TOPIC: INSURANCE

Introduction
The unforeseen calamities exposed to business organizations and individuals are referred
to as Risks, Contingencies, Perils or hazards.
Insurance
This is a contract between an individual or organization and the insurance company
whereby the company undertakes to protect the insured against loss arising from
occurrence of the insured risks.
Insured
The person or the organization taking insurance cover.
Insurer
The company giving insurance cover
Premiums
Regular payments which the insured makes to the insurance company.

In insurance many contribute a little each into the common pool and the few who suffer a
loss are compensated from it. Hence the term pooling of Risks.

Benefits of pooling of risk to insurance Company

 It enables an insurance company to create a common pool of funds from regular
premiums from different clients.
 It enables the insurance company to compensate those who suffer loss when the
risks occur.
 The insurance company is able to spread risks over a large number of insured
people.
 Surplus funds can be invested.
 It enables the insurance company to meet its operating cost by using the pool
funds.
 It enable the insurance company to calculate premiums to be paid by each client.
 It enables the company to re- insure itself with another insurance company.
Insurance contract.
Insurance is a contract which must meet the following conditions in order to be legally
valid.
 It must be for a legal purpose.
 The parties must have legal capacity to contract.
 The terms and conditions of the contract must be acceptable to both the insured and
the insurer.
 There must be a payment in form of premiums and a consideration which is the
insurance cover.
Importance of insurance
I.) Employment creation
Provides employment directly or indirectly to individuals who would others be unemployed.
II.) Creating Confidence in investors
Insurance services create confidence in investors who are able to invest in risky but
profitable areas in that they are assured of compensation in case of the risks taking place.

III.) Revenue to the Government

Incomes realized in the insurance industry such as profits made by companies and salaries
to employees are subjected to taxation providing revenue for the government.

IV.) Continuity of Business

In case the risk insured against occurs, the insured is compensated. This enables the
insured to continue running the business.

V.) Spread Risk

Insurance helps in spreading of risks in that each of those who are insured against the risk
contribute a little and out of the common pool the few who suffer a loss are compensated.

VI.) Encourage Savings

The amounts contributed as premiums may make the individual‟s savings.

VII.) Investments
Not all the amounts that is collected from premiums is used for compensation as only a few
people may suffer the risk. The amount remaining after compensating may be invested by
the insurance companies.

Terms used in insurance

a.) Insurance
This is a written contact between the insured and the insurer whereby the insured
transfers to the insurer the financial responsibilities for losses arise from the insured
against.

b.) Premium
This is the specific amount of money paid at regular intervals by the insured to the insurer
for coverage against losses arising from a particular risk.

c.) Risk
These are perils or events against which an insurance cover is taken.

d.) Pure Risk

This is a risk which result in loss if it occurs and result in no gains if it does not occur.
e.) Speculative Risk
This is a risk which when it occurs may result in a loss or a profit.

f.) Insured
This is the insurance company that undertakes to compensate the insured in event of loss
arising from occurrence of the insured risk.

g.) Actuaries
These are people employed by an insurance company to compute expected losses and
calculate the value of premiums.

h.) Claim
This is a demand by the insured for compensation from the insurer for loss arising from an
insured risk.

i.) Policy
This is a document that contains the terms and conditions of the contract between the
insurer and the insured.

j.) Actual Value

This is the true value of the property.

k.) Sum Insured/sum Assured

This is the value for which insurance cover is taken as stated by the insured at the time of
taking the policy.

l.) Surrender value

This is the amount of money that is refundable to the insured by the insurer in case the
former terminates payment of the premium before the insurance contract matures.

m.) Grace Period

This is time allowed between the date of signing the contract and the date of payment of
the first premium.

n.) Insurer
This is the insurance company that undertakes to compensate the insured in event of loss
arising from occurrence of the insured.

o.) Proposer
This is a person wishing to take out an insurance cover (prospective insured).
p.) Cover- note (Binder)
This is a document given by the insurance company to an insured on payment of the first
premium while awaiting for the policy to be processed.

q.) Annuity
Annuity is a fixed amount of money that an insurer agrees to pay the insured annually until
the latter‟s death.

r.) Consequential Loss

This is loss incurred by a business as a result of disruption of business in the event of the
insured risk occurring.

s.) Assignment
This is the transfer of insurance policy by an insured to another person. Any claims arising
from the transferred policy passes to the new policy holder called an Assignee.

t.) Beneficiaries
These are people named in a life assurance policy who are to be paid by the insurer in the
event of the death of the insured.

u.) Nomination
This is the act of designating one or more people who would be the beneficiaries in the
event of the death of the insured. These people are called nominees.

v.) Average Clause

This clause is usually included in policies to discourage under- insurance. The clause
provides that the insured can only recover such proportion of the loss as the value of the
policy bears on the property insured.

The amount recoverable are arrived at using the following formulae:

Compensation =

w.) Double insurance

This is the taking of insurance policies with more than one company in respect to the same
subject matter and risk. It is significant because if one of the insurers is insolvent at the
time claim arises the insured can enforce his/her claim against the solvent insurer.

If the both insurers are solvent then they share the compensation.
x.) Self-insurance
This is where an individual or organization insures one/itself by accumulating funds to
meet any losses that might arise from risks rather than covering the risks with an
insurance company.

y.) Proposal Form

This is a form that is filled by a prospective insured seeking to get insurance cover from
the insurance company.

Principles of insurance
a.) Uberrima fides/utmost good faith.
The client is required to furnish the insurer with all the details regarding the risk to the
covered.

b.) Indemnity
The insured should be restored to the original financial position he was in before the loss
occurred.

c.) Contribution
When the risk occurs two or more insurers share the loss. In proportion to the sum-
insured with each.

d.) Subrogation
Once the insured is fully compensated for the loss suffered he/she is not supposed to gain
out of the loss.

e.) Insurable interest

One should only insure property that he/she stands to suffer a direct financial loss in case
the risk insured against occurs.

f.) Proximate cause

For the insured to be compensated there must be a very close connection between the loss
suffered and the risk insured against.

Classes of insurance
1.) Life Assurance
 Covers the risk of death.
 It also covers the risk of incapacitation.
 Types of life assurance contracts
I.) Term Insurance
 This is a life assurance that provides protection within a specified period of time
whereby if the policy holder dies within this period, compensation is offered to the
beneficiaries.
 However if the insured does not die within this specified period, there is no
compensation.
II.) Whole Life Assurance
 This type of policy requires the assured to pay premiums until he/she dies.
 In the event of death, his/her beneficiaries are paid the sum assured as indicated
in the policy.
III.) Endowment Insurance
 The assured is required to pay regular premiums for a specified period of time.
 The sum assured is paid at maturity.
 However, in case the assured person dies before the expiry of the period, the sum
assured is paid to his/her beneficiaries.

Whole Life Endowment

Compensation is paid after the Compensation is paid after the expiry of an
death of the assured. agreed period
Premiums are paid throughout the Premiums are paid only during the agreed
life of the assured. period.
Benefits go to the dependants The assured benefits unless death precedes
rather than the assured. the expiry of the agreed period.
Aims at financial security of the Aims on financial security of the assured and
dependants. dependants

IV.) Annuities
 This type of policy requires the assured (annuitant) to pay a certain sum of money
to the assurer.
 In return the assurer agrees to the annuitant a specified amount or money every
year for a specified period or until the annuitant dies.
V.) Statutory Scheme
 It is offered by government aimed at providing welfare to the members of the
scheme such as medical services and retirement benefits.
Characteristics of Life Assurance Policy
 May cover life until death or for an agreed period of time.
 It deals exclusively with life.
 It is usually a long term contract and annual renewal is not necessary.
 Its value depends on the assured ability to pay premiums.
 May be used as a security when acquiring loan.
 The policy can be assigned to beneficiaries.
 It has surrender value.
 It has maturity date.
 It may be a savings plan whereby the sum assured is payable either on maturity or
to assured‟s beneficiaries.
2.) General insurance/property insurance
 It covers property against various risks which may result to loss or damages.
 It is also referred to as non-life insurance because it does not cover life.
 It is a contract of indemnity and requires annual renewal.
The risks insured against this class include:
a.) Fire Insurance
This type of insurance covers loss or damage of property caused by fire.The property
insured include:

 Stock
 Equipment
 Machines
 Building
Conditions to be fulfilled when claiming for compensation:

 Fire must be accidental.

 Fire must be the immediate cause of loss and not incident cause.
 The loss is caused by actual fire.
Types of fire insurance policies:
i. Consequential Loss Policy
It indemnify the insured for the loss of profit due to interruption of business activities as
a result of fire. It is offered to protect future earning of an enterprise after fire
damage.

ii. Sprinkler Leakage Policy

Provides cover against loss or damage caused to goods or premises by accidental leakages
from firefighting sprinklers.

iii. Fire and Related Perils Policy (Material Damage Policy)

It covers building which include factories, warehouses, shops, offices and their contents.
This policy does not cover loss of profit arising from fire damage.

b.) Accident Insurance

These policies covers all sorts of risks which occur by accident. It includes the following:

Motor policy

These policies are aimed at covering vehicles from losses arising from accidents. The
policy requires annual renewal. The policies under motor policies include:

 Third party insurance

This covers losses caused by the vehicle to other people, other vehicles and to property.
The policy covers neither the vehicles itself nor the owner.

 Third party, fire and theft

Under this policy, compensation is offered to third parties as well as vehicles itself in case
of loss or damage caused by fire or theft.

 Comprehensive policy
The policy covers first, second and third parties or damage.

General Accidents Policies

The risks insured include:

i. Personal cover
The policy covers partial or total physical disability caused to a person due to injury or loss
of income due to accident.

The policy offers the following:

 Where the insured loses part of the body e.g. finger,

 In case of partial or total disability the insured may get regular payment.
 In case of death the beneficiaries get the sum insured.
 Where the insured is hospitalized, the medical bill is met by the insurer.

ii. Workmen‟s compensation cover

It covers employees who may suffer injuries while on official duty.

iii. Cash or goods in transit cover

It provides cover for loss of cash or goods while being transported.

iv. Theft and Burglary cover

It covers losses arising from activities of robbers and thieves.

v. Bad debt cover

This policy covers an organization against losses which might arise as a result of debtor‟s
failure to pay their debts.

vi. Public liability

This type of insurance covers losses, injuries or damages caused accidentally by a business
or its employees to the members of public.

vii. Fidelity guarantee policy

Protects one from loss arising from activities of his/her dishonest employees.

c.) Marine Insurance

Provides insurance cover for the ship, other water going vessels and cargo against sea
perils which may lead to financial loss. The perils include:

 Storms
 Sinking
 Fire
The policies available under marine insurance
i. Marine hull policy
Covers the ship against loss or damage as a result of risks at sea.

ii. Marine Cargo Policy

Covers cargo against loss or damage while being transported by ship.

iii. Port policy

Covers a specified peril when the ship is either being loaded, offloaded or serviced.
iv. Voyage Policy
Covers the ship or cargo on a particular journey.

v. Floating Policy
Under this policy regular shippers pay a lump sum to cover their ships. When any of the
ships makes a shipment, the amount of insurance for that particular shipment is calculated
and deducted from the lump sum.

vi. Time Policy

Covers losses arising within a specified period of time. It usually covers the ship itself.

vii. Mixed Policy

This covers ships against losses while on a specified voyage and specified time.

viii. Fleet Policy

Covers a fleet of ship against losses under one policy.

ix. Composite Policy

Applies where several insurance companies have insured a particular ship against the same
risk.

Other Policies under marine insurance

 Construction or builders policy
This covers the risk that a ship is exposed to while it is either being constructed, tested
or delivered.

 Freight policy
This is the cover taken by the ship‟s owner for compensation against failure by the hirer
of the ship to pay for freight charges.

 Third party liability

This is a cover taken by the ship‟s owner to cover claims that may arise from loss caused
to other people by the ship.

Marine losses
The following are some of the losses encountered in the marine insurance.

 Total loss
This refers to the total damage on either the cargo or the ship or both. It may be
classified as either constructive total loss or actual total loss.

i. Constructive total loss

This occurs when the insured ship is extensively damaged and is abandoned because the
cost of salvaging it would be more than the wreckage.

ii. Actual total loss

This occurs when there is total damage on either the cargo or the ship or both.

 Partial losses
It is also referred to as average in marine insurance. It is classified as:

i. Particular average
This is an accidental loss or damage on either the ship or the cargo

ii. General average

This is a loss that occurs when actions taken to save the ship and the cargo result into a
loss.

Characteristics of General Insurance

 The policy cannot be assigned to anybody else.
 Premiums charged depend on the value of the property and the degree of the risk.
 The policy is a contract of indemnity.
 It is normally a short term contract that requires periodical renewal.
 The policy has no surrender value.
 Requires the insured to have insurable interest in the property being insured.
 Compensation goes to a maximum of either the sum insured or actual value of
property insured whichever is less.
Factors to be considered when determining premiums to be charged
i. Health of the person.
ii. Residence of the insured.
iii. Value of the property insured. iv.
Occupation of the insured.
v. Extent of the previous losses.
vi. Frequency of occurrence of risks. vii.
Period to be covered by the policy.
viii. Age of the person or of the property in question.

Re-insurance
The term re-insurance refers to insuring again. This may be the case where an insurance
company has covered property whose value is very high or the chances of risk occurring
are very high.

Factors that may Necessitate Re- insurance./Circumstances that make

it necessary for companies to re-insure.
i. Value of the property
When the value of property is great such as a ship, single insurance company may find it
difficult to bear the loss.

ii. High risk of loss

When chances of loss through the insured risks are high it becomes necessary to re-
insure.

iii. Number of risks covered

When the insurance company has insured many different risks it would be too costly to
compensate many claims at once hence the need for re-insurance.

iv. Need to spread the risks

When the insurance company has insured many different risks it would be too costly to
compensate many claims at once hence the need for re-insurance.

v. Need to spread the risks

When the insurance company wishes to share liability in the event of a major loss
occurring.

vi. Government policy

The government may make it a legal requirement for an insurance company to re-insure.
Co-insurance
This refers to covering of the same risk with different insurance companies. This may be
the case where the value of the property is too high to be covered by one insurance
company.

Co-insurance and double insurance

In Co- insurance it is the insurance company that contacts other insurance companies so
that they co-insure while in Double insurance it is the owner of the property that who
approaches different insurance companies.

Procedure of obtaining an insurance policy.

i. Filling a proposal firm
The person intending to take insurance policy fills in a proposal form. The applicant fills
relevant / material facts on the subject matter of insurance.

ii. Determining the premium to be paid

The premium to be paid is determined depending on the value of the property and the type
of risk to be covered.

iii. Payment of the first premium

After the insurance company has accepted to cover the risk and premiums are calculated
and the insurer pays the first premium.

iv. Issuing of cover note (binder)

The insured is issued with temporal policy which is valid for 30 days within which the
policy would be issued.

v. Issuing of policy
This is the contractual document between the insurer and the insured and it contains the
terms and conditions of the insurance cover. Once issued it replaces the cover note and
the policy becomes operational.
Procedure for making an insurance claim
The following steps are followed:

i. Notifying the insurer

Immediately the risk insured against occurs, the insured should notify the insurer.

ii. Filling a claim

Filling an official claim form giving all the details relating to the occurrence of the risk
then returning it back to the insurer.

iii. Investigation of the claim

On the receipt of the filled claim form the insurer launches an investigation concerning
the cause of the occurrence of the risk.

iv. Preparation of the assessment report

Once it is established that the claim is valid, insurance company uses experts called
assessors to prepare a report concerning the extent of the loss suffered.

v. Payment of the claim

On receiving the assessors report, the insurance company makes arrangements to pay the
insured. The payment concludes the contract between the insurer and the insured.

Insurance and Gambling

Insurance Gambling
The person taking the policy A gambler has no such interest
should have insurable interest

The aim of the insurance is to The aim of gambling is to improve the

restore the financial position the financial position of the gambler
insured was in before the
occurrence of the loss

The insured is expected to pay Gambling money is paid only once

regular premiums for the insurance
cover to remain in force

Insurance involves pure risks Gambling involves speculative risks

The event of loss might never occur The event of bet must happen to determine
the winner and the loser.
Circumstances that may lead to termination of policy.
i. If the assured surrender the policy.
ii. Lapse of time for the policy, that is, if the cover was meant for a specific
period.
iii. In case one is unable to pay the premiums for one reason or another. iv.
After compensation in case a risk has taken place.
v. In case of life insurance a policy is terminated by the death of the insured.