Insurance and Assurance

CONTENT

1. INSURANCE AND ASSURANCE
2. INSURANCE RISKS AND NON- INSURANCE RISKS
3. INDEMNITY INSURANCE AND NON-INDEMNITY INSURANCE
4. The principle of Insurance
5. Types of Insurance
6. Forms of life policy
7. Accident insurance
8. Marine insurance
9. Procedures of Insurance Contracts
10. Terms frequently used in Insurance Industry
11. The importance of Insurance to Commerce and Industry

Insurance is a contract whereby an insurer or underwriter agrees to compensate the insure in the event of his suffering a loss, in return for the payment of a premium by the insured.

The basic principle of insurance is the pooling of risks – A number of people who wish to cover themselves against a certain risk contribute to a pool or a common fund out of which compensation are made to those who actually suffer losses arising from that particular risk. The amount of premium depends on the probability of the risk. The greater the risk, the higher the premium and vice versa.

Compensation for victims will depend on the premium paid and the extent of losses suffered.

INSURANCE AND ASSURANCE

Insurance refers to events which are uncertain and which may or may not happen e.g. fire, burglary etc. It is based on probabilities.

Assurance refers to events which are certain and which are sure to happen e.g. death must happen. Example is life assurance. Assurance is based on possibilities.

EVALUATION

1.         What is insurance?

2.         Distinguish between the terms insurance and assurance.

INSURABLE RISKS AND NON-INSURABLE RISKS

Risks which are calculable (i.e. the likelihood of their occurrence is possible to be estimated) and for which premiums may therefore be assessed are called INSURABLE RISKS e.g. Motor Accident, Life, Marine, Theft, etc.

In other words, insurable risks are those risks whose likelihood of occurrence can be forecast, from past experience and for which a rate of premium can be calculated to enable the insurance company to collect enough premium to pay those who will unfortunate enough to suffer loss from such risks. Insurable risks hold out the prospects of loss but not again.

NON-INSURABLE RISKS

Also called un-insurable risks are risks that cannot be insured because their likelihood of

occurrence cannot be calculated due to insufficient information being available to insurer to enable him estimate the premium. It holds the prospects of gain as well as loss.

EXAMPLES OF NON-INSURABLE RISKS ARE:

1. Loss of profit through competition.
   1. Loss due to gambling.
   1. Loss due to changes in taste and fashion.
   1. Loss due to mal administration (i.e. loss incurred as a result of bad management).
   1. Risk due to war.
   1. Loss of profits through fall in demand.
   1. Speculation.  

INDEMNITY INSURANCE AND NON-INDEMNITY INSURANCE

Indemnity insurance is the type of insurance in which the insured can be restored to his former position before the incident occurred by receiving compensation. Examples are insurance against fire, marine, burglary etc.

In non-indemnity insurance, the insured cannot be restored to his former position before the incident occurred. This insurance is not purposely for equating the loss with the compensation. Examples are life assurance and personal accident insurance.

PRINCIPLES OF INSURANCE

There are six main principles which underlie insurance contracts and which must be present for the contract to have validity. These principles are:

1. INSURABLE INTEREST: The person who takes an out insurance policy (i.e. the insured) must have an interest in the subject matter of the insurance policy. This means that so far as the subject matter is concerned, the insured must have a benefit from its existence and it must be shown that he will suffer damage or injury from its loss e.g. the owner of a house is said to have insurable interest in that house but the tenant of the house has an insurable interest in his property within the house. The owner of the house can insure his house where as the tenant can only insure his property within the house.
2. UTMOST GOOD FAITH (i.e. UBERRIMAE FIDEI): Both parties to the insurance contract must deal openly and honestly with each other and disclose all relevant facts. It is essential that the insured tells all material facts which would affect the premium which the insurer charges. In other words, the contract of insurance is one of “uberrimae fidei” where the proposer(i.e the insured) must act with the utmost good faith and produce all relevant facts to the insurer. If, later the insured is found to have provided the insurer with incorrect information (e.g as to the age or value of the property) or to have concealed certain facts, then the contract of insurance can be declared null and void without return of premiums. The insurer too, must disclose the exact terms of contract as well as all material facts he has about the risk to the insured(i.e the proposer).
   
3. INDEMNITY: Indemnity is the compensation given to the insured by the insurer in the event of his suffering a loss. Under this principle, the insurance company will help to restore the insured to his former position before the loss occurred. All types of insurance are insurance of indemnity except life assurance and personal accident insurance. Under a contract of indemnity, the policy holder is entitled to be placed in the same position after a loss, as before it, so that he makes neither profit nor loss.
   
4. SUBROGATION: Subrogation refers to the right, which a person has to stand in the place of another and enjoy all the rights and remedies of that person. The principle states the insurer, having paid the  claim to the insured, is entitled to stand in the place of the insured against other parties who have caused the injury on which the claim has been paid. The insurer is therefore entitled to benefit from any claims which the insured has against a third party which can be used to reduce the damage suffered. Therefore an insurer who has paid on a burglary claim is entitled to the stolen goods should such goods be recovered later. The right to step into the shoes of another applies to all contract of insurance except life assurance and personal accident policies.
   
5. CONTRIBUTION: Where a person insures the same risk with more than one insurer and if a loss is incurred, the insured can only recover to the extent of the loss and nothing more. This means he cannot claim compensation in full from each of the insurance companies and thereby make a gain or profit. Therefore each of the insurance companies (insurers) will pay a certain proportion of the loss. This principle does not apply to life assurance and personal accident policies.
   
6. PROXIMATE CAUSE: This principle explains that the person insured can only be indemnified if the loss was one that directly and immediately from the risk insured against. In other words there must be a close connection between the risk insured against and the cause of the loss. E.g. a claim for death benefits under a personal accident policy would only be paid if the insured died from accident and not from illness.

EVALUATION

1. A. Explain the principle of indemnity

B. Why is it not applicable to life policies?

• Insurance may be described as a “ pooling of risks”. Explain what this statement means.

TYPES OF INSURANCE

There are various risks which a business should/could insure against. These constitute the various types of Insurance, namely: i) Bad debts ii) Goods in transit iii) Group insurance iv) Cash in transit v) Fidelity guarantee vi) Plate glass policy vii) Burglary, theft , robbery viii) Consequential loss ix) Employer liability x) Aviation insurance xi) Motor vehicle insurance xii) Fire xiii) Life insurance xiv) Marine insurance xv) Export credit guarantee xvi) Contractor all risk insurance xvii) Agricultural insurance xviii) Personal Accident insurance xix) Pension or superannuation schemes xx) Pluvius policy

FORMS OF LIFE POLICY

1. Whole life Assurance: Premiums are paid throughout the lifetime of the assured and the sum assured is payable only when death of the holder of the policy occurs. This policy is taken for the benefit of dependants like children , wife and relations
2. Term assurance: This is to cover the life of the policy holder for a specific period only and the sum assured is paid only if the policy- holder dies before the specific date-i.e no payments is made if he survives till the end of that date . This policy is usually taken to cover the life of the holder during a journey e.g by air
3. Endowment Assurance (Policy) Premiums are paid over an agreed number of years and the sum assured is paid either at the end of that specific time or when the policy-holder dies, whichever happens first.
4. Annuities: This is a form of pension in which an insurance company, in return for a certain sum of money (paid in a lump sum or by installment) agrees to repay this money plus the investment income that it is able to earn over the expected life time of the investor or for a specified period.

ACCIDENT INSURANCE

This covers all types of insurance except life, fire and marine.

TYPES OF ACCIDENT POLICIES

A. MOTOR VEHICLE INSURANCE

This provides for the payment of compensation for the death or bodily injury to any person arising from the use of vehicles on the road. There are two types of Motor Vehicle Insurance.

1.  Third Party Insurance Policy:  This type of policy covers only the loss or injury suffered by the third party (i.e. passengers as well as property) but does not include loss or damage relating to the owner or his vehicle.

2.  Comprehensive Insurance Policy: This covers the owner ( driver), the insured vehicle ,third parties and sometimes the contents of the insured vehicle. This type of policy is optional i.e it is not compulsory under the law. Premiums paid under the comprehensive insurance policy are higher than those under third-party policies.

B. PERSONAL ACCIDENT INSURANCE POLICY

This policy covers the loss for partial or permanent deformity or disability arising from accident e.g loss of sight, loss of limb etc.

EVALUATION

1. Give five reasons why a life insurance policy may be taken.
2. Describe any five insurance policies which a large departmental shop owner may take.

MARINE INSURANCE

This consists of insurance cover for both ships and their goods(i.e. cargo) against risks at sea.

TYPES OF MARINE INSURANCE

1. Hull Insurance: This covers damage or loss both to the insured vessel (i.e ship) and the damage or loss caused by it to other vessels. It is subdivided into Time policy and Voyage policy.
2. Cargo Insurance: This covers goods and cargoes carried by a ship. It makes provision for the refund of the value of goods or cargo carried by the shipowner should the goods get lost or damaged at sea.
3. Ships owners liability: This type of insurance covers all risks and losses for which the owner of a ship or its employees are liable for negligence in  handling of goods ,injury to crew on board, dock workers, passengers, damage to other ships or to ports(i.e installations at wharves, quays etc)
4. Freight insurance: This policy is taken to cover against refusal to pay charges for lifting the goods. Also this ship owner may be called upon to refund the freight to the owner of the goods if the goods do not get to their destination(i.e if the goods are lost in transit).

PROCEDURES OF INSURANCE CONTRACT

The various processes involved in obtaining an insurance are:

• An Inquiry- i.e. finding out about the insurance either directly from the insurance company or agents(brokers)
• Proposal Form – This is issued by the insurance company. It must be completed truthfully and honestly (i.e. with utmost good faith) by the person seeking insurance. It forms the basis of the contract between the insured and insurer.
• Premium: This is the amount paid by the insured, either in lump sum or by annual, monthly or weekly installment. If premiums are not paid subsequently when due, the policy ceases to be valid.
• Cover Note: After the first premium has been paid .the insurance company issues a cover note to the insured, giving him a temporary cover(i.e. protection) until enquiries are made by the insurance company and the insurance policy has been prepared .The cover note is usually valid for thirty days after which a fresh one is to be collected if the insurance policy is not yet ready.
• Insurance Policy: This is the legal document which gives details of the contract i.e. it set out the exact terms of the insurance contract.

TERMS  FREQUENTLY  USED IN INSURANCE INDUSTRY

1. Underwriter: This is a person or company who undertakes to cover a part (portion) of the risk involved in insurance.
2. Re-insurance: This is a situation whereby an insurer agrees to insure with another insurance company, all or part of the risk. By spreading large risk among many insurance companies, losses will be reduced. Re–insurance is the transfer of risk from one insurer to another. It provides additional security to the insured and all other policy holders.
3. Actuary: This is a person who assesses the risks involved in an insurance and calculates the premium relevant to that risk. He is also involved in handling matters concerned with pension funds.
4. Surrender Value: This is the amount in cash an insurance company will repay to an endowment policy holder if he wishes to discontinue prior to the date of maturity of the policy. It is usually calculated as a percentage of the total premium paid up to the date of surrendering the policy.
5. Jettison: This is the deliberate throwing overboard of cargoes in a ship in order to lighten the ship and prevent it from sinking.
6. Barratry: This refers to any act committed by the captain of a ship that is contrary to the interest of the ship owners.

EVALUATION

1. Define an actuary
2. Explain the terms a) surrender value b) re-insurance

THE IMPORTANCE OF INSURANCE TO COMMERCE AND INDUSTRY

1. It facilitates International Trade
2. It makes funds available for investment
3. It helps in reducing risks of businesses
4. It provides a means of savings and making provisions for the future
5. It serves as a collateral security to obtain loans from banks i.e. life assurance
6. It confers on the insured the benefits of tax relief or tax rebate i.e. life assurance
7. It provides employment opportunities for brokers , actuaries etc
8. It provides a sense of security giving confidence to businessmen to engage in commercial activities

EVALUATION

1.         Explain the meaning of the word “underwriter” as it relates to insurance

2.         State five benefits of Insurance to commerce.

READING ASSIGNMENT

Essential Commerce for SSS by O.A Longe page 185-200

GENERAL EVALUATION QUESTIONS

1. Give four similarities and four differences between hire purchase and deferred payment
2. State five reasons why a life assurance policy may be taken
3. Describe any five insurance policies which a large departmental store owner may take
4. Describe three types of risks that may be insured against under marine insurance
5. Differentiate between contribution and group insurance

WEEKEND ASSIGNMENT

1. Which of the following does not relate to Marine Insurance? a) floating policy b) time policy c) valued policy d) endowment policy
2. The term which refer to the deliberate throwing of cargo into the sea to save a ship from sinking is known as  a) charter party b) Lloyds c) jettison d) re-insurance
3. The temporal document which is issued by an insurer when an insurance policy is being processed is a) contact note b) debit note c) credit note   d) cover note
4. What covers the risk which an employer may suffer as a result of the dishonesty of an employee a) accident insurance b) fire insurance c) fidelity guarantee d) consequential loss
5. The primary objective of insurance is to a) prevent accidents b) meet uncertainties in future c) give loan to businessmen d) control the flow of cash

THEORY

1. Explain the meaning of the term “premium” as it relates to insurance
2. List three benefits of insurance to commerce.

EVALUATION

1.         Explain the following terms (a) Hull Insurance         (b) Freight Insurance

2.         Distinguish between Third Party Insurance Policy and Comprehensive Insurance Policy

READING ASSIGNMENT

Essential Commerce for SSS by O.A Longe page 185-200

GENERAL EVALUATION QUESTIONS

1. Give five advantages and four disadvantages of credit sales
2. Explain the different activities involved in industrial, commercial and service occupations
3. Explain five advantages and four disadvantages of transportation by pipelines
4. Give five functions of the Federal Airports Authority of Nigeria
5. State five aids to trade and explain how each facilitate trade

WEEKEND ASSIGNMENT

1. Fidelity guarantee insurance policy covers employees a) injured at work  b) pension and gratuity c) handling cash c) retirement benefits
2. Time policy insurance is associated with a) motor vehicles b) ships at sea c) life endowment d) goods in transit
3. Which of the following policies compensates a businessman for profit lost while rebuilding his factory after a fire incident    a) consequential loss policy  b) engineering policy c) fidelity guarantee insurance d) accident policy
4. Which of the following types of insurance is usually excluded  from the principle of indemnity a) fidelity guarantee b) life c) marine d) motor vehicle
5. The insurance policy that specifically covers damage to structure or machinery of a ship is known as……………. insurance.      a) cargo b) hull  c) ship owners d) time

THEORY

1. List four insurance policies a ship owner can take
2. List two examples of losses that can be compensated under personal accident policy

EVALUATION

1.         List five types of insurance policies that can be taken by a trader.

2.         State and explain three principles of insurance.

READING ASSIGNMENT

Essential Commerce for SSS by O.A Longe page 185-200

GENERAL EVALUATION QUESTIONS

1. Mention any five government legislations aimed at protecting the consumer
2. State any five sources of capital for a public limited company
3. Describe five services rendered by thrift societies to their members
4. Explain five problems of using rail transportation in Nigeria
5. Explain three ways by which banks grant credit to their customers

WEEKEND ASSIGNMENT

1.         Which of the following does not permit the insured to make a profit out of insurance a) utmost good faith b) proximate cause c) insurable interest d) indemnity

2.         The primary objective of insurance is to a) prevent accidents b) meet uncertainties in the future c) give loan to businessmen d) control the flow of cash

3.         A tenant was not compensated along with the landlord when the house he was living in got burnt. This is in line with the principle of a) proximate cause b) subrogation c) insurable interest (d) indemnity

4.         If an assured as taken an insurance policy against death by accident and actually dies of malaria fever, which of the following would prevent his beneficiary from being compensated a) subrogation b) proximate cause c) contribution d) insurable interest

5.         The compensation made to an insured for loss incurred in insurance is called

a) commission b) interest c) indemnity d) premium

THEORY

1. Mention four types of insurance
2. State the principle of subrogation

EVALUATION

1. What is meant by the term insurable risk
2. Distinguished between indemnity and non-indemnity insurance.

GENERAL EVALUATION QUESTIONS

1. Explain five circumstances when an insured may not be indemnified
2. Explain the following terms (a) insurable risks (b) non insurable risks
3. Give five main differences between a retail co – operative society and a public limited company
4. Explain five functions of the Central Bank of Nigeria
5. Explain five reasons why many small businesses turn into private limited companies

READING ASSIGNMENT 

Essential Commerce for SSS by O.A. Longe Page 185 – 201

WEEKEND ASSIGNMENT

• Which of the following risk would an insurance company not be prepared to cover

(a) death resulting from HIV (b) change in fashion (c) theft of property (d) loss of cash in transit

• The aid to trade responsible for compensating traders on loss suffered in the day-to-day business operation is (a) warehousing (b) insurance     (c) transportation (d) advertising
• Which of the following is a non-insurable risk (a) cash-in-transit     (b) fire (c) consequential loss (d) speculative venture

• The sum which the insured pay periodically to his insurance company is called

(a) brokerage (b) commission (c) indemnity (d) premium

• The incidence of loss that would have paralysed commercial activities are heaped on

(a) banking (b) communication (c) advertising          (d) insurance

THEORY

1. List four examples of non-insurable risks
2. Distinguish between insurance and assurance.