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PRINCIPLES OF BUSINESS
FORMS 4: INSURANCE

Students should be able to:

• Evaluate the principles upon which insurance is based
• The concepts of:
(a) pooling of risks
(b) subrogation
(c) proximate cause
(d) indemnity
(e) utmost good faith
(f) contribution
(g) insurable interest

• Explain the various types of insurance policies

• Types of insurance policies: life and non-life
• Explain how insurance facilitates trade
• Explain the value of insurance coverage in lowering the risks associated
with business.

Insurance – Insurance came about due to unexpected events happening and

individuals not being able to restore the losses themselves e.g., fire and flood.
Insurance is the transferring of immediate risk facing an individual or group by
them pooling the risk of loss of all individuals in the group together.
It is actually putting aside some money in case some unfortunate event happens.
It provides compensation for loss or damages in these events. Insurance is for
inanimate items e.g., cars, houses goods etc.

Assurance provides for an event that will happen such as death. This will
always result in payment because an investment element is combined with an
insured amount. The correct term for insuring people is Assurance.
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THE CONCEPT OF POOLING RISKS:

Risks are either insurable or non-insurable. Companies will insure against risk
that they can calculate. There must be a large number of persons requiring
insurance for the same type of risks otherwise the pooling of risks is not
functional. Pooling risks is the main principle upon which insurance is based.
Pooling means that the loss suffered by a small number of insured
individuals is spread over the total group of people insured.
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A premium is paid by a number of persons facing similar risks in the pool. This
is used for compensation against any incontinency.

Risk transfer means shifting the responsibility of bearing the risk from one
party to another. A premium is paid per month into a pool for compensation
against any unfortunate event.

INSURABLE vs NON- INSURABLE RISKS

Risks are either insurable or non-insurable. Insured risks are those that the
insurance company can calculate such as the insuring goods against theft or fire.
Non insurable risks are loss of income due to a fall in sale.
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The insurance Guiding principles are:

1) Utmost good faith / Uberrimae fidei or "uberrima fides"
2) Insurable interest
3) Proximate cause
4) Indemnity
5) Subrogation
6) Contribution
7) Average clause or Under-insurance

The insurance Guiding principles are:

Utmost good faith / Uberrimae fidei or "uberrima fides"

This is a very important principle and it is the root of all contracts between
insurance companies and policy holders. The inured party must reveal all the
relevant and important information about the thing or the person that is insured.
If a person does not reveal all the necessary facts, then they are in breach and
cannot claim on the insurance company. Example a person buying life insurance
is asked to disclose if they have any chronic illness.
NOTE: An uberrimae fidei contract is a legal agreement, common to
the insurance industry, requiring the highest standard of good faith
during disclosure of all material facts that could influence the decision
of the other party. Uberrimae fidei or "uberrima fides" literally
means "utmost good faith" in Latin.
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Insurable interest - A person cannot take out an insurance policy to protect

property in which they do not have a financial or insurable interest. The
insurance company will only insure against a risk if one is going to suffer and if
the thing it is insured against occurs e.g., fire. A person cannot take out
insurance on a friend house for fire.

Proximate cause – This ensures that the claim on the insurance company will
only be paid if the loss that is suffered is a direct result for what it was insured
against. Example, if house was destroyed by fire and it was insured against
flooding, the insurance cannot be claimed for loss due to fire.

Indemnity- The person will be compensated for the actual amount lost. The
insured will not be able to make a profit in any way. Example, if your car was
destroyed in an accident, you will not receive a new car but only the value or
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worth of the car. The insured should be ‘returned to the position they were in
before the loss’
This does not apply to a person losing his life because no money can
compensate against loss of life.

Subrogation- This ensures that the indemnity principle actually works. If there
was an accident and a car was wrecked, the insurance company will replace the
car to its value and salvage the wreckage. The car is salvage because the person
might get a different car and then sell the wrecked car. The insured person will
not in any way benefit or profit from the loss.

Contribution- This means to ‘take the place of.’ This term is relevant if the
same property is insured by two or more companies. Example if a house is
valued at 4 million and insured with two insurance companies A for 3 million
and B for 1 million, then in case of a loss the insured will not benefit. Company
A will only pay 3/4 of the value of the loss and company B pays only a ¼.

Average clause or Underinsurance - This allows the insurance company to

compensate the insured in the same percentage or ratio that he is insured against
at current value. Example, a man insures his house two years ago for $4 000
000 and it is now valued at $8 000 000. If the damages to his house is calculated
at $200 000, he will only receive compensation of $100 000. This was because
the business was worth half the value two years ago when it was insured.
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Also, an insured person may try to reduce the cost of insurance by stating that
‘the contents of a house is worth $50 000 when in fact they are worth $100 000.
If a robbery occurs, the person will only be paid $50 000.

THE ROLE OF INSURANCE

✓ It is a means of investment

✓ Provides coverage against personal risks

✓ Provides a source of capital since they are institutional investors

✓ They take on many of the risks of firms, therefore, industry is encouraged

✓ It allows for an improved standard of living. This is because insurance

companies facilitate trade enabling persons to enjoy a wide range of goods
and services.

✓ It transfers risk as it is very risky for traders to send goods over long
distance and different climates.

✓ It provides contributions to the balance of payments due to earnings on the

invisible trade services account
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TYPES OF INSURANCE POLICIES

There are two types- Life assurance and non-life insurance.
Life Assurance- The insured persons cannot be compensated.
• Whole life policies – Policies are payable on the death of the
insured. However, the person stops paying the premium at age
sixty.

• Term policies- An example is mortgage policies. Persons who need

mortgages on their houses will subscribe. In the event of death, the
policies are used to pay off the mortgage.

• Endowment policies _ These policies allow for a specific sum of

money to be paid on a specified date or on the death of the policy
holder, whichever comes first. They allow persons to share in the
profits of the company, but higher premium is paid.

• Special policies- These are developed to meet the need of specific

groups or employees e.g., Guardian Life/Sagicor
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• Home purchase policies – These link the proceed of an investment

policy to the purchase of a house

• Unit linked policies – These provide ordinary life coverage as well

as investment in a unit trust e.g., OMNI or SCOTIA MINT

Non -Life Insurance/Business Insurance

Marine Insurance
• Hull insurance – provides coverage for a vessel and its fixtures

• Cargo insurance- coverage for loss or damage to cargo (indemnity to the

purchaser of goods being shipped)

• Freight insurance – Charge for carrying cargo is given to the ship owner.
The insurance company provides indemnity to the ship owner if he has to
repay the charge if he fails to deliver.

• Ship owner’s liability insurance – Gives the sip owner coverage for a
number of events which may be his fault or cause by his employees e.g.,
damage to another vessel through collision or injury to crew.

HOW DOES INSURANCE FACILITATE TRADE?

Transfer the risk from the company/person transporting the goods to the
insurance company. That is coverage is provided for vessel and goods. In
case of any events, the owner and the transporting companies is compensated
for loss or damage of goods.

Fire, Motor or Aviation Insurance

Motor insurance has four categories and is compulsory for all drivers.
• Minimum legal coverage – for injuries to third parties on public
roads. A third party includes all others except the insurer and the
insured
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• Third party coverage – The same as above but provides compensation

for property and equal fees of third party

• Third party fire and theft- For injuries to third parties on public roads.
Compensation of property and legal fees of third party; coverage for
theft of car and for damage caused by fire.

• Comprehensive coverage – For injuries to third parties on public

roads. Compensation of property and legal fees of third party;
coverage for theft of car and for damage caused by fire. Also provide
for damages to insured vehicle, personal injury to driver or damage to
personal possessions in the car.

Aviation Insurance-Covers aircrafts against damages by accident and the

operators against claims from injury or the death of passengers.
Accident insurance – property – Covers a number of risks relating to any type
of property. This includes accidental damage to machinery, vehicles, deliberate
damage caused by vandals, burglary and loss of animals or stock.
Personal accident Insurance-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. This insurance is
usually taken out by celebrities.
Liability insurance-coverage is provided for events which may be made
against the insured e.g., racers
Public liability –Coverage is provided by firms who may have to pay
customers for injury to their persons or property by their short comings or
negligence e.g., slipping on a wet floor
Employer’s liability –Employers are required by law to insure their employees
Fidelity guarantee– Coverage is provided against theft by employees
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THE VALUE OF INSURANCE COVERAGE IN LOWERING THE

RISKS ASSOCIATED WITH BUSINESS

In operating businesses, owners or employers expose themselves to many risks.

Insurance is used to minimise risks faced by employers.

Businesses face risks in the equipment used (malfunction); workers (harmed on

the job); customers (being harmed on business premises; natural disasters
destroying buildings or inventory.

Insurance is crucial to financial and organizational stability because liability

can quickly lead a business and its owners into bankruptcy.

Liability insurance protects the company from lawsuits due to negligence,

personal injury, damage to property caused by defective and unsafe products.
For doctors- protects them against claims of malpractice.

Property insurance is necessary for firms that own or rent buildings against
vandalism, fire, etc

Employment insurance is needed if a worker is hurt on the job, exposed to

dangerous material. operating dangerous machinery. Some companies are
protected from employees filing for unemployment benefits

Commercial auto insurance is necessary for companies in minimising costs of

repairing or replacing vehicles or in case the vehicle transporting goods has
been hijacked.