures that reduce the frequency of a particular loss. For example, measures that reduce truck
accidents include driver examinations, zero tolerance for alcohol or drug abuse, and strict enforcement

of safety rules. Measures that reduce lawsuits from defective products include installation of safety
features on hazardous products, placement of warning labels on dangerous products, and institution of
quality-control checks.
Loss reduction refers to measures that reduce the severity of a loss after it occurs. Examples
include installation of an automatic sprinkler system that promptly extinguishes a fire; segregation of
exposure units so that a single loss cannot simultaneously damage all exposure units, such as having
warehouses with inventories at different locations; rehabilitation of workers with job-related injuries;
and limiting the amount of cash on the premises.
b) Risk financing
As stated earlier, risk financing refers to techniques that provide for the funding of losses after
they occur. Major risk-financing techniques include the following:
Retention
Non-insurance transfers
Commercial insurance
b.1) Retention
Retention means that the firm retains part or all of the losses that can result from a given loss.
Retention can be either active or passive. Active risk retention means that the firm is aware of the loss
exposure and plans to retain part or all of it, such as automobile collision losses to a fleet of company
cars. Passive retention, however, is the failure to identify a loss exposure, failure to act, or forgetting to
act. For example, a risk manager may fail to identify all company assets that could be damaged in an
earthquake.
Advantages and disadvantages of retention
The retention technique has both advantages and disadvantages in a risk management program.
The major advantages are the following:
o Save money. The firm can save money in the long run if its actual losses are less than the loss
component in the insurers premium.
o Lower expenses. The services provided by the insurer may be provided by the firm at a lower
cost. Some expenses may be reduced, including loss-adjustment expenses, general administrative
expenses, commissions and brokerage fees, loss control expenses, taxes and fees, and the
insurers profit.
o Encourage loss prevention. Because the exposure is retained, there may be a greater incentive for
loss prevention.
o Increase cash flow. Cash flow may be increased, because the firm can use the funds that
normally would be paid to the insurer at the beginning of the coverage period.
The retention technique, however, has several disadvantages:
Possible higher losses. The losses retained by the firm may be greater than the loss allowance in
the insurance premium that is saved by not purchasing the insurance. Also, in the short run, there
may be great volatility in the firms loss experience.

Possible higher expenses. Expenses may actually be higher. Outside experts such as safety
engineers may have to be hired. Insurers may be able to provide loss control and claim services
less expensively.
Possible higher taxes. Income taxes may also be higher. The premiums paid to an insurer are
income-tax deductible. However, if retention is used, only the amounts actually paid out for
losses are deductible. Contributions to a funded reserve are not income-tax deductible.
b.2) Non-insurance transfers
Non-insurance transfers are another risk financing technique. Non-insurance transfers are
methods other than insurance by which a pure risk and its potential financial consequences are
transferred to another party. Examples of non-insurance transfers include contracts, leases, and holdharmless agreements. For example, a companys contract with a construction firm to build a new plant
can specify that the construction firm is responsible for any damage to the plant while it is being built. A
firms computer lease can specify that maintenance, repairs, and any physical damage loss to the
computer are the responsibility of the computer firm. Or a firm may insert a hold-harmless clause in a
contract, by which one party assumes legal liability on behalf of another party.
Advantages and disadvantages of non-insurance transfers
In a risk management program, non-insurance transfers have several advantages:
o The risk manager can transfer some potential losses that are not commercially insurable.
o Non-insurance transfers often cost less than insurance.
o The potential loss may be shifted to someone who is in a better position to exercise loss control.
However, non-insurance transfers have several disadvantages. They are summarized as follows:
The transfer of potential loss may fail because the contract language is ambiguous. Also, there
may be no court precedents for the interpretation of a contract that is tailor-made to fit the
situation.
If the party to whom the potential loss is transferred is unable to pay the loss, the firm is still
responsible for the claim.
Non-insurance transfers may not always reduce insurance costs, because an insurer may not give
credit for the transfers.

b.3) Insurance
Commercial insurance is also used in a risk management program. Insurance is appropriate for
loss exposures that have a low probability of loss but for which the severity of loss is high.
Advantages and disadvantages of insurance
The use of commercial insurance in a risk management program has certain advantages:
o The firm will be indemnified after a loss occurs. The firm can continue to operate and may
experience little or no fluctuation in earnings.
o Uncertainty is reduced, which permits the firm to lengthen its planning horizon. Worry and fear
are reduced for managers and employees, which should improve their performance and
productivity.
o Insurers can provide valuable risk management services, such as loss-control services, exposure
analysis to identify loss exposures, and claims adjusting.

10

o Insurance premiums are income-tax deductible as a business expense.

The use of insurance also entails certain disadvantages and costs:
The payment of premiums is a major cost, because the premium consists of a component to pay
losses, an amount for expenses, and an allowance for profit and contingencies. There is also an
opportunity cost. Under the retention technique discussed earlier, the premium could be invested
or used in the business until needed to pay claims. If insurance is used, premiums must be paid in
advance.
Considerable time and effort must be spent in negotiating the insurance coverages. An insurer or
insurers must be selected, policy terms and premiums must be negotiated, the firm must
cooperate with the loss-control activities of the insurer, and proof of loss must be filed with the
insurer following a loss.
The risk manager may have less incentive to follow a loss-control program, because the insurer
will pay the claim if a loss occurs. Such a lax attitude toward loss control could increase the
number of non-insured losses as well.
c) Which method should be used?
In determining the appropriate method or methods for handling losses, a matrix can be used that
classifies the various loss exposures according to frequency and severity. This matrix can be useful in
determining which risk management method should be used. (see Exhibit 2.3)

Type of loss
1
2
3
4

EXHIBIT 2.3 Risk management matrix

Loss frequency
Loss severity
Appropriate risk
management technique
Low
Low
Retention
High
Low
Loss control and retention
Low
High
Insurance
High
High
Avoidance

The first loss exposure is characterized by both low frequency and low severity of loss. One
example of this type of exposure would be the potential theft of a secretarys dictionary. This type of
exposure can be best handled by retention, because the loss occurs infrequently and, when it does
occur, it seldom causes financial harm.
The second type of exposure is more serious. Losses occur frequently, but severity is relatively
low. Examples of this type of exposure include physical damage losses to automobiles, workers
compensation claims, shoplifting, and food spoilage. Loss control should be used here to reduce the
frequency of losses. In addition, because losses occur regularly and are predictable, the retention
technique can also be used. However, because small losses in the aggregate can reach sizable levels over
a one-year period, excess insurance could also be purchased.
The third type of exposure can be met by insurance. As stated earlier, insurance is best suited
for low-frequency, high-severity losses. High severity means that a catastrophic potential is present,
while a low probability of loss indicates that the purchase of insurance is economically feasible.
Examples of this type of exposure include fires, explosions, natural disasters, and liability lawsuits. The
risk manager could also use a combination of retention and commercial insurance to deal with these
exposures.

11

The fourth and most serious type of exposure is one characterized by both high frequency and
high severity. This type of exposure is best handled by avoidance. For example, a truck driver with
several convictions for drunk driving may apply for a job with trucking company. If the driver is hired
and injures ore kills someone while under the influence of alcohol, the company would be faced with a
catastrophic lawsuit. This exposure can be handled by avoidance. The driver should not be hired.
2.3.3.2 Measure possible solutions
Every solution will require an allocation of the firms scarce resources. Understanding how much
money, how much time, and how many people are required to implement the solution is a critical factor
in analyzing the solutions. The risk manager must perform a net present value analysis of each solution.
This facilitates understanding by other managers who speak finance as their native language. A costbenefit analysis is a necessary but not sufficient part of making good risk management decision.
2.3.3.3 Evaluate possible solutions
In addition to financial analysis, the risk manager must perform a qualitative analysis. Here the
manager evaluates the impact of adopting the solution on the firms strategies. Does the solution
enhance the firms ability to achieve its goals? Also, the manager must consider the qualitative impact
on key stakeholders. (see Exhibit 2.4)
EXHIBIT 2.4 The stakeholders model
Owner
Sole-proprietor
Partnership
Corporation
Competition
Win/Lose
Substitute
goods

Suppliers
Raw material
Capital
Labor

Organization
Management
Labor

Coopetition
Win/Win
Complementary
goods
Society /
Governments
Country regulation
International codes

12

Consumers
Households
Businesses
Government

2.3.4 Decision process

When the risk manger has created a list of solutions one of the most difficult steps begins. As
resources are scarce, the risk manager must carefully choose among the set of possible solutions.
The risk manager does not make decisions in isolation. Like the other steps in the process, many
other stakeholders are involved. There are two typical models of garnering support. First, the risk
manager might use a top down approach.
This is appropriate when the firm uses unskilled labor and the supple of labor is abundant. In
situations where the labor force is highly skilled (such as in the technology sector) a bottom up
approach might be more effective at getting support for the risk management solution.
The risk manager does not work alone. Other functional departments within the firm are
extremely important in identifying pure loss exposures and methods for treating these exposures. These
departments can cooperate in the risk management process in the following ways:
Accounting. Internal accounting controls can reduce employee fraud and theft of cash.
Finance. Information can be provided showing how losses can disrupt profits and cash flow, and
the effect that losses will have on the firms balance sheet and profit and loss statement.
Marketing. Accurate packaging can prevent liability lawsuits. Safe distribution procedures can
prevent accidents.
Production. Quality control can prevent the production of defective goods and liability lawsuits.
Effective safety programs in the plant can reduce injuries and accidents.
Human resources. This department may be responsible for employee benefit programs, pension
programs, safety programs, and the companys hiring, promotion, and dismissal policies.
2.3.5 System administration
After a solution has been implemented it is essential to get feedback on the solutions success.
First, the risk manager must collect information about the solutions. Many different forms of
Risk Management Information Systems (RMIS) are available. A Risk Management Information Systems
(RMIS) is a computerized database that permits the risk manager to store and analyze risk management
data and to use such data to predict future loss levels. However, most commercial forms focus on claims
administration and need to be modified to serve all the needs of the risk manager in applying the risk
management process.
To be effective, the risk management must be periodically reviewed and evaluated to determine
whether the objectives are being attained. In particular, risk management costs, safety programs, and
loss-prevention programs must be carefully monitored. Loss records must also be examined to detect
any changes in frequency and severity.
Finally, the risk manager must determine whether the firms overall risk management policies
are being carried out, and whether the risk manager is receiving the total cooperation of the other
departments in carrying out the risk management functions.

13

Chapter 3 Risk and insurance

3.2 Insurance legal and economic aspects
Insurance contracts have distinct legal characteristics that make them different from other
legal contracts. Some of these characteristics are the following:
Aleatory contract
Unilateral contract
Conditional contract
Personal contract
Contract with onerous title
Successive contract
Contract of adhesion.
3.2.1 Aleatory contract
An insurance contract is aleatory rather than commutative. An aleatory contract is one in which
the values exchanged may not be equal but depend on an uncertain event. Depending on chance, one
party may receive a value out of proportion to the value that is given. For example, assume that a person
pay a premium of 500 m.u. for 100,000 m.u. of insurance of her home. If the home were totally
destroyed by fire shortly thereafter, she would collect an amount that greatly exceeds the premium paid.
On the other hand, a homeowner may faithfully pay premiums for many years and never have a loss.
3.2.2 Unilateral Contract
An insurance contract is a unilateral contract. A unilateral contract means that only one party
makes a legally enforceable promise. In this case, only the insurer makes a legally enforceable promise
to pay a claim or provide other services to the insured. After the first premium is paid, and the insurance
is in force, the insured cannot be legally forced to pay the premiums or to comply with the policy
provisions. Although the insured must continue to pay the premiums to receive payment for a loss, he or
she cannot be legally forced to do so. However, if the premiums are paid, the insurer must accept them
and must continue to provide the protection promised under the contract.
3.2.3 Conditional contract
An insurance contract is a conditional contract. That is, the insurers obligation to pay a claim
depends on whether the insured or the beneficiary has complied with all policy conditions. Conditions
are provisions inserted in the policy that qualify or place limitations on the insurers promise to
perform. The conditions section imposes certain duties on the insured if he or she wishes to collect for a
loss. The insurer is not obligated to pay a claim if the policy conditions are not met. For example, under
a property policy, the insured must give immediate notice of a loss. If the insured delays for an
unreasonable period in reporting the loss, the insurer can refuse to pay the claim on the grounds that a
policy condition has been violated.
3.2.4 Personal contract
In property insurance, insurance is a personal contract, which means the contract is between the
insured and the insurer. Strictly speaking, a property insurance contract does not insure property, but
insures the owner of property against loss. The owner of the insured property is indemnified if the
property is damaged or destroyed. Because the contract is personal, the applicant for insurance must be

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acceptable to the insurer and must meet certain underwriting standards regarding character, morals, and
credit.
3.2.5 Contract with onerous title
An insurance contract is a contract with onerous title, which means that each party has a
certain interest, a benefit for the obligations assumed. Similar to other onerous contracts (buyingselling, leasing, lending), the insurance contract is different from the contracts with gratuitous title
(donation), which implies an obligation for only one party. The insured gets the protection offered by the
insurer. In the same time, the insurer is taking over the insured risk, but not for free, but for a price, the
insurance premium.
The civil law represents the other legal aspect of insurance.
The ex contractu insurance is based on the principle of facultative act, which means the contract
is signed based on the consent of the parties, natural and legal persons, against those phenomenon
(events) that are threatening their property or life. The contractual insurance is a personal method of
handling risks.
On the other hand, the ex lege insurance is based on the compulsive act principle, which means
that natural or legal persons, that own certain goods or properties must insure them against the risks
provided by the law. The insurers, authorized to perform such an insurance activity, must insure those
interested according to the provisions of the law. The compulsory insurance has reduced its area of
action after the development of the market-based economy. The compulsory insurance offers protection
for certain categories of natural and legal persons in case of certain social and economic events.
3.3 Basic characteristics of insurance
Based on the preceding definition, an insurance plan or arrangement typically has certain
characteristics. They include the following:
Pooling of losses
Payment of fortuitous losses
Risk transfer
Indemnification
3.3.1 Pooling of Losses
Pooling or the sharing of losses is the heart of insurance. Pooling is the spreading of losses
incurred by the few over the entire group, so that in the process, average loss is substituted for actual
loss. In addition, pooling involves the grouping of a large number of exposure units so that the law of
large numbers can operate to provide a substantially accurate prediction of future losses. Ideally, there
should be a large number of similar, but not necessarily identical, exposure units that are subject to the
same perils. Thus, pooling implies (1) the sharing of losses by the entire group, and (2) prediction of
future losses with some accuracy based on the law of large numbers.
3.3.2 Payment of Fortuitous Losses
A second characteristic of private insurance is the payment of fortuitous losses. A fortuitous loss
is one that is unforeseen and unexpected and occurs as a result of chance. In other words, the loss must
be accidental. The law of large numbers is based on the assumption that losses are accidental and occur

15

randomly. For example, a person may slip on an icy sidewalk and break a leg. The loss would be
fortuitous.
3.3.3 Risk Transfer
Risk transfer is another essential element of insurance. With the exception of self-insurance, a
true insurance plan always involves risk transfer. Risk transfer means that a pure risk is transferred
from the insured to the insurer, who typically is in a stronger financial position to pay the loss than the
insured. From the viewpoint of the individual, pure risks that are typically transferred to insurers include
the risk of premature death, poor health, disability, destruction and theft of property, and liability
lawsuits.
3.3.4 Indemnification
A final characteristic of insurance is indemnification for losses. Indemnification means that the
insured is restored to his or her approximate financial position prior to the occurrence of the loss. Thus,
if your home burns in a fire, a homeowners insurance policy will indemnify you or restore you to your
previous position. If you are sued because of the negligent operation of an automobile, your auto
liability insurance policy will pay those sums that you are legally obligated to pay. Similarly, if you
become seriously disabled, a disability-income insurance policy will restore at least part of the lost
wages.
3.4 Requirements of an insurable risk
Insurers normally insure only pure risks. However, not all pure risks are insurable. Certain
requirements usually must be fulfilled before a pure risk can be privately insured. From the viewpoint of
the insurer, there are ideally six requirements of an insurable risk.
There must be a large number of exposure units.
The loss must be accidental and unintentional.
The loss must be determinable and measurable.
The loss should not be catastrophic.
The chance of loss must be calculable.
The premium must be economically feasible.
Large Number of Exposure Units
The first requirement of an insurable risk is a large number of exposure units. Ideally, there
should be a large group of roughly similar, but not necessarily identical, exposure units that are subject
to the same peril or group of perils. For example, a large number of frame dwellings in a city can be
grouped together for purposes of providing property insurance on the dwellings.
Accidental and Unintentional Loss
A second requirement is that the loss should be accidental and unintentional; ideally, the loss
should be fortuitous and outside the insureds control. Thus, if an individual deliberately causes a loss,
he or she should not be indemnified for the loss.
Determinable and Measurable Loss
A third requirement is that the loss should be both determinable and measurable. This means the
loss should be definite as to cause, time, place, and amount. Life insurance in most cases meets this

16

requirement easily. The cause and time of death can be readily determined in most cases, and if the
person is insured, the face amount of the life insurance policy is the amount paid.
No Catastrophic Loss
The fourth requirement is that ideally the loss should not be catastrophic. This means that a large
proportion of exposure units should not incur losses at the same time. As we stated earlier, pooling is the
essence of insurance. If most or all of the exposure units in a certain class simultaneously incur a loss,
then the pooling technique breaks down and becomes unworkable. Premiums must be increased
prohibitive levels, and the insurance technique is no longer a viable arrangement by which losses of the
few are spread over the entire group.
Calculable Chance of Loss
Another important requirement is that the chance of loss should be calculable. The insurer must
be able to calculate both the average frequency and the average severity of future losses with some
accuracy. This requirement is necessary so that a proper premium can be charged that is sufficient to pay
all claims and expenses and yield a profit during the policy period.
Economically Feasible Premium
A final requirement is that the premium should be economically feasible. The insured must be
able to afford to pay the premium. In addition, for the insurance to be an attractive purchase, the
premiums paid must be substantially less than the face value, or amount, of the policy.
3.5 Technical elements of insurance
The technical elements of the insurance are the following:
The insurer
The insured party
The beneficiary of the insurance
The insurance contracting party*
The insurance contract*
The insured risk
The insurance assessment**
The insured amount
The insurance quota***
The insurance premium
The term of the insurance*
The damage**
The insurance compensation**
* Elements specific to facultative insurance
** Elements specific to property insurance
*** Elements specific to compulsory property insurance
The insurer is the legal person (the insurance company), which, in exchange for the insurance
premium received from the insured party, is liable for covering the damages induced upon the insured
goods by certain natural calamities or accidents, for paying the insured amount at the moment a certain
17

event occurs in the life of the insured persons or for paying a compensation for the damage for which the
insured is liable according to the law - to third parties.
The insured party is the natural or legal person that, in exchange for the insurance premium
paid to the insurer, insures his/her goods against certain natural calamities or accidents, or the natural
person that insures him/herself against events that may occur in his/her life, as well as the natural or
legal person that insures oneself against the damage one may induce on third parties.
When considering the property and third party liability insurance, both legal and various natural
persons may represent the insured party. In case of personal insurance, any natural person that complies
with the stipulations provided by the normative acts may represent the insured party.
The beneficiary of the insurance is represented by the person that has the right to cash in the
compensation or the insured amount without having taken part in the insurance contract. Sometimes,
the third party that becomes the beneficiary of the insurance is expressly appointed by the insured party
in the insurance contract. Other times, the appointment of the beneficiary of the insurance takes place
while the insurance contract is being implemented, either by means of a written statement, sent by the
insured party to the insurance company, or by will. The beneficiary of the insurance is appointed also by
taking into account the insurance terms (for instance, the husband, the legal heirs). When there are
several appointed beneficiaries or heirs, they all have equal rights over the insured amount, provided that
the insured party had not indicated otherwise.
The insurance contracting party is the natural or legal person that can contract an insurance,
without him/her becoming the insured party. Thus, for instance, an economic agent can contract an
insurance against accidents on behalf of his/her employees that are driving to and from the workplace by
cars owned by the economic agent. In this case, the insured parties are the employees, for whom the
insurance has been contracted, and the economic agent is the insurance contracting party. There is not
always a strict differentiation between the notions of contracting party and beneficiary of the insurance.
Thus, the insurance contracting party can also be its beneficiary, at the same time.
For instance, in case of mixed life insurance, if the insured party lives up to the moment when
the term of the insurance runs out, he/she will also be the beneficiary of the insurance. In case of death
of the insured person before the term of the insurance runs out, a third party becomes the beneficiary of
the insurance. It can be concluded that the notions of contracting party and beneficiary of the insurance
are encountered only in case of personal insurance. In case of insurance of goods, the insured party is the
same with the contracting party and the beneficiary of the insurance and in case of third party liability
insurance, the insured party is the same only with the insurance contracting party, as the insurance
compensation is always cashed by the damaged third party.
The insured risk is the event or the group of events that, once they occur, have as a result, due to
their impact, the obligation of the insurer to pay to the insured party (or the beneficiary of the insurance)
the insured amount or the compensation.
The insured amount is the part of the insurance for which the insurer assumes responsibility in
case the insured event occurs. The insured amount is the maximum amount for which the insurer is
responsible and represents one of the elements on which the insurance premium is based. For property
insurance, the insured amount can be equal or less than the value of the goods. It may, under no
circumstances, be greater than the value of the insured goods, because insurance is conceived so as to
allow compensation greater in value than the actual losses incurred by the insured.
he insurance norm represents the insured amount established by the law over the insured object
unit and it regards only the compulsory insurance. For instance, for general public buildings, the
insurance norm is established as per square meter of built area. Its quota is different for rural and urban
areas as well as for the end use of the building. For agricultural crops, the insurance norm is established

18

per hectare. In this case, the insurance norm quota is different depending on the type of agricultural
crops. Multiplying the insurance norm by the number of insured object units, one can get the insured
amount for the goods in question.
Insurance premium represents the amount of money previously established that the insured
pays to the insurer so as the latter can build the insurance fund necessary to cover the losses. Out of the
insurance premium received, the insurer builds, in addition to compensation or insured amount fund,
other funds stipulated by the regulations and it also covers its expenses for building and managing its
insurance funds. The insurance premium value received from the insured party is obtained by
multiplying the insured amount with the tariff premium quota established for every 100 or 1000
monetary units of insured amount. The tariff premium quota also known as gross premium is
differentiated as level according to the insurance branch, type of insured goods, frequency and intensity
of the insured risk. It includes two classes: basic quota, also known as net premium and its
supplement, or value added to the basic quota.
Insurance term is the period of time during which the insurance relations between insurer and
insured are in force the way they are established by the insurance contract.
The insurance term is a specific element of the facultative insurance contract, binding the two
parties to respect the obligations rising from the contract. Thus, the insurer is obligated to pay the
insurance compensation for the damage occurred to the goods included in the insurance contract, or the
amount insured belonging to the insured or insurance beneficiary, when the insured event occurs. As for
the insured, he is obligated to pay the insurance premium on the dates previously established, to guard
and keep in good condition the insured goods.
Damage represents a loss in money terms incurred by an insured good as a result of the insured
event happening.
Insurance compensation is the amount of money that the insurer owes the insured in order to
compensate for the damage produced by the insured risk. The insurance compensation can be less or
equal to the damage, according to the responsibility principle of the insurer.
The part from the established damage, which is retained by the insured, is called franchise.
There are two types of franchise: simple and deductible.
Through simple franchise, the insurer covers entirely the damage to the level of the insured
amount if it is greater than the franchise.
The deductible franchise is subtracted in all cases of damage, no matter what the level of the
damage. Compensation is paid only for the damage part that exceeds the franchise.
Neither for the simple franchise, nor for the deductible one, is compensation paid for the damage
within the boundaries of the franchise.
As the insurance compensation level in the case of limited responsibility principle is lower, the
amount of tariff premium is lower too. By applying this principle, certain expenses are avoided, such as
evaluation, damage assessment for lower level amounts, which have lower economic value.
Limited responsibility principle is applied, usually, for merchandise insurance in international
transport.
3.6.2 Types of insurance according to different criteria
The life and general insurance may be classified according to different criteria:
Object of policy;
The legal characteristics;
Risks included;
Territorial application;

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The relationships between the insurer and insured.

Object of policy
According to the area of application, insurance can be classified in:
1. property insurance the object of these insurances are the material goods owned by
natural and legal persons and that can be subject to natural forces or accidents. In our
country, the property included in this type of insurance is the following: production
equipment, agricultural crops and cultures, cars, vessels, airplanes, buildings, other
constructions, home appliances a.s.o.
2. personal insurance the object of this type of insurance are the natural persons. The
effects of person insurance policies are either compensation for the negative effects of
natural calamities, accidents, sickness or the payment of insured amount in case of a
certain event (death, work disability a.s.o.)
3. civil liability insurance the insurer is liable to pay the indemnity for the loss caused by
insured to a third party. The loss can be material damage, death, average or total loss of
certain property.
The legal characteristic
The insurance policies may be classified also according to their legal characteristics. The
following classes are applied in Romania:
1. compulsory insurance (established through law). This type of insurance are applied
for those risks that affect a large number of natural or legal persons and cause losses for
each of those persons. The property insured through this type of insurance are mainly:
buildings, equipment, cattle, agricultural cultures a.s.o. The relationships between the
insured and the insurer are established by law. At this moment, the owners of cars must
insure their vehicles against third party liability, material damage and disability on
Romanian territory. The compulsory insurance has some features that differentiate it
from facultative insurance. First, the compulsory insurance is a total insurance. It
applies to all similar property owned by natural or legal persons, according to certain
legal provisions. The compulsory insurance excludes the possibility of selecting the
insurable risks. Thus, the insurance premiums for the same risks and similar property are
the same and lower in amount than those established through facultative insurance.
Second, the compulsory insurance is a quota insurance. The insured amount is
established based on certain series of quotas per insured unit. The insurance quota may
be relative and absolute. They are established based on the smallest economic value of
types of property. Thus, the need to complete this type of insurance with a facultative
insurance for that property with a bigger economic value. Third, the compulsory
insurance is continuous. It applies as long as the insured property exists. In case the
insured property was replaced, the insurance policy still stands. The rights and
obligations of the contracting parties are not limited in time. Finally, in the case of
compulsory insurance, the insurer is liable automatically, from the moment when the
insured gets the possession of the insured property. The indemnification is not
conditioned by the payment of insurance premium as the date of the payment is provided
by law. In the case when the insured did not pay on time, the insurer has the right to ask
for interest for the remaining amount of premium or to deduct from the indemnification
the amount unpaid.

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2. facultative (contractual) insurance they are based on an insurance contract. The

insured must declare all the necessary data related to the insured property so that the
insurer could take over the risks that would affect that property. Also, the insured should
agree to pay the insurance premiums and to fulfill all his obligations that arise from the
insurance contract. The facultative insurance may be signed for property, persons, civil
liability or risks that are not comprised in the compulsory insurance policies. The
facultative insurance is based only on the agreement signed by the two contracting
parties. This type of insurance is not total it includes only some property, even though
almost everybody owns that type of property. The insured amount is not established
based on quotas but on the offer of the insurer and taking into account the real economic
value of the property in the moment of signing up the contract. The facultative insurance
is valid during a certain period of time, which is specified in the contract. At the end of
that period, the insurers obligations are annulled, no matter if the insured risk occurred
or not in that period. The facultative insurance is active only after the fulfillment of the
requirements mentioned in the insurance contract (the most important, the payment of
the insurance premium).

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Chapter 4 - Insurance contract

4.2 The principles of insurance contract
Each insurance contract is based on a series of principles that may be treated as conditions so
that the contract would be enforced. The main principles of insurance contracts are the following:
The indemnity principle;
The insurable interest principle;
The subrogation principle;
The Utmost Good faith principle;
The Causa Proxima principle;
The contribution principle.
4.2.1 The Indemnity principle
The principle of indemnity is one of the most important legal principles in insurance. The
principle of indemnity states that the insurer agrees to pay no more than the actual amount of the loss;
stated differently, the insured should not profit from a loss. Most property and liability insurance
contracts are contracts of indemnity. If a covered loss occurs, the insurer should not pay more than the
actual amount of the loss. Nevertheless, a contract of indemnity does not mean that all covered losses
are always paid in full. Because of deductibles, limits on the amount paid, and other contractual
provisions, the amount paid may be less than the actual loss.
4.2.2 The principle of insurable interest
The principle of insurable interest is another important legal principle. The principle of
insurable interest states that the insured must be in a position to lose financially if a loss occurs, or to
incur some other kind of harm if the loss takes place. For example, George has an insurable interest in
his car because he may lose financially if the car is damaged or stolen. Or someone has an insurable
interest in his/her personal property, such as a television set or VCR, because he/she may lose
financially if the property is damaged or destroyed.
4.2.3 The principle of subrogation
The principle of subrogation strongly supports the principle of indemnity. Subrogation means
substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third
person for a loss covered by insurance. The insurer is therefore entitled to recover from a negligent third
party any loss payments made tot the insured. For example, assume that a negligent motorist fails to stop
at a red light and smashes into Anas car, causing damage in amount of 5,000 m.u. If she has collision
insurance on her car, her company will pay the physical damage loss to the car (less any deductible) and
then attempt to collect directly from the negligent motorist who caused the accident. Alternatively, Ana
could attempt to collect directly from the negligent motorist for the damage to her car. Subrogation does
not apply if a loss payment is not made. However, to the extent that a loss payment is made, the insured
gives to the insurer legal rights to collect damages fro the negligent third party.
4.2.4 The principle of utmost good faith

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An insurance contract is based on the principle of utmost good faith. That is, a higher degree of
honesty is imposed on both parties to an insurance contract than is imposed on parties to other
contracts. This principle has its historical roots in ocean marine insurance. The marine underwriter had
to place great faith in statements made by the applicant for insurance concerning the cargo to be shipped.
The property to be insured may not have been visually inspected, and the contract may have been
formed in a location far removed from the cargo and ship. Thus, the principle of utmost good faith
imposed high degree of honesty on the applicant for insurance.
4.2.6 The principle of contribution
Contribution means that the insurer has the right to ask to other insurers similarly liable, for a
loss suffered by an insured, in the view of taking part together in the payment of indemnity to insured,
including the corresponding costs.
The contribution principle applies only in the case the insured found cover from more insurers
for the same loss. Similar to the subrogation principle, the contribution principle is applied only for the
contracts of indemnity.

4.3.6 The rights and obligations of the contracting parties

The nature of the insurance contract implies a strict interpretation of the provisions. Each clause
must be clearly stated in order to avoid confusions and misunderstandings. In the case of ambiguous,
unclear clauses, the Romanian Civil Law states that the interpretation of those clauses to be made in
favor of the insured.
The rights and obligations of the two parties may be divided into two periods:
Before the occurrence of the insured event
After the occurrence of the insured event.
Before the occurrence of the insured event
The rights and obligations of the insured
The main rights of the insured are exercised in the moment of occurrence of the insured event.
Among these rights, the following are the most important:
The right to modify the contract (for example, the possibility of changing the name of the
beneficiary or the payment method of the premiums);
The right to conclude supplementary insurances (for example, in property and liability
insurance, in order to increase the initial insured amount);
The right to repurchase (in the case of insurance with premium reserves, such as life
insurance, the insured has the right to cancel the contract by paying the repurchase
amount, usually 95% of the premium reserve).
During this period, the insured must fulfill three main obligations:
1. Payment of insurance premium
Usually, the contracting party is the same with the insured. If the insurance is signed for another
person, the obligation of payment remains with the contracting party.
When the insured event occurred, if the insurance premium was not paid for the entire term, the
insurer has the right to deduct the premiums owed until the end of the term with a part of the indemnity

23

that belongs to the insured. If the contracting party dies and the insured property must be divided among
heirs, the obligation to pay the insurance premium is beard by all the heirs as long as the property does
not become the property of a certain heir.
2. Obligation to inform the insurer about the changes in the risk and to maintain
the insured property in proper conditions
In the case the insured does not maintain properly the insured property, according to the legal
provisions, the insurer has the right to cancel the contract or if the insured event occurs, the insurer has
the right to deny payment of the indemnity if the negligence of the insured impairs the insurer to
establish the cause or the extend of the loss.
3. Obligation to inform the insurer about all the conditions worsening the insured
risk.
If during the insurance contract, there are new factors that influence the frequency or the severity
of the risk occurrence, the insured must specify these factors to the insurer. This obligation would result
in a modification of the contract to the new conditions. Otherwise, the insurer has the right tot annul the
contract. The aggravation of the insured risk may happen in the following conditions:
Due to the insured, through positive actions, such as, for example, the transfer of the
theft-insured property from the location mentioned in the contract in other locations, with
a smaller risk; or through negative actions for example, the negligence of the insure to
apply necessary measures to maintain the insured property in proper conditions;
Due to the activity of a third person;
Due to objective events, independent of human wish, such as social and political events:
war, strike a.s.o.
The insured must inform the insurer of these factors as soon as he found out about them.
The rights and obligations of the insurer
Before the occurrence of the insured event, the insurer has mainly rights. Each obligation of the
insured corresponds to a similar right of the insurer:
The right to verify the existence of the insured property and the maintenance conditions;
The right to apply legal sanctions in the case the insured did not fulfill his obligations
regarding the maintenance, utilization and security of the insured property.
Besides these rights, the insurer has also some obligations, such as:
The obligation of releasing the duplicate of the insurance contract, in case the insured lost
the original copy;
The obligation to issue, at the insureds request, insurance confirmation certificates, in
the case of carriers liability insurance toward passengers for their luggage and
merchandise, as well as for third parties.
After the occurrence of the insured event
The rights and obligations of the insured
The main right of the insured at this stage is to receive the insurance indemnity.
The main obligations of the insured are the following:
The effective stopping of the natural calamities in order to reduce the loss and to save the
insured property;
The information of the insurer, in the terms specified in the insurance contract, regarding
the insured risk;

24

Participation to the assessment of the insured event and of the resulted loss;
Offer of details and documents regarding the insured event;
Assistance in order to assess and evaluate the losses.
The rights and obligations of the insurer
The main obligation of the insurer, after the occurrence of the insured event, is the payment of
the indemnity. In order to pay this indemnity, the insurer must establish the real cause of the loss from
which is derived the insureds right to receive the indemnity and the corresponding obligation of the
insurer to pay that indemnity.
On the one hand, the insurer will assess the loss and will evaluate the damages and on the other
hand, the insurer will establish the payment of the insurance indemnity.
In order to establish the extend of the indemnity, the insurer must verify if the following
conditions were met:
The insurance was enforced at the moment of occurrence of the insured event;
The insurance premiums were paid and the period for which these premiums were paid;
The damaged property was included in the insurance contract;
The event causing all the damage was covered through the insurance contract.
The evaluation of the losses will be done according to the market prices of similar property,
taking into account the depreciation of that property. The compensation will be limited by the insured
amount and by the extend of the loss.

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Chapter 6 - Insurance market

6.2 Types of businesses on the insurance market
The most representative insurance and reinsurance markets are concentrated in the international
financial and commercial centres where the majority of these transactions take place. The actors of these
markets considered to be in charge of the supply of insurance are:
insurance companies,
reinsurance companies and
brokerage agencies.
As suppliers of insurance, the specialised companies from this field have specific activities.
Thus, they are the following:
a) insurance and reinsurance companies that offer protection to their clients
b) intermediaries: brokers legal persons that act as representatives of the buyers of insurance
and reinsurance and insurance agencies that offer to their clients the policies of a certain
insurer.
c) companies that offer insurance services linked to the insurance activity: evaluators,
establishing agents, loss adjusters, consultants in the field of risk management.
6.2.1 Insurance and reinsurance companies
The groups of insurance and reinsurance sellers include insurance and reinsurance companies
that accept to offer protection against risks in exchange of some insurance or reinsurance premiums. In
the case of these companies, a vital element is their financial health and security, perceived by the
clients according to the companys ability to meet payment obligations against creditors.
The following types of companies have the quality of insurer or reinsurer:
insurance companies,
reinsurance companies,
captive insurers or reinsurers,
mutual associations,
Lloyds syndicates and underwriting pools.
Insurance companies
The insurance companies are the main suppliers of insurance and in the same time buyers of
reinsurance on the international market.
Reinsurance companies
The reinsurance companies appear mainly as sellers of reinsurance transactions, but
sometimes also act as buyers of reinsurance especially in the case of catastrophic risks.
The professional reinsurance companies are specialised reinsurance companies present on the
international market. Most of these are based in Europe: Munich Reinsurance Company in Germany,
Societe Comerciale de Reassurance in France, Guarding Reinsurance Company in Switzerland and
others in USA, such as: American Reinsurance Co., INA Reinsurance Company, General Reinsurance
Co. and so on.

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Captive insurers and reinsurers

Captive insurers and reinsurers represent a distinct category of insurers or reinsurers that
developed in the post war period and that are strongly correlated to the development of large
commercial and industrial enterprises.
Mutual associations
The mutual associations represent a form of association of several persons that contribute to
the setting up of a common insurance fund from which those who suffer losses will be indemnified. At
the beginning of their development, if the funds were not sufficient, the associates were demanded to
pay supplementary contributions. In the case there was an excess of funds, they received no
supplementary incomes. Nowadays, no strict rules apply; every association establishes its own policy
regarding reduced premiums or supplementary bonuses. There is also a trend towards demutualisation
and transformation in commercial companies.
Lloyds syndicates and underwriting pools
Lloyds syndicates have a significant importance on the international markets and especially on
the London insurance market. They include as members natural and legal persons (since 1994) who are
liable for the risks assumed by underwriters in their own name. They carry on insurance as well as
reinsurance activity.
The underwriting pools have as a goal the reduction of the demand for reinsurance offered by
conventional markets through the mobilisation of local resources and/or through the conclusion of direct
insurance or reinsurance transactions.
Considering the geographical criteria, the underwriting pools may be national or regional, but in
both cases the pools activity is coordinated by a company that assumes the role of leader.
6.2.2 Intermediaries in insurance and reinsurance
Most often, the insurance or reinsurance is not concluded directly between the parties but
through intermediaries. In insurance, there are two categories of intermediaries:
insurance agents
insurance brokers.
Insurance agents
Insurance agents represent a widely used distribution channel through which insurance
companies sell their policies mainly to natural persons willing to conclude life insurance contracts or to
insure their property. They represent the interests of the insurance company and have limited
attributions (they may fill in the request for insurance but cannot issue the insurance policy). They
receive from the insurer a salary, a commission or a combination of these and may work with several
insurance companies.
Insurance brokers
The present international insurance and reinsurance market is characterised by the active
presence of insurance brokers. The term broker refers to legal persons that act as intermediaries in
finding partners and concluding insurance and reinsurance contracts in the benefit of their clients.
Due to their knowledge and wide access to international insurance and reinsurance markets, the
brokers have a significant role in the mobilisation of the underwriting capacity demanded by the

27

insurance of big risks. For the services they provide, they are paid a brokerage commission representing
a certain percentage from the insurance premium. Both the insurance agent and the brokers are paid
by the insurer and not by the insured party.
The insurance and reinsurance brokers have the following tasks:
a) provide their clients assistance in setting up an adequate insurance and reinsurance contract or
improving the existing one;
b) contact the adequate insurers/reinsurers in order to conclude the desired long term contracts;
c) negotiate the terms of the contract and prepare its content;
d) intermediates the payment of the premiums or cashing in of the indemnity ;
e) prepares the renewal of the insurance contract;
f) assists the insurer in respecting the contractual clauses.
EXHIBIT 6.3 Differences between insurance agent and insurance broker
Insurance agent
Insurance broker
1. He represents the insurers interests.
1. He represents the insureds interests.
2. He sells the insurance policies of 2. He buys insurance/reinsurance policies
one/more insurers.
for his client.(principal)
3. He is a natural person working full 3. He is an independent legal person,
time or part time for the insurer that he specialized in intermediating insurance
represents (on the basis of a contract).
activities.
4. He is not an insurance specialist.
4. He is an insurance expert.
5.As general rule, he is not liable for 5. He may be sued for not fulfilling or
negligence in his activity.
defective fulfilling of his obligations.
6. He is paid by the insurer through a 6. He is paid by the insurer through a
wage, commission or combination of commission (brokerage).
those.
7.
Sometimes,
he
has
limited 7. He has the obligation of finding proper
responsibilities (filling in the request for protection for his client, to conclude the
insurance) without the right of issuing the insurance contract, and sometimes to
insurance policy.
manage the claims.

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Chapter 7- Personal insurance

7.1 Introduction
Considering the criteria of insured risk, the personal insurance can be divided in two major
categories:
Life insurance, which covers the risk of death
Personal insurance other than life, that insures the physical integrity and health of a
person
In case the insured event takes place, the insured receives an indemnity, corresponding to an
amount priory established through the insurance contract, called insured amount. In exchange, the
insured has to pay to the insurer the insurance premium.
The insurance contract of both types of personal insurances may include additional provisions or
clauses that, for an extra premium, may extend the array of insured risks of the principal product.

7.6 Main types of life insurance products

Life insurance is represented today by a wide range of products, mainly created during the last
decades, due to the arising needs of the customers. Nowadays, a product is acquired mostly because of
the services that it may render; for safety or comfort. Thus, life insurance represents a method of
financial protection. It is a part of the familys financial plan, along with other types of investments in
shares, real estate, bank deposits and so on. In this way, the insurance guarantees and provides for the
necessary funds in case an unexpected event occurs.
7.6.1 Term life insurance
This represents the simplest form of life insurance. It is concluded for a certain period of time
and covers only the risk of death. In this case, the insured periodically pays an amount of money called
the insurance premium, while the beneficiary will cash in the insured amount stipulated in the contract,
in case of death of the insured occurs.
A particularity of this type of insurance is that the insured amount will be indemnified only if
the death occurs during the term of the contract. If the contract matures and the insured is still alive,
the insurer bears no liability in connection with the insured amount. Neither the insured, nor the
beneficiary will receive any compensation at the maturity of the contract.
Due to these reasons, the level of the premium is lower than in the case of other types of insurance
and it is clear that protection is offered only for the risk of death.
7.6.2 Whole life insurance
This type of insurance covers the risk of death for a longer period of time, respectively up to a
certain age (for example 95 years). Generally, the condition is that the insured pays the insurance
premiums up to his or her retirement. The risk of death is covered during the entire period from the
insurance conclusion up to reaching a certain age (as provided in the contract). If the insured reaches
that age, he or she will receive the updated insured amount. The distinction between this type of
insurance and term life insurance is given by the level of the insurance premiums and by the fact that the
insured is reimbursed with the insured amount in case he or she survives the contract.

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7.6.3 Endowment insurance

The particularity of this type of insurance is that it offers protection not only for the risk of
death, but also for the risk of survival. The insurer will pay the insured amount either to the insured or
to the beneficiary; the insured will be indemnified in case he or she is still alive when the contract
matures, while the beneficiary will be indemnified in case the insured will not survive up to the maturity
of the contract. Thus, the endowment insurance is a complex product that offers double insurance. An
advantage is represented by the fact that the amounts paid as insurance premiums constitute in fact a
form of savings.
Another important issue is related to the access to these funds, which is permitted in exchange of
renunciation of the insured to the policy. The amount to be received from the insurance company is
known as surrender value and increases as the contract approaches maturity. Thats why it is
recommendable not to give up the policy because the surrender value increases as time passes.
The contract is concluded for a certain number of years ranging between 3 or 5 years to 60 or 65
years, with the condition that the insured is no older than a certain age (usually 75 years). The insurance
premium is established taking into account the insured amount that for this type of insurance may be
unlimited.
7.6.4 Reduced mixed life insurance
By choosing this type of insurance contract, it is possible to be reimbursed with the premiums
corresponding to the risk of survival. In the case in which at the maturity of the insurance contract, the
insured is still alive, he is entitled to the insured amount and in the case he dies, the insurer will pay the
sum of the premiums registered up to the moment of the insureds death and the amount corresponding
to the profit obtained by investing the mathematical reserves.
In this case, the insurance company accepts an unlimited insured amount and it is up to the
insured to decide its level.
7.6.5 Student insurance
Another life insurance product is the student insurance which has a main aim to save up funds
for the childrens university studies, even in the case in which the policy holder wouldnt live up to that
moment. The insured is usually the parent or trustee and the beneficiary is the child who reached the age
of going to university.
The insurance premiums are paid by the insured up to the moment the child begins his studies
and the beneficiary receives the annuities from the age stipulated in the contract. The payment period
ranges from 4 to 5 years or it may occur at once, when the beneficiary starts his or her studies. The
insurer will pay off his obligations even in case of the insureds or beneficiarys death. In the case the
beneficiary dies during university studies, the policy is transformed into an endowment policy. No
matter the level of the insured amount, the premiums need to be paid within a period of at least 5 years.
7.6.6 Dowry insurance
This type of insurance allows parents to offer their children a certain amount of money in the
moment in which they get married so that they are able to start a new family and an independent life
without financial difficulties. It is a form of life insurance which covers the risk of death of the insured
(parent or tutor) and pays the beneficiary the insured amount when he or she gets married or reaches a
certain age (usually 20,25 or 27 years). It is a product similar to the student insurance except the fact that
the beneficiary cashes in the insured amount at once.

30

In case the insured dies, the child will benefit of the insured amount at the agreed age while if the
beneficiary dies the policy is transformed in an endowment policy.
7.6.7 Unit-linked insurance
Unit-linked insurance is a package insurance, offering protection, as well as investment
opportunities. The premium paid in by the insured person is invested in one or more funds in which the
insured person will then own a number of units (smallest division of the funds).
The unit-linked package includes two components: protection and investment.
The protection component is a whole life insurance (unlimited period), for which premiums
are paid until retirement. In case of death, the beneficiary receives the maximum from the insured
amount (which is guaranteed by the insurer) and the current value of the insureds account (the monetary
equivalent of the units held)
The investment component consists of the purchase of units in specially designed financial
funds. These are internal funds (owned by the insurer) with a closed circuit, as they consist of
financial assets, managed by the insurer, serving only unit-linked packages. Insurance companies
usually set up several such funds and clients may choose. The insurance premium will be entirely
invested in the financial funds mentioned above.
Differences between traditional and unit-linked insurance
Unit-linked insurance differs from classical insurance as far as the substance, the administration
manner and the flexibility for the insurer and the insured is concerned.
From the point of view of the investment technique the differences are obvious. With traditional
insurance the investment risk is borne by the insurer, while with unit-linked it is borne by the insured
party. The value of the policy is always obtained as the result of the multiplication of the number of
units with the daily quota.
The traditional insurance always comprises a regular term insurance or a deadline for payment
of the insurance premium. The policyholder has the choice to pay additional sums (top-up) or he/she can
benefit from the equivalent money, being under no obligation to strictly obey the terms.
The traditional insurer establishes the insurance premium according to the total costs, risk
premiums and deposit premiums. In the case of unit-linked, the insurer has an account that provides the
sums for the compensation of expenses and the risk premiums. The rest of the money is invested.
7.6.8 Mortgage insurance
The acquisition of a land or house requires usually the conclusion of a life insurance through
which the creditor (the bank) insurers himself that in case the debtor dies, the installments will be still
cashed in.

7.8 Personal insurance other than life

This category includes several types of insurance such as:
medical insurance,
traveling insurance,
accident insurance.
7.8.1 Medical insurance

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It is a form of insurance meant to cover totally or partially the costs of hospitalization, for a
consecutive number of days of hospitalization (usually 3 or 5), the costs of medical treatment as a result
of an illness or an injury in the period of time covered by the insurance or the income compensation for
the duration of the illness. The risk of death is not covered by the insurance.
The insurance premiums are different for men and women. As in other health insurance
contracts, there is a waiting period of time before the insurance enters into force. The period of time
could be between 3 and 6 months.
The covered costs by this type of insurance are the following:
The hospitalization
The convalescence
The treatment after hospitalization
Maternity compensation
Family doctor fees
Specialists doctor fees
The surgical interventions
Private ambulance fees
Repatriation expenses
The rental of a wheelchair
A list of examples follows, comprising some of the forms of surgery which can be covered
through such insurance:
brain surgery; heart, kidney, lung, bone marrow transplant; chest cavity surgery (heart or lungs);
prosthesis implants for hips or knee; esophagus surgery; abdominal surgery; colon removal; blood vessel
reconstruction; heart surgery; joints surgery; eye surgery; burned skin reconstruction (more than x% of
the body); gland surgery; minor abdominal surgery; appendicitis; endoscope surgery; gynecology;
tendon transplant; amputations; facial surgery; skin transplant; finger amputation; digestive system
surgery; biopsies.
As a rule, exceptions to insurable types of surgery are: histological sampling; pregnancy-related
surgery; in vitro fertilization and complications; artificial or natural abortion; sterilization; minor skin
surgery; dental surgery; removal of implants; infectious disease treatment; minor burns.
7.8.2 Traveling insurance
Traveling insurance has as object the accidents or sicknesses that may occur during the
contractual period, mentioned in the insurance contract, during a pre-established travel (especially
outside the boundaries of the country). Some insurance companies cover even the risk of death in that
period.
Sickness is defined as a serious change in the state of health of the insured. It is, however,
important to mention that in an insurance contract, sickness gets coverage only if it is not the
consequence of a pre-existent known illness or to malformations that were treated under medical
surveillance.
If it is the case of accident or sickness, under the conditions imposed by the insuring company,
the insurer, through a delegate (most commonly an agency that undertakes the obligations of providing
assistance services) will arrange all the details to make sure the insured person gets the needed help in
that specific situation. Among these services, one can mention transportation to the nearest medical
point where adequate treatment can be provided.
32

During the travel, the insurer will pay for the insured certain amounts that are found to be
reasonable and normal for the given situation. Normally, the insurance contract includes also a list with
detailed types of medical costs that will be covered, such as: the treatment prescribed by a doctor,
hospitalization and surgery, any necessary treatments or laboratory check-ups, transportation to the
hospital, drugs.
When hospitalization is not necessary and/or the insured pays the required medical expenses,
refunding can be asked to the insurer on the basis of proving documents.
As a rule, refunding will not be an issue when the conditions of the contract were not fulfilled,
when the geographical boundaries mentioned in the contract were overlapped or in the case of
treatments or surgical interventions due to sicknesses that appeared prior to the traveling period.
The traveling insurance contract has a special part dedicated to the excluded events, such as: war
of any nature, drug or medicine consumption if not prescribed by an authorized doctor, consumption of
alcohol, suicide, suicidal attempts and their consequences, participation of the insured to sport events of
any kind, participation of the insured in demonstrations, rebellions, public riots and other acts that are
against the law.
7.8.3 Accident insurance
Accident insurance represents a type of personal insurance different from life insurance. The
policy can be imposed by law, under the form of worker compensation policy, for certain categories of
activities, such as construction, industry, mining, transport, or can be imposed by unions in the labor
contracts.
This type of insurance differs a lot from life insurance, and thus they are not classified in this
category, but represent a distinct type of personal insurance other than life.
The major differences between the two categories consist of:
accident insurance covers (as main risk) various accident risks, not the risk of death;
it is generally contracted on a short term (usually one year or shorter);
the insured amounts are paid to the insured, proportional to the invalidity degree (based
on the insurance conditions), unlike the life insurance payment, which is made to the
beneficiary, in case of the insureds death;
accident insurance is simpler, while life insurance can offer complex byproducts; besides
life coverage, it offers saving or investment benefits, in case of survival. In most cases
where companies operate in a risky environment, they offer accident insurance to their
employees.
The accident represents an unwanted event, due to a violent external cause, in an unfortunate
situation, which has occurred independently of the insureds will, is not expected and causes damages,
injuries or death.
Permanent invalidity represents a permanent physical damage due to an accident that has as
consequence the reduction of physical, sensorial or intellectual potential, which has occurred less than a
year after the accident and is a consequence of the accident.
Temporary work incapacity is considered to be a temporary bodily damage following an
accident, which has caused the same effects as above, and prevents the insured from performing his
duties at work for a limited period of time.
Accident insurance can be contracted on an individual basis or collectively. The later can be
concluded on a nominal basis or for the whole group, on professions, for all employees, or for a certain
employees.

33

Excluded risks are generally those which occur due to an abnormal, illegal, or immoral state or
behavior of the insured. Some examples would be: accidents occurring when the insured was drinking,
intoxications due to alcohol, medication, and drug abuse, accidents caused by the insureds illegal
actions, negligence, follow-ups of surgery or medication which are not related to the accident,
consequences of professional, infectious, or mental sickness, accidents caused by any form of war,
rebellion, explosion, contamination

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Chapter 8 Motor insurance

8.2 Types of coverage
Although, at the beginning, the motor insurance involved only protection for personal injury or
other losses suffered by third parties, time brought in new types of protection.
Thus, motor insurance is not limited to the insurance of the vehicle, but offer also other types of
protection related to:
merchandise insurance,
carriers liability insurance,
vehicle insurance,
third party liability insurance.
These types of insurance cover a large array of risks and have certain particularities that relate to
insurable or non-insurable risks and the way they are underwritten. It is also worth mentioning that the
motor insurance was influenced to a significant extent by the maritime insurance.
8.3 Types of motor insurance policies
8.3.2 Carrier liability insurance
During transportation, the carrier is involved in certain activities that bring about his liability
towards the owner of the merchandise. In order to avoid payment of compensations due to damages, the
carrier may conclude a liability insurance contract.
Under a carrier liability insurance contract, the insurer covers the liability of the carrier
(natural or legal person) that undertakes the transportation of the merchandises by vehicles owned,
leased or rented by him. This is done in accordance with the provisions of the International Road
Transportation Contract of Merchandises (abbreviation CMR).
The insurance is valid on a certain territory, for a certain period of time or for a certain trip.
According to the provisions of article 17 and 23 of CMR, the carrier is liable for the total or
partial damage of the merchandise within the period of time from the reception of the merchandise up to
its final delivery. The carrier is also liable for not meeting the delivery deadline.
The carrier is exempted from his liability when the loss or damage of the merchandise is the
consequence of a special risk linked to one of the following situations:
utilisation of a convertible vehicle, if this was expressly agreed in the contract and stated
in the bill of lading;
lack or damage of the package for the merchandises that, by their nature, are exposed to
damage if they are unpacked or inappropriately packed;
loading, unloading or movement of the merchandise by the sender, the recipient or their
representatives;
inappropriate loading or numeration of the parcels;
live stock transportation .
8.3.3 Vehicle insurance
At international level, due to a large variety, the classification of insurable risks takes into
account the type of the vehicle. Thus, there are:

35

vehicles in private property,

motorcycles,
commercial vehicles (used for merchandise or passenger transportation),
vehicles used for agricultural works or forestry, and so on.
Physical damage insurance
The risks, for which insurance is provided, are different from one insurance company to another,
as every company establishes independently its underwriting policies. However, there are certain risks
that are underwritten by the majority of the insurance companies:
accidental damages caused by crashing or impact with other vehicles or any other movable
or immovable objects inside or outside the insured vehicle;
fire and damages linked to this event;
thunder, explosion and other damages, if they occurred at a certain distance from the
vehicle;
rain, hail, storm, flood, hurricane, earthquake;
land gliding ;
snow avalanche and fall of certain objects on the establishment where the vehicle is
located.
In order to avoid any misinterpretations or possible litigations, the insurance conditions also state
the excluded risks for which no insurance is provided:
direct or indirect damages of the vehicle, caused by civil war, military operations, strikes,
vandalism, terrorism, sports contests or training for sports contests;
damages caused by fire or explosion of the vehicle due to unauthorised transformations;
damages suffered by components, spare parts or other accessories separately stored in the
house or garage;
damages that result from over-demanding the capacity of the vehicle;
expenses incurred in order to transform or improve the vehicle as compared to its state
before the insured event occurred;
indirect damages such as reduction in the value of the vehicle or others caused by
interruptions in using it;
expenses incurred by the transportation to the place of the insured event;
cost of the medical care provided to the driver even in case of insured events.
The succession of the steps in the claims settlement process includes the following:
a) to notify the police or other competent bodies requesting documents regarding the causes
and circumstances of the event, the damages produced;
b) to take any possible measures to limit the damages;
c) to take any possible measures to protect and avoid the subsequent deterioration of the
damaged goods;
d) to provide the insurance company all the documents necessary to check the existence and
the value of the insured vehicle, to establish and evaluate the damages, to determine the
compensation rights;
e) to provide the insurance company all the documents regarding the insured event.
8.3.4 Third party liability insurance

36

Through third party liability insurance the insurer undertakes to cover the damages produced
by the insured to third parties.
In every country, there are special legal provisions that regard motor insurance and especially
third party liability insurance. This is mainly due to the social implications of this type of insurance.
In the European Union, the evolution of legal provisions shows a gradual extension of the
compulsory motor insurance. Thus, according to the first directive regarding motor insurance, the
insurers had to cover at least the liability of the insured for injuries suffered by third parties. The second
directive imposed the necessity to cover the material damages suffered by third parties, while the third
directive also refers to compulsory passenger insurance.
Nowadays the third party liability insurance is valid on the territory of all the member states.
8.3.4.2 International third party liability insurance
Due to the reasons previously underlined, the third party liability insurance also represents a
necessity at international level. The Economic Commission for Europe of the United Nations
Organisation was the first that forwarded the idea that the insurance underwritten in the home country of
the insured should be also valid in the country where the accident occurred.
Thus, in each member country, a motor insurance bureau was established to represent the local
insurance companies. This institution has the right to issue insurance certificates directly or through one
of its member companies. This certificate is known as international card for motor insurance or the
green card.
The green card represents the proof that the owner of the vehicle concluded a third party
liability insurance contract. It covers the liability of the insured under the legal provisions of the visited
country where the accident occurred. The local bureau has the task to establish, assess and liquidate the
damages with which it will be reimbursed by the issuing bureau, together with an extra amount of
money for the services rendered.
The agreement also takes into account the situation in which the visited country has no
compulsory third party liability insurance. In this case, the local bureau called service bureau, after a
preliminary advice with the issuing bureau, liquidates the damages suffered by third parties and then
waits to be reimbursed.
In 1949, the national motor insurance bureaux set up an international organisation called the
Council of Motor Insurance Bureaux with its headquarters in London. Its main accomplishments
were an inter-bureau convention called Uniform Agreement and the introduction of a green card with
a unique format. The convention entered into force on January the 1st 1953.
In the green card system, the bureau of a European country has the statute of a member with full
rights, while the bureau of a non-European country has the statute of an affiliated bureau.
In order to prove the insurances existence, the insurer issues each year an international green
card that states the foreign correspondents of the insurance company that guarantee on their behalf the
compensation of damages.
The green card system does not establish the insured amount; the indemnity is given in
accordance with the legislation in force in the country where the accident happened and in agreement
with the injured party.
The insurance companys liability starts from the moment the insured vehicle leaves the country
and ends upon its return.

37

The establishing and assessment of damages, the evaluation and payment of the indemnity is
done is accordance with the rules established by the green card convention through the foreign
correspondents of the insurer from the origin country.
Indemnity is offered for the damages caused by physical injury or death of the victims or for the
material damages suffered by goods outside the vehicle that produced the accident, as well as for the
physical injury or death of the vehicles passengers.

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Chapter 9 Marine Insurance

9.5 Types of risks in marine insurance
These risks may appear during loading, unloading and trans-shipment of the goods, during
transportation or intermediary stops.
The insurable risks are divided into: general and specified risks.
The general risks are the risks with a known frequency of occurrence based on statistical data
and damage rate. In this category, there are included mainly: collision, fire, theft, storms, stranding,
sinking, burning a.s.o.
Risks caused by force majeure (irrespective of human will): hurricane, storms, fires, shipwrecks
from different reasons, ship stranding, the collision between two ships/ boats (Romanian: abordaj) the
collision of the ship with a fix, floating body other than a ship (collision).
Other risks may be damages caused by the negligence of the ships crew fraudulent deeds of
the captain or the crew with the purpose to plunder, damage or destroy the ship or its load, other illegal
actions performed without the ship owners consent.
Until here, we referred only at risks covered ordinarily by insurance. Beside these there are also
specified risks (which also may provoke the loss of the ship or of the load) that may be covered through
insurance specifically asked for and with an extra premium. In this category there are included the
following risks:
risks due to the nature of the insured property (braking, altering, scratching a.s.o);
risks with social-political feature (revolutions, civil wars, pirates actions; etc. if these
weren't the result of a shipwreck or accidents during transportation.)
There are not covered the damages caused by the theft, throwing over board the loading, the loss
of the goods taken by the waves or inflaming.
There are also uninsurable risks - even with a supplementary premium. In this category are
losses caused by the nature of goods, by the serious negligence of the insured or his representatives;
warms, rats, insects; the delay in delivery or price decreases; or by normal losses (drying) during the
transportation, etc.
The extraordinary expenses incurred by the ship owner concerning a general average may be
insured:
- portuary expenses in the force majeure harbor (pilots, portuary taxes, unloading, reloading ,
guarding ...);
- ship repayments with temporary/definite character;
- salaries and retribution for the crews overtime;
- general average expenses in each port before reaching the destination;
- expenses with the adjustment of general average;
- insurance cost.
There cannot be insured as expenses covered by general average:
- repairing for the ship taken into another place but the destination;
- demands for sacrifice and cargo averages and freight;
- any other expense covered at the destination;
- commissions and interests.

39

9.6 Types of average in marine insurance

Damages caused by outside persons (foreign of that ship) = averages
An average is a material loss, a degradation of an object no matter its size or cause. The loss
may be:
a) total average the sinking of the ship, throwing the load overboard into the sea.
The total average implies the complete loss of the insured good or the damage to the physicalchemical features of the good has reached such level that the good can no longer be used.
The total average can be divided into two categories:
actual total loss;
constructive total loss.
A ship is considered to have suffered an actual total loss (absolute total loss) when:
- it's entirely destroyed or so badly damaged that it cannot be repaired;
- when the cost of the repairing would be larger than the commercial value of the ship;
- when the materials needed to repair it cannot be obtained.
The actual total loss may be caused through sinking, fire, or disappearing without a trace in the
sea.
Regarding the load it may be considered actual total loss if the goods disappearance is due to
the ship's sinking or inflaming, or if there is a complete deterioration of the load in such a way that it
cannot be sold as a merchandise.
In the case of the constructive total loss, the ship exists and may be saved and repaired but it's so
badly damaged that the saving and repairing operations would ask for extremely large expenses that
would overcome the insured value of the ship.
The constructive total loss is determined by the following criteria:
when the ship is deliberately abandoned because it's actual total loss seems unavoidable;
when the ship cannot be saved from actual total loss without an expense that will overcome
its insurance value or when it's undervalued - it's commercial value;
when the ship is so damaged that the cost of repairing is greater than the value that it would
have after the repairing or the insured value.
In practice, it is used a cause that stipulates the right of the insured to consider the ship
constructive total loss when the value of the repairing is greater than three quarters of its actual value or
of the insured value of the ship. The insured person has the possibility to choose one of the solutions:
to consider the loss as practical loss and keep the ship, receiving from the insurer an
amount equal to the loss.
to abandon the insurer's ship as an actual loss and to receive as compensation the insured
value.
b) particular average the deterioration of some installations on board of the ship, or of some
products of the loader because of the sea water that penetrated into the hull, the breaking out of a fire,
the loss of merchandise swept away by the waves, etc.
The particular average includes also extraordinary expense made with the rescue of the ship and
of its load. We may distinguish averages losses (damages) and averages expense.
The particular average is characterized by the fact that the monetary damage of the goods is the
direct consequence of either a force majeure (storm, fire, shipwreck) or a navigation fault (collision) or
of the goods vices (degradation in certain conditions). In this case, the damages and the expenses regard

40

only one of the parties involved into the marine expedition; this means either the ship or the load. The
particular average has an accidental feature not a willing one.
c) general average is characterized by the fact that the damage (sacrifice) or the extraordinary
expense was made by the captain willingly and consciously in order to save the interests of all the
parties involved in the marine expedition.
In order for a average or a loss to be considered a general average it has to fulfill the following
conditions:
a) to be the result of an action intentionally performed by the captain and it also should be
rationally made;
b) the action should have in view the rescue/ saving from a common danger of the ship, of its
load as well as the freight (when it is the case);
c) the sacrifice to be real - if it doesn't concern throwing overboard some goods considered lost
or worthless;
d) the action to take place in an extraordinary situation, not in some goods sailing conditions.
e) the voluntary sacrifice of a part of the endangered wealth, the rescue expenses as well as all
the expenses incurred in the general average are beard both by the rescued goods and the sacrificed ones,
proportionally with their value at the time and place where the marine expedition ended.
The insurer undertakes to cover the average according to the kind of risks:
- damages of the ship due to:
(risks of the water, explosion, theft from outside, slippage due to waves, collision with other ship, plane
or similar objects, docks, hull even floating ice, earthquake, accidents to loading, downloading or
moving the goods; rescue measures of the ship, shipping errors, negligence of the crew)
- expenses due to prevention, reducing, establishing the causes, the effect;
- rescue expenses (lawyers, experts, arbitrage);
- expense for mutual damage.
The insurer does not pay for: usage, depreciation, forcing the ice, recovering the wreck, only the
insured goods, wages of the crew (except when it is the case of general average), human life losses,
illnesses, indirect damages (opportunity costs).
The ship is insured for the value declared by the insured and agreed by the insurer. This value
cannot be less than the salvage value or to be larger than the value of a similar ship at the moment of the
insurance closing.
At this insured amount can be added up to 25% (maximum) of the ship value, in the case of total
loss or for the differences between insured amount and value of the ship. If the value of the ship at the
time of damage is larger than the insured amount, the insurer will pay the increased value according to
the supplementary insurance in the case of total loss.
Establishing and determining the causes and the value of the damage are performed by
commissars when the ship is abroad, and directly when the ship is returning in the country. The insurer
pays only the insured amount.
In case of:
Total loss - The ship is considered lost if during 180 days, it is no sign from it or of its existence,
from the last news received from the ship. The total loss is declared when the cost of repairing is larger
than the insured amount.

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Damage - In the case partial damage it is paid the percentage of the damage without subtracting
the usage. The damage is equal to the sum of repairing / replacing of the damaged parts - salvage value.
The damages caused by depreciation, malfunctioning of parts of the ship are covered with the
exception of the value of replacing or repairing expenses of the parts that caused the leverage.
9.8 International organizations in marine insurance
In the process of exploiting of marine ships, these can suffer different damages, and in order to
cover them the ship-owners appeal to the full insurance. At their turn, these ships can cause damage to
other ships, which engage the ship-owners that have to compensate to those damaged or to support fines
or penalties.
These risks can be the object of a discrete marine insurance, which is realized through the
Protection and Indemnity Clubs. Protection deals with risks related to ship-owner responsibility while
indemnity relates to risks resulting from ship exploiting.
Protection offered by the Protection and Indemnity Clubs differs from protection given by
common insurance companies by the following:
- Protection offered by such a club is mutual, which means that members of the clubdifferent ship-owners-are in the same time insurer and insured.. each ship-owner once
member of a Protection and Indemnity Club, contributes to covering damages suffered
by other members and, at his turn, benefits from the contributions of the other members
to cover his own damages. A ship-owner who concludes an insurance contract with a
commercial insurance company becomes insured, and the relation between him and the
insurance company is that between the insured and the insurer.
- The level of insurance premiums owed by the insured to the insurer is usually set on
the insurance market and once stipulated in the contract, it cant be subject to any
modification, even if in the meantime it turned not to be covering for the insurance
company. In the case of Protection and Indemnity Clubs, the initial contribution of the
associate members is subject to modification; at the end of the year, if it turned to be
undimensioned, the members of the club pay a supplementary contribution
- The gross premium paid by the insured to the insuring company also includes the
insurers profit, which is not the case in these clubs. These ones use the revenues realized
from indemnities, accepted reinsurance, placements to cover their expenses (for
compensations, administrative expenses.)
- Protection offered by insurance companies is limited as value, while that offered by
Protection and Indemnity Clubs is usually unlimited (they only limit the covering
protection offered for the responsibility in case of oil pollution at 500 mil USD).
- The Members of the club form a group of independent ship-owners or trade companies
having the same interests.
A Protection and Indemnity Club generally covers the risks that an insurance company doesnt
accept, such as: lacks and averages at the unloading of merchandise off the ship; fines applied to the ship
for illegalities at custom or immigration laws, expenses with raising the wreck, work accidents,
hospitalizing, quarantine, merchandise contamination, etc.
On a protection line, the Club makes inquiries to elucidate the circumstances in which the
event has occurred, in which is implicated the members responsibility and helps in trials regarding
rescue indemnity, improper repairs, inferior fuel supplied.

42

Chapter 11 Property insurance

Property insurance covers a wide range of risks that could determine great material losses. The
risks vary from fire the first risk for which protection has been offered, to the most diverse events:
catastrophe (natural, technological, environmental), theft, robbery, riots and strikes, war. The property
category includes: buildings, oil platforms, amusement parks, ports, airports, bridges, cars, outfits,
equipments, installations, electronic equipments, works of art, money, valuables, life stock a.s.o.
11.2. Damages in property insurance
The damage represents the effect on goods caused by the occurrence of the insured risks.
11.2.1 Types of damages in property insurance
The damages of goods are classified taking into consideration several criteria, of which the most
commonly used are:
a. by nature:
immovable goods: lands, office buildings, factories, houses, warehouses, parking
lots;
movable goods, respectively that can be transported from one place to another (in
use or for sale): raw materials, work in progress, in warehouse, finished products,
commercial products, outfits, licenses, furniture, money, stocks;
b. by cause of the damage:
physical damages: fire, storms, hurricanes, goods damaging explosions;
social damages: deviation from the normal behavior (theft, vandalism, negligence),
group deviations (strikes, riots);
economic damages: due to internal causes ( negligence, management errors or due to
external causes), the economic situation of impossibility to pay.
c. by type of the loss, one can distinguish two categories:
direct losses, that appear when the property is damaged, destroyed, or disappears due
to contact with a physical or social risk. Example: a fire starts in a building, the inner
walls are destroyed, vandalism actions, accidents happen.
indirect losses are the losses that result from a change in value due to direct damages
of a good; it is a loss that appears because the affected good is destroyed or damaged
by another special risk. Example: the food in the fridge gets spoiled if the fire
destroys the electric wiring and cuts of electricity for the building. The meat, cereals,
wine and medicines may be damaged in case a direct loss for the goods that affect the
environment occurs.
d. by degree of expansion, damages can be:
total damages, such as:
the total destruction without left materials that can be used or sold;
the destruction in such a degree that reconstruction or repairing is no
longer possible;

43

the cost or reparation can not be justified.

partial damages are represented by the partial destruction or
alteration of
goods in such way that they can be repaired or reconditioned to be appraised or
depreciated.

11.2.2 Evaluation of damages in property insurance

In property insurance, the evaluation of damages is done by several methods considering the
way of setting the insured amount for the value for which the goods were insured.
1. Initial price, respectively the sum of money paid for the purchase. The disadvantages of this
method are easy to be noticed: first, the value of the goods depends on the price level and on the
negotiations that take place at the moment of the purchase, and secondly initial cost does not
consider depreciation and ignores possible further changes that increase the value of the good
(improvements, technology, fashion, a.s.o.).
2. Initial price less depreciation, according to accounting rules. Accountants evaluate the factory
and the equipment at initial price less depreciation. The disadvantage of this method is that
irregularities between the accounting and physical depreciation may appear.
3. Replacement value. It is necessary to determine the cost for replacements or reconditioning of
the existing good to the current prices. The disadvantage of this method is that one may get to
unrealistic values. For example, the materials used for a building constructed 25 years before are
totally unrealistic in the present; repairing a 10 years old computer (!) is far more expansive then
buying a new one in the present.
4. Market value. This criterion is very important especially for the risk manager. The disadvantage
is that the market value of real estates is connected to the relationship between offer and demand.
It is difficult to establish because the building is unique and its price is tied to the special
elements. Another disadvantage is that the damage can be more than a material loss because it
can be greater if it includes some payments for immediate use of property.
5. Economic value. The evaluation is done by determining the present value from the revenues the
good produces. The disadvantages of this method come from the difficulty of computation and
assessment of net losses from revenues that have to be majored separately.
11.3 Types of property insurance
The conditions for property insurance are different according to the covered risks. The
subscription policy belongs to the insurers and it is based on statistical data, risks selection, possible
losses, territory, occurrence frequency, degree of risk exposure, possible accumulations of damages etc.
The insurers may surely include or exclude certain risks from the coverage offered; the list of
general, special or excluded risks may be restrictive or wide, in accordance with underwritten policy.
One must remember that not any risk can be insured. Some of them are separately insurable, others are
completely excluded. That is why it is essential to carefully study the offered conditions and to know the
exact needs to be insured so that optimum advantages protection conditions may be obtained.
11.3.1. Building insurance (including their content)

44

In the beginning, the fire insurance policy had as purpose the compensation of damages
produced because of the fire. Later on, some additional perils started to be added among these, the
most frequent ones are: explosion, earthquake, flood, damages caused by impact with cars, animals,
flying objects, including aircrafts, riots and strikes, spontaneous combustion, fermentation, settlements,
rising or sliding of land, subterranean fire, lightning, natural catastrophe (earthquakes, floods, risings or
sliding); atmospheric phenomena (lighting, storm, gales, tornados, stone hails); break ins; accidents;
theft, robbery; alluvia, wettings that are produced inside the building and damages the content, the
weight of the snow layer, damages to the water plumbing.
Property insurance is necessary because there is always a risk that can produce direct material
losses for the respective building and its content and indirect losses as consequence of the immediate
ones (cessation of activity); seldom this kind of loss is incalculable.
The main types of property insurances used in the majority of countries refer to buildings and
their content. In the specialized publications one can meet insurance conditions with pre-established
names that distinguish the types of risks.
The explosion is the sudden manifestation of the pressuring force, based on the quality of gas
and vapours to expand (stable chemical reactions for an unstable system). One does not consider as
explosions:
the sudden equalization of a low pressure (implosion),
the aerodynamic explosion produced by an aircrafts manoeuvre,
the reaction in the combustion area of an engine, fire guns, cannons in which the
explosion energy may be controlled.
The most comprehensive insurance policy is the All Risks policy, by which all losses
determined by various causes are compensated, except for the ones that are separately provided for in
the exclusions section.
Usually the All Risks policy includes the following risks: fire, lightning, explosion, the fall of
objects onto the buildings, earthquake, flood, storm/gale, material damages produced by strikes and
riots; material damages produced by breaking an entry and/or acts of robbery, violence or threatening,
the destructive results of these actions on the elements of the building, the locks and furniture, the risks
of vandalism, terrorism, sliding or movement of land, the weight of snow and/or ice, avalanches,
hurricanes a.so.
In this class of insurance are included, on contractual bases, the following buildings:
The buildings and other constructions that are ready have a roof and at least 3 walls.
Unfinished buildings and constructions that fulfil the conditions mentioned above.
Inhabited buildings (including the basement, cellar and attic) and the constructions used
as workshops, mills or other professional works.
Warehouses and the shelters for small animals or birds foreseen with stone, wood, brick
or concrete walls having at least 1,50 m height.
The wine cellars, hot houses; any other similar buildings and constructions including
constructions of pillars and the ones which are not directly on earth, they being on
supporting pillars; the surroundings built by concrete, forged iron, pillars, wood and iron
paler, any kind of stone or brick.
The following are not included in the insurance:
Deteriorated or ruined buildings or constructions that can not be inhabited or cannot serve
at any economic activity.
Simple surroundings, catacomb constructions with no building on them, ditch and dike.
45

Light constructions being outside the town, the village, the district and temporary used,
such as: boats, huts, tents or any other similar constructions; abandoned and ownerless
buildings; the wood shelters for animals or birds less than 1,50 m height.
The general exclusions include the damages due to the following events:
Catastrophes, such as: atomic explosion, radiation, pollution, contamination;
Deterioration due to the nature of the insured good: obsolescence, effervescence,
oxidation, corrosion, infiltration, smoking, spotting;
Collapse of the buildings due to the construction flaws, of bad maintenance, age or
degradation degree, without being related to any of the insured risks;
Insureds guilt;
Cracking in the foundation terrain or in the terrain of the neighbours building, due to
volume variation of the terrain as a result of contraction, freezing, swelling or unfreezing.

46

Chapter 13 Liability insurance

13.1 The concept of liability insurance
The third party liability insurance is an important and extremely representative insurance
category.
In insurance, the third party liability refers to:
The property is damaged or destroyed;
The life of the third party is threatened through injuries and death as a result of
negligence or omissions of the guilty part.
The liability insurance represents the insurance that covers all the amounts the insured is liable
to pay, according to legal provisions, for the material damages or physical injuries produced by him to
a third party.
The goal of this insurance policy is to offer compensation for the legal liability regarding the
death, the injury or the material damages provoked to other parties than the insureds employees. The
insurance policy covers also the legal expenses.
In the case of liability insurance, there are included three important elements:
The insured any natural or legal person, his representative having or not juridical
power;
The third party any natural or legal person, other than the insured;
The insured event damage or destroy of property that do not belong, to the insured, are
not under the control of the insured/his representative occurred during the insurance term.
Also, the insured event refers to physical injury or death of any person occurred during
the insurance term, with the exception of those covered by a labor contract or service
contract.
13.2 Types of liability insurances
The liability insurances comprise a large range of coverages, and they are continuously
enlarging due to the increase of the diversification degree of the human activities and due to the legal
persons liabilities that tend to be bigger and bigger, also the natural persons which have liabilities
towards third parties. The most important types of liability insurances are:
employers liability and workers compensation;
manufactures and contractors liability M&C;
liability for industrial and commercial risks;
liability insurance for environment pollution;
homeowners liability;
lodger liability;
business owners policy; for example, a dangerous building that may produce injuries;
storekeepers liability insurance;
public liability;
auto insurance, bike raiders liability, civil liability towards third parties in aviation
insurance, insurance for the usage of boats, that is excluded from the usual coverages, but
it is covered separately;
personal liability (a walker may be the cause of a huge car accident);

47

different categories of sportsmen liability (golf players);

product liability (the producers and distributors of some products that have some defects;
for example foreign parts in food that may bring prejudices to the consumers);
professional liability for accountants, lawyers, architects, constructers that covers the
liability for errors, their own or their employees omissions, as well as for doctors,
sergeants, dentists that covers the damages done to their clients;
directors and officers liabilities.
The liability toward the third parties insurances include a large range of coverages, materializing
in different types of policies. It is important to remember that some of those may be sections from other
types of contract, being offered by the insurer in a package along with other types of insurances. This
practice depends on the legislation of the country.
The insurance premium is determined regarding the limit of the established liability, the history
of the damages of that client, the nature of the insurance and other known criteria.
The object of the liability insurance is represented by:
1. the prejudices for which the insured responds on the base of the laws towards third parties, to
which he needs to pay sums that cover the damages and law suit expenses as body injuries or
death and destruction of some goods, direct result of the insured risks that were generated
2. expenses made by the insured in the civil law suit with the written accord of the insurer, if he was
obligated to pay the damages.
13.2.1 Employers liability insurance
Through this insurance, it is offered protection for the insured against losses, expenses related to
the establishment of the compensations regarding the injuries, sickness determined by the negligence of
the employer. As a rule, the deterioration of the clothes is not covered, even if the employer is liable of
that. In some countries, the legislation includes also the liability towards dependents, in case of death of
the employer.
Through the measures of risk management for this type of insurance, imposed by the insurance
company, are:
the endowment with equipment and the assurance of an adequate work place,
professional training that is necessary for the usage of the machineries and installations,
permanent supervision of the working place.
The third party may be an employee or an ex employee that suffers body injuries or gets sick
because of the negligence, errors, malfunctions or omissions of the employer. In many countries, the
employers liability is compulsory.
13.2.2 Product liability insurance
Product liability appeared and is in practice presently because of the sold merchandise for
which the producers are liable towards the ones that uses it or consumes it. Through its usage, some
body injuries, sickness, death or injury, losses or material prejudices may occur.
Product liability is made through separate policies, limited as sums for each period of insurance.
The product liability needs to consider carefully the legislation of each country. In the developed
countries, the regulations are strongly protecting the consumers, and the limits of the liability have high
levels and, often, the courts offer gains to the consumers. For this reason, the insurance premiums have
significant values, corresponding to the limits of the liability and the past experiences.

48

13.2.3 Directors and officers liability insurance

This type of insurance is a form of protection extremely specialized that covers the liability of
the directors and of the members of the administration boards for errors and negligence in the leading or
managing of a company. Through a similar policy, it may be covered also the liability of other
categories of leading personnel, administrative personnel, secretarial.
In the legislations and in the practices of the insurance companies all over the world, the terms of
Directors and Officers may have different meanings.
It is impossible to elaborate standard coverages for the directors liability. The directors liability
is very difficult to be evaluated. Among the elements that regard a fair evaluation of the risk are:
the correct definition of the responsibilities,
the refuse of the directors to inform the underwriter about the responsibility of each
insured,
the actualization of the information that may lead to the renewal of the contracts,
the extension to which the cover is done for the new directors.
The insurance premiums are extremely big, and their determination is not based on statistical
data, because they are not relevant - in this type of insurance, the past experience cannot be a guide for
the future.
Directors are liable for the company performance, so that, its shareholders, clients, creditors,
employees and others can take actions against directors as natural persons.
In addition, the insurance policy offers coverage for expenses with the barrister in the lawsuit,
and for financial indemnifications, that the director should pay.
13.2.4 Professional liability insurance
The aim of the professional liability insurance is the indemnification of those bearing different
losses (material, financial, etc.) caused by certain professionals. This type of insurance appeared as a
necessity imposed by the implications of practicing certain professions, which may cause damages by
negligence in exercising the profession.
Here, one can identify professions that offer consulting or other specialized services, such as
architects, constructors, physicians, lawyers, accountants, consultants and , in general, all professions or
trades that require high responsibility (including managers). Through their activity, they may by error,
mistake, negligence, fail to act, or any other culpability, prejudice the persons for which they work for,
or other third party.
Professional liability insurance implies the indemnification of the claims issued against the
insured person for the damages that take place during the insured period; they refer to any civil liability
directly related to the professional activity of the insured person, as it is defined by the legislation in
force at the policy issuing date. When the insured person is a legal person, the terms of the policy apply
also to managers and employees, with regard to the mentioned activity.
As a rule, indemnifications are granted for:
material damages from personal culpability natural or legal person and from other
persons culpability, for which he/she is constrained to act according to law; bodily harm or
death, goods damages or destruction;
expenses incurred by the insured person in the lawsuit (legal costs necessary for a good
activity and approved by instance);

49

legal expenses incurred by injured person (third party) for carrying out legal procedures with
the purpose of compelling the insured person to pay the indemnification, if the insured was
bound to pay them by judicial decision;
indemnifications and damages resulted from the loss, damage or deterioration of documents,
burglary or calamities etc.;
claims issued against the insured for damages that took place during the insurance period,
with regard to any civil liability (including the liability for plaintiff costs and expenses)
directly related to the activity, as it is defined by the legislation in force at the policy issuing
date, activity accomplished by and in the name of the insured person or by the persons for
which the insured is responsible according to law.
any loss caused by error, mistake, negligence or fail to act, done by a partner, manager or
employee of the insured person, directly related to the accounting expertise and accounting
activity and which is disclosed and noticed to the insurer during the insurance period;
any damage due to the loss, destruction or deterioration of documents and/or programs and
floppy disks necessary for recording and processing accounting, financial and managerial
data, or caused by burglary or natural disasters, independent from the insured person (fire,
flood, earthquake, landslide, collapses etc.)
13.2.5 Public liability insurance
This insurance consists of the repayment of the necessary amounts to the insured person for a
third party compensation - in the capacity of public - in case of bodily harm or material damage,
induced by his/her negligence or that of his/her employees. Such liabilities can proceed from slippery
floor, irregular surface of pavement, stairs, elevators or escalators, shop windows faults, merchandise
falling off the shelves or shop windows, hanging marks, doors-trap, parks, museums and so on. It is
customary to insure elevators and escalators under constructing-assembling and engineering policies,
which provide for maintenance and control coverage, as the legal liability insurance. Besides that, there
can emerge some aspects related to pollution as well.

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Chapter 14 Reinsurance
14.1 The concept of reinsurance
Reinsurance appeared as an offer of the reinsurer to the direct insurer due to significant events, in
volume or frequency that might seriously affect the insurer from the financial point of view.
Reinsurance represents a willed agreement between a legal person named reinsured (the ceding
company)) and another company named reinsurer, according to which the reinsured pays a part of the
insurance premium and receives in return the reinsurers protection and also a certain indemnification
in case the reinsured event occurs. The amount of indemnification is equivalent to the damage volume,
but not higher than the reinsured amount (the value of the reinsurance contract).
In the reinsurance contract, there are certain specific concepts that should be clarified:
- Reinsured or the ceding company represent the direct insurer that cedes a part of the risk to
the reinsurer; the reinsurance contract being based on the original insurance contract;
- Reinsurer is a specialized company in risks underwriting from the direct insurer that
receives the reinsurance premiums and compensated the reinsured in case of the insured event
occurence;
- Reinsurance premium is1 part of the insurance premium that the ceding company cedes to
the reinsurer. The level of the reinsurance premium depends on the level of the risk that is undertaken
by the reinsurer and by the offer-demand ration on the reinsurance market.

Gh. Bistriceanu, F. Bercea, E. Macovei - Lexicon de protecie social, asigurri i reasigurri, Ed. Karat, Bucureti, 1997,
p. 534.
1

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EXHIBIT 14.1 Reinsurance mechanism

Pa

Reinsurer

Insurer

Insured

Pr

Pr

CA

CR

CR
Reinsured

Retroceder

Retrocedent

wher
e:
Pa
insurance
premium;

CR reinsurance contract;
CA - insurance contract;
Pr reinsurance premium;

Pr retrocession premium;
CR retrocession contract.

- The reinsurance relationship takes place between the ceding company and the reinsurer;
between the original insured and the reinsurer there is no relationship.
- In case of damage, the insured asks and receives compensation from his insurer and the latter
receives, according to the reinsurance contract, the same amounts from his reinsurer.
14.4 The economic importance of reinsurance
In order to remove the disagreements between the provisions deducted from the past statistical
data and the reality, disagreements that take place because of a small number of insured persons as
compared to those questioned, the insurance companies resort to reinsurance.
Reinsurance actions only through the intermediation of insurance, that allows the decreasing of
the part of risks that exceed the possibilities of comprise of the insurers, and the decrease of the liability
in the insurance activity.
The relationships between the reinsured and the reinsurers are regulated through the reinsurance
contract.
The insurance contract (the rapport insured insurer) is totally independent of the reinsurance
contract. The insured has no right towards the reinsurer, because the insurer reinsures without the
knowledge of the insured.
The conclusion of the reinsurance contract can lead neither to the cover of the liabilities of the
insurer, nor to the birth of any juridical rapport of insurance between the insured and the reinsurer. If the
reinsurer becomes insolvent, the insurer has the same obligations towards the insured, of course, in the
limits of the total sum comprised in the insurance. In the cases the insurer becomes insolvent, the
insured has no right to ask the reinsurer for its claims, as the value of the compensation owed by the
reinsurer for the quota of assumed risk is transferred in favor of the bankruptcy sum, to be divided
among all the creditors.
14.5 The reinsurance contract

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14.5.1 Definition and juridical characteristics of the reinsurance contract

The agreement of will between the direct insurer, who is called reinsured, and another
specialized insurer, who is called reinsurer, through which the reinsured gives away part of the
insurance premium, named reinsurance premium, to the reinsurer, and the latter takes the risk and
compensates in case of the insured event until at most the value of the contract, in called reinsurance
contract.
The reinsurance contract, according to its character, may be:
a)
Compulsory reinsurance contract;
b)
Optional reinsurance contract;
c)
Mix reinsurance contract.
a)
In the case of the compulsory reinsurance contract, the reinsured obliges to include in
the reinsurance all the insurances he closes, in the conditions stipulated in the contract, while the
reinsurer obliges to accept them ad-litteram. In this type of contract, the liability of the reinsured and of
the reinsurer starts in the same time.
This type of contract has some advantages for the reinsurer. The reinsurer is sure that the
reinsured cannot select the risks, keeping the favorable ones and giving away the unfavorable ones. This
type of contract is the most used.
b)
The optional reinsurance contract supposes that the reinsured proposes, and the
reinsurer accepts or not that insurance. This kind of contract is advantageous for the reinsured, as he
selects the risks to be given away through reinsurance.
For the reinsured there is also a disadvantage, as this cannot conclude the insurance contract in
the beginning, as he has to study the market first.
c)
The mix reinsurance contract appears as a combination between the compulsory and
the optional contract, in the sense that one of the contracting parties has to accept the risks stipulated in
the contract.
The reinsurer is interested to compensate the reinsured only in the limit of the liability he
assumed through the reinsurance contract.
Between the insured and the reinsurer there is no connection. Even if the reinsurer goes into
bankruptcy, the obligations of the insurer towards the insured remain the same;
1. The reinsurer follows the fortune of the reinsured;
2. The reinsurance contract has no standard form, taking into account the interest, the nature and
the dimensions of the risk, the field of activity, etc.
The separation of the relations between the insured and the insurer on one hand, and the
reinsured and the reinsurer on the other hand, was established through some regulations According to
these, the insured couldnt emit claims to the reinsurer, except from the case when such a request is
especially stated in the policy;
1)
The reinsurance contract cannot be concluded for a sum larger than that for which the
original insurance contract was concluded;
2)
There is also the reciprocity phenomenon, meaning that the reinsured becomes
retrocessioner.

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Chapter 15 Techniques and methods of reinsurance

Depending on risks allocation between the reinsurance company and the reinsured, the reinsurance can
be proportional or non-proportional.
EXHIBIT 15.1 Types of reinsurance treaties

Reinsurance
Nonproportional

Proportional

Quota-share

Surplusshare

Mixed

Reinsurance
pool

Excess of loss

Stop loss

Catastrophicloss

15.1 Proportional reinsurance

15.1.1 Quota Share Q/S treaty
The essential characteristic of this type of contract is that the reinsurance company and the reinsureds
participation are settled as a percentage of the
15.1.2 Surplus share treaty
In the case of surplus-share treaty, the reinsured ceases only the sums that does not intend or is unable
to retain on his own. The retention is settled automatically as fix amounts called lines. All that exceeds
this retention called surplus is ceased in reinsurance. The reinsured transfers only the risks which have a
high frequency. This is the ideal form for the reinsured.
15.1.3 Mixed reinsurance (quota-share and surplus-share treaties)
If the quota-share treaty cannot undertake the entire portfolio offered to the reinsurance company by the
reinsured, than it can be completed with a surplus-share treaty.
The reinsured retains a fixed sum for each category of risk (retention). Once retained this sum, a part of
the risk is reinsured under a quota-share treaty. This model of reinsurance is advantaging the reinsurance
company, which accepts quota-share because the latter participates at risk undertaking and damage
payment in same proportion as the reinsured. Mixed reinsurance is often used when an insurance
company starts business in a specific field. So, the reinsurance company can compute with exactness,
its retention. Also, it avoids administrative work caused by the modification of the retention in the
surplus-share treaty.

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