INSURANCE
Insurance protects us from Insurance also protects us from
financial losses caused by such financial losses that may be
fatal accidents 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
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
Objectives Cont.
State and explain the principles of insurance
Outline the procedure involved in taking out
insurance cover and in making a claim.
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 Professional Insurance Company in
restoring/indemnifying/comp Lusaka.
ensating the insured should
the risk occur
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
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.
The Importance Of Insurance
• It protects the insured
against financial loss
– by providing compensation I received my new car
from my insurer as
compensation
– thereby providing traders with the confidence
to engage in big business ventures
• Insurance is an invisible export that brings
foreign exchange.
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
A house bought after receiving against financial loss arising
monetary compensation from an from claims from employees
Insurance company.
who may die or be injured
while on duty.
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.
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
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.
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
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 The risk of being caught for
performing an illegal act such as
• Examples of Non Insurable risks robbery is non insurable.
include: Bad Management, Illegal
acts such as theft, losses due to
change of fashion, natural
calamities such as earth quakes,
etc.
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)
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.
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
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.
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.
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.
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.
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.
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.
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.
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?”
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.