Insurance is a system in which a number of people share the risk and are compensated for economic losses in the event of an accident. The duty of disclosure is crucial for fair pricing, and if it is violated, the insurer can terminate the contract. Disclosure obligations mitigate information asymmetries and maintain trust in the insurance system.
Insurance is a system in which a group of people with the same risk form a risk pool and pay a premium to receive a payout in the event of an insured event. It is not just a way to compensate for financial losses, but also plays an important role in promoting the stability of the entire society. People who purchase insurance products can prepare for economic losses caused by accidental accidents in the future. This is all the more important because insurance is not just a financial product, but a social safety net.
Insurance payouts are contingent on a contingent event – the occurrence of an accident – and as such, insurance is a contingent product, meaning that the goods or services received depend on whether or not the contingency is realized. Because of this, insurance relies heavily on trust between the policyholder and the insurer. While ensuring that policyholders receive adequate compensation in the event of an accident, insurers must maintain the stability of the entire insurance system through proper risk management.
The premiums paid by members of a risk community and the benefits received are based on the probability of an event occurring in that risk community. While the exact probability of a particular event occurring is not known, estimating that probability based on past events approximates the actual probability of the event as more observations are made. These probability-based calculations play a crucial role in insurance math and allow for fair premiums. The foundation of insurance is based on statistics and probability, and it is an attempt to manage future uncertainty.
Since the purpose of insurance is not to gain financial gain, but to compensate for future economic losses, it is only fair that members of a risk community pay premiums that are commensurate with the risk of the risk community to which they belong. Therefore, in a fair insurance policy, the premium paid by each member must match the expectation of the payout he will receive, and the total premium paid by all members must match the total payout. The expected value of a claim is the probability of an accident multiplied by the amount of money that will be paid out in the event of an accident. The ratio of premiums to claims (premiums / claims) is called the premium rate, and if the premium rate is higher than the probability of an accident, the total amount of premiums of all members will be higher than the total amount of claims, and vice versa. Therefore, in fair insurance, the premium rate and the probability of an accident should be equal.
Of course, in reality, insurers reflect the costs of their business activities in their premiums, making it difficult to apply fair insurance, but basically, they calculate premiums and benefits based on the above principles. What is important here is that insurers do not simply pursue profits, but ensure that policyholders are treated fairly. This is an important factor in building trust between insurers and policyholders, which is critical to the long-term success of an insurer.
However, unless policyholders provide truthful information about the extent of their risk, it is difficult for insurers to accurately assess the risk of each individual policyholder and set premiums accordingly. For this reason, if a risk community of people who are expected to have a similar probability of having an accident is entered by people who have a higher probability of having an accident and pay the same premium, the frequency of accidents in that risk community will increase, increasing the total amount of claims paid by the insurer. To compensate, the insurer has no choice but to increase the premiums paid by members. The end result is that some people pay higher premiums than they should for their level of risk. This problem stems from an information asymmetry: the insurer has more information about the insured’s risk than the insured does. To solve this problem, insurers need a means of identifying hidden characteristics of policyholders.
The duty of disclosure in our commercial law is the legal embodiment of such a means. An insurance contract is concluded by the insured’s offer and the insurer’s acceptance. The insured must be informed of “material facts” before entering into the contract and must not misrepresent them. The “material facts” are the basis for the insurer’s decision to accept the policyholder’s application or to set differential premiums. Thus, the duty of disclosure prevents many people from paying higher premiums than are commensurate with their level of risk, or from being disincentivized to buy insurance at all.
The duty of disclosure is breached if the insured intentionally or grossly negligently fails to inform the insurer of a “material fact” before entering into the insurance contract, or if the insured misrepresents the facts. In such cases, our commercial law gives the insurer the right to terminate the contract. The insurer can terminate the contract for breach of the duty of disclosure, whether before or after the insured event, and can do so unilaterally. Upon termination, the insurer is not liable to pay the claim, and if it has already paid the claim, it can claim a refund. Unlike a breach of a legal obligation, where the law usually allows you to compel the breaching party to fulfill the obligation or sue for damages, the insurer can only exercise the right of rescission when the insured breaches the duty of notice. However, the insurer’s right to terminate may be limited. If the insurer knew about the breach at the time of the contract or was grossly negligent in failing to do so, the insurer’s right to terminate is excluded even if the insured breached the duty to inform. This means that the insurer is more at fault than the insured. There are also certain limits on the time period within which the insurer can exercise its right to terminate, in order to quickly finalize the legal relationship between the two parties and avoid leaving the insured in an unstable legal position for a long period of time. However, if the “material matters” that must be disclosed are not causally related to the insured event, the insurer is liable to pay the claim. However, you can still exercise your right to cancel. In insurance, the duty of disclosure serves the purpose of verifying the characteristics of the person being insured and thus preventing the unfair transfer of premiums to other insureds. This ensures that the main purpose of insurance is fulfilled, which is to protect against economic losses due to the risk of an accident.
The trust between the insured and the insurer must be maintained even after the insurance contract is concluded. Trust can be strengthened if the insured regularly informs the insurer about his or her level of risk, and the insurer adjusts the premium to reflect this. This is essential for the sustainable operation of the insurance system. Insurers can build on this trust to develop insurance products and increase customer satisfaction by offering a wide range of insurance products to meet the diverse needs of customers. Customer satisfaction is directly linked to an insurer’s reputation, which is an important factor in its long-term success.
