LEARNER’S STUDY GUIDE Analyse the Financial Services industry and the role of insurance in a business environment (12168) NAME: ORGANISATION: COURSE NO.: OR RPL: Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Contents Instructions to the learner 2 UNIT 1 Different financial services (SO1) 7 UNIT 2 Important insurance needed for a business (SO2) 29 UNIT 3 Contract of insurance in a business entity (SO3) 42 UNIT 4 Negotiating an insurance contract to meet the needs of a selected business enterprise (SO4) 49 Answers to self-tests 62 Addendum 1 68 Addendum 2 75 Addendum 3 78 Version 1 2020/04/08 1 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Instructions to the learner Introduction Welcome Welcome to the learning intervention that deals with the analysis of the Financial Services industry and the role of insurance in a business environment. This learning intervention forms part of a level 4 Skills Programme - Analyse the Financial Services industry and the role of insurance in a business environment, which enable you to meet the minimum requirements to be “fit and proper” in terms of the Financial Advisory and Intermediary Services (FAIS) Act 37 of 2002. Purpose of this learning intervention This learning intervention analyses financial services for commonality and difference and introduces the need for insurance in a business entity. The focus is knowledge, skills, values and attitudes in relation to the business context. Overall outcomes By the end of this learning intervention, you should be able to analyse the different services that are classified as financial, explain the different kinds of insurance that are important in a business enterprise, explain a contract of insurance in a business entity, and negotiate an insurance contract that meets the needs of a specific business enterprise Target audience This learning intervention is intended for people who need to analyse the financial services industry and the role of insurance in a business environment Delivery medium This training will take place in the form of self-study. In other words, you are required to work through this self-study guide and complete the included activities. The activities are comprehensive, practical and experiential in nature. They are based on “real work” where you work with real workplace scenarios and case studies. Prerequisites Learning assumed to be in place You should be competent in Communication, Mathematical Literacy and Financial Literacy at NQF Level 3 Learner’s roles You are required to and work through this self-study guide, responsibilities complete activities, Version 1 2020/04/08 2 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Introduction to this self-study guide ask for guidance and support when required, and complete the assessment. Analysis of the Financial Services industry and the role of insurance in a business environment are the central themes of this training and are discussed in detail in this self-study guide. This guide makes use of icons to guide you in your learning process below is a description of these icons: Icon Meaning Icon Meaning Self-tests and activities Assignments and assessments Study Outcomes Read Action verbs This guide uses action verbs in its learning outcomes. Action verbs tell you what you must DO. Action verb Explanation Apply Make use of the relevant rules; put into practice. Analyse Put into a specific order or relation. Describe Show by clarifying the scenario Explain Can you write in your own words to explain? Identify Ascertain the characteristics Indicate Show by using examples origin, nature or define The diagram below illustrates the broad process to follow when doing an analysis of the Financial Services industry and the role of insurance in a business environment and will also illustrate how the self-study guide is structured. Version 1 2020/04/08 3 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Analysis of the Financial Services industry and the role of insurance in a business environment (12168) UNIT STUDY READ SELF-TEST/ ACTIVITY ASSESSMENT Start here UNIT 1/SO1 Analyse the different services that are classified as financial. The outcomes for this unit The content of Units 1.1-1.5 Study the examples of four major holding companies in Addendum 1 Complete Self-test 1 UNIT 2/SO2 Demonstrate knowledge and understanding of the kinds of insurance that are important in a business. UNIT 3/SO3 Explain a contract of insurance in a business entity. The outcomes for this unit The content of Units 2.1-2.9 Complete Self-test 2 The outcomes for this unit The content of Units 3.1-3.4 Complete Self-test 3 UNIT 4/SO4 Negotiate an insurance contract to meet the needs of a selected business enterprise. The outcomes for this unit The content of Units 4.1-4.6 Study the examples of a typical risk questionnaire in Addendum 2. Complete Self-test 4 Start preparing for your final assessment Page 1 Version 1 2020/04/08 4 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Unit standards The overall outcomes and specific outcomes of this learning intervention are aligned with registered Unit Standard 12168. This means if you are able to demonstrate competence in the learning outcomes, which are aligned to the specific outcomes of the Unit standard you will qualify for credits, which will contribute towards the 120 credits required for a national certificate at Level 4. If you are unable to demonstrate competence, you will not obtain any credits for the unit standard. This learning intervention is aligned to the following unit standard as illustrated in the table below: Unit standard Title Analyse the Financial Services industry and the role of insurance in a business environment Unit standard number 12168 NQF level Number of credits 4 9 This means a total of 9 credits towards a National Certificate. How is this self-study guide made up? This course has four units each unit corresponds with a Specific Outcome (SO) as indicated in the SAQA documentation (Addendum 3). Each unit has a number of sub-units, these subunits correspond with the assessment criteria (AC) as indicated in the SAQA documentation. Note: SO1AC1 refers to Specific Outcome 1 Assessment Criteria 1 Assessment In order to obtain the 9 credits for Unit Standard 12168, as discussed previously, you must provide evidence of your competence after working through this self-study guide. Providing evidence of your competence will occur during the assessment process. The laid down policies, procedures and related issues regarding assessments will be explained to you before the assessment takes place. You will also be given an overview or instructions on how the assessment will take place, what evidence you must produce, how you must prepare yourself, etc. A qualified assessor or your line manager will guide and support you throughout this process. Resources The following resources will assist you in preparing for your assessment: Version 1 2020/04/08 5 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Our wish to you Reference Availability Multimark III ® Policy wording and all the Schedules and Specifications Any insurance company or short-term insurance personnel Everything of the best in your studies. Enjoy every moment that you spend studying. It is time well spent in making sure of your future. Version 1 2020/04/08 6 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment UNIT 1 Different financial services (SO1) After completion of Unit 1 you should be able to do the following: Specific outcomes for this unit Indicate the similarities and the differences between services that are classified as financial. Analyse business activities that are common to most financial service providers and give an indication of commonalities and differences of these services. Identify changes in the structure of the financial services sector and indicate how these changes will impact on the sector and the consumer. Analyse the four main holding companies in terms of links to other financial organisations. Identify financial organisations listed on the JSE and explanation why some financial organisations choose to list locally and offshore. Study the material for each sub-unit before moving onto the activities. 1.1 Various categories of financial services (AC1) Categories of financial services The South African financial services sector can be said to be very sophisticated and developed, by world standards. Broadly speaking the categories of financial services are Licences Version 1 2020/04/08 micro financiers, banking, capital markets, collective investment schemes, insurance, retirement funding, and medical aid. The provision of any of these financial services is regulated by law, and any company wishing to provide these services must be licensed to do so, as must any financial intermediary, or broker, who assists with the procurement of any of these services. 7 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Regulator A regulator ensures that the particular industry functions in accordance with the laws passed by Parliament. The main purpose of regulating these markets is to ensure an orderly market and protection of the consumer, in line with international trends and requirements. Heavy penalties are applied to any organisation, or company, that fails to abide by the laws. Usury Act The Usury Act 73 of 1968 governs the maximum interest rate which can be charged a borrower, who is defined as follows: any person to whom a money lender has granted a loan of a sum of money in terms of a money lending transaction The definition of a money lending transaction includes the purchase of goods, the use of a credit card, and the purchase or lease of movable and immovable property. However, the Usury Act does not apply to loans of up to R10 000. Microfinanciers Loans below R10 000 are exempt from the Usury Act. This is the area where micro-financiers direct their marketing. They are able to provide loans at an interest rate they consider fair for the risk they take. It is said that the micro-financier operates outside of the banking realm. Traditional banks also provide loans under R10 000, but only to persons that the banks consider a safe risk. The micro-financiers, therefore, concentrate their market on those persons who are not serviced by the traditional banks, or who have a credit history that makes them a high risk. Micro-financiers have a significant role to play in extending credit facilities to the un-banked and also allowing these individuals to build a credit track record, which should ultimately enable the individual to access the formal banking sector’s credit facility agreements. Micro Finance Regulatory Council In the past, certain unscrupulous micro-financiers charged exorbitantly high interest rates and denied traditional banks access to the records of good paying clients, knowing that they could lose the business due to lower interest rates. This prompted Government to intervene and force the microfinanciers to form, and become members of, the Micro Finance Regulatory Council. In May 2004, there were 1 641 registered micro-financiers, of whom 245 were black. Traditional banking sector Version 1 2020/04/08 The banking sector is regulated by the supervisory division of the South African Reserve Bank (SARB). The banking sector can be broadly categorised into commercial banks and merchant, or investment, banks ranging in size from small niche to large banking concerns. 8 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Equity financing Equity financing is where the business sells shares in the company. The investor (the person or entity) who purchases shares acquires ownership in the company for the percentage of shares purchased. Investors do this in the hope of achieving greater returns than those providing loan capital at a fixed rate of interest because they will share in the profits of the business and, if the business does really well, the value of their shares will also increase. Purchasing shares in a business is also referred to as acquiring stock in the business. An investor can purchase shares in a business via a private placing or in a company that is registered and listed on the Johannesburg Securities Exchange (JSE). JSE Companies listed on the JSE have to comply with the JSE’s regulations. This gives the investor the added confidence that the company has to comply with the minimum requirements of the JSE, whose terms of listing are strict and require total transparency as to the financial activities of the company concerned. Investing in listed companies is seen as having less risk than investing in private companies. The JSE, therefore, provides an important vehicle whereby investors can invest their money in businesses and whereby businesses can raise finance. Companies list on the JSE in particular categories. Examples are resources (mining, oil, and gas), basic industry (chemicals, forestry and paper, steel, construction, and building materials), and financials (investment companies, banks, niche financials, life assurance, insurance, and real estate). To assist businesses not meeting the requirements of a primary listing to raise money, in the late 80s, the JSE introduced a category for the development capital market, also known as venture capital. This enabled start-up and smaller companies to raise finance via the JSE. AltX Until recently, the only stock market in South Africa was the JSE. To promote the equity financing of small and medium companies, the first alternative exchange in Africa, named AltX, was launched by the JSE on 27 October 2003. AltX replaced the venture and development capital markets established by the JSE. Collective investments Collective investments are investment schemes in securities (shares that are listed on the JSE and other securities exchanges), property, and participation bonds. The securities and property investment schemes are also referred to as unit trust funds. Version 1 2020/04/08 9 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Unit trusts Unit trusts can be purchased in a single lump sum or on a monthly basis by contributing a regular monthly payment into the scheme. This makes unit trusts an ideal investment vehicle for private individuals who may wish to invest small amounts on a regular basis. The individual investor funds are pooled with those of other investors, and these funds are invested on behalf of the investors by experienced fund or asset managers, and each investor owns “units” in the fund. The funds have particular investment criteria. Some unit trust funds devote their clients’ funds to purchasing a mixture of shares on the stock exchange, while others purchase only those in a particular sector, such as financial, industrial, or property shares. There are also unit trust funds which devote their clients’ funds to investments outside of the stock exchange, such as fixed interest bonds or the money market. In this way, unit trusts cater for small investors providing differing levels of risk which the investor wishes to take. Insurance The assessment criteria that follow contain a lot more detail on the insurance sector, and therefore, we will only consider a brief overview of the insurance sector here. Short-term insurance Typically, we think of personal lines insurance for individuals, such as householders, all risks, and motor insurance, when we think of short-term insurance. For businesses, short-term insurance includes fire, business interruption, theft, money, employee dishonesty, motor vehicles, and other business risk insurance covers. Long-term insurance Long-term insurance pertains to life insurance, investment policies, and individual retirement annuity policies. Employee benefits Employee benefits include group pension and provident funds and group life and disability insurance. Medical aid This includes both individual and group medical aid schemes. Funeral policies Both the long-term insurance companies and friendly societies provide funeral insurance. While long-term insurance companies also provide other products, friendly societies only provide funeral insurance. Intermediary services Many of the financial services described above are provided to the client via an intermediary who is also referred to as a broker. Some products are only available to the client directly from the financial service provider, whilst others are available either directly or via an intermediary. There are some financial services that are only available via an intermediary. Version 1 2020/04/08 10 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment For example, a client may apply directly to a bank for a home loan or he could use a mortgage broker, who is a person who specialises in arranging mortgages at the best interest rate. Shortterm insurance is available directly from the insurance company or via an intermediary. If, however, you wish to invest in shares in a company listed on the JSE, you can only do this via a stockbroker. South African Reserve Bank (SARB) Monetary policy SARB plays a central role within the financial services industry and is often referred to as the central bank. Activities of SARB include the following: Monetary policy Statistical and economic information Payment and settlement systems Bank supervision Banknotes and coins Exchange controls The Reserve Bank is responsible for setting and implementing an acceptable monetary policy, which is designed to enhance the country’s economic stability and development. Although SARB is a privately owned bank (not owned by Government), it acts as Government’s banker and assists Government in controlling the country’s liquidity and interest rates. The main functions are to perform domestic as well as international banking and treasury services, manage the gold and foreign exchange reserves of the country, implement the country’s interest rate policy, act as funding agent of Government, and facilitate the effective functioning of the domestic financial markets. SARB regards its primary goal in the South African economic system as the achievement and maintenance of the country’s financial stability, which would be evidenced by an effective regulatory infrastructure, effective financial markets, and effective and sound financial institutions. Statistical and economic information Version 1 2020/04/08 SARB collects, processes, interprets, and publishes economic statistics and other information. To this end, SARB publishes quarterly bulletins and annual economic reports. The data these publications contain are a major source of information for policymakers, analysts, and researchers. 11 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Payment and settlement systems SARB provides an inter-bank settlement service via a real-time electronic settlement system called the South African Multiple Option Settlement (SAMOS) system. Besides single settlements between banks, SAMOS is also used for the settlement of obligations arising out of retail payment clearing and the equity and bond markets. SARB oversees the safety and soundness of this national payment system and implements risk-reduction measures to reduce systemic risk. Bank supervision SARB is responsible for bank regulation and supervision in South Africa. The purpose is to achieve a sound, efficient banking system in the interest of the depositors and the economy as a whole. This function is performed by issuing, and controlling, banking licences and monitoring their activities in terms of either the Banks Act 94 of 1990 or the Mutual Banks Act 124 of 1993. Banknotes and SARB has the sole right to make, issue, and destroy banknotes coins and coinage in South Africa. The SA Mint Company, a subsidiary of SARB, mints all the currency coins that are allowed to be used as legal tender in South Africa. The SA Bank Note Company, another subsidiary of SARB, prints all banknotes on behalf of the governor of SARB. Look at any South African banknote and see who owes you the value of the note. Exchange controls Version 1 2020/04/08 SARB has been given the responsibility for the day-to-day administration of exchange control. The Minister of Finance has also appointed certain banks to act as authorised dealers in foreign exchange. This appointment gives these banks the right to buy and sell foreign exchange, subject to conditions and within limits prescribed by the Exchange Control Department of SARB. Authorised dealers are not agents for SARB, but act on behalf of their customers. The country’s exchange control policy is determined by the Minister of Finance (or by Government/Cabinet in the broader sense). SARB, therefore, merely acts as an adviser to the Minister of Finance. 12 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Financial Services Board (FSB) Much as SARB is responsible for bank regulation and supervision in South Africa, the FSB is responsible for the regulation and supervision of the non-banking financial services, which includes the following categories of financial services: Insurance Collective investment schemes Financial advisors and intermediaries Capital markets Retirement funds and friendly societies The purpose of the FSB is to ensure an orderly and professional financial services market, which is in line with international standards. One must bear in mind that the failure of an insurance company or an investment scheme can result in the financial ruin of large numbers of individuals and create extreme hardship. The FSB is the Minister of Finance’s controlling arm of the nonbanking financial services sector of South Africa’s economy. Unlike SARB, the FSB is a government organisation which has industry leaders on its governing committees. South African Revenue Services (SARS) Similarities between financial services Version 1 2020/04/08 While the Minister of Finance determines the tax policy of the country, SARS is responsible for the collection of the tax, which includes individual tax, company tax, value added tax, capital gains tax, airport passenger tax, customs duty, and all other direct and indirect tax. There are similarities between the different financial services: Risk Transactional banking Investment Financial management Economic development Information technology 13 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Risk All of these categories of services deal in risk in one form or another. The banking sector has risk when they lend money in return for interest. The risk profile of the lender will affect the interest rate the bank will charge: the higher the risk, the higher the interest rate the bank will charge. Insurance companies underwrite risk in return for premium: the higher the risk, the higher the premium. In the capital market, it is generally accepted that the returns are relative to the risk taken, and once again, the higher the risk, the higher the potential returns. Transactional banking Transactional banking refers to clients who deposit and draw cash from their bank accounts. Compare this with the motor insurance on a large fleet of vehicles. Some businesses still insure comprehensively, instead of retaining risk, even though they know there will be a minimum level of claims. In a sense, they merely rand swap with the insurance company. They pay the premium at the beginning of the year based on their claims experience of the year before. Some will say there is a similarity between this and transactional banking. Investment All of these sectors compete for the investor’s funds. Banks offer savings accounts, call accounts, and fixed deposits where clients can invest their money. Life insurance companies offer investment products. Companies on the stock exchange wish to attract capital as do collective investment schemes. Financial management All of the sectors have to do with either personal or business financial management. Economic development All of the sectors contribute towards the micro and the macro development of the economy of South Africa. Information technology (IT) All of the sectors in the financial services industry rely heavily on IT as a delivery channel and to control their business. Differences between financial services There are also differences between the various financial services: Version 1 2020/04/08 Costs Onshore/Offshore Regulation Taxation Liquidity Domestic/Non-domestic Selection of investments 14 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Costs The costs associated with the acquisition of various investments by way of commission, fees, and taxes varies. Onshore/ Offshore Some of the financial service providers only provide services in South Africa, whilst others can provide a worldwide service. Regulation The various sectors are regulated by different regulators. Banks are regulated by the SARS, while insurance companies, unit trusts, and other collective investments and the capital markets are regulated by the FSB, and micro-financiers and medical aid companies are regulated by the respective established councils. Taxation Without going into detail in this unit standard, be aware that the taxation treatment of investments can vary significantly, both in terms of the initial outlay and on-going contributions to the investment and on its maturity. Liquidity Some investments may take longer to liquidate than others. For example, a 30-day notice bank account requires 30 days of the intention to withdraw. Call accounts allow the client to withdraw funds on one day’s notice if the amount is high. Domestic/Nondomestic Some of the financial services providers only deal with individuals, others may deal with individuals and businesses, and others yet again only deal with businesses. Selection of investments Many categories of financial service providers specify their investment avenues. For example, unit trusts may limit their investments to companies listed under the property sector of the JSE. 1.2 Analysis of common business activities for financial service providers (AC2) Commonalities and differences between the various activities of financial service providers are summarised in the table below: Version 1 2020/04/08 15 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Activity Microfinancier Commercial bank Merchant bank Short-term insurance Long-term insurance/ Retirement funds Medical aid Unit trusts/ Securities exchange Credit Yes Yes Yes No No No No Transactional banking No Yes No No No No No Short-, medium-term loans Yes Yes Yes No Yes No No Mortgage finance No Yes No No No No No Source of capital No Yes Yes Yes Yes No Yes Provides an investment vehicle No Yes Yes No Yes No Yes Corporate financial services No No Yes No No No No Insurance No No No Yes Yes Yes No 1.3 Current changes in the structure of the financial services sector (AC3) Changes in structure can be driven by legislation or by means of mergers, acquisitions, and insolvencies or by technology. Mergers and acquisitions All sectors saw radical consolidation during the merger mania of the 90s, and this resulted in a huge reduction in the number of banks and insurance companies. Sadly, this has left the consumer with less choice. Changes in legislation Every sector of the financial services industry has undergone huge structural change as a result of continued regulatory and legislative reform. Sectors which were previously not regulated now fall under the ambit of official legislated regulation, such as the micro-financiers and financial advisors and service providers. Other sectors have been combined for the purposes of regulation, such as unit trust and participation bonds, which were regulated by separate legislation in terms of the Collective Investment Schemes Control Act 45 of 2002. Conversely, other sectors were separated, such as the longand short-term insurance companies. Version 1 2020/04/08 16 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Structures More often than not, regulatory changes have an impact on the way financial service companies are structured. For example, many insurance companies had both long- and short-term divisions. With the splitting of the original insurance Act into long- and short-term Acts, insurance companies had to register separate companies and separate their short-term and long-term insurance activities. Moreover, as the lines between banking and insurance and collective investments and between insurance and medical aid became more blurred, the legislators have endeavoured to level the playing fields and to demarcate between the various financial services. For example, there have been attempts to level the playing field with regard to the tax treatment of investments within the various sectors. Medical aids In the medical aid arena, a lack of clarity between what longterm insurance companies can do in terms of the Long-term Insurance Act 52 of 1998 as opposed to the Medical Schemes Act 131 of 1998 is causing long-term insurance companies to seriously consider withdraw health products. Black economic empowerment (BEE) The Financial Services Charter, brought about to address Government’s requirements regarding BEE will have significant impact, across the board, on the structure of the financial services industry. Technology Changes in technology and particularly with the facility of Internet banking, the improvement of online security, and mobile telephony are impacting on delivery channels. Banking services and insurance products are available online. Telephone banking is available. Banks are using SMS services of cellular phones to confirm transactions and balances. These changes have impacted on the way some banks and insurance companies are structured. Virtual banking is a reality now. Where shares used to be traded on the floor at the securities exchange, today paper scrip is being phased out, and shares are traded electronically. These changes have brought about enormous added ease and convenience to consumers. Version 1 2020/04/08 17 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 1.4 Analysing four of the main holding companies in the field in terms of links to other financial organisations (AC4) Financial institutions The major financial institutions in the field have diverse holdings in the field, which gives them a presence throughout the sector. Financial institutions, in this context, refers to the large life insurance companies (long-term insurance companies) and banking groups. Apart from life insurance and retirement funds, their holdings span from asset and fund management to property and other investment companies, banking, short-term insurance, and medical aid. This provides them with enormous leverage for cross-selling of products within their holdings. These financial institutions also have holdings outside of the financial services field. Several of the main holding companies, as at September 2004, appear below. Study the examples of four major holding companies in Addendum 1. 1.5 Financial organisations listed on the JSE (AC5) Financials Companies list on the JSE in particular categories of activity. The financial sector is listed under the category of FINANCIALS. Organisations within the financials sector include investment companies, banks, speciality and other finance, life assurance, insurance, and real estate. Exercise As an exercise, have a look at the share guide in one of the daily newspapers and examine the companies listed under the financial sector headings above. Overseas listings Companies list locally and offshore to increase ability to raise capital. This is known as a dual listing. A dual listing increases access to markets to raise capital for the business. Moreover, companies may list in more than one territory when they have significant amounts of business in those territories. Version 1 2020/04/08 18 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 1. Broadly speaking what are the categories of financial services? Self-test 1 2. What changes in the financial services sector have you noticed recently? 3. List at least 4 financial service organisations that are quoted on the JSE. 4. Study Example 2 (Addendum 1) of Sanlam’s holdings and identify the main business of at least 10 holdings. 5. Why do some companies prefer to list offshore? Competency Competency check and progress indication Version 1 2020/04/08 Check SO1 I can indicate the similarities and the differences between services that are classified as financial. AC1 I can analyse business activities that are common to most financial service providers and give an indication of commonalities and differences of these services. AC2 I can identify changes in the structure of the financial services sector and indicate how these changes will impact on the sector and the consumer. AC3 I can analyse the four main holding companies in terms of links to other financial organisations. AC4 I can identify financial organisations listed on the JSE and explanation why some financial organisations choose to list locally and offshore. AC5 19 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment UNIT 2 Important insurance needed for a business (SO2) After completion of Unit 2, you should be able to do the following: Specific outcomes for this unit Explain the concept of insurance and pooling in relation to business enterprise risk management. Describe the role of insurance in relation to business enterprise financial planning. Apply the terminology used in the insurance sector Explain the concept of insurable interest as applied to a specific business entity. Identify the five events and risks that can be insured Explain the advantages of insurance in relation to a specific business entity. Identify two business events and risks that cannot be insured and explain why such risks are insurable. Explain the concept of claims with reference to the effect these have on the payment of a claim. Explain the process auditing books of a business to provide claims statistics. Indicate the action that can be taken if claims statistics are unsatisfactory. Explain the concept of market/portfolio with reference to the role of the intermediary and the insurance company. Study the material for each sub-unit before moving onto the activities. 2.1 Insurance and pooling of risk in relation to business enterprise risk management (AC1) London coffee shops Insurance, as we know it today, literally started in the London coffee shops amongst the shipping merchants. The value of the merchandise they were either importing or exporting was such that if a ship sank en route or was hi-jacked on the high seas, the merchant could face financial ruin. So they began to pool money together, and if the cargo of one of the merchants was lost or damaged, the merchant would be reimbursed from the money in the pool. It could be said they were pooling their risks. Version 1 2020/04/08 20 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Statistics Looked at it another way, they knew statistically that on average out of so many voyages, one lot of cargo would be lost, but they didn’t know whose cargo it would be. By contributing a small proportion of the value of the cargo, the risk of its loss and consequent financial loss would be transferred. Thus, the losses of the few were paid for by the many. It was from this activity that insurance companies evolved. Risk transfer In the simplest of terms, insurance is a mechanism whereby the risk of financial loss for particular events is transferred to someone else. Let us look at the risk of fire. Say a business suffered a fire which totally destroyed their premises, all of their equipment, stock, and everything. Most businesses would not have sufficient cash to survive such an event. Insurance is one of the ways in which risk is transferred. For payment of a fraction of the value of what they could lose, the risk of loss or damage to the assets by fire is transferred to the insurance company. Underwriting This is really what insurance is. For payment of a sum of money (the premium), someone else (the insurance company) will take a risk, which if it occurred, could financially ruin the business. Some enterprises pose more risk than others. So to ensure that those enterprises which have a greater exposure are not subsidised by those with less exposure, the insurance company will charge a higher premium or impose special terms, or higher first amounts payable. This is called underwriting. Pooling of risk The insurance company in turn needs to have a large pool of risks, so that there is enough money from all of the small contributions, to pay for the few businesses that do suffer losses. Some activities are so unattractive, from an underwriting point of view, that the traditional insurance companies will not provide insurance cover. One such is nuclear risks. Businesses who are involved in nuclear risks have thus got together and pooled their risks to create their own insurance pool. Risk management Version 1 2020/04/08 Risk management is the science of identifying what could go wrong, quantifying what it would cost if it did happen, estimating the cost of preventing it going wrong, deciding whether to retain the risk or arrange transfer to an insurance company, controlling the risk, and managing the entire process. 21 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Transferring risk Companies that decide to transfer the risk to an insurance company are contributing to a pool of knowledge gained by the insurance company, who are able to calculate the statistics of an event happening. Those companies that decide to retain the risk do so at their own risk of not having sufficient capital to pay for the event, should it happen. Premium rates Think about motor vehicle insurance. The premium paid goes into a motor insurance pool with the insurance company. You have the option of accepting the first amount payable required by the insurance company, as a retained risk, or of increasing it and saving premium. However, will you have the increased first amount payable handy at the time of an accident? This is a risk you have to seriously consider before making a decision. This is one of the functions of employing a risk manager, or risk management consultant. Insurance premium rates are always less than 100%. Motor insurance seems to be rated at ± 12% of the value of the vehicle. Household contents insurance rates are nearer to 2% calculated on the value of the house contents. Fire insurance premium rates for a metal workshop could be as low as 0,25% on the value of the workshop contents. Premium accounts Insurance companies have years of statistics and are able to assess a risk with reasonable certainty. A metal workshop fire may only happen once in 400 years, hence, the rate of 0,25%. However, the larger the spread of risk, that is, not all in your suburb but throughout the country, the less chance of the insurance company suffering a fire claim. All premium received by the insurance company for metal workshops is placed in a metal workshop premium account in their books. The more metal workshops they insure, the larger the premium income, and the less the effect on them should one metal workshop suffer a fire. This is a simplistic explanation. All fire insurance premiums are recorded in the books of the insurance company in their fire account. All motor insurance premiums are recorded in the motor account. Pooling of premiums or risks Pooling of premiums or risks converts to the insurance maxim of “many paying for the few”: many premiums received to pay for the few claims paid. Pooling relies upon the rule of numbers. The more numbers you have to work with, the more exact you can be on your assumptions and projections. You would be more accurate if you had 1 000 motor claim values than you would be if you had only 100 motor claim values with which to work. You would be able to estimate the average value of motor claim values expected in the future. Version 1 2020/04/08 22 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 2.2 The role of insurance in relation to business enterprise financial planning (AC2) Financial planning Business enterprise financial planning should not stop at preparation of the budget, but should also consider what risks the business faces and how the business would finance those risks should they eventuate. Insurance is one of the major means that businesses use to finance risk, and insurance is, therefore, critical in any business enterprise’s financial planning. Wealth creation The providers of the money needed to start or run an enterprise – stakeholders or banks – will not invest or lend their money to an enterprise unless they know that their money has been secured. On the other hand, the enterprise cannot operate without the money. Because of this, insurance is sometimes looked upon as the enzyme which enables capital (money) and business to get together to create wealth. Insurance protects the enterprise against unforeseen financial losses or liabilities and thus is vital to the financial wellbeing of the enterprise. Broadly defined, insurance can be broken down into short-term insurance, long-term insurance, employee benefits, and medical aid. Short-term insurance Short-term insurance is so called because it is generally renewable monthly or annually and covers the assets, profits, and legal liabilities of the enterprise. Accidental death or bodily injury to directors and employees is also available from short-term insurers. Long-term insurance Long-term insurance can cover death or disability whether resulting from accident or illness of the staff, directors, or key people of the enterprise, although some long-term policies do have an investment element. Employee benefits Employee benefits refer to pension funds and group life cover. Medical aid Medical aid refers to cover for the staff against medical expenses. Thus, the role of insurance in an enterprise spans all aspects, from the enterprise’s assets, profits, and liabilities to the staff employed by the enterprise. Version 1 2020/04/08 23 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 2.3 Terminology used in the insurance industry (AC3) Insurance is not unlike other business industries. The language spoken is quite different from the language used in everyday speech. The terminology used in the insurance industry is extensive. Most of the terms used have been questioned in a court of law where actual definitions have been set. Most of these terms originated from the marine insurance policy created by the traders who undertook their business negotiations in coffee houses in London some 200 years ago. A brief glossary of terms follows: Betterment Betterment describes a situation where the client has taken the opportunity on the occasion of the loss or damage to replace the property with something better and consequently will have a proportion of the claim deducted, depending on the extent of betterment. Cession Providers of finance on assets usually require the policy to be ceded to them. This means that the proceeds of the policy will vest in the financer and ensures that they will be used to replace the assets which were damaged or, in the case of a total loss, that they will be paid their outstanding balance before the client receives the residue, if any. Claims experience A record of the client’s claims, usually broken down by insurance year and type of claim (class of insurance) Claims ratio The ratio of claims to premium paid, usually expressed as a percentage of same Classes of short-term insurance In terms of the Short-term Insurance Act, insurance companies have to report to the Registrar of Insurance on a quarterly basis, and the returns have to be split between various classes of insurance. These classes of insurance are property, transportation, motor, accident and health, guarantee, liability, engineering, and miscellaneous. Version 1 2020/04/08 24 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Condition of average Average refers to a penalty against the client if he is underinsured at the time of a claim. The client will bear a rateable proportion of the loss based on the amount by which the property is underinsured.1 The formula for average is as follows: Sum insured x Loss Actual value at risk Contribution Defined events / Perils insured Disclosure of material information Contribution in the business insurance context is when there is dual insurance. The insurance company will not be liable to pay more than a rateable proportion of the loss. This often happens when the bondholder also insures the building. Defined events and perils insured describe the events or perils against which cover is provided. When seeking to purchase insurance, you will need to provide the insurance company with all material information regarding the risk. This may be done by completing a proposal form, or where there is an insurance broker involved, the insurance broker will prepare broking notes. The broking notes describe the risk and detail the scope of the insurance cover sought, the first amounts payable, and the previous loss history. As the insurance company will base their terms for the insurance on the information supplied, the client or the client’s broker has a duty to disclose any information about the risk which a reasonable person (not an insurance expert) would consider to be material. Material in this context means information which would have influenced the terms which the insurance company provided. This could be the scope of cover, the premium they would have required, or the first amounts payable they would have required. The disclosure of all material information is the subject of most insurance policy court cases. Not unlike a financier needing full details as to why the client wants the facility, the insurance company must be given all the facts as to why the client wants, or needs, insurance. Duty of care This is a phrase you will hear in relation to a business insurance contract. All short-term insurance policies contain a condition which requires the client to take reasonable care to prevent losses or accidents. References to the male gender throughout this Learner’s Study Guide are only to facilitate reading and should be interpreted to refer to the individual in question, irrespective of gender. 1 Version 1 2020/04/08 25 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Endorsement An endorsement is usually issued to record an amendment to the policy wording, or schedule. Occasionally, instead of issuing an endorsement, the entire schedule of the policy is re-issued when there is a change to be made. Gross profit Some insurance terminology has a different connotation to what a business person may normally understand by the term. One of these is a term used in business interruption insurance: the insurance of gross profit. In accounting terms, gross profit is the profit of the business before tax, whereas for the purposes of business interruption, gross profit is defined as the amount of the fixed costs and the pre-tax profit of the business. Indemnity Indemnity is a term commonly used in insurance. To indemnify a client means to put him back in the same position that he was in immediately before the event that resulted in loss or damage. To be indemnified, he should neither be better or worse off after the claim than he was before the claim, nor make a profit on a claim. Indemnity was defined as far back as 1883 in the United Kingdom court case of Castellain v. Preston, where Lord Justice Bret said: “… indemnity is the controlling principle in insurance law.” Lord Justice Bret went on to say: “a fire policy is a policy of indemnity only … and this means the insured … shall be fully indemnified but never more than indemnified.” (Castellain v. Preston [1883] 11 QBD 380 CA) As one cannot put a value on life and limb, policies covering individuals for death or disablement are not subject to the principle of indemnity. This includes life insurance and personal accident policies. Insurable interest You are not permitted to insure anything that by its loss or damage you do not stand to lose financially. Therefore, you can only insure something where by its loss or damage, or by a legal liability action against you, you will suffer financially. Insured/ Assured The client who purchases the insurance is usually referred to as the insured or assured. Insurer/ Assurer The insurance company that provides the insurance is called the insurer or assurer. Limit of indemnity The limit of indemnity is the maximum the insurance company will pay for any one claim. It does not mean they will pay this amount for any loss, but it is the maximum they will pay. In accordance with the principle of indemnity, the insurance company will only pay what the client loses. The client may not make a profit on a claim. Version 1 2020/04/08 26 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Offer and acceptance Offer and acceptance form the basis of a legally binding contract. In the context of insurance, the client requesting a quote does not constitute an offer, and most proposal (application) forms state that the insurance company is not bound to accept the risk once the proposal form has been completed. This is, however, the beginning of an offer. In practical terms, to acquire a portfolio of insurances for a business enterprise, the client or their broker will describe the risk they wish to transfer (the insurance they wish to purchase) to the insurance company. This is done by means of a proposal form, or if the client has a broker, the broker may compile broking notes. Based on this information, which forms part of the contract, the insurance company prepare their terms at which they will accept the risk. The terms include the scope of cover, the premium, and the first amounts payable. Special terms may be required for certain risks, such as what fire or theft protections must exist for the cover to be valid in advance of a possible claim. These terms may differ from the quotation requested; for example, the insurance company may require higher first amounts payable than those requested by the client. So, the offer starts with the client and is only completed when the insurance company state what their terms are and what premium they want for the risk. If the client accepts the terms, subject to all of the other requirements for a legal contract being present, you then have offer and acceptance, and a legally binding contract of insurance will come into force. If the client does not accept the insurance company’s terms and suggests alternatives, such as a lower first amount payable, this amounts to a counter offer. If the insurance company accept the counter offer, then a legally binding contract of insurance will come into force. Perils Commonly referred to as “nature risks”, these are risks that are basically nature inflicted, for example, storms and earthquakes. However, the meaning of the term has recently been expanded to include fire and explosions. Policy document The policy is a legal document which provides evidence of the insurance contract in force. There are a few terms used to describe the components of a policy. A policy is made up of the schedule and the printed wording, and should be read together. Proximate cause In its simplest form, the proximate cause of a loss is the dominant cause without any other intervening causes. It is often defined as the uninterrupted chain of events between cause and effect, the cause being the event and the effect being the loss or damage. Version 1 2020/04/08 27 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Recovery When a client effects a successful right of recourse against another party or an insurance company does so in terms of a subrogated right of recourse, this is said to be a recovery. Reinstatement value conditions “Re-instatement value conditions” is a term you may often hear in the insurance environment. Essentially, when the re-instatement value condition applies, the insurer will replace or re-instate the insured property with similar property to that lost or damaged, but not with property more extensive than or superior to the property lost or damaged when new. Sometimes, payment on a market value basis will not indemnify the client. An example is a partial loss of a building by a fire. It would not be feasible to try to obtain second-hand building materials of the same quality and age as those destroyed by the fire. Consequently, the only way to re-instate the building will be to use new materials, but not more extensive or superior to those destroyed when they were new. If the insurer elects to re-instate, they are obliged to do so even if it is more expensive than they thought it would be or even if the cost of re-instatement exceeds the sum insured. Re-insurer/Reassurer Insurance companies do not keep all of the risk which they accept. They too purchase insurance to limit their exposure on any one individual risk or an accumulation of risks by an individual event. This is then termed re-insurance, or re-assurance. Providers of re-insurance, or re-assurance, are called re-insurers. As insurance companies grow and their balance sheets strengthen, they tend to keep more risk and purchase less reinsurance. Right of recourse Where another party has been responsible for loss or damage to the client, there may be a right of recourse against the other party. This right of recourse allows the client to recover their loss from the other party. Subject matter of contract The client’s insurable interest in the subject matter Subject matter of insurance Subject matter in a business insurance context is the subject of what is insured. This could be material damage to property, an event giving rise to a legal liability, or loss of a legal right. For example, the subject matter of a fire policy may be buildings, plant and machinery, stock, tenants’ fixtures and fittings, or office contents. Version 1 2020/04/08 28 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Subrogation Where loss or damage is caused by a third party, the client may have a right of recourse against such a person for the loss or damaged caused by him. Subrogation is the term used to describe the assuming or taking over of the client’s right of recourse by the insurance company. At law, the insurance company is entitled to such right of recourse once they indemnify the client. The subrogation clause in a policy amends the common law position to the extent that they may exercise this right of recourse before the insured is indemnified. In terms of this clause, the client must do and permit all such things to be done as may be necessary to give effect to the right of recourse, at the expense of the insurance company. Sum insured This is the total value of the insured property as estimated by the insured. Most policies that rely upon a sum insured as the basis of coverage impose the condition of average to penalise the insured if the sum insured is less than it should be. Territorial limits The territorial limits describe the countries in which the insurance is valid. Loss or damage to any insured property which occurs outside of the territorial limits would not be covered. 2.4 Insurable interest (AC4) The subject matter of the contract is the client’s insurable interest in the subject matter insured. Gambling Insurable interest is necessary to distinguish an contract from a gambling wager. Although some gambling such as casinos, horse racing, and the lotto all other forms of gambling are illegal and, unenforceable. insurance forms of are legal, therefore, Therefore, to distinguish an insurance contract from a gambling wager, there must be insurable interest. This means the client must stand in relation to the subject matter to be able to sustain a financial loss or loss of legal right, which is capable of being quantified. Marine Insurance Act (UK) Version 1 2020/04/08 This was defined in the United Kingdom Marine Insurance Act of 1906: … where the assured is so situated that where the happening of the event on which the insurance money is to become payable would, as a proximate cause, involve the assured in the loss or diminution of any right recognized by law or, in any legal liability, there is an insurable interest in the happening of that event to the extent of the possible loss or legal liability. 29 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Insurable interest In other words, a person has insurable interest when he has a financial interest in any tangible physical property, whereby if the property is lost, destroyed, or damaged, this would cause him a financial loss, or in an event which may result in a third party being able to claim financial compensation from them in a court of law. Example Say you knew someone who was a careless driver. You cannot insure his car hoping to make a profit on a claim if he has an accident in which the car is damaged. However, if you had lent him money to buy the car, then you can insure it, but you would only be entitled to recover the value of the balance outstanding to you. The outstanding balance is your only insurable interest in the car. Short-term insurance In short-term business, and personal, insurances, insurable interest must exist at the time of taking out the insurance and at the time of loss or damage. Marine insurance In marine insurance, insurable interest need only exist at the time of the loss. This is because the interest in the subject matter insured may change during a voyage. Life insurance In life insurance, the opposite applies, and insurable interest need only exist at the time the policy is taken out. Care, custody, or control It is possible to have an insurable interest in property other than your own, as when someone else’s property is in your legal care, custody, or control, because you will be held liable if the property is damaged in your care, custody, or control and consequently would suffer a financial loss. The insurable interest in this case is not so much in the property, but in the possible legal liability of the business arising from damage to the property whilst in their care, custody, or control. Example You own a shop, and you purchase all your stock from one supplier. If the supplier has a fire, you will suffer loss of sales and consequently a loss of profit. In this case, there is an insurable interest in your loss of profit, flowing from damage to the supplier’s property. This can be covered under a supplier’s extension on a business interruption policy. Version 1 2020/04/08 30 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Re-insurance It follows that the liability of the insurance company to pay claims gives them an insurable interest to insure themselves, and this they do via a re-insurance policy. 2.5 Events and risks that can be insured and the advantages of insurance in relation to a specific business entity (AC5) Fire damage to the physical assets of the business Businesses may have many millions of rands tied up in the assets needed for the business. Fire damage can be catastrophic, and total losses are not uncommon. Without the money to replace these assets, the business will not be able to continue to earn profits for the stakeholders or have money to pay the banks for loans taken in connection with the business. By insuring the assets against loss or damage by fire, the business ensures that the productive assets of the business will be replaced after a fire, thus, protecting the stakeholders’ capital and loans provided by the banks. Business interruption Say a fire totally destroys the premises of a business. The business has fire insurance on the assets and business interruption following fire damage to the assets of the business. The fire insurance will pay for the damage to the assets. During the period that it takes to repair or reinstate the damaged property, the business continues to incur expenses (these are referred to as fixed costs and are all charges which will be incurred whether the business has income or not), and no profit is earned. Business Interruption policies cover the client for the continuing expenses (the fixed costs) and pre-tax profit for the period that the results of the business are affected. The fixed costs and pretax profit combined are referred to as gross profit. The insurance is not limited to the period required to re-instate or repair the damaged property, but includes the period it will take to reach the same level of income as before the loss, including an adjustment for the anticipated trend or seasonal trade of the business. The maximum period for which the insurance company will pay for the loss of business income is referred to as the indemnity period. The advantage to the business entity is that they would be able to continue to pay all of the fixed costs of the business and have insurance monies to replace the pre-tax profit which the business would have earned. Version 1 2020/04/08 31 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Legal liability The very nature of business means that any person or company in business faces potential liabilities. In some cases, the potential legal liability may be so great that it has no bearing in relation to the earning potential of the business. Legal liability insurance is available to protect business entities against certain liabilities. Legal liability for damage to property or injury to third parties is the most common. This can include general public liability at the premises and work away, tenants liability, products liability, or liability for defective workmanship. Example A small employment agency rents an office in a fourstorey building. The agency anticipates annual revenue of R500 000. The building has a replacement value of R3 m and is occupied by six other companies with stock, computers, and other property worth R2 m. If a fire caused by the employment agency renting one of the offices completely destroys the building, the employment agency may be liable for the building and the loss of property suffered by the other tenants. This is an exposure of R5 m or 10 times the employment agency’s anticipated total annual revenue. You may think businesses cannot be held legally liable if due to an error, they burn down the building they rent. Unfortunately, the truth is that they can be held liable. It depends on the cause of the fire. The event may seldom or never occur, but if it does, the amount involved can be astronomical and would mean the demise of the business. The fact that this may never occur in the life of a business is taken account of in the premium rate charged. High legal liability limits of cover can be obtained for a relatively small premium. Legal liability insurance protects the business against possible catastrophic financial losses arising from legal liabilities caused during the conduct of the business. Death of a key person in the business Version 1 2020/04/08 Often a small enterprise (and sometimes even larger businesses) is dependent on certain key individuals. This may be for reasons of their intellectual property or marketing ability. If the key person were to die or be disabled, the business could suffer a financial loss of reduced sales or additional recruitment/training costs to find a suitable replacement. 32 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment This gives the business an insurable interest in the life of the key person, and they can effect a key person life assurance policy on the life of the person concerned. The proceeds of the policy would be payable to the business to enable them to employ a suitable replacement person. A banker or financier may insist on such a policy, should the business be dependent on a small number of key people. Such a policy would protect the business against financial losses arising from the death or disability of a key person. Partnership insurance Two or three individuals each with contributory but different skills enter into a partnership, and all have equal shares in the business. Should one of the partners die or be disabled, his estate would still have shares in the business but be unable to perform the function for which he was selected as a partner. It would be preferable for the remaining partner(s) to pay the disabled partner, or the deceased partner’s estate, the value of his share in the business, leaving the remaining partner(s) in control of the business. To achieve this, a whole life policy is used with the beneficiaries being in favour of the other partners. Say there are three partners: Partners A, B, and C. Three policies for one-third of the value of the business are taken out on the life of each partner, but the beneficiary in each case is not the life assured but the other two partners. The beneficiaries on the policy on Partner A’s life would be Partners B and C, and so forth. This type of insurance protects the partner(s) against having shareholders who have no knowledge of the business in the event of the demise of one of the partners. 2.6 Business events and risks that cannot be insured (AC6) Trade risks Insurance companies do not generally insure trade risks. Trade risks refer to events such as a slump in the market due to adverse economic circumstances, fluctuating interest rates, fluctuating exchange rates, or changes in Government policy and the impact which this may have on the business. Human error A trade risk is also a risk that relates directly to the activities of the workers. If a worker damages something he is working on, that is a risk the business must suffer themselves. Therefore, all workers must be trained correctly to prevent suffering financial loss due to the inability of the worker to perform his duties correctly. This is sometimes referred to as “human error”. Version 1 2020/04/08 33 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Risks excluded by insurance contracts All short-term insurance policies exclude the following: War risks Riots, strikes, and public disorder Nuclear risks Asbestosis Computer losses related to date recognition failure War risks War risks are excluded as the private sector deems them to be a risk outside of that which can be underwritten. Government have a fund in terms of the War Damages and Compensation Act 85 of 1976, from which victims of war damages are compensated. The concern is whether in reality Government would have such funds. The exception to this is marine policies that can cover war, but only for the sea voyage part of the journey and not any inland part, for example, transport from the exporter’s factory to the port. Riot, strikes, and public disorder After the 1976 riots and following sanctions by the international community, re-insurers withdrew cover for politically motivated riots, forcing insurance companies to withdraw cover from businesses and private individuals. In response, Government at the time formed the South African Special Risk Insurance Association (SASRIA), who, in return for non-refusable and non-cancellable cover, was granted the sole right to underwrite political riot cover in South Africa. SASRIA, therefore, had a monopoly on this type of insurance. Because of the difficulties of proving whether or not a riot was politically motivated, SASRIA’s monopoly was eventually extended to all riot, strike, and public disorders within the Republic. Namibia followed suit with the introduction of NASRIA, but with substantially lower limits of cover than SASRIA. SASRIA cover is obtained from the insurance company who issue the fire policy. The insurance company act as SASRIA’s agent in so far as the issuing of the policy and collection of premium is concerned. Version 1 2020/04/08 34 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 2.7 Nuclear risks Nuclear risks are also excluded from all short-term insurance policies in total. This means loss of or destruction or damage to property, all consequential losses, and legal liability. This is because no insurance company can carry such a large risk. Asbestos Due to insistence by re-insurers, an absolute exclusion has been introduced relative to the use, application, or working with asbestos. This is due to the large value of claims suffered since 1950 arising out of the mining of asbestos, which subsequently caused the worker to suffer from asbestosis. Computer losses Due to the risks arising from computers or any other electronic devices failing to recognise the correct date, and also at the insistence of reinsurers, all insurance policies now exclude loss or damage related to a computer not being able to action a date. This materialised due to the change in the millennium and the fact that certain electronic devices were controlled by a date recognition system. The new computer age has reduced this risk, but insurance coverage is still not available. Claims reserves and the effect these have on the payment of a claim (AC7) Insurance companies have to maintain a minimum solvency margin which is laid down by the Short-term Insurance Act and the Long-term Insurance Act. When a claim is reported, the insurance company has to raise a reserve in their accounts for the claim, which negatively affects their solvency margin. Solvency margin Version 1 2020/04/08 A solvency margin is the amount of money the insurance company must have available to settle claims at any given time. The formulae stated by the FSB in the Acts differ between the short- and long-term insurance companies, but generally must not be less than 15% of their premium income. So if the insurance company is receiving a premium income of, say, R1 m per day, they must have at least R150 000 per day available to settle a claim that may occur anytime in the future during the life of the policy cover. 35 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Under reserving This is why it is so important for the insurance company to obtain as close as possible an estimate of the claim value. If the estimate is too low, the insurance company will have under reserved for the claim and could declare higher profits than they could realistically make. Over reserving If the reserve is too high, it will impact on this year’s results as the funds will be held in reserve, rather than being able to be declared as profit. In addition, the loss ratio of the company will appear higher than it really is, which could negatively affect the share price of the insurance company. Re-insurer In certain circumstances, the insurance company may need to notify their re-insurance company of the claim. Where this is the case, the re-insurer will also require the estimate to enable them to raise a claims reserve for the claim. Under reserving or failure to notify re-insurers when appropriate will, at the least, lead to delays in claims settlement and could give rise to the insurance company having difficulty recovering from their re-insurer. It is important to note that the contract of re-insurance is between the insurance company and the re-insurance company. Failure of the re-insurance company to pay does not affect the insurance company’s liability to indemnify the client, except of course to the extent that they are able to do so out of their own reserves. Claim reserving Claim reserving is rather like you saving to go on holiday. You know you will be going on holiday, but you may not have decided where to go or for how long. You budget and hope that when you need the money, you have enough. The insurance company know that they will have to pay a claim, but they do not know when or how much. So the Acts make it compulsory for the insurance company to budget a minimum amount (basically 15%) and, when the claim actually happens, to make sure that their estimate is adequate and to transfer the budgeted reserve into a bank call account, waiting for payment to the insured. 2.8 Auditing books of business to provide claims statistics (AC8) Claims statistics Accurate claims statistics are vital to managing risk. By studying the pattern of previous losses, it will point to possible remedial action being required as a risk management or loss control measure. Version 1 2020/04/08 36 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Look at the claims by class of insurance, by branch (if the client has more than one branch), by type of asset, by individual responsible (if internal), and by fault (whether it was the client’s fault or not, which could indicate whether there are any recovery possibilities). Frequent small losses Business often suffers losses, such as shoplifting, staff pilferage, miscalculations, accounting errors and straight theft by persons unknown. These losses are regarded as a ‘trade risk’ to the business. The risk of trading that has to be built into the sale price of the product. If businesses could curtail these trade risks, the end sale price could be reduced, or the Stakeholders could earn a slightly larger return on their investment. Insurance is not designed to compensate the business for trade losses. Therefore trade losses must be absorbed by the business and taken into account when preparing the Financial report. There are, however, other losses that under certain circumstances could be considered an insurance risk. A minor motor accident where the business entity decides that it is not worth their while to submit an insurance claim. The repair costs could be either less than the policy first amount payable, or not much higher. Insurance companies have years of experience of insuring businesses and have a reasonable understanding of what risks the business is exposed to. Therefore insurance companies tend to force the business client to look after their risk by imposing a first amount payable at a level to force the business to be more careful in their activities. Losses remain losses unless an insurance company actually settles the loss in terms of the insurance policy. Thereafter the loss is termed a claim. A claim is a loss paid for by an insurance company. When an insurance company receives numerous, or frequent, notifications of losses, where some convert into claims due to settlement, the insurance company are likely to increase the first amount payable to force the business to be more careful and suffer losses within their own financial ability. From a businesses risk management perspective, self-funding by the client in respect of smaller losses is a far more efficient way of financing the risk. Insurers will always include a provision for anticipated smaller claims into their premium for the next year. So it is cost effective for the business to retain the smaller losses rather than transfer these to an insurer and suffer an increase in the premium payable. Same type losses You may identify a spate of theft claims either at one branch or at several branches involving the same type of assets. This could lead you to look into improving security at the branch with the problem or, if there has been theft at several branches, whether there is a similarity in the type of asset being stolen. If five branches had laptop computers stolen, you could change Version 1 2020/04/08 37 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment company policy on laptops to make branches responsible for higher first amounts payable, impose penalties if they are stolen from a vehicle, or advise branch managers to tighten control. If you have a client with a large fleet of vehicles, looking at fault, how many of the claims were your client’s fault, and how many were the fault of a third party? Are recoveries being pursued? Maybe the client has all drivers undergo advanced driver training, but the majority of claims are not the drivers’ fault. You could increase the first amounts payable if the recovery rate is good. Run a check to see whether there are drivers who have been involved in regular claims. Find out why and what action can be taken. Recoveries Recoveries are important because even if the insurer has paid the client, the claim still reflects in the client’s claims experience and may affect their premiums and insurance terms going forward. The claims experience is reduced by recoveries made by the insurance company. The insurance company also analyses the claims history, both when they quote and during the currency of the policy, but particularly before providing renewal terms. They too will want to cut out frequent small losses which merely serve to erode the premium without providing any real value to the client. Insurance companies deal with this by underwriting the risk, imposing higher first amounts payable or having special requirements such as fire or theft protections or the use of carriers to convey money. Corrective Actions/ measures Businesses that suffer small losses, or trade risk losses, must consider what their industry experience is. Retail establishments traditionally experience up to a 3,0% trade risk loss due to shoplifting and staff pilferages. If the retail business suffers a higher loss ratio, to purchases, of 3,0% they should investigate why. Is the security system inadequate, or are people just not passing goods over the counter for scanning? Engineering concerns suffer, on average, trade risk losses of up to 5,0%. Are goods received records recording each item received correctly, or is the delivery note from the supplier just signed without a thorough check being undertaken? Business entities must make sure that their record systems are correct and checked regularly. When viewing insurance risks the business must look at their claims, losses that are paid by an insurer, and establish if there is anything they can do to reduce the losses. Are the vehicle drivers having too many small accidents, are goods falling off delivery trucks, is the fork lift driver mis-judging where the forks must go when collecting stocks from the warehouse, and so on. Each business entity is subject to its own trade risks that could become an insurance claim. Once the business has established a pattern, either by themselves or following an investigation by a risk manager, then the business can decide how best to deal with these small losses/claims. Increasing the first amount payable is the Version 1 2020/04/08 38 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment insurance companies usual method, but business can decide to apply for this increase, for a small reduction in the premium payable. Alternatively the business can decide that they will institute more training or impose a first amount payable against the employee who causes losses. Many business impose a first amount payable against a vehicle driver to make the driver more risk conscious of how they are driving. 2.9 A captive market/portfolio and the role of both the intermediary and the insurance company (AC9) Corporate companies At times, the larger corporate companies began to feel the conventional insurance companies were not meeting their needs. Premiums were volatile from one year to the next, cover became more restrictive, and as the value of the large mining and industrial companies’ assets and profits rose, the ability of the insurance companies to take such large risks became impeded. In insurance terminology, this is referred to as a lack of capacity. Captive insurance company To counter this, corporate companies began to register their own insurance companies. These companies were insurance subsidiaries of non-insurance parent companies and were only licensed to underwrite all or part of the parent companies risk. Such insurance companies are known as captive insurance companies. Advantages Some of the advantages of a captive are that it gives the client direct access to the re-insurers and they can select which risks of the parent they wish to retain and which risks to transfer outside of the captive. Costs can be reduced, and the captive will retain the investment income and any profits which accrue. They can also be used to underwrite cover which the conventional market won’t provide, such as asbestosis or date recognition, and can be a means of diversification for the parent company. They are also used by multinational companies as part of their global risk management and risk financing tools. Disadvantages Captives can have disadvantages, not the least of which is the regulatory compliance required of an insurance company and the capitalisation requirements (they can be expensive to start up). Moreover, a conventional insurer will have a greater spread of risk. A further challenge when the captive is used to provide cover for risks not underwritten by a conventional insurance company can be how to rate the risk. Third-party risks A move away from the traditional use of a captive insurance company to only underwrite risks of the parent company began when some companies saw opportunities in having a captive to underwrite third-party risks as this would be leveraged from the parent company’s client base. Version 1 2020/04/08 39 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Examples of this were furniture chains that could provide both long- and short-term insurance to clients buying goods on credit and TV rental companies wanting to provide risk cover to the client renting the TV. The Registrar of Insurance granted limited licences to these captives to underwrite only the risk related to the goods or services provided by the parent company. As these vehicles became more popular, the conventional insurance companies realised they were losing a significant amount of business to them. Some of the conventional insurance companies devised ways to participate in this emerging market and began to offer alternatives to clients who did not wish to go the route of registering their own insurance company. Rent-a-captive The rent-a-captive concept developed by offering the client the use of the insurance company’s licence and infra-structure, enabling the client to achieve the objects of a captive without the usual costs involved. The drawback of rent-a-captive is that the client does not own the captive. If the insurance company were to go insolvent, the client would lose any of their accumulated funds in the captive. Moreover, a rent-a-captive is not transferable to another insurance company. Cell captive To overcome the disadvantages of rent-a-captive, insurance companies introduced the cell captive. The difference with a cell captive is that through use of a shareholding structure, each client’s funds are kept separate. A number of the major insurers have created separate risk financing companies who provide these vehicles. However, they often do not wish to provide claim services on the day-to-day administration of claims. Intermediary The intermediary can assist the client both with the establishment of a captive or cell captive and with the day-to-day claims administration which may arise. The intermediary then acts as manager of the captive, or cell captive, and charges an administration fee to undertake the work normally undertaken by an insurance company when they provide traditional insurance coverage. This is a new method of the intermediary earning an income, over and above their commission, which they lose when the corporate client uses a captive, or cell captive, to underwrite a risk. 1. What is the concept of insurance? 2. Explain how insurance plays a role in a business enterprise. Self-test 2 3. Explain ‘insurable interest? 4. When must insurable interest apply in respect of a marine policy? 5. Material damage, legal liability and motor insurances are common business entity insurance covers arranged. Are there any other forms of business insurance that can be arranged? Version 1 2020/04/08 40 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 6. What business events cannot be insured? 7. Explain claim reserving in your own words. 8. How important is it to audit the books of a business to secure claims statistics? 9. Why do large corporations consider arranging some form of captive insurance? Competency Competency check and progress indication Version 1 2020/04/08 Check SO2 I can explain the concept of insurance and pooling in relation to business enterprise risk management AC1 I can describe the role of insurance in relation to business enterprise financial planning. AC2 I can apply the terminology used in the insurance sector. AC3 I can explain the concept of insurable interest as applied to a specific business entity. AC4 I can identify the five events and risks that can be insured. AC5 I can explain the advantages of insurance in relation to a specific business entity. AC5 I can identify two business events and risks that cannot be insured and explain why such risks are insurable. AC6 I can explain the concept of claims with reference to the effect these have on the payment of a claim. AC7 I can explain the process auditing books of a business to provide claims statistics. AC8 I can indicate the action that can be taken if claims statistics are unsatisfactory AC8 I can explain the concept of market/portfolio with reference to the role of the intermediary and the insurance company. AC9 41 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment UNIT 3 Contract of insurance in a business entity (SO3) After completion of Unit 3, you should be able to do the following: Specific outcomes for this unit Explain the purpose of a contract whit reference to an actual policy for a business entity Explain the purpose of portfolio Indicate the characteristics of a portfolio for an authentic business enterprise Explain the term endorsement and give examples that are identified in a business contract Explain the rights and responsibilities of the insured in terms of a complex business insurance contract Study the material for each sub-unit before moving onto the activities. 3.1 The purpose of a contract with reference to an actual policy for a business entity (AC1) Insurance contract All contracts have rights and obligations. In an insurance contract, the client has, inter alia, an obligation to pay the premium. However, if the event insured against occurs, the client has a right to be indemnified. The usual purpose of a contract of insurance is to fill a need identified in the client’s financial planning. Most insurance contracts have the purpose of protecting the client against a possible financial loss. In other words, they provide a form of risk financing. Some insurance contracts may have an investment element to them. The policy document is not the contract, but evidences the contract entered into between the client and the insurance company. Multi-peril policy It is possible to enter into an insurance contract for a business, covering several types of insurance in the same contract. These are called composite or multi-peril policies and are common for small to medium size companies. In South Africa, we have a generic policy called Multimark III ®, which is available from the general short-term insurers. With this one policy, the client can obtain most of the classes of short-term insurance required by a small to medium size business. Version 1 2020/04/08 42 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment This includes material damage insurance (assets), business interruption, legal liability, and insurances of the person and motor vehicles. Such a contract of insurance would serve a very broad purpose. Multimark III ® You should have secured a copy of the Multimark III ® Policy wording and schedules. 3.2 The purpose and the characteristics of a portfolio for an authentic business enterprise (AC2) Portfolio In this context, a portfolio is a range of insurance products identified in the financial planning of a business, as necessary to protect the business from financial loss. Risk profile The purpose of a portfolio is to examine all the areas where the business is exposed to risk and to plan an insurance programme which addresses the risk financing needs and the risk profile of the business. By risk profile, one means the nature of the risk as well as the client’s attitude to risk. Certain clients may be risk averse, and in that case, it would not be appropriate to design an insurance portfolio with high levels of self-insurance, that is, higher first amount payables. By risk profile one means, the nature of the risk as well as the client’s attitude to the risk, referred to as the ‘moral hazard’. A moral hazard is directly related to the clients attitude to protecting the property and their desire not to suffer an insurance claim. Clients who have no regard for the safety of persons, making sure that the security of systems work correctly or that the stocks are stored in a structured manner, is asking for a loss and is therefore regarded as a bad moral hazard by the insurance industry. Hence the need for an insurance company to conduct inspections of the business to make sure that the business management have an interest in preventing losses, and consequently claims. Insurable risks Version 1 2020/04/08 The characteristics of the portfolio are that it should address all of the insurable risks to which the business is exposed, having regard to the cost effectiveness of transferring the risk relative to the likelihood of the risk happening, and it should take into account the business enterprise’s philosophy towards dealing with risk. 43 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment The portfolio will be characterised by short-term and long-term insurance and within larger businesses may include employee benefits and medical aid. Short-term insurance Long-term insurance Material damage – Assets Examples are buildings, plant and machinery, stock, fixtures and fittings, office contents, computers, PABX and other electronic equipment, money, and motor vehicles. The risks insured against could be fire and allied perils, theft, all risks, machinery breakdown, or electronic breakdown. Business interruption Depending on the nature of the business, loss of gross profit (fixed costs and pre-tax profit), loss of revenue, loss of gross rentals, or accounts receivable can be insured. The insured perils are mostly only against damage to the insured assets by fire and allied perils. Liabilities This can include, depending on the nature of the business entity, general public liability, defective workmanship, products liability, employers liability, motor liability, or professional indemnity. Bodily injury This covers accidental death or bodily injury to directors and employees. The cover can be based on a capital sum or on the earnings. The cover is usually arranged on a twenty-four hour basis, but can be restricted to business hours only at a reduced premium. Motor The motor cover would cover the accidental loss or damage to the motor vehicle and for any liability arising out of its use. This is known as comprehensive motor cover. If the cash flow of the business permits, low value vehicles may be insured for third-party liability, fire, and theft only as this is much cheaper. This could be characterised by the following: Individual life and disability Key man Partnership Funeral insurance Retirement annuity Employee benefits Version 1 2020/04/08 Group life and disability Group pension or provident fund 44 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Medical aid Individual or group 3.3 Endorsement (AC3) Alteration Sometimes the client may wish to alter an insurance contract during the period of insurance. They may have acquired additional buildings or another plant and need to increase the fire sum insured. Or the amount of cash collected has increased, and they have to increase the limit on their money cover. Or they have acquired a new vehicle, and this must be added to the policy. When this happens, the insurance company may note the change by an endorsement. Endorsement The insurer may wish to change something in the printed wording of the policy, for instance, introduce an additional exclusion because of a deteriorating claims experience. This could be done by endorsement. It should be noted that the insurer would usually only introduce changes at the renewal of the policy. Override printed wording Endorsements override anything in the printed wording of the policy. This is why endorsements usually note the change being effected and then say, “Subject otherwise to the terms, exceptions, and conditions of this policy”. Example The following is an example of an endorsement issued changing the theft limit from R5 000 to R10 000. It is hereby declared and agreed that with effect from the 15 March 2000, the limit of R5 000 in respect of the premises situated at 79 Second Street, Your Suburb, City/town is increased to R10 000. In consideration of the foregoing, there is an additional premium of R2 000 due the company for the period 15 March 2000 to renewal date, being 30 June 2000. Subject otherwise to the terms, exceptions, and conditions of this policy. Signed in Johannesburg on this the 25th March 2000. ……………………. 3.4 Rights and responsibilities of the insured in terms of a complex business insurance contract and the need for reinsurance (AC4) Rights of the insured The main right of the insured is to be indemnified or compensated in the event of an insured loss. With regard to fire policies, the client has the right to re-instate property on another site subject to certain conditions, if reinstatement value conditions apply. Version 1 2020/04/08 45 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Various brands and labels clauses give the client the option first to either purchase any salvage or have their brands labels removed from any salvage prior to their disposal by the insurance company. Responsibilities of the insured The insured has the following responsibilities: Duty of disclosure Duty of reasonable care Premium payment Notification of claims Assisting with recoveries Disclosure Insurance contracts are based on the information supplied to underwriters. As the client would naturally have a far more intimate knowledge of their business than the insurance company, it is vital that the client disclose all information prior to inception of cover, renewal, or during the insurance period which may influence the insurance companies appreciation of the risk (that is, information which a reasonable person would have considered material). Examples of material information could be hazardous aspects of the business, such as processes, new products, activities or services, signing of leases or contracts which extend legal liability beyond normal common law, new premises, threats from other parties, third-party property in their custody, hiring of plant and equipment, past claims history, and any criminal convictions relevant to the subject matter of the insurance. You do not generally have to disclose things that reduce the risk to underwriters or are common knowledge. It is, however, safer to err on the side of caution and inform the insurance company of all aspects of the business because many claims have been repudiated on the grounds of nondisclosure of material information. Moreover, insurance companies buy re-insurance when the risk is too large for them to underwrite on their own. The information disclosed by the client to the insurance company is also disclosed by the insurance company to the re-insurance company when they buy their re-insurance cover. The re-insurance company may repudiate a claim by the insurance company on the grounds of nondisclosure, which in turn may cause the insurance Version 1 2020/04/08 46 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment company to adopt the same stance and repudiate the client’s claim. Insurance companies also have automatic reinsurance facilities, and these often exclude certain activities. If the client fails to disclose a hazardous activity excluded on the insurance company’s automatic re-insurance arrangements, this again may cause an insurance company to repudiate a claim. Duty of reasonable care The client has a duty to take reasonable steps and precautions to prevent accidents or losses. In other words, the insured must act as if not insured. Premium payment The client has the duty to pay the premium on or before inception of the cover. Failure to do so will prejudice the cover. Premiums can be payable monthly or annually. Insurance companies do charge extra for monthly premium payment facilities. Notification of claims The client has a duty to report claims to the insurance company as soon as reasonably possible. Claims involving theft or loss of property have to be reported to the South African Police Services (SAPS) immediately. Assisting with recoveries The client has a duty to assist in the recovery of any lost or stolen property if located after payment of any claim. The insured must assist the insurance company in enforcing any rights to which they may become subrogated, whether before or after the client has been indemnified. 1. Is an insurance policy a legally enforceable contract? 2. Name the three main types of insurances that will make up a typical portfolio of a business. Self-test 3 3. What is the purpose of an endorsement? 4. List the main responsibilities of the insured. Competency Competency check and progress indication Version 1 2020/04/08 Check SO3 I can explain the purpose of a contract whit reference to an actual policy for a business entity. AC1 I can explain the purpose of portfolio. AC2 47 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Version 1 2020/04/08 I can indicate the characteristics of a portfolio for an authentic business enterprise. AC2 I can explain the term endorsement and give examples that are identified in a business contract. AC3 I can explain the rights and responsibilities of the insured in terms of a complex business insurance contract. AC4 48 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment UNIT 4 Negotiating an insurance contract to meet the needs of a selected business enterprise (SO4) After completion of Unit 4, you should be able to do the following: Specific outcomes for this unit Identify the need for an insurance in the financial planning of a business Analyze a business entity risk and insurance need with a view to negotiating insurance to meet the identified need Explain the need to investigate an insurance contract with two different insurance institutions Identify exclusions in a contract Indicate why exclusions are necessary and whether they re acceptable to a business entity Explain the terms of a contract Identify specialised insurance required to meet the needs of a particular business enterprise and reasons are given to explain why the identified risks are important to the particular kind of business Study the material for each sub-unit before moving onto the activities. 4.1 Identifying the need for insurance in the financial planning of a business entity (AC1) Identify the risks In order to identify the insurance needs of a business enterprise, you need to identify the risks the business entity faces: what the possible consequences of those risks may be, in financial terms, and how the risk is best handled and controlled. This is a risk management approach to identifying the scope and level of all retained and transferred risks. International, and a majority of local, insurance brokers have extensive risk questionnaires that can identify most of the risks associated with businesses. Retail shop Jane Smith has requested that you arrange insurance coverage for her retail shoe shop. The shop will have assets such as fixtures and fittings, till, stock, cash, and maybe a motor car or small delivery vehicle. They rent the premises they are in and have four other shops in the complex, each carrying a different trading name. The shops are run by the owner, six sales assistants and a driver. Version 1 2020/04/08 49 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Short-term insurance You would need to establish a number of facts, relative to the business of retailing shoes, before looking at the type of insurances most suitable for the business. Fire Typically, the shops would need fire and allied perils on the replacement value of the fixtures and fittings and on the cost price to the shop of the stock. Theft Theft cover at a limit for any one burglary Business interruption They will need business interruption cover to cover them against loss of gross profit in the event of damage to the assets by any of the perils insured against on the insurances covering fire and allied perils. The sum insured should represent the total of the businesses fixed costs and the pre-tax profit for a minimum of 12 months. Money Money cover for a limit for any one claim which should represent the maximum amount of money on the premises or in transit at any one time Glass The lease on the premises most likely holds them responsible for any damage to that part of the premises occupied by the shops, including the shop front window. Glass insurance will provide cover for the shop front window and the sign writing and any illuminated signs. The sum insured on the glass must be based on the total replacement cost of all the fixed glass. Public liability Because they are renting premises and will have the public in their shop, they will need general public and tenants liability cover. Limits for public liability should be high. Say a fire starts in the shop which is proved to be their fault. The whole building could burn down and all the other tenants would lose both the contents of their shops and their future income stream. The limit of cover would depend on the value of the building and the shops which occupy it, but R10 m to R20 m for any one occurrence is not extreme. Public liability insurance limits also include the costs of legal representation at any court. Bodily injury There may be a need for personal accident cover for the owner and the staff. Motor The motor vehicle may need to be insured comprehensively or only for third party fire and theft, depending on its value and the cash flow of the business. Employee benefits and long-term insurance It is unlikely that there will not be enough employees to consider group life and disability, or group pension or provident funds. Version 1 2020/04/08 So consider the need for individual life and pension cover. The owner may need individual life cover to secure loans on the business, and the staff may need life cover. If there is no 50 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment company pension fund, the owner and the staff may wish to consider separate retirement annuity policies. Funeral cover may also need to be considered. Medical aid Individual membership would be needed as there are not sufficient employees to establish a group medical aid. Risks The risks associated with businesses differ. The insurances for a retail shop will be totally different from the insurances needed by a factory employing 200 workers. Once the exposures and risks have been identified, it becomes the insurance broker’s duty to prepare their broking notes for presentation to the insurance company(ies). As mentioned in Unit 3.4, all the facts that are material to the risk must be declared to the insurance company. When businesses are preparing their annual expense budget, they must consider the exposures to loss and the forms of insurance, and the cost thereof. As explained throughout this Unit Standard, businesses should not operate without insurances, certainly if they require debt or equity financing. Few businesses can operate without some form of external finance. Study the examples of a typical risk questionnaire in Addendum 2. 4.2 Business entity specific risks and insurance needs (AC2) Jane’s Retail Shoe Shop Let’s look at the short-term insurance portfolio for Jane’s Retail Shoe Shop. The risk financing needs for specific risks are considered under the following headings using a Multimark III ® Policy as the example. Fire Under fire insurance, we consider some other catastrophe risks. These would include, lightning, thunderbolt, explosion, earthquake and earth tremor, storm, wind, water, hail, snow, impact by aircraft and other aerial devices or articles from them, impact by vehicles or animals, leakage of fire appliances and installations, subsidence and landslip, and malicious damage. Theft Consider the location and the protection. How much stock could burglars take given the value of the stock and the time they may have? Glass We established that in terms of the lease for the premises, the client is responsible for any damage to the premises, so cover will be needed for the glass on the shop front window. The scope of cover for the glass is accidental breakage. Version 1 2020/04/08 51 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Money Consider the maximum amount of cash that may be on the premises at any one time. This includes money in the safe and the cash register and petty cash. Because of the attractiveness of cash, there are specific requirements as to how cheques are to be received and made out. Business interruption Damage at the shop by any of the major perils or risks described in the fire insurance section would most likely result in a loss of sales. Loss of sales has no direct effect on the businesses obligation to pay salaries and other expenses of a constant nature. So business interruption is definitely required. Public liability Specific legal liability risks include exposure to customers on the premises, the occupied premises, and surrounding businesses, and of course any legal liability in respect of the products they sell. Insurances of the person Consider death, disability, and medical expenses in respect of the owner and the staff. Comprehensive motor The ownership and use of a vehicle by the business has risks associated with it. Financial losses could arise as a result of damage to the vehicle in an accident or by natural perils, such as storm or hail, or it could be stolen. The business may also suffer a financial loss as a result of legal liability to a third party should the driver cause an accident. These risks are covered in terms of comprehensive motor insurance. Multimark III ® The above risks and covers are all catered for in the policy document. Life and medical covers are negotiated by intermediaries who have professional knowledge of people risks and the availability of coverage in these areas. Broking notes The broker would prepare their broking notes containing the following minimum information: Version 1 2020/04/08 Full name of business Physical address(es) of business Type of business Description of business processes Claims experience of business for as far back as possible Classes of insurance required Sums insured, or limits, required for each class of insurance Details of any special features of the business 52 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment BROKING NOTES The Insured The Business Period of Insurance FIRE SECTION Premises Property insured Additional perils Earthquake Special perils Malicious damage From to Stock and materials in trade both dates inclusive R Yes/No Yes/No Yes/No BUSINESS INTERRUPTION SECTION Premises Gross profit R Indemnity period (Maximum number of months) ……. Definitions Insured standing charges (Fixed costs) These must be stated in full on a scheduled list. THEFT SECTION Premises: R MONEY SECTION Premises 1. Money not contained in a locked safe or strongroom (i) while on the insured premises outside the hours during R1 500 which the commercial operations of the Insured are conducted (ii) while in the residence of the Insured, a partner in or of R1 500 or director or employee of the Insured 2. Money contained in a locked safe or strongroom situated in a building at the Insured’s premises outside the hours during which the commercial operations of the Insured are conducted in respect of the safe or strongroom described below: (a) R (b) R in respect of any safe or strongroom not specified in 2(i) above, the limit shall be according to the grading of such safe or strongroom as follows: R2 500 (a) No SABS grading R5 000 (b) SABS category 1 grading R12 500 (c) SABS category 2 grading R25 000 (d) SABS category 2 HD grading R50 000 (e) SABS category 2 ADM grading R75 000 (f) SABS category 2 ADM – GRADING D3 R100 000 (g) SABS category 3 grading R200 000 (h) SABS category 4 grading provided that the company’s liability shall not exceed the limit shown under 3 for the premises concerned. 3. In respect of any other loss of or damage to money during the period described below, the Version 1 2020/04/08 53 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment limit of indemnity for money relating to the specified insured premises shall be R R R R 4. In respect of loss of crossed cheques or R100 000 crossed money orders or crossed postal orders (This limit of indemnity is payable in addition to the limits of indemnity shown in 1, 2, and 3.) provided that irrespective of the number of specific limitations under which claim is lodged, the maximum liability of the company for one defined event or any series of defined events arising from one original source shall not exceed for each insured premises the sum of the limits of indemnity stated for 3 and 4. GLASS SECTION Premises: R Special reinstatement (National Building Yes/No Regulations) PUBLIC LIABILITY SECTION Limit of indemnity R Extension and clauses Included Products liability Yes/No Territories (excluding USA and Canada): Defective workmanship liability Yes/No First amount payable: (a) Product liability R (b) Defective workmanship R GROUP PERSONAL ACCIDENT SECTION Persons insured: Occupation: Circumstances: 1) Death R 2) Permanent disability such percentage of the compensation as is specified for the particular disability 3) Temporary total disability for a period R per week longer than……… weeks but not longer than …………..weeks. 4) Medical expenses R CLAIMS EXPERIENCE Version 1 2020/04/08 54 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 4.3 Investigating and selecting a specific insurance contract to meet identified needs (AC3) Choice of the insurance contact is decided by comparing the terms of each contract offered and the insurance companies themselves. Let us look at this in more detail. Terms and premiums Often clients are more concerned with the premium than the terms of the contract. The premium required is, however, relative to the overall terms of the contract offered by the insurance company. The terms of a contract refer to the scope of cover, first amounts payable, loss control requirements, and the premium. Restrict cover One insurer may wish to restrict cover on less favourable terms than those offered by the other, and hence, their policy would have more exceptions. First amounts payable and counter offers Although you may request quotations with a certain level of first amounts payable, the insurance company may not be willing to underwrite the cover at the level of first amounts payable requested. They then make a counter offer, providing terms with an alternative first amount payable structure. Compare the first amount payables required by all companies to see which is more favourable. Physical loss control requirements What are the insurer’s minimum requirements regarding fire, theft, and the safekeeping of money? One insurance company may require a sprinkler installation, whilst another may be prepared to underwrite the risk without a sprinkler installation. Premium The premium is the amount of money the insurance company want for the cover to be provided. Selection of the insurer When selecting which insurance company to use, it is advisable to compare both the administration of the company and its claims paying ability. Administration Is the company well run? How long does it take to obtain a quotation or to have a policy or an endorsement issued? Is the documentation correct the first time around? Is the claims department efficient in its dealings? These are the questions you should ask to compare the administration of an insurance company. It may be better to pay a little more premium to ensure there is efficient administration of the portfolio. Version 1 2020/04/08 55 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Claims paying ability Obviously, the claims paying ability of the insurance company is critical. There is little point in arranging insurance with an insurance company who will not be able to meet claims. Although insurance companies are regulated, have to submit quarterly returns to the Registrar of Insurance, and have minimum solvency margins, this does not guarantee that an insurance company has sufficient cash reserves to settle claims quickly. Rating agencies Most South African insurance companies have been formally investigated by rating agencies to provide an independent assessment of the insurer’s financial security and claims paying ability. The rating agencies take many factors, apart from the insurance company’s statutory solvency margin returns, into account. In most instances, the insurance intermediary will have the rating agencies report available, or even have their own internal investigation report of the ability of the insurance company to perform as required. 4.4 Exclusions (AC4) General exclusions Staying with the example in Unit 4.2, Jane’s Retail Shoe Shop, and still using the Multimark III ® Policy as an example, we will now examine some of the exclusions in the contract. We have already considered some of the general exclusions in an insurance contract, so here we will consider some of the specific exclusions which apply to particular classes of insurance. Use of heat and fire Fire insurance excludes damage to property undergoing any heating or drying process. This is excluded because such property is deliberately being subjected to heat and is, therefore, considered a trade risk. This is not relevant to the shop and, therefore, does not pose any problem. It could be a problem for a dry cleaner or laundry service though, and the client should be made aware of the implication of this exclusion, when applicable to their business. Theft Theft insurance for business entities mostly restricts the cover to theft accompanied by forcible and violent entry or exit from the premises. Glass This insurance would exclude glass which is damaged before the insurance is taken out and scratching without the glass being fractured through its entire thickness. These exceptions should be acceptable to the client. Version 1 2020/04/08 56 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Money Because money is so attractive from a theft point of view, the client is expected to take extra care with money, and the insurance company do not cover money stolen from an unattended vehicle or money stolen from an unlocked safe. Money not in a safe is usually limited to R1 500. Business interruption The loss of gross profits insurance does not have any exceptions of its own as it follows the fire insurance. This means all the terms and exceptions of the fire insurance will apply to this insurance and it will only respond if there is insured damage to the assets covered under the fire insurance. Public liability Some of the main exceptions in legal liability insurances are related to contracts entered into by the client which extend their legal liability beyond that of common law. This is because the insurance is not designed to insure contractual risks. Insurances of the person Personal accident, or stated benefits, insurances exclude air travel unless as a passenger, suicide and self injury, death or injury caused by an existing infirmity, the use of alcohol or drugs, participation in any riot or civil commotion, and hazardous activities, such as motor cycling, racing, mountaineering, winter sports involving snow or ice, professional football, and hanggliding. Again, most of these exceptions relate to the premium for the risk. Some of these activities can be insured, but the insurance company would want to know about them to ensure that the correct premium is charged. Motor As a whole, the motor insurance cover will exclude any damage or legal liability arising from the vehicle being used other than in accordance with the description of use, occurring outside the territorial limits of the policy or whilst being driven by a driver who is proved to be under the influence of intoxicating liquor or drugs or whilst the driver is unlicensed. As far as damage to the vehicle is concerned, the policy will exclude wear and tear, depreciation, mechanical breakdown, and damage to tyres or shock absorbers caused by inequalities in the road. Third party legal liability excludes any liability which is covered by any compulsory motor vehicle insurance, such as the Road Accident Fund. Passenger legal liability is only included for passengers in a private type vehicle, such as a car or light delivery vehicle (LDV). The use of the vehicle as a tool of trade, such as mobile cranes (trucks with cranes attached to them), is also excluded. Most exclusions are there for rating purposes or to exclude cover in respect of risk which it would be against public policy to insure, such as driving under the influence of alcohol. Version 1 2020/04/08 57 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 4.5 The terms of the contract (AC5) The insurance company’s terms for Jane’s Retail Shoe Shop can be summarised as follows: Scope of cover Per Multimark III ® Policy document; in other words, all of the terms, conditions, and exceptions of the Multimark III ® Policy will apply. First amount payable Fire: First amounts payable are not common in respect of fire insurance. However, it would not be uncommon to apply a first amount payable to damages emanating from lightning. Physical loss control requirements Premium Version 1 2020/04/08 Theft: The insurance company could apply a first amount payable for “smash-and-grab” claims. Glass: The insurer could apply a first amount payable for “smash-and-grab” claims. Money: First amount payables are not common in respect of money insurance. Loss of gross profit: First amount payables are not common on loss of gross profit insurances, other than in respect of loss of sales arising from the failure of electricity, water, or gas. A time first amount payable calculated for the first 24 hours of failure would apply. Public liability: First amount payables are not common in respect of legal liability insurance. Motor: Motor first amount payables can be based on a monetary amount or be expressed as a percentage of the claim. Fire: Fire protections may include hand held appliances, hose reels, or sprinkler systems. Water protection may include palletising of stock to keep it off the ground. Theft: Physical protections such as burglar bars and particular types of locks may be stipulated. An alarm with an armed response service may be required depending on the location. Money: A particular grading of safe will be required depending on the limit of cover required. Motor: Alarms and satellite tracking will be mandatory for high valued vehicles. Fire, theft, glass, money, and loss of gross profits: The premium will be calculated by applying a rate to the value insured. Public liability: Liability insurance is often a flat premium per premises, whilst products liability will be calculated by applying a rate to the turnover of the business. 58 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 4.6 Insurances of the person: The premium could be based on the death benefit value insured or a rate applied to the annual earnings of the insured persons. Motor: Individually stated vehicles will have the premium based on the use, the value, the type of vehicle, where it is normally kept, the vehicle security protections, and on the claim free years applicable. Specialised insurance (AC6) Some businesses require more specialised insurance than others. Some examples may be as follows: Employee dishonesty Employee dishonesty, or fidelity cover as it is otherwise known, is generally available. This cover is, however, limited to direct financial loss suffered only as a result of the dishonesty of any of the businesses employees. Electronic funds transfer (EFT) More specialised policies are available which include financial loss arising from fraudulent EFT perpetrated by either an employee or an outsider to the business. Professional indemnity Public liability insurances will only indemnify the client for their legal liability arising from injury or damage and exclude legal liability arising from defective design or specification. Professionals face the risk of being legally liable for pure financial losses for liabilities from the design of a product. These exposures can be insured by a professional indemnity policy. Typically, professionals such as attorneys, accountants, auditors, engineers, doctors, and financial service organisations need this cover. Construction insurance Fire insurances do not insure property while it is under construction. Building and other contracts such as the supply and installation of machinery can be insured under contractor’s policy. This policy covers the contract works (the subject matter of the contract) and all the material intended to become part of the contract works while it is in transit or while it is on the contract site. The policies also extend to insure the principal and contract’s legal liability. Plant all risks and hired-in-plant policies are available for the contractor’s equipment or plant which the contractor may hire in to do the contract. Financial guarantees or sureties This is applicable to contractors who have to provide a performance guarantee as part of the principal’s requirements when the contract is awarded. For the purposes of insurance guarantees, the client will always have to provide a counter guarantee and more often than not will have to provide collateral security. The amount of collateral security required may vary, depending on the strength of the contractor’s balance sheets. Version 1 2020/04/08 59 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Marine insurance Typically, those businesses that import or export will require marine insurance. Marine insurance is underwritten by a specialised department within the insurance company. Credit insurances (domestic or export credit) Any client who supplies goods or services on credit has a credit risk. It is a financial aid to large-scale finance deals and is important in the medium- to long-term credit facilities provided by the supplier. Credit Guarantee Corporation of Africa Limited (CGIC) was established in South Africa by the major insurers and banks to underwrite credit risks. Export credit covers non-payment due to insolvency, political risks, or consequences outside of the control of the seller and the purchaser. Domestic credit covers only the insolvency or protracted default of the buyer. Engineering insurance Factories and other businesses which are heavily dependent on machinery and equipment may need to insure against machinery breakdown. Because of the specialised nature of such machinery, it is handled by a specialist insurance underwriter who has technical knowledge of machinery. Electronic equipment Specialist policies are available to cover electronic equipment such as computers, telephone exchanges, and other electronic equipment. These policies include electrical and electronic breakdown cover. Exhibition all risks Clients sometimes participate in industry or trade fairs. Most of their policies may be restricted to providing cover for their property at their own premises, hence, the need to arrange separate exhibition insurances. The policy would cover all of the property, the client’s own or that which they hire for the exhibition, whilst in transit to and from and whilst at the exhibition. The client should also tell their legal liability insurers about the event to make sure they are covered for legal liability arising as a result of participation in the exhibition. This is because being an exhibitor may not have been mentioned in the client’s description of business. Perhaps, depending on where the event is being held and the anticipated number of visitors, the client should consider extra legal liability cover, specifically for the exhibition. Specialised insurances are available for nearly any activity, event, or business. Version 1 2020/04/08 60 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 1. How vital is it to investigate the needs for insurance in a business entity? Self-test 4 2. Name a few specialised forms of insurance coverage that a business could consider. 3. Design a table that you can use when comparing different insurance contracts 4. List the typical exclusions found in a vehicle insurance contract. 5. List 10 specialised insurance items. Competency Competency check and progress indication Version 1 2020/04/08 Check SO3 I can identify the need for an insurance in the financial planning of a business. AC1 I can analyze a business entity risk and insurance need with a view to negotiating insurance to meet the identified need. AC2 I can explain the need to investigate an insurance contract with two different insurance institutions. AC3 I can identify exclusions in a contract. AC4 I can indicate why exclusions are necessary and whether they re acceptable to a business entity. AC4 I can explain the terms of a contract. AC5 I can identify specialised insurance required to meet the needs of a particular business enterprise and reasons are given to explain why the identified risks are important to the particular kind of business. AC6 61 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Answers to Self-tests 1. Broadly speaking what are the categories of financial services? Self-test 1 A. Micro financiers, banking, capital markets, collective investment schemes, insurance, retirement funding and medical aid. 2. What changes in the financial services sector have you noticed recently? B. Mergers and acquisitions, legislation changes, bee involvements and technology advancements. 3. List at least 4 financial service organisations that are quoted on the JSE. C. Sanlam D. Old Mutual E. Liberty F. AAAAA 6. Study Example 2 (Addendum 1) of Sanlam’s holdings and identify the main business of at least 10 holdings. A. Example Company Name Main Business ABSA Financial SAFAIR Leasing and chartering of passenger and cargo aircraft to domestic and international operators TRADEK Tlotlisa Holdings Ltd (former Tradek HOLDINGS LTD Holdings Ltd) is an investment holding company. BELDIV Investments Genbel Securities is a South African GENBEL securities trading and underwriting SECURITIES LTD group. GENSEC Gensec Property Services PROPERTY specialises in the management and SERVICES (PTY) administration of commercial LTD properties. SANLAM Investments INVESTMENTS (PTY) LTD SANLAM LIFE Life Insurance INSURANCE LTD Sanlam Netherlands Holdings BV is SANLAM the European holding company of NETHERLANDS the HOLDINGS BV Sanlam Group. Rycklof Investments Investments Version 1 2020/04/08 62 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 7. Why do some companies prefer to list offshore? A. Companies list locally and offshore to increase ability to raise capital. This is known as a dual listing. A dual listing increases access to markets to raise capital for the business. Moreover, companies may list in more than one territory when they have significant amounts of business in those territories. 1. What is the concept of insurance? Self-test 2 A. The many contributors into a common fund to pay for the few who suffer a loss. 2. Explain how insurance plays a role in a business enterprise. a. Financial planning for the future, wealth creation, protection of assets and people. 3. Explain ‘insurable interest’. a. You are not permitted to insure anything that by its loss or damage you do not stand to lose financially. Therefore, you can only insure something where by its loss or damage, or by a legal liability action against you, you will suffer financially. 4. When must insurable interest apply in respect of a marine policy? a. At the time of claim. 5. Material damage, legal liability and motor insurances are common business entity insurance covers arranged. Are there any other forms of business insurance that can be arranged? a. Bodily injury, death, partnership and business interruption. 6. What business events cannot be insured? a. War, nuclear activity, use of asbestos, computers inability to use a date and riot. Riot can be insured but only through a specialist insurance company called SASRIA. Version 1 2020/04/08 63 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 7. Explain claim reserving in your own words. a. Claim reserving is rather like you saving to go on holiday. You know you will be going on holiday, but you may not have decided where to go or for how long. You budget and hope that when you need the money, you have enough. The insurance company knows that they will have to pay a claim, but they do not know when or how much. So the Acts make it compulsory for the insurance company to budget a minimum amount (basically 15%) and, when the claim actually happens, to make sure that their estimate is adequate and to transfer the budgeted reserve into a bank call account, waiting for payment to the insured. 8. How important is it to audit the books of a business to secure claims statistics? a. Accurate claims statistics are vital to managing risk. By studying the pattern of previous losses, it will point to possible remedial action being required as a risk management or loss control measure 9. Why do large corporations consider arranging some form of captive insurance? a. At times, the larger corporate companies began to feel the conventional insurance companies were not meeting their needs. Premiums were volatile from one year to the next, cover became more restrictive, and as the value of the large mining and industrial companies’ assets and profits rose, the ability of the insurance companies to take such large risks became impeded. In insurance terminology, this is referred to as a lack of capacity. Version 1 2020/04/08 64 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 1. Is an insurance policy a legally enforceable contract? a. Insurance policies are legally enforceable contracts. Self-test 3 2. Name the three main types of insurances that will make up a typical portfolio of a business. a. Short-term insurance b. Long-term insurance c. Medical aid 3. What is the purpose of an endorsement? a. Sometimes the client may wish to alter an insurance contract during the period of insurance. They may have acquired additional buildings or another plant and need to increase the fire sum insured. Or the amount of cash collected has increased, and they have to increase the limit on their money cover. Or they have acquired a new vehicle, and this must be added to the policy. When this happens, the insurance company may note the change by an endorsement. 4. List the main responsibilities of the insured. a. Duty of disclosure b. Duty of reasonable care c. Premium payment d. Notification of claims e. Assisting with recoveries 1. How vital is it to investigate the needs for insurance in a business entity? Self-test 4 a. Without insurances the business entity is likely to fail due to fail due to the lack of finances should a loss occur. 2. Name a few specialised forms of insurance coverage that a business could consider. a. Fire, Theft, Glass, Money, Business interruption, Public Liability, Personal, Motor insurance 3. Design a table that you can use when comparing different insurance contracts. Version 1 2020/04/08 65 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Specifications Terms Premiums Restricted cover First amounts payable Physical loss control requirements Insurers administrative capability Insurers claim paying ability Rating Old Mutual Sanlam Liberty 4. List the typical exclusions found in a vehicle insurance contract: a. As a whole, the motor insurance cover will exclude any damage or legal liability arising from the vehicle being used other than in accordance with the description of use, occurring outside the territorial limits of the policy or whilst being driven by a driver who is proved to be under the influence of intoxicating liquor or drugs or whilst the driver is unlicensed. b. As far as damage to the vehicle is concerned, the policy will exclude wear and tear, depreciation, mechanical breakdown, and damage to tyres or shock absorbers caused by inequalities in the road. c. Third party legal liability excludes any liability which is covered by any compulsory motor vehicle insurance, such as the Road Accident Fund. d. Passenger legal liability is only included for passengers in a private type of vehicle, such as a car or light delivery vehicle (LDV). e. The use of the vehicle as a tool of trade, such as mobile cranes (trucks with cranes attached to them), is also excluded. Version 1 2020/04/08 66 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 5. List 10 specialised insurance items. a. Employee dishonesty b. Electronic funds transfer (EFT) c. Professional indemnity d. Construction insurance e. Financial guarantees or sureties f. Marine insurance g. Credit insurances (domestic or export credit) h. Engineering insurance Version 1 2020/04/08 i. Electronic equipment j. Exhibition all risks 67 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Addendum 1 Example 1 Long-term sector: Old Mutual Old Mutual is dual listed on both the JSE and the London Securities Exchange. OLD MUTUAL PLC Long-term Insurance % Associates OM KOTAK MAHINDRA LIFE ASSURANCE (INDIA) 26% Direct subsidiaries OM GROUP (UK) LTD 100% Indirect subsidiaries ACADIAN ASSET MANAGEMENT INC. (USA) AMERICOM LIFE & ANNUITY INSURANCE CO. INC. (USA) BARROW, HANLEY, MEWHINNEY & STRAUSS INC. (USA) BOE HOLDINGS LTD BOE INTERNATIONAL HOLDINGS (PTY) LTD BOE LIFE ASSURANCE COMPANY LTD BOE LIFE LIMITED BOE LTD BOE UNIT TRUST MANAGEMENT COMPANY LTD BRIGHT CAPITAL LTD CLAY FINLAY INC. (USA) DWIGHT ASSET MANAGEMENT CO. INC. (USA) FAIRBAIRN CAPITAL (PTY) LTD FEDELITY & GUARANTY LIFE INSURANCE COMPANY OF NY FIDELITY & GUARANTY LIFE INSURANCE CO. INC. (USA) FIRST PACIFIC ADVISORS INC. (USA) GERRARD PRIVATE BANK (JERSEY) HEITMAN FINANCIAL LLC MUTUAL & FEDERAL INSURANCE COMPANY LTD NEDBANK LTD NEDCOR ASIA LTD (SOUTH AFRICA) NEDCOR INVESTMENT BANK HOLDINGS LTD NEDCOR LTD NEDINSURANCE COMPANY LTD OLD MUTUAL (NETHERLANDS) B.V. (NETH) OLD MUTUAL (SOUTH AFRICA) LTD OLD MUTUAL (US) HOLDINGS INC. (USA) OLD MUTUAL ASSET MANAGERS (BERMUDA) LTD (BER) OLD MUTUAL ASSET MANAGERS (SOUTH AFRICA) (PTY) LTD OLD MUTUAL ASSET MANAGERS (UK) LTD (UK) OLD MUTUAL ASSET MANAGERS (KENYA) LTD OLD MUTUAL FUND MANAGERS (GUERNSEY) LTD OLD MUTUAL GROUP LTD (BERMUDA) OLD MUTUAL HEALTH INSURANCE LTD OLD MUTUAL HEALTHCARE (PTY) LTD OLD MUTUAL INTERNATIONAL (GUERNSEY) LTD (GUERNSEY) OLD MUTUAL INVESTMENT ADMINISTRATORS (PTY) LTD OLD MUTUAL LIFE ASSURANCE CO. (BERMUDA) LTD 100% 100% 100% 53% 53% 53% 76% 52% 53% 100% 100% 100% 100% 100% 100% 100% 65% 100% 87.6% 52.7% 52% 52% 52% 52% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Version 1 2020/04/08 68 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment OLD MUTUAL LIFE ASSURANCE CO. (MALAWI) LTD (MALAWI) OLD MUTUAL LIFE ASSURANCE CO. (NAMIBIA) LTD (NAMIB) OLD MUTUAL LIFE ASSURANCE CO. (SOUTH AFRICA) LTD OLD MUTUAL LIFE ASSURANCE CO. LTD (KENYA) OLD MUTUAL LIFE ASSURANCE CO. ZIMBABWE LTD (ZIM) OLD MUTUAL PROPERTIES (PTY) LTD OLD MUTUAL PROPERTY INVESTMENT CORP (PVT) LTD OLD MUTUAL REASSURANCE (IRELAND) LTD OLD MUTUAL SPECIALISED FINANCE (PTY) LTD OLD MUTUAL UNIT TRUST MANAGERS LTD OLD MUTUAL UNIT TRUST MGMT CO. NAMIBIA LTD (NAMIBIA) OLD MUTUAL US LIFE HOLDINGS INC. (USA) OM PORTFOLIO HOLDINGS (SA) (PTY) LTD OMNIA LIFE (BERMUDA) LTD OSV FINANCIAL MANAGEMENT GMBH PACIFIC FINANCIAL RESEARCH INC. PEOPLE'S BANK (PTY) LTD PILGRIM BAXTER & ASSOCIATES INC. (USA) PROVIDENT INVESTMENT COUNSEL INC. (USA) RODINA INVESTMENTS LTD SELESTIA LIFE & PENSIONS LTD THOMPSON, HORSTMANN & BRYANT, INC. THOMPSON, SIEGEL & WALMSLEY INC. Example 2 Long-term sector: Sanlam Sanlam is also very diverse in the long-term field and is also dual listed, both on the JSE and the London Securities Exchange. SANLAM LTD Long-term Insurance Associates ABSA GROUP LTD SAFAIR LEASE FINANCE (PTY) LTD (JOINT VENTURE) TRADEK HOLDINGS LTD 100% 100% 100% 63% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 52% 100% 100% 100% 100% 100% 100% % 21% 50% 37% indirect Direct subsidiaries BELDIV INVESTMENTS (PTY) LTD GENBEL SECURITIES LTD GENSEC PROPERTY SERVICES (PTY) LTD SANLAM INVESTMENTS (PTY) LTD SANLAM LIFE INSURANCE LTD SANLAM NETHERLANDS HOLDINGS BV SANLAM SPEC (PTY) LTD TASC ADMINISTRATION (PTY) LTD 100% 100% 100% 100% 100% 100% 100% 100% Indirect subsidiaries ELECTRA INVESTMENTS (SA) LTD GENSEC UNIVERSAL FUND PLC HICHENS, HARRISON & CO. PLC (UK) PSIGMA GROUP (UK) RYCKLOF INVESTMENTS (PTY) LTD SANLAM FINANCIAL SERVICES (PTY) LTD SANLAM INVESTMENT MANAGEMENT (PTY) LTD SANLAM NAMIBIA LTD SANTAM LTD U.R.D. INVESTMENTS (PTY) LTD 100% 93% 100% 60% 100% 100% 100% 100% 48% 100% Version 1 2020/04/08 69 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Investments SANTAM LTD Example 3 Banking sector: Firstrand Limited FIRSTRAND LTD Banking Associates AFRICAN LIFE MARSH HOLDINGS SA (PTY) LTD MC CARTHY LTD MOBILE ACCEPTANCES (PTY) LTD OUTWARD INVESTMENTS (PTY) LTD RELYANT RETAIL LTD TOYOTA FINANCIAL SERVICES (PTY) LTD ZEDA CAR LEASING (PTY) LTD 5% % 33% 40% 48% 26% 46% 26% 33% 50% Direct subsidiaries FIRSTRAND HOLDINGS LTD FIRSTRAND INVESTMENT HOLDINGS LTD MOMENTUM GROUP LTD 100% 100% 100% Indirect subsidiaries DISCOVERY HOLDINGS LTD FIRST ASSET MANAGEMENT FIRST LAND DEVELOPMENTS LTD FIRST NATIONAL ASSET MANAGEMENT & TRUST CO. P/L FIRST NATIONAL BANK (PTY) LTD FIRST NATIONAL BANK HOLDINGS (BOTSWANA) LTD FIRST NATIONAL BANK OF NAMIBIA LTD (NAMIBIA) FIRST NATIONAL BANK OF SWAZILAND LTD (SWAZI) FIRSTCORP MERCHANT BANK HOLDINGS LTD FIRSTLINK INSURANCE BROKERS HOLDINGS (PTY) LTD FIRSTRAND BANK LTD FIRSTRAND INTERNATIONAL (MAURITIUS) LTD FNB EQUIPMENT FINANCE (PTY) LTD MOMENTUM INTERNATIONAL MULTIMANAGERS RAND MERCHANT BANK LTD RMB PRIVATE EQUITY (PTY) LTD 62% 100% 100% 100% 80% 100% 77% 100% 100% 100% 100% 100% 100% 73% 100% 88% Example 4 General industrial sector: Imperial The extent of involvement in financial services of Imperial is interesting considering this company is listed on the general industrial sector IMPERIAL HOLDINGS LTD % Diversified Industrial Associates ACL AVIATION (PTY) LTD 50% AIR CONTRACTORS LTD (IRELAND) 49% FLEET SUPPORT SERVICES (PTY) LTD 50% 49.9 IMPERIAL BANK LTD % KHAYA CAR HIRE (PTY) LTD 38% SAFAIR LEASE FINANCE (PTY) LTD (JOINT VENTURE) 50% TRUCK & ALLIED SERVICES (PVT) LTD (ZIMBABWE) 50% Version 1 2020/04/08 70 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment UKHAMBA HOLDINGS (PTY) LTD 46.9 % Direct subsidiaries AFRICAN CAR HIRE (SWAZILAND) (PTY) LTD (SWAZILAND) AIR CONTRACTORS (UK ) LIMITED ALMEYROSE INVESTMENTS (PTY) LTD ANVIL INTERNATIONAL FINANCE LTD ANVIL INTERNATIONAL LTD ARROW BULK CARRIERS (PTY) LTD ASSOCIATED MOTOR HOLDINGS (PTY) LTD AUTO PEDIGREE (PTY) LTD BRIAN PORTER HOLDINGS LTD CAR HIRE BROKERS (PTY) LTD CARGO AFRICA (PTY) LTD CLAY SPRINGS INVESTMENTS (PTY) LTD COLD CHAIN (PTY) LTD, THE COMMERCIAL CENTRE (PTY) LTD DEKSON TRANSPORT (PTY) LTD ERF FOUR NINE NINE SPARTAN (PTY) LTD ETOSHA TRANSPORT (PTY) LTD FAST N FRESH TRANSPORT (PTY) LTD FOURWAYS HOLDING (PTY) LTD FREIGHTMAX (PTY) LTD GARDEN ROUTE TOURS (PTY) LTD GMS TRANSPORT (PTY) LTD GOLD REEF GUIDES (PTY) LTD GOLDFIELDS TRUCKING (PTY) LTD GROSVENOR TOURS (PTY) LTD GUEST ASSISTANCE (PTY) LTD HANIEL REEDEREI HOLDING GMBH HIGHWAY CARRIERS (NATAL) (PTY) LTD ICAP FINANCE (PTY) LTD IMPACT FORK TRUCKS LTD Version 1 2020/04/08 100% EFFECTIVE 100% 100% 100% EFFECTIVE 100% EFFECTIVE 60% EFFECTIVE 90% EFFECTIVE 100% 100% 75% EFFECTIVE 60% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 50% EFFECTIVE 100% EFFECTIVE 100% 100% 100% EFFECTIVE 50% 50% EFFECTIVE 100% DORMANT 100% 100% DORMANT 60% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 51% EFFECTIVE 100% EFFECTIVE 70% EFFECTIVE 100% EFFECTIVE 71 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment IMPERIAL CAR IMPORTS (PTY) LTD IMPERIAL CAR RENTAL (BOTSWANA) (PTY) LTD (BOTSWANA) IMPERIAL CAR RENTAL (NAMIBIA) (PTY) LTD (NAMIBIA) IMPERIAL CAR RENTAL (PTY) LTD IMPERIAL FINANCIAL HOLDINGS LTD IMPERIAL FINANCIAL SERVICES (PTY) LTD IMPERIAL FLEET SERVICES (PTY) LTD IMPERIAL GROUP (PTY) LTD IMPERIAL LOGISTICS INTERNATIONAL GMBH & CO. KG IMPERIAL MANAGEMENT SERVICES (PTY) LTD IMPERIAL MOTORS (PTY) LTD IMPERIAL PANEL SHOPS (PTY) LTD IMPERIAL TRANSPORT HOLDINGS LTD IMPERIAL TRUCK HIRE (PTY) LTD IMPERIAL TRUCK SYSTEMS (PTY) LTD IMPERIHOLD (PTY) LTD IMPERILOG LTD INTERCITY BENONI (PTY) LTD INTERCITY MOTORS (PTY) LTD INTERNATIONAL TRANSPORT CORP (PTY) LTD JAVELIN TRUCKING (PTY) LTD JWJ MECHANICALS (PTY) LTD KAGISO AUCKLAND PARK (PTY) LTD KAGISO PIETERSBURG (PTY) LTD KELRN TRANSPORT (PTY) LTD LECTROLITE PRODUCTS (PTY) LTD LOMBARD'S TRANSPORT (TVL) (PTY) LTD LONDOLA TRANSPORT (PVT) LTD (ZAMBIA) LONG DISTANCE TRANSPORT (PTY) LTD Version 1 2020/04/08 90% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% DORMANT 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 60% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 53% EFFECTIVE 100% EFFECTIVE 100% DORMANT 100% EFFECTIVE 100% DORMANT 72 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment LONGRAIL LTD LUFTMEISTER AIR (PTY) LTD MB LOGISTICS (PTY) LTD MEGAFREIGHT SERVICES (PTY) LTD MERCURIUS MOTORS (PTY) LTD MILLFREIGHT TRANSPORT & CONSULTING (PTY) LTD MRB ONDERNEMINGS (PTY) LTD MULTI WESCO (PTY) LTD MURNAU HOLDINGS LTD NATIONAL AIRWAYS & FINANCE CORPORATION (PTY) LTD NEWCASTLE PROPERTIES SHARE BLOCK (PTY) LTD NOMINATED CARRIERS (PTY) LTD NORMANS TRANSPORT LINES (PTY) LTD NORTH EAST CARRIERS (PTY) LTD PLUS RENT A CAR (PTY) LTD (MOZAMBIQUE) PROPATEEZ 53 (PTY) LTD QUADRO STEEL PROPERTIES (PTY) LTD QUALITY PANELBEATERS (PTY) LTD QUATTRO CARRIERS (PTY) LTD REGENT INSURANCE COMPANY LTD REGENT LIFE ASSURANCE COMPANY LTD ROYAL FREIGHT SERVICES (PTY) LTD SAFAIR (PTY) LTD SAFAIR LEASE FINANCE (PTY) LTD (JOINT VENTURE) SAFICON BOUMAT GROUP SERVICES (PTY) LTD SAFICON MOTOR HOLDINGS LTD SAKER'S INVESTMENTS (PTY) LTD SANITECH SERVICES (PTY) LTD SCHUS IMPORTS (PTY) LTD SHORTHAULS (PTY) LTD Version 1 2020/04/08 100% DORMANT 100% EFFECTIVE 100% EFFECTIVE 58.98% EFFECTIVE 100% EFFECTIVE 70% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 62% EFFECTIVE 50% DORMANT 100% 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 80% EFFECTIVE 90% DORMANT 100% EFFECTIVE 100% EFFECTIVE 100% 100% EFFECTIVE 50% EFFECTIVE 100% EFFECTIVE 100% DORMANT 100% EFFECTIVE 100% EFFECTIVE 81% EFFECTIVE 100% DORMANT 73 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment SPRINGBOK ATLAS (PTY) LTD SPRINGBOK TOURING OF NAMIBIA (PTY) LTD (NAMIBIA) SSANGYONG MOTOR DISTRIBUTORS (PTY) LTD SUNRIPE LTD SWANS RENT A CAR (PTY) LTD TANKER SERVICES (PTY) LTD TANNERY PANELBEATERS (PTY) LTD TEMPEST CAR HIRE (PTY) LTD TIDE TRANSPORT (BOTSWANA) (PTY) LTD (BOTSWANA) TOURISM HOLDINGS RENTALS S A (PTY) LTD TOURISM INVESTMENT CORPORATION LTD TRAN-SEND FREIGHT SPECIALISTS (PTY) LTD TRUCKAFRICA (BOTSWANA) (PTY) LTD TYCO INTERNATIONAL (PTY) LTD VAN ZYL'S SPRING WORKS (PTY) LTD WESTERN CARRIERS (PTY) LTD WIP MOTORS (PTY) LTD Indirect subsidiaries KAWASAKI MOTORCYCLES SA 100% EFFECTIVE 100% EFFECTIVE UNKNOWN% 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 80% EFFECTIVE 100% EFFECTIVE 90% DORMANT 100% EFFECTIVE 65% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 100% EFFECTIVE 70% EFFECTIVE 100% EFFECTIVE TRUCKAFRICA INTERNATIONAL (PTY) LTD 75% 70% EFFECTIVE 100% Investments ITI TECHNOLOGY HOLDINGS LTD 9% KOBUS MINNAAR TRANSPORT (PTY) LTD Version 1 2020/04/08 74 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Addendum 2 1. DESCRIPTION OF BUSINESS Main Activities: Main Suppliers: Main Customers: Main Services: 2. WHAT COULD REALLY CLOSE DOWN THE BUSINESS? 3. WHAT ASSETS/PEOPLE/SERVICES IS THE BUSINESS DEPENDANT ON? Dependency Level Dependency Dependency Group on Zero Low Med. High Retain Insure Land Buildings Communications Computer Files Machinery Stocks Money Income People Service lines Transport Other Version 1 2020/04/08 75 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment 4. WHAT PERILS IS THE BUSINESS MAINLY EXPOSED TO? Exposure Level Exposure Exposure to / Group spread of Fire Fire Zero Low Med. High Retain Insure Smoke Wind Rain Hail Snow Lightening Earth Earthquake Mining tremor Subsidence Landslip Water Flood Tidal wave Animals Animals Vermin People Pilferage Theft Robbery Fraud/Dishonesty Computer fraud Malicious damage Strikes Extortion Kidnapping Machinery Collapse Impact Machinery breakdown Explosion Stocks Stock deterioration Leakages Version 1 2020/04/08 76 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Spontaneous combustion Services/Fuel Other 5. WHAT LIABILITIES IS THE BUSINESS EXPOSED TO? Exposure Level Exposure Exposed Group from Zero Low Med. High Retain Insure Land Buildings/Walls Car park Machinery/Vessels Stock in trade Products/Services Documents/ Agreements/Notices Money Animals People Transport Media/Internet Statutes Version 1 2020/04/08 77 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment Addendum 3 All qualifications and unit standards registered on the National Qualifications Framework are public property. Thus the only payment that can be made for them is for service and reproduction. It is illegal to sell this material for profit. If the material is reproduced or quoted, the South African Qualifications Authority (SAQA) should be acknowledged as the source. SOUTH AFRICAN QUALIFICATIONS AUTHORITY REGISTERED UNIT STANDARD: Analyse the Financial Services industry and the role of insurance in a business environment SAQA US ID UNIT STANDARD TITLE 12168 Analyse the Financial Services industry and the role of insurance in a business environment SGB NAME NSB SGB Financial Services NSB 03-Business, Commerce and Management Studies PROVIDER NAME FIELD SUBFIELD Business, Commerce and Management Studies Finance, Economics and Accounting ABET BAND UNIT STANDARD TYPE NQF LEVEL CREDITS Undefined Regular Level 4 9 REGISTRATION STATUS REGISTRATION START DATE REGISTRATION END DATE SAQA DECISION NUMBER Registered 2001-12-05 2004-12-05 SAQA 0639/01 PURPOSE OF THE UNIT STANDARD This unit standard analyses financial services for commonality and difference and introduces the need for insurance in a business entity. The focus is knowledge, skills, values and attitudes in relation to the business context. The qualifying learner is capable of: enterprise. tract that meets the needs of a specific business enterprise. LEARNING ASSUMED TO BE IN PLACE Version 1 2020/04/08 78 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment There is open access to this unit standard. Learners should be competent in Communication, Financial Literacy and Mathematical Literacy at NQF Level 3. UNIT STANDARD RANGE The typical scope of this unit standard is: financiers, long and short term insurance, intermediary insurance, asset management, trust management, collective investments and South African Revenue Services. UNIT STANDARD OUTCOME HEADER N/A Specific Outcomes and Assessment Criteria: SPECIFIC OUTCOME 1 Analyse the different services that are classified as financial. ASSESSMENT CRITERIA ASSESSMENT CRITERION 1 1. The various categories of financial service are analysed and an indication given of the similarities and differences between the various services. ASSESSMENT CRITERION 2 2. Business activities common to most financial service providers are analysed and an indication is given of where there is commonality and difference. ASSESSMENT CRITERION 3 3. Current changes in the structure of the financial services sector are identified from the media and an indication is given of how these changes will impact on the sector and the consumer. ASSESSMENT CRITERION 4 4. Four of the main holding companies in the field are analysed in terms of links to other financial organisations. ASSESSMENT CRITERION 5 5. The financial organisations listed on the JSE and other markets are identified and reasons are given to explain why some financial organisations choose to list both locally and offshore. SPECIFIC OUTCOME 2 Demonstrate knowledge and understanding of the kinds of insurance that are important in a business OUTCOME NOTES Demonstrate knowledge and understanding of the kinds of insurance that are Version 1 2020/04/08 79 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment important in a business venture. ASSESSMENT CRITERIA ASSESSMENT CRITERION 1 1. The concepts of insurance and pooling of risk are explained in relation to business enterprise risk management. ASSESSMENT CRITERION 2 2. The role of insurance is described in relation to business enterprise financial planning. ASSESSMENT CRITERION 3 3. Terminology used in the insurance industry such as offer, acceptance and subject matter is applied to insurance in the business sector. ASSESSMENT CRITERION 4 4. The concept of insurable interest is explained as applied to a specific business entity. ASSESSMENT CRITERION 5 5. Five events and risks that can be insured are identified and the advantages of insurance are explained in relation to a specific business entity. ASSESSMENT CRITERION 6 6. Two business events and risks that cannot be insured are identified and reasons are given why some business risks are uninsurable. ASSESSMENT CRITERION 7 7. The concept of claims reserves is explained with reference to the effect these have on the payment of a claim. ASSESSMENT CRITERION 8 8. The importance of auditing books of business to provide claims statistics is explained and an indication is given of the action that can be taken if claims statistics are unsatisfactory. ASSESSMENT CRITERION 9 9. The concept of a captive market/portfolio is explained with reference to the role of both the intermediary and the insurance company. SPECIFIC OUTCOME 3 Explain a contract of insurance in a business entity. ASSESSMENT CRITERIA ASSESSMENT CRITERION 1 1. The purpose of a contract is explained with reference to an actual policy for a Version 1 2020/04/08 80 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment business entity. ASSESSMENT CRITERION 2 2. The purpose of a portfolio is explained and the characteristics of a portfolio are indicated for an authentic business enterprise. ASSESSMENT CRITERION 3 3. The term endorsement is explained and examples of endorsements are identified in a business contract. ASSESSMENT CRITERION 4 4. The main rights and responsibilities of the insured are understood and explained in terms of a complex business insurance contract and the need for reinsurance. SPECIFIC OUTCOME 4 Negotiate an insurance contract to meet the needs of a selected business enterprise. ASSESSMENT CRITERIA ASSESSMENT CRITERION 1 1. The need for insurance is identified in the financial planning of a business entity. ASSESSMENT CRITERION 2 2. Business entity specific risks and insurance needs are analysed with a view to negotiating insurance to meet the identified needs. ASSESSMENT CRITERION 3 3. An insurance contract is investigated with two different insurance institutions to meet the identified need and a decision is made and supported to explain the particular insurance choice. ASSESSMENT CRITERION 4 4. Exclusions in the contract are identified and an indication is given as to why the exclusions are necessary and whether they are acceptable to the business entity. ASSESSMENT CRITERION 5 5. The terms of the contract are explained for the selected business entity. ASSESSMENT CRITERION 6 7. Specialised insurance required to meet the needs of a particular business enterprise is identified and reasons are given to explain why the identified risks are important to the particular kind of business. UNIT STANDARD ACCREDITATION AND MODERATION OPTIONS This Unit Standard will be internally assessed by the provider and moderated by a moderator registered by INSQA or a relevant accredited ETQA. The mechanisms and requirements for moderation are contained in the document obtainable from INSQA, INSQA framework for assessment and moderation. Version 1 2020/04/08 81 Unit Standard SAQA 12168 – Analyse the Financial Services industry and the role of insurance in a business environment UNIT STANDARD ESSENTIAL EMBEDDED KNOWLEDGE N/A UNIT STANDARD DEVELOPMENTAL OUTCOME N/A UNIT STANDARD LINKAGES N/A Critical Cross-field Outcomes (CCFO): UNIT STANDARD CCFO IDENTIFYING The learner can identify and solve problems and make a decision about the choice of an insurance contract for a business entity by understanding the consequences of insuring or not insuring risk and the selection of a portfolio to meet specific needs. UNIT STANDARD CCFO ORGANIZING The learner can organise and manage himself by undertaking financial planning for the insurance needs of a business enterprise. UNIT STANDARD CCFO COLLECTING The learner can organise and manage himself by undertaking financial planning for the insurance needs a business enterprise. UNIT STANDARD CCFO COMMUNICATING The learner can communicate effectively using visual, mathematics and language skills in the modes of oral and written presentations when explaining the terms of the contract of a selected business entity and the rights and responsibilities of the insured and the need for reinsurance. UNIT STANDARD CCFO DEMONSTRATING The learner can see the world as a set of related systems in identifying changes in the structure of the Financial Services Sector and indicate the impact on the sector and the consumer. UNIT STANDARD ASSESSOR CRITERIA N/A UNIT STANDARD NOTES N/A All qualifications and unit standards registered on the National Qualifications Framework are public property. Thus the only payment that can be made for them is for service and reproduction. It is illegal to sell this material for profit. If the material is reproduced or quoted, the South African Qualifications Authority (SAQA) should be acknowledged as the source. Version 1 2020/04/08 82