INSURANCE

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INSURANCE
Insurance protects us from financial losses
caused by such fatal accidents
Insurance also protects us from financial losses
that may be caused by fire as shown above.
Professional Insurance Company in Lusaka, Zambia
Grade 12 Commerce by Mr. G. Mumba Munali Boys
High School, August 2008
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Objectives

• After this lesson, you will be able to
• Define Insurance
• State its importance/functions
• Explain how insurance operates
• Discuss the types of Insurable Risks

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Objectives Cont.

• State and explain the principles of insurance
• Outline the procedure involved in taking out
  insurance cover and in making a claim.

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What Is Insurance?

• Insurance is the protection granted to an
  individual, institution or indeed the traders
  against financial losses that may be caused by of
  the occurrence of risks
• It is based on probabilities the risks may or
  may not occur
• Insurance aims at restoring/indemnifying/compensat
  ing the insured should the risk occur

Professional Insurance Company in Lusaka.
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Common Terminologies Used In Insurance

• Proposer One applying for or seeking insurance
  cover.
• Insured One who is covered by an Insurance
  Company
• Insurer Insurance company providing the
  insurance cover
• Proposal Form Application form for insurance

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Common Terminologies Used In Insurance Cont.

• Policy A written contract of insurance between
  the insurer and the insured, containing all the
  terms, conditions and warranties of the insurance
  cover, and as well as the amount of premium, sum
  insured and the expiry date of the contract
  among others.
• Premium Non-refundable small amount of money
  contributed to the Insurance Company in return
  for insurance cover.
• Third Party One who is affected, but not part
  of the insurance contract.

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The Importance Of Insurance

• It protects the insured
• against financial loss
• by providing compensation
• thereby providing traders with the confidence to
  engage in big business ventures
• Insurance is an invisible export that brings
  foreign exchange.

I received my new car from my insurer as
compensation
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The Importance Of Insurance Cont.

• Life assurance provides a family saving plan as
  it mostly benefits the dependants, should the
  assured die.
• Insurance protects the insured against claims
  from the injury, death or damage to property of
  the third parties.
• It protects employers against financial loss
  arising from claims from employees who may die or
  be injured while on duty.

A house bought after receiving monetary
compensation from an Insurance company.
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How Insurance Operates.

• Insurance operates on the basic rule of Pooling
  Of Risks.
• Pooling of risks is
• when many insured persons pay premium to the
  insurance company, thereby creating a pool
  (piling up/collection) of funds, from which the
  company pays out compensation to those who suffer
  losses.

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How Insurance Operates Cont.

• Insurance is successful with the collection of
  more premiums but the occurrence of fewer risks
• The lucky ones (the fortunate), who do not
  receive anything, pay for the unfortunate.
• The insured persons/institutions must not all
  suffer a loss at the same time, as there cannot
  be enough funds in the pool to pay every one

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Business Risks
Fire causes financial losses in business

• A risk is any danger that may cause a financial
  loss. Examples include Fire, accident, damage
  to property, burglary, theft, death, bad debts,
  poor or bad management, floods, earth quakes,
  etc.
• There are two types of risks namely Insurable
  risks and Non-Insurable risks.

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Insurable Risks

• The are risks that
• can easily be assessed and whose frequency of
  occurrence can be estimated
• can have premiums fairly calculated
• have past statistical records
• can be accepted for coverage by the insurance
  company
• Examples of insurable risks include fire, theft,
  death, claims from third parties, damage to
  property, burglary, bad debts, etc

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Non-Insurable Risks

• These are risks that
• can not be easily assessed and their frequency of
  occurrence can not be estimated
• whose premium can not be fairly calculated
• do not have any past statistical record of
  occurrence
• can not be accepted to be covered by the
  insurance company
• Examples of Non Insurable risks include Bad
  Management, Illegal acts such as theft, losses
  due to change of fashion, natural calamities such
  as earth quakes, etc.

The risk of being caught for performing an
illegal act such as robbery is non insurable.
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Principles Of Insurance

• These are rules or guidelines in insurance which
  must be strictly adhered to. The non-adherence
  to these principles can render ones insurance
  contract being declared null and void.
• There are four main principles of insurance
  namely
• Principle of Indemnity
• Principle of Proximate Cause
• Principle of Insurable Interest
• Principle of Utmost Good Faith (Uberrima Fides)

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Principle of Indemnity

• It states that should the insured suffer a loss,
  he or she must be brought back to the original
  (former) position without being allowed to make
  profit out of it, and that the sum insured is
  directly proportional to the amount of
  compensation.

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Principle Of Indemnity Cont.

• To ensure that principle of indemnity performs
  its function, it is governed by three rules
  namely
• Rule of Contribution
• Rule of Subrogation
• Rule of Average Clause or Under Insurance

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Rule Of Contribution

• This rule states that should one insure the same
  item with more than one insurance company, the
  concerned insurers would each equally contribute
  towards the required sum of compensation.

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Rule of Contribution Cont.

• For example, Mr. Mumba decides to insure his car
  against accident with Zambia State Insurance
  Company, Madison Insurance Company and Goldman
  Insurance company for K30,000,000.

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Rule Of Contribution Cont.

• If the risk occurs and he needs K30,000,000 to be
  brought back to the original position, the three
  Insurance Companies will each contribute
  K10,000,000 towards his compensation.
• This is to ensure that he is brought back to his
  former position without being allowed to make
  profit out of insurance.

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Rule Of Subrogation

• This rule states that Should the insured item be
  damaged beyond repair, once the insured is
  compensated in full, the remains of the damaged
  item would now belong to the insurance company.

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Rule Of Subrogation Cont.

• For example, if Mrs. Chilukushas car (which was
  comprehensively insured) is damaged beyond
  repair, the Insurance can decide to buy her
  another car, and thereafter assume ownership of
  the damaged one.
• Rule of subrogation therefore prevents her from
  making profit by selling the spare parts of the
  damaged vehicle.

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Rule of Average Clause

• This rule states that the insured is his/her own
  insurer for the amount not covered by the
  insurance company.
• For example, if Mr. Ngambi insures his house for
  only 65 of its value, the Insurance Company can
  only compensate him up to 65 of the total sum
  required as compensation.

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Rule Of Average Clause Cont.

• Furthermore, if Mrs. Siwale comprehensively
  insures her car valued at K20,000,000 for
  K15,000,000 and then the cost of repair is
  estimated at K12,000,000.
• Her amount of compensation will be as follows
• Sum Insured X Compensation
• Original Cost
• K15,000,000 X K12,000,000
• K20,000,000
• K9,000,000
• This is what Mrs Siwale would receive, instead of
  K12,000,000 to prevent her from making profit out
  of insurance.

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Principle Of Proximate Cause

• It states that Should the insured suffer a
  financial loss, he/she can only be compensated if
  the risk insured against is the nearest or
  immediate cause of the loss, and if it is not
  deliberately caused by any one.
• For example, if Mr. Mumba insures his car against
  theft, but an accident occurs, there would be no
  compensation.
• Proximate Cause therefore is What Caused The
  Risk?

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Principle Of Insurable Interest

• It states that Only the legal owner of the
  property has the right to insure a property or
  life, as he/she stands to personally experience a
  financial if a risk occurs.

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Principle Of Insurable Interest Cont.

• The importance of the insurable interest is that
  it prevents people who are not legal owners from
  deliberately destroying the insured items in
  order to claim compensation and thus make profit
  out of the loss.
• For example, Mr. Simwinga cannot insure Mr.
  Mumbas car. This is because Mr. Simwinga has no
  insurable interest in Mr. Mumbas car.
• Furthermore Mr. Simwinga may be tempted to
  deliberately destroy the car in order to claim
  compensation and make profit out of the loss.

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Principle Of Utmost Good Faith (Uberrima Fides)

• It states that Both the Insurance Company and
  the Proposer must tell the truth without leaving
  out any material facts relating to the insurance
  contract.
• It must be applied at the time of filling details
  on the proposal form, as the Insurance Company
  uses this information to assess the risk, decide
  whether to accept the risk or not and be able to
  fix a fair premium.

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Principle Of Utmost Good Faith Cont.

• The proposal form therefore acts as a basis for
  insurance cover.
• Furthermore, principle of utmost good faith
  entails that the Insurance Company must honour
  all its promises reflected in the policy.
• Where either the Insurer or the Insured fails to
  follow the principle of utmost good faith, the
  insurance contract is declared null and void.

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Procedure Involved In Taking Out Insurance Cover

• The Proposer may approach the Insurance Broker or
  the Insurance Company directly.
• He/She then obtains a Proposal Form from either
  the Broker or Insurance Company.
• The Proposer completes the Proposal Form in
  utmost good in faith, giving full, accurate and
  detailed information about the property and risk
  being insured against.

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Procedure Involved In taking Out Insurance Cover
Cont.

• Where important information relating to the item
  being insured is not disclosed on the proposal
  form, the contract is nullified.
• The Insurance Company then assesses the risk and
  fixes the correct or fair premium to be paid.
• When the Proposer pays the premium, a Cover Note
  is issued as temporal cover while the full policy
  is being prepared.
• The full Insurance Policy may now be issued
  within a months time.

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Procedure Involved In Making A Claim

• Inform the police about loss immediately it
  occurs.
• Notify the Insurance Company of the loss as soon
  as it happens, as early notification allows the
  company to carry out necessary investigations.
• Complete a claim form, giving full details of the
  loss suffered.
• Insurance Company employees called Assessors
  inspect the damage, assess and determine the
  amount of loss suffered in order to arrive at a
  fair and reasonable amount of compensation.

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Procedure Involved In Making A Claim Cont.

• Claims are carefully examined to ensure that the
  risk insured against was the proximate cause of
  the loss and that the claim is genuine and
  without breaching the insurance contract.
• The Claimant signs an Agreement Of Loss Form
  to bind him/her to accept the amount of
  compensation arrived at.

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Procedure Involved In Making A Claim Cont.

• The Insurance Company settles the claim by paying
  the claimant the money in compensation.
• If for example, another item is bought to replace
  the damaged one, the wreckage is subrogated by
  the Insurance company.

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Types Of Insurance Cover

• These include
• Life Assurance
• Motor Insurance
• Liability Insurance
• Marine Insurance
• Accident Insurance Personal and Property
• Business Interruption
• Cash In Transit

Marine Insurance Most Insurance Companies such
as Professional Insurance Company in Zambia offer
this type of insurance cover.