INSURANCE

1. INSURANCE

2. 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

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

4. 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/compensating the insured should the risk occur

5. 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

6. 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.

7. 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.

8. 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.

9. 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.

10. 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

11. Business Risks 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.

12. 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

13. 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.

14. Principles Of Insurance These are rules or guidelines in insurance which must be strictly adhered to. The non-adherence to these principles can render one’s 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)

15. 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.

16. 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

17. 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.

18. 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.

19. 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.

20. 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.

21. Rule Of Subrogation Cont. For example, if Mrs. Chilukusha’s 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.

22. 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. Ng’ambi 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.

23. 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.

24. 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?”

25. 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.

26. 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. Mumba’s car. This is because Mr. Simwinga has no insurable interest in Mr. Mumba’s car. Furthermore Mr. Simwinga may be tempted to deliberately destroy the car in order to claim compensation and make profit out of the loss.

27. 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.

28. 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.

29. 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.

30. 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 month’s time.

31. 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.

32. 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.

33. 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.

34. Types Of Insurance Cover These include; Life Assurance Motor Insurance Liability Insurance Marine Insurance Accident Insurance: Personal and Property Business Interruption Cash In Transit