In our daily lives we experience
many events that may interfere with
our normal actitivities.These events
technically known as risks or perils
are usually uncalled for since they
may happen without us expecting
them to occur. They are hazardous in
nature that is, they destroy property,
take lives and injure others. But how
do we prevent these or at-least take
precaution? This is where Insurance
comes to play.
Insurance
Refers to the system of pooling risks
together by contributing small sums
of money to a common pool which in
the long run compensates those persons who suffer the actual loss. By
this Insurance companies work by
collecting money from people wishing to get insured,this money forms
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a “common pool” which is used to
compensate anyone insured that has
been faced with a certain risk.
Premium is a name given to the
money paid to insurance companies
for the consideration of undertaking
to compensate a person(s) once an
insured risk occurs.It is calculated
statistically on the basis of past occurred losses by an expert known as
an Actuary.
Insurance vs Assurance
These two terms are commonly used
interchangeably however they greatly
differ in their meaning.Whereas Insurance is used to refer to a compensation policy or contract for events
that may or may not occur ample is
hazards brought about by fire, accidents et cetera, Assurance is used to
mean a compensation contract but for
events that will definitely occur. Examples of these are death and old age.
HISTORY OF INSURANCE
The history of insurance or rather its concept dates back as far as societies
started emerging. Such groups of people lived and conducted a number of
activities such as trade, traveling and others which as a long term perspective required a proper and more efficient way to perform them so as to yield
greater benefits, reduce risks et cetera. This as an incentive paved way for
“Insurance” to be conducted.
The earliest form of Insurance could be seen as an entailment of mutual
aid among community members on the happening of minor hazards such as
if one family’s house gets destroyed, the neighbors are committed to help rebuild it. It could also be seen in the construction of granaries as a protection
against famines. individuals living communally could build granaries so as
to protect and preserve crops for longer periods of time in case a famine is
about to happen and the produce could be distributed equally to the community members.
In a monetary economy however, there existed a medium of exchange
which could be used to finance such a service.This can be observed in the famous Code of Hammurabi which was recorded by the Babylonians as early
as 3rd millennium BC.It was explained in it that if a merchant received a loan
to fund his shipment, he would pay the lender an additional sum in exchange
for the lender’s guarantee to cancel the loan should the shipment be stolen or
lost at sea.
Although not as far back, life assurance also had its early forms such as
seen by the Greeks and Romans in the 6th Century BC when they created
guilds called “benevolent societies”, which cared for the families of deceased
members, as well as paying funeral expenses of members.
Before insurance was established in the late 17th century, “friendly societies” existed in England, in which people donated amounts of money to a
general sum that could be used for emergencies.
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Granaries in Dan-Makaho, Niger
A granary in Kashan, Iran
Two versions of the Code of Hamurabbi at the Louvre in Paris, France
The Syndics of the Drapers’ Guild by Rembrandt van Rijn, 1662
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INSURANCE VS GAMBLING
Insurance and Gambling are two activities that are known interchangeably
worldwide but however vary very much in their way of conduct though however are similar in some few aspects. Many people avoid taking out insurance
in fear of the gambling nature in it since insurance only compensates only
those faced with risks. Meaning those not faced with such indemnified risk
face a loss ie “loose” their money paid out in form of premium paid to the
insurance company. It is however of imperative importance to underline that
insurance is a form of investment to the insured both directly and indirectly.
A form of direct investment can be seen since insurance provides organizations and private individuals with confidence to operate risky ventures while
Indirect investment can be observed since by providing commercial services
and, therefore, contributes to the country’s invisible exports, the repatriation
of interest and dividends from overseas et cetera.
Insurance and gambling are similar in the following ways;
-In both, there is a principle of probability.
-In both, making contracts involves several parties.
-In both, there are principles to be applied and followed.
-In both, contributions are made in small amounts and by many people but
those who benefit are few.
Differences between insurance and gambling are as follows;
-Insurance is legally accepted While Gambling is illegal.
-The insured must have insurable interest in the property insured While There
is no such condition in gambling.
-The risk insured against may never occur While In gambling, the event(betting of who will win) must occur.
-There is neither a loser nor a winner While In gambling there is always a
winner.
-Insurance promotes employment While Gambling promotes idleness.
to the law to make it lawful binding. An insurance contract thus should contain certain features or characteristics.These are namely:
-An offer
-Free consent
-Acceptance
-Competency
-Lawful consideration
Generally speaking, there are two major categories of insurance namely,
general insurance and life insurance. General insurance deals with insuring
property against risk while life insurance deals with insuring against human
lives. On the basis of events insured however, the contract of insurance can
be classified according to the following types:
Personal Insurance. Here the insurer agrees to pay a specified sum of money on the happening of a particular event such death, disease recto the insured
or named person.
Property Insurance. Here the insurer agrees to compensate the insured
against a a particular risk.
Liability Insurance. Here one can insure his/her liability his employees or
to the third party(s) arising out of law or a contract.
Guarantee Insurance. Here an insurer agrees to indemnify the insured
against loss arising out of breach of contract, dishonesty or fraud.
The major known kinds of insurance policies are however a bit different from
these given above since the latter are classified on their coverage and popularity along the mass.They are marine, fire, life and accident.
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Since insurance is a business dealing with everyday clients it should adhere
MARINE INSURANCE
This deals with risks connected with losses at seas. It refers mainly to in-
surance of ships and goods consigned by a ship. A good example of marine
insurance is a cover for ships against piracy while on the high seas for goods
against theft or from going bad while on board. Hence namely there are two
departmental sections of marine insurance, i.e. marine hull section and marine cargo section.
In marine insurance there are many types of policies offered the most famous of them being;
Voyage Policy. This covers losses that may occur for a particular journey.
Time Policy. This covers losses that may occur within a specified period.
Floating policy. This covers losses on particular route for a specified period
Port Policy. This covers the vessel for a period of time while in port.
Fleet Policy. This covers several ships belonging to one owner.
Marine insurance also has losses depending on the severity of the situation
namely;
Actual Total loss. This occurs when a ship is lost at sea or the cargo is completely destroyed.
Constructive total loss. This occurs when the ship is abandoned or the cargo is seriously damaged as to be of no practical use as intended.
General Average. This occurs when some of the cargo has to be jettisoned
in order to secure the safety of the ship and the rest of cargo. In this case the
loss is borne by both the ship owners and the owner(s) of the cargo.
Particular Average. This occurs when part of the cargo or the ship suffers
damage and the partial loss so sustained is borne entirely by the ship owner(s) of the cargo as the case may be.
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FIRE INSURANCE
This contract provides cover for losses caused by fire and other natural di-
sasters like lightning and floods. Such risks may be done intentionally by a
person causing mischief such as arsenalists or may occur as a natural hazard
or circumstance.
The major types of fire insurance are as follows;
Floating policy. This covers property or stock in a warehouse of some owners located at different places.
Excess policy. This provides cover for goods which varies in value or quantity during a certain period of time.
Comprehensive policy. This covers all types of risks not only fire but also
floods, lightning, rebellion et cetera.
Blanket policy. This covers all fixed assets and current assets.
Declaration policy. Here a businessman declares the maximum value of
stock which he may expect to hold during a year.
Reinstated/Replacement policy. Here the insurer reserves the right to replace the property destroyed directly thus the insured does not receive cash
as compensation.
Consequential policy. This provides cover against the loss of profit caused
by dislocation of business caused by a fire hazard.
However for any claim for any loss caused by fire must satisfy certain conditions to make it adhere to the compensation entitled there upon. Such conditions are;
a) The loss must be covered by actual fire or ignition and not just by high
temperature.
b) The proximate cause of loss should be fire.
c) The loss or damage must relate to the subject matter of the policy.
d) The ignition must be either of the goods or the premises where goods are
kept.
e) The fire must be accidental not intentional.
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ACCIDENT INSURANCE
This deals mainly with insuring vehicles against accidents as well as covering
a variety of risks not covered in other forms of general insurance.Accident insurance mainly has two categories namely, Comprehensive policy and Third
party policy.
Comprehensive policy is a cover for all possible types of risks namely loss or
damage to motor vehicle due to accident or theft, personal injuries or death
of the owner or passenger of the vehicle as well as damage payable to third
parties by the owner of the vehicle for accident while Third party policy is a
cover for risks or liability due to damage or destruction to personal property
and includes three main parties, namely the insurer, insured and a “third party” i.e anyone else who suffers injury as a result of the accident.
There also exists other types of accident insurance namely;
Personal accident policy. This is a policy taken out by individuals to cover
against any accident they may ever get involved in, especially those caused by
vehicles.
Employer’s liability policy. This is taken out by employers to protect their
workers against injuries that may occur while at work and during working
hours.
Public liability policy. This policy is taken out by shop owners, factories or
contractors to cover against any claims made by the public as a result of accident or damage to their property or injury arising from the negligence of the
insured and their employees.
Cash and good in transit insurance policy. This covers the loss of cash or
goods in transit between the trader’s premises and branches of the business,
bank and customers.
Fidelity guarantee policy. This covers against the dishonesty of employees
who may steal cash or goods of the business, e.g cashiers, managers, store
men and accountants who are entrusted with the duty of handling large sums
of money.
The major significance this kind of general insurance is that it cover a very
wide range of risks not usually covered by other insurance policies.
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LIFE INSURANCE/ASSURANCE
A life insurance is an insurance contract that provides cover against risks that will
affect human life such as health, old age and others. It can also be defined as the
contract by which one party (assurer) agrees to pay a certain sum of money in consideration of a payment called premium on the happening of a certain event such as
death or reaching old age.
A life insurance or rather assurance has certain features or characteristics such as;
a) It is assurance against human life.
b) The event insured must happen.
c) It acts as a saving.
d) The policy can be used as security by assured to acquire a loan.
e) An assurer pays the assured on death or expiry of the contract.
f) Premium paid depends on the age of the assured i.e. the young person will pay a
lower premium compared to an adult.
g) It is a contingent contract and not a contract of indemnity.
Like other insurance contracts there are some kinds of assurance contract such as;
Whole life policy. This requires payment of premiums throughout the life of the
assured but the sum assured is paid only after the death of the assured and it is paid
to the beneficiaries. Major types are Ordinary Assurance policy, Limited Whole
Life Insurance policy and Convertible Life Insurance policy.
Endowment policy. Here premiums are paid for a specified period only and the
benefit/sum assured becomes payable at the expiry of such period a period or at
death, whichever is earlier.
Medical Insurance policy. This pays for the cost of hospitalization and medical
fees for the insured individuals who are injured or become ill. Its coverage also includes emergency treatment, surgery, dental, vision care and long-term treatment.
Annuity policy. This requires the insured to pay premiums for a specified period
or up to a certain age. The sum insured is payable after he/she stops paying the premium and it is paid periodically until he/she dies.
Joint life policy. This policy is taken for insured life of more than one person e.g.
husband and wife, partners within a partnership firm et cetera. Sum insured is payable and split among the survivors.
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PRINCIPLES OF
INSURANCE
Insurance business is usually governed by a set of principles commonly known as Principles of Insurance.
They are;
Principle of Indemnity.
Insurance should be a contract of indemnity since it indemnifies or restores a person’s financial condition
to once as it were before a happening
of a certain insured risk.
Principle of Proximate Cause.
Here the happening of a certain hazard should directly be caused by a risk
that has been insured against shown
in the policy.
Principle of Utmost Good Faith(Uberrimae Fidae)
Here an insured person should have
disclosed all relevant and truthful information that correlates with the subject matter insured since an insured
places full trust upon the insurer.
Principle of Insurable Interest
For any property insured against the
insurer should be the sole owner of it
and not insure it for someone else.
Principle of Subrogation
On the happening of a risk that has
not completely destroyed the property i.e partial loss, the ownership of the
scrap of the property insured against
will be transferred to the insurer or
insurance company. The Insurer will
however provide full compensation
or may provide to replace or re-instate the subject matter entirely.
Principle of Contribution
For the case of double insurance
where by a certain property is insured
by more than one insurance company, on happening of a certain insured
hazard each insurer will provide compensation in proportion to the sum insured against by each company.
Mitigation of Loss
This Principe states that the Insured
should take all the possible steps to
minimize the loss or damage to the
property covered by the insurance
policy, in case the calamity happens.
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IMPORTANCE
INSURANCE
DOCUMENTARIES IN INSURANCE
In Insurance business there are a number of documents usually prepared for
different purposes in insurance.
The key insurance documents used are;
Policy. This is a document containing the contract between the insured and
insurer setting forth the terms and conditions under which insurance is issued.
Proposal Form. This is a form comprising the request of the prospective insured for a particular insurance policy and signifies his/her willingness to pay
the premium.
Cover note(Binder). This is a document showing that premium has been paid
and received by the insurance company or its agent who now undertakes to
indemnify the insured.
Claim form. This is a form filled by the insured when the event insured against
occur on all the details of the of the loss to claim for compensation from the
insurer.
Assessor’s/Surveyor’s report. Is the report prepared by the assessor after he/
she has surveyed the loss incurred on the particular risk event happened following the receipt of claim form.
Certificate of Insurance. Is a certificate that certifies that the goods imported
or exported particularly under C.I.F(Cost Insurance Freight) basis have been
insured in a particular policy.
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OF
Offers compensation
Insurance compensates the unfortunates
few who actually suffer loss or damages from the risk insured against thus enables the insure to keep running his/her
business without many problems.
Gives confidence to business owners
It gives confidence to businesspersons
to undertake risky investments since
they they are safeguarded against insured risks.
Acts as collateral security
Life assurance and other policies taken
out act as collateral security. Thus, the
holder of the policy can acquire a loan
from financial institutions that provide
business finance.
Acts as a means of saving
A life assurance policy acts as a means
of saving especially for old age. For example, an endowment policy enables
people to save for a period and when the
policy matures they can use the money
they have saved.
Provides employment
Insurance provides employment to
those who work in insurance companies, such as managers, assessors, accountants, actuaries and underwriters.
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Promotes trade
Insurance promotes both home and
international trade because traders
get involved in trading activities,
without fear because of guaranteed
compensation by insurance companies.
Promotes economic growth and
development
Through pooling of resources much
money is collected, some of which
is used to pay claims and some of
which is invested in different ventures, such as repairing the county’s
roads.
Serves as an avenue for investment to traders
It provides commercial services
and therefore contributes to the
country’s invisible exports, helps in
stabilizing the county’s balance of
payment.
Provides Medical support
Modern trends in insurance entails
the use of special cards provided
by an insurance company to the assured which enables them to pay
and cater for health services in hospitals the insurance company are in
contract with.
ORGANIZATIONS PROVIDING INSURANCE SERVICE
In the insurance sector, there exists many companies that seek to provide
insurance to notable parties wishing to be insured.These companies differ in
the management structure and their sources of capital for financing insurance
business.The principal types of Insurance companies are;
Proprietor insurance companies. These are insurance companies whose capital is subscribed by shareholders thus their capital is in form of share capital
which offers shares either to private members or to the public.
Mutual Insurance companies. These are insurance companies which don’t
have shareholders and its members consist of the policy makers themselves.
State insurance companies. These are insurance companies owned by the
state.
HOW DO INSURANCE COMPANIES WORK?
Insurance companies operate on the theory that only a few people out of many
are likely to suffer a loss. If each of these persons contributed a small amount,
there would be enough money to pay compensation to those who have been
unfortunate to suffer a loss.
People/organizations wishing to insure themselves against a possible risk take
out an insurance policy with an insurance company in exchange for paying a
premium. The insurance premiums collected form a pool of liquid funds commonly referred to as an insurance pool from which people who suffer losses because of the insured risks are compensated. The remainder of the fund
provides an important source of finance for insurance companies. The pool is
managed and controlled by insurance companies.
If the risk occurs, the insured is compensated from the common pool. However, the amount paid will be just enough to restore him/her to the state he/she
was in before he/she suffered the loss, i.e the amount given t him will not exceed the amount the value of the destroyed property. For example, if someone
insured his vehicle worth shs.20,000,000 against a road accident, and at the
time of the accident the value of the vehicle is two million Tanzanian shillings,
the insurance company will only give him back two million T.shillings.
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THE LLOYD’S
The Lloyd’s was founded by Edward Lloyd as a coffee house on Tower
Street in 1686 which provided a hub for merchants, bankers and seafarers to
assemble and transact business informally.It also became a popular meeting
place for underwriters, i.e. those who would accept insurance on ships for the
payment of a premium. This brought about the first formal instance of marine
insurance.
Over the years, The Lloyd’s has intergrated and changed its base structure as
well as it has adopted insuring more and more risks. As of today, it guarantees
insuring all possible risks as well as other diverse and niche ones such as protection against hostile takeover bids, insuring the lives on notable celebrities
such as Steve Fossett’s life for $50 million and others.
Lloyd’s is not an insurance company; it is a market of members. As the
oldest continuously active insurance marketplace in the world, Lloyd’s has retained some unusual structures and practices that differ from all other insurance providers today. Originally created as a non-incorporated association of
subscribing members, it was incorporated by the Lloyd’s Act 1871 and is currently governed under the Lloyd’s Acts of 1871 through to 1982.
There are two classes of people and firms active at Lloyd’s. The first are
members, or providers of capital. The second are agents, brokers, and other
professionals who support the members, underwrite the risks and represent
outside customers (for example, individuals and companies seeking insurance,
or insurance companies seeking reinsurance).
It operates as a partially-mutualised marketplace within which multiple financial backers, grouped in syndicates, come together to pool and spread risk.
These underwriters, or “members”, are a collection of both corporations and
private individuals, the latter being traditionally known as “Names”.
The role of the Corporation is to provide the infrastructure for underwriters and brokers to do business. The Corporation acts in a supervisory capacity
to ensure that the market operates efficiently and effectively and that those involved meet certain standards.
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TERMS USED IN
INSURANCE
THE LLOYD’S
1.Insured; The person or business
which takes out an insurance policy and
is promised compensation by the insurance company in the event of loss.
2. Insurer;This is an insurance company which operates the insurance business. It assumes responsibility for helping those who have suffered loss.
4. Premium;This is the amount paid
by the insured to the insurer as a consideration for the insurance cover provided by the insurer. It constitutes the
insurance pool from which those who
suffer losses are compensated. It can be
paid in a lump sum or in installments.
The installments can be paid monthly,
quarterly or annually depending on the
agreement between the insured and the
insurer.
5. Sum insured; This is the value of
the property that is insured as stated by
the owner at the time of applying for insurance. This determines the amount of
premium to be paid. The higher the sum
insured, the higher the premium charged
and the lower the value of sum insured,
the lower the premium charged.
6. Under-insurance; This is when the
insured under declares the value of his
property at the time taking out an insurance. In this case he is charged a lower
premium, but in the event of loss, he is
only paid the sum insured, which is less
than the actual value of goods or property lost.
7.Over-insurance; This is when the
insured over declares the value of his/
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her property at the time of taking out the
insurance, i.e, he/she over insures the
property. He/she is charges high premium because of the value stated but in
the event of total loss, he/she will be
paid only the actual value of the property lost.
8. Claim; This is a demand for compensation submitted to the insurer by the insured after the occurrence of the insured
risk.
9. Liability; This is an obligation on the
part of the insurer to compensate the insured when the risk insured against occurs.
10. Third party; There are normally
two parties involved in an insurance contract, i.e, the insurer and insured. Any
other person who becomes involved in
some way or another is referred to as
a third party, example, in motor insurance, the third party is the person who
is injured by the insured vehicle or any
other item destroyed by the insured vehicle.
11. Reinsurance; This is where one
insurance firm which insures another
firm or person against a big loss, also
insures itself against such a big claim
with another insurance company called
the re-insurer. The insurance company
can re-insure part or all of it with another company. In the event the event
of a loss, the insured makes a claim to
the company which issued the policy.
The insurer also makes a claim to the
re-insurer. When the insurer settles the
claim, the value is then given to the insured by the insurer.
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12. Surrender value; This is the money paid back to the insured if he/she decides to cancel the insurance agreement
before the end of the period specified. In
this case, the policy holder does not get
back all of the premiums already paid as
a certain amount is deducted to cover the
expenses incurred while preparing the
policy.
13. Settlement; the money paid to the insured by the insurer to fulfill the claim
after a loss has been sustained.
14. Loss; The occurrence of the event
which has been insured against. If the
entire property insured is destroyed, the
loss is said to be total loss. If only part of
the property insured is destroyed, the loss
is said to be partial.
15. Co-insurance; This refers to a situation where the value of the property is
too great to be protected by one insurance
company. The risk of the loss is spread
among many insurance companies with
each company insuring only a portion.
The company with the largest share of
the value is called the leader and assumes
responsibility for all the documentation
and handles claims on behalf of other
co-insurers.
16. Subject matter; This refers to an
item/property in which the insured has
insurable interest. It is an item that is insured with the insurance company.
18. Average clause; A clause in the contract which requires the insurance company to pay only for a proportion of the
damage. This prevents people from making a profit from under-insurance.
19. Endorsement; Is a special condi-
tion appended or affixed to the policy
to provide for a certain special requirement not otherwise found in the printed
text of the policy.
20. Warranty; This is a promise by the
insured to pay the insured periodically
until he dies.
21. Exgratia payment; These are payments made without prejudice to the
insured in respect of losses of which
the insurer is not legally liable or where
liability is open to argument and are
common to all branches of insurance
excep life insurance.
22. Representation; This is any statement made by a proposer or his his
agent, not being a warrant which forms
a portion of the premises from which
the other contracting parties draw their
conclusions either to accept or reject
the contract and by which they ae guided in fixing the terms and adjusting the
conditions thereof.
23. Nomination; Means to nominate a
person or persons to whom the assured
amount may be paid in case of death of
the assured person.
24. Assignment; Means the act of
transferring the title and interest in the
policy to any other person.
25. Days of Grace; Are the days after
the due date of the premium.
MAGAZINE REFERENCES;
Wikipedia, Masasi and Commerce for
East Africa
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