Principles of Business

Topic: Insurance
Insurance
This refers to providing cover for an event that might happen.
Events include car accidents, destruction of house and contents by fire or flood, hurricane,
theft/burglary
Assurance
This refers to providing cover for an event that will happen such as death.
Important Terms:

 Insurable risk: Insurable risks are risks that insurance companies will cover. These
include a wide range of losses, including those from fire, theft, or lawsuits.
However, no insurance company will cover every risk. Some losses are simply
impossible to value or too costly, too probable, or too susceptible to
manipulation. These are known as uninsurable risks.
 Pooling of risk: Risk pooling is the sharing a common risk evenly among a large number
of people, where the policy holders pay a certain amount of money for the period. It is
from the pool of funds where persons will be compensated where necessary.
 Insured: a person or organization covered by insurance.
 Insurer: an individual or company who through a contractual agreement, undertakes to
compensate specified losses, liability or damages incurred by another.
 Third party: this refers to any other party except the insured or the insurer.
 Premium: This is a specified sum of money paid by insurance policy holders every
period.

PRINCIPLES OF INSURANCE
1. Utmost good faith: This principle states that the insured must give all relevant
information about the thing or person to be insured.
2. Insurable interest: To prevent persons from profiting from the insurance, an insurance
company will insure against a risk only if the insured would suffer if the thing insured
against happens.
3. Proximate cause: This principle states that a claim will only be honoured if the loss
suffered is as a direct result of the insured risk happening.
4. Indemnity: This refers to compensation for the loss sustained. The idea of indemnity is
to restore the insured/person to where he/she was before the loss.
 5. Subrogation: This means that the insurer takes the place of the insured. It is the right of
an insurance company to get back the money that it pays to someone with an insurance
contract from the person who has caused the loss, injury, or damage.
6. Contribution: Contribution, as used in the insurance industry, is the principle holding
that two or more insurers each liable for a covered loss should participate in the
payment of that loss the insured cannot make a profit by claiming the loss of one
subject matter from different policies or companies.
- Contribution is where two or more insurers come together to compensate the
insured to ensure that no profit is made by the insured
7. Average clause: This states that the insured will be compensated in the same
proportion or ratio that he is insured at today’s value.
- The Average Clause is a policy term that restricts the total payout based on the
proportion of the value covered
Types of Insurance Policies
There are two main types of insurance policies
a. Life Insurance
b. Non-life Insurance

Life Insurance Policies

Life insurance is sometimes referred to as assurance rather than insurance.

Types of life insurance policies

i. Whole life policies: This provides for payment to be made after the death of the
insured. Typically the premiums are paid quarterly or annually by the person whose
life is insured, or by his/her spouse. The idea is that when the insured person dies,
someone will benefit from the policy (for example a spouse or dependent)
ii. Endowment policies provide a payment of a sum at a certain age or on the death of
the insured, whichever occurs first. This provides not only for dependents but also
pays out useful sum of money for the insured if he/she survives the period covered
by the policy.
Others are:
iii. Term policies
iv. Special policies

Non-life Insurance
a. Marine Insurance:
i. Hull insurance covers damage to the vessel itself and all its machinery and fixtures
ii. Cargo insurance covers the cargo the ship is carrying
iii. Freight insurance is a customary insurance taken out to cover if, for some reason,
the shipper does not pay the transport (freight) charges to the ship owners
iv. Ship owner’s liability refers to a vessel owner’s responsibility to insure against a
wide variety of events, such as a collision with other vessels or a dock, injury to crew
members or passengers and polluting beaches
Fire, motor, aviation
Fire insurance provides compensation for losses due to fire, but also those caused by
other explosions, flood broken pipes, and burglary and so on.

Consequential loss policy: This will indemnify (compensate/reimburse) an owner for loss
of profits he would have earned if the business were still operating
Motor insurance is compulsory for all drivers and has 4 categories
a. Minimum legal owner: For injuries to third parties on public roads only.
NOTE: a third party includes all others excluding the insured and the insurer
b. Third party cover: This provides cover for property and legal fees of the third party
c. Third party, fire and theft: This provides cover for property and legal fees of the third
party plus cover for theft of vehicle and for damage caused by fire
d. Comprehensive: This provides cover for property and legal fees of the third party
plus cover for theft of vehicle and for damage caused by fire. In addition this covers
damage to the insured’s vehicle, personal injury to the driver and loss of or damage
to personal possessions in the vehicle
Aviation Insurance
This covers aircraft damage by accident and the operators against claims from injury or
death of passengers, crew or third parties.
Accident Insurance
Property covers a number of risks related to any type of property, including accidental
damage to machinery, plate glass, vehicles, burglary, and loss of animal or stock for
different reasons
Personal Accident Insurance
This refers to accidents caused by a wide range of risks to persons or groups of persons.
Compensation is provided for losses due to total or partial disability arising from
accidental causes
Celebrities take out this type of this type of insurance in case they are injured and
cannot work for an extended period.
 Liability insurance
Liability insurance policies provide cover for events which may be made against the
insured. Motorists, ship owners and airline operators are required to have these
policies.
Public liability
Provides coverage for firms which may have to pay claims for injury to persons or
property caused by their shortcomings or negligence.

Employer’s liability
Employers are required by law to insure their employees for disease or injury arising
from any damage while they are at work. Employers are liable (obligated) to
compensate their employees for loss.
Fidelity guarantee
Insurance companies will provide compensation against theft by employees
Role of insurance

 Insurance companies allow us to enjoy an improved standard of living because they

allow us to get a wider range of goods and services
 Insurance provides coverage against personal risks which individuals would not be able
to manage
 Insurance provides contributions to the balance of payments due to earnings on
invisible trade
 Insurance companies offer financial protection for consumers.
 Insurance companies help businesses mitigate risk and protect their employees
 Insurance companies help keep our farms operating

Business faces several risks, including and hence my want to take out insurance policies:

 If one or both of the owners become ill for an extended length of time the business
could collapse
 Employees and customers could be injured on the business site
 A large amount of money is handled and is at risk of theft
  If a faulty product (for example a wheel or tyre) is supplied, it could prove dangerous
and lead to a claim against the company

How does insurance facilitate/helps trade?

Facilitate: make easy, allows something to run smoothly

 Insurance companies encourages industry and facilitates trade by taking on many of

the risks of the firm
 Traders would not send goods across so many miles from one country to another if they
were not assured that they would be compensated for losses sustained in transit
 Insurance companies provide a source of capital since they are institutional investors
NOTE: An institutional investor is a company or organization that invests money on
behalf of other people
 Insurance companies are also involved in real estate, providing buildings, offices, plazas
and shopping centres thus helping in the development of the construction and other
related industries
 Provides Safety and Security to Individuals and Businesses
 Generates Long-term Financial Resources
 Promotes Economic Growth: The Insurance sector makes a significant impact on the
overall economy by mobilizing domestic savings. Insurance turn accumulated capital
into productive investments. Insurance also enables mitigation of losses, financial
stability and promotes trade and commerce activities those results into sustainable
economic growth and development. Thus, insurance plays a crucial role in the
sustainable growth of an economy
 Provides Support to Families during Medical Emergencies: Medical Insurance is a policy
that protects individuals financially against different type of health risks. With a Health
Insurance policy, an insured gets financial support in case of medical emergency.

 Spreads Risk: Insurance facilitates moving of risk of loss from the insured to the insurer.
The basic principle of insurance is to spread risk among a large number of people. A
large population gets insurance policies and pay premium to the insurer. Whenever a
loss occurs, it is compensated out of corpus of funds collected from the millions of
policyholders.