Module 3/3
Long term solutions
in friendly
societies:
Indicate the sub-sectors of
the Financial Industry and
the role of insurance in the
financial industry.
Table of Contents
Icons and Conventions used..................................................................................................... 2
Introduction ........................................................................................................................... 3
Specific Outcome 1: Types of Financial Services ................................................................ 6
Specific Outcome 2: The Concept and Role of Insurance in Financial Planning ................ 19
Specific Outcome 3: The insurance contract ...................................................................... 23
Specific Outcome 4: Selecting an insurance product ......................................................... 25
Conclusion .......................................................................................................................... 33
Exercises ............................................................................................................................. 36
Model answers to Exercises ................................................................................................ 38
Self Assessment Questions ................................................................................................ 40
Icons and Conventions used
The pictures you see below are icons or graphic representations of concepts. It is used
throughout the learner guide to make things easier for you to read. Make a mental note of
them before you continue.
Icon
Description
Activity: This icon prompts you to reflect on your own situation, answer questions and note
your answers and ideas in the space provided.
Example: This icon refers to content that serves to explain a concept by means of an
example.
Evidence: This icon refers to information about evidence that you need to collect and insert
in your guide. Your line manager will utilise it as input when writing a report about your
performance as part of your assessment.
The typographical conventions you see below are used throughout the learner guide to
alert you to process information, to provide study guidance and to make the content more
readable. Study the meanings as set out in the table so that you will not have to continually
return to this page for clarification.
Convention
Bold
Description
This serves to emphasise and important fact.
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Introduction
It is not sufficient to know how to serve a customer and how to manage your time and work
processes in order to provide efficient customer service. It is a great advantage when you are
able to explain the industry within which the customer’s query resides.
Through understanding the industry within which you work, you will not only be able to better
interpret the customer’s query, but also be able to provide her/him with a better solution to
her/his query or need.
This module aims at providing you with a very broad overview of the financial services
industry, as it exists within South Africa. It further explains the role of insurance within this
industry and then allows you the opportunity to resolve your own insurance need.
Learning outcome
On completion of this module, you will be able to:
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Indicate the sub-sectors of the Financial Services Industry and the role of Insurance in the
industry.
Assessment criteria
In order to assess the attainment of the learning outcome, you will be assessed against the
assessment criteria as listed below.
Specific outcomes and assessment criteria:
Specific outcome
1. Name and describe the
different services that
are classified as
financial.
2. Know and understand
the concept of insurance
and the role of insurance
in financial planning.
Assessment criteria
1.1. The various categories of financial services are named and
explained using the terminology accepted within the financial
services industry.
1.2. Business activities common to all financial service providers are
identified and listed from readily available information.
1.3. Examples of companies in the financial services sector are
identified from advertisements in the media.
1.4. Four of the main players in the field are identified and the kind of
financial services offered by each are listed and categorised
according to purpose.
2.1. The concepts of insurance and pooling of risk are explained in
relation to personal risk management.
2.2. The role of insurance is described in relation to personal financial
planning.
2.3. Terminology used in the insurance industry such as offer,
acceptance and subject matter is explained and used in the
context of one of the insurance sectors.
2.4. The concept of insurable interest is explained with examples from
one insurance sector.
2.5. Five events and risks that can be insured are identified and the
advantages of insurance are explained in relation to the
individual client.
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Specific outcome
3. Explain a contract of
insurance.
4. Selecting an insurance
product to meet
personal needs.
Assessment criteria
2.6. Two events and risks that cannot be insured are identified and
reasons are given why some risks are uninsurable.
3.1. The purpose of a policy contract is explained with reference to an
actual policy.
3.2. The purpose of the policy schedule is explained and the
characteristics of a policy schedule are indicated on an authentic
schedule.
3.3. The term policy endorsement is explained and examples of
endorsements are identified in a policy contract.
3.4. The main rights and responsibilities of the insured are
understood and explained in terms of a simple insurance
contract.
4.1. The need for insurance is identified in own financial planning.
4.2. A selection of similar insurance products is analysed with a view
to meeting the identified need.
- Motor Insurance
- Personal Insurance
4.3. An insurance product is selected to meet the identified need and
reasons are given for the particular choice.
4.4. Information about the benefits covered by the selected product is
processed at a basic level of understanding.
4.5. Exclusions in the contract are identified for the selected product.
The terms of the contract are explained for the selected product.
4.6. At least two other products are named in the same sub-sector of
the Insurance Industry.
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Activities
Throughout this module, you will be required to perform certain activities in order to assist you
in preparing for the assessment criteria. These activities include:
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Name different companies and institutions offering different types of financial services;
Indicate differences between the South African Reserve Bank and a commercial bank;
Explain the difference between short term and long term insurance;
Indicate differences between retirement funds and retirement annuities;
Indicate differences between the activities of an auditor and accountant;
Identify examples of companies in the financial services sector from advertisements in the
media and classify them according to the types of services they provide;
Identify the value of insurance in your own personal financial planning;
Explain different terms within the insurance industry;
Explain the insurance contract;
Identify your own need for short term insurance;
Summarise the features of Third Party Insurance;
Summarise the features of Third Party, Fire and Theft Insurance;
Summarise the features of Comprehensive Cover; and
Compare the three types of insurance mentioned above.
Estimated time required
It is estimated that you would require approximately 90 hours in order to complete this module
successfully.
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Specific Outcome 1:
Types of Financial Services
The financial services industry is one of the most advanced and developed of all the sectors
in the South African economy. There is a wide range of services on offer to the South African
public, catering for everyone from the man in the street to large corporations. In this section
of the course we shall be looking at the main players in the financial services sector and their
primary business activities.
The structure of the financial services industry has changed a great deal over the past few
decades. The most important change is the blurring of distinctions between one financial
service provider and another. For example, whereas the role of a building society and the
role of a bank were very different 30 years ago, now banks offer home loans and building
societies offer banking services to their clients. Many financial service providers offer a wide
range of services, which do not fall under the traditional description of their functions.
Whereas 50 years ago a bank performed only the traditional banking tasks of taking
customers’ money (deposit taking) and lending it to other customers; now banks provide
mortgage finance, insurance policies, unit trusts, offshore investments and are involved in a
wide range of financial services. On the other hand we have insurers (contractual
intermediaries) offering banking services. It is important to be aware of this when you are
studying this section of the course, as you need to be aware that many of the categories of
financial service providers overlap each other.
Name any insurance company currently offering financial services.
Name any banking institution offering insurance products.
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We shall now look at some of the main providers of financial services in the South African
economy.
1. The South African Reserve Bank
Although the Reserve Bank is not a commercial bank it plays a vital role in the financial
services sector of the country’s economy. As a central bank it carries out functions that
are not performed by other banks. Its primary objective is “to protect the value of the
currency in the interest of balanced and sustainable economic growth in the Republic”.
The functions of the Reserve Bank include:
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The issuing of banknotes and coins;
Acting as a banker to the Government;
Looking after the country’s gold and other foreign reserves;
Acting as a bank and a supervisor of other banks; and
Managing public debt.
2. Commercial Banks
Banks are the custodians or protectors of the general public’s money. South Africa’s
banks comply fully with international banking standards and they have extended their
markets to become important players in the banking sectors through many parts of Africa.
The four largest commercial banks in South Africa are Absa, First National Bank, Nedcor
and Standard Bank. These four banks have moved into other areas of the financial
services sector and now provide insurance and investment services in addition to
straightforward banking. This is a result of the increased competition that banks face, as
well as the loss of their long held monopoly on financial services. Increased emphasis on
competition and efficiency has meant that regulation no longer offers banks the protection
from competition that they used to enjoy.
The main activities of commercial banks include:
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Taking money from the public in the form of deposits;
Managing payments systems through cheques, ATM cards, credit and debit cards and
so on;
Acting as financial intermediaries by placing themselves between the lender and the
borrower (i.e. taking money from customer A in the form of a deposit and lending to
customer B);
Investing depositors’ money; and
Dealing in foreign currency.
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In the space provided, indicate the differences between the South African
Reserve Bank and a commercial bank.
Reserve bank
Commercial bank
3. Long Term Insurers
The philosophy behind all insurance is the sharing of risks amongst many to safeguard
against unexpected misfortunes such as fire, accident, death or disability. The nature of
the unexpected misfortune in the short term insurance industry is different, but the
principle of pooling (or sharing) risks is the same.
Long term insurance policies include the following major product groups:
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Term insurance;
Funeral insurance;
Whole life insurance;
Endowment insurance;
Investment policies; and
Health insurance.
There are four main ways in which savers accumulate capital or save money over the long
term:
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Unit trusts
Pension funds
Home mortgages
Long term insurance policies
Consumers who buy life insurance will pay monthly premiums on the life insurance policy,
and when a claim is made, the insurer will pay a benefit to the claimant. The South
African insurance industry is very advanced and highly competitive, and the insurance
industry is the largest home of national savings, contributing over 12.5% to the Gross
Domestic Product.
4. Short Term Insurance
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The basic concept of short term insurance is the same as that of long term insurance,
namely that the groups pool the risk and share the resources. The major difference is that
long term insurance deals with certainties, or things that MUST happen (e.g. death and old
age). Short term insurance, on the other hand, deals with events that MIGHT happen,
such as a house burning down, jewellery being stolen or a car being hijacked. Unlike long
term insurance, short term insurance is not an investment but it is a way of buying
protection against the possibility of material or financial loss.
Short-term insurers’ main areas of activities are:
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Personal lines insurance;
Business insurance;
Reinsurance; and
South African Special Risks Association cover for losses sustained during riots, civil
disturbances, lockouts and other uprisings.
Explain the difference between short term and long term insurance.
5. Retirement Funds
Retirement funds may be either pension or provident funds and share the same function.
They are non-profit seeking institutions that administer employees’ and employers’
provisions for the day when employees are no longer able to work. The difference
between the two types of funds is that pension funds provide pensions for members when
they retire, whereas provident funds provide a lump sum of money. Both funds usually
provide benefits for members if they suffer permanent disability or have to withdraw early
from the fund, and for a member’s dependants in the event of the member’s death. Life
insurers are closely linked with retirement fund business.
6. Investment Trusts
“Investment trust” is a broad term for companies offering a wide range of financial
services. South African companies have been investing in the Johannesburg Stock
Exchange for over 100 years, and this area of the financial services sector has grown
enormously in the last three decades.
Some of the activities in which investment companies are involved are:
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Stock-broking;
Investing in the money markets;
Dealing in shares on the Stock Exchange;
Dealing in the bond, securities and futures market;
Managing portfolios; and
Managing unit trust funds.
In the space provided, indicate the differences between retirement funds and
retirement annuities.
Retirement fund
Retirement annuities
7. Unit Trusts
Unit trusts provide a way for ordinary South Africans to participate in the equity, bond and
money market. The principle behind a unit trust is simple: a large number of investors put
their money together in order to obtain a spread of professionally managed investments.
This lessens the risk for the investor and enables her/him to invest in the markets even if
s/he does not have the huge amounts of capital that would be necessary if s/he were
investing as an individual. The Unit Trust Management Company accepts money from
investors. The money is kept in the trust fund. The fund is completely separate from the
Management Company and remains unaffected by the financial position of the
Management Company. In other words, the company managing the unit trusts may not
use assets in the fund for the running of their company.
Some of the activities of unit trust managers are:
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Accepting investors’ money into the fund;
Administering the fund;
Selling and buying the units; and
Making investment decisions.
8. Micro-lenders
One of the key issues in the South African banking sector has been the provision of
financial services to low-income groups. Many banks have stopped opening low-income
accounts as they have found them uneconomical. The small amounts deposited in such
accounts are relatively expensive for the banks to administer. Other institutions have
filled this gap, as a “micro-lending” business has developed.
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Micro-lenders are companies that will lend consumers relatively small amounts of money
at an agreed interest rate. Unfortunately most of the publicity attached to micro-lending
has been negative, as there have been numerous cases of unethical and illegal practices
from these lenders. In some cases, the “loan sharks’ were charging over 50% interest
and threatening violence and abuse if the money was not paid. The micro-lenders serve
the poorest people in the community, who are often illiterate and unused to standard
banking practices.
The Banking Council is attempting to address these issues and has drawn up a new Code
of Conduct for all those who lend money. A Micro Finance Regulatory Council (MFRC)
and Micro Lenders Association have been established to provide some protection for the
public from the less scrupulous micro-lenders.
9. The Foreign Exchange Market
The foreign exchange market is a currency market, in other words, it is where different
currencies are bought and sold. The same rules apply as in any other setting where there
is buying and selling: the buyer tries to get the best value for her/his money, and the seller
tries to get the highest price possible! The exchange rate is the price of one currency in
exchange for another, or the amount of currency that can be bought or sold with another
currency.
If a South African importer wants to purchase goods in France, for example, s/he will
need to pay for those goods in Euros. The importer will buy Euros at the local bank in
order to pay for the goods. The importer will use South African currency, i.e. Rands, to buy the
Euros.
On the other hand, if an exporter decides to sell his fruit in the European Union, the
purchaser in Europe may pay her/him in Euro or the currency of the country to which the
exporter is sending the goods. When the exporter receives her/his Euro, s/he will sell
them to the Foreign Exchange department at the bank in return for the Rands he needs to
operate in South Africa.
In South Africa the banks are the largest players in the foreign exchange market,
providing a foreign exchange service both to individuals and large corporations.
The supply and demand of foreign exchange arises from activities such as:
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Imports - the need for currency to pay for goods received from abroad;
Exports - foreign currency is received for goods sold abroad;
Travellers - different foreign currency is received for goods sold abroad;
Medical - payment needed for medical treatment received in other countries;
Pension - where a pensioner is living in another country; and
Gifts – given/received from abroad.
10. The Stock Exchange
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The Johannesburg Stock Exchange has undergone a name change and it is now know as
the Johannesburg Securities Exchange (JSE).
There are three main financial markets in the country:
1. JSE (www.jse.co.za) - is the only licensed stock exchange in the country and is the
largest stock exchange in Africa;
2. South African Futures Exchange (SAFEX); and
3. Bond Exchange of South Africa (BESA).
The term “exchanged” refers to the buying and selling of shares in public companies. In
other words, individuals or companies buy a portion or “share” of another company
through the JSE. The company that is selling the shares hopes to raise cash through the
sale of its shares, while the buyer purchases the shares in the hope that the value of the
shares will increase, so that s/he can sell them and make a profit. It should be noted that
individuals do not buy and sell shares on the Exchange; all dealing is done through the
stock-broking firms. Owning shares on he JSE is a way of investing one’s capital, and
both the risk and the return is higher than it would be if one put one’s money into a bank
account.
The major functions of the Securities Exchange are:
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Channelling savings into investment, i.e. creating capital (money) resources for the
companies whose shares are being purchased;
Providing investment liquidity, or enabling companies to obtain cash by selling part
ownership of the company through shares; and
Providing a regulated market for dealing in stocks and shares.
The Financial Services Board registered the JSE’s new electronic trading method, called
Shares Transactions Totally Electronic (STRATE) in 2000. The purpose of STRATE is to
simplify and speed up transactions on the Securities Exchange.
11. The Bond Exchange of South Africa (BESA)
The Bond Exchange operates on the same principles as the JSE, except that the trading
is done in bonds. A bond, in this context, is a promise to repay borrowed money at a fixed
rate of interest at a specified time.
The Concise Oxford Dictionary offers this definition: “A certificate issued by the
government or a public company promising to repay borrowed money at a fixed rate of
interest at a specified time.”
At the moment only corporate entities (i.e. firms, rather than individuals) are allowed to be
trading or broking members of the BESA. In the year 2000 there were 76 registered
member firms on the Bond Exchange.
The main activities of BESA are:
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Issuing long-term securities such as bonds; and
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Trading long-term securities.
12. The South African Futures Exchange (SAFEX)
The South African Futures Exchange is the only licensed derivatives exchange in the
country. It differs from the Securities Exchange in that the dealing on a futures exchange
is for the buying and selling of shares in the future. A futures contract is when there is an
agreement to buy or sell a standard quality and quantity of an asset on a specific date in
the future at a negotiated price. Most of the trading on the futures market is between
institutions (including insurance companies), rather than between individuals.
13. Stock-broking Firms
Before we move on to other providers of financial services we need to look at the role that
stock-broking companies play in providing financial services. There are strict entry
requirements laid down by the South Africa Institute of Stockbrokers (SAIS) for those who
wish to trade on the Stock Exchange. Stockbrokers buy and sell stocks and shares on
behalf of their clients.
Some of the main activities of stockbrokers are:
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Channelling investors’ funds into the shares of public companies;
Monitoring the movement of stocks and shares on the JSE; and
Administering share portfolios (groups) on behalf of their clients.
14. Accounting
The accounting profession has been present in South Africa for many years. After many
changes in name and in structure the South African Institute of Chartered Accountants
was formed. The Institute acts as a spokesperson for the profession and sets standards
for registration as a Chartered Accountant. It has over 18 000 members, making it much
larger than its fellow, the Institute of Commercial and Financial Accountants of SA (CFA),
which has over 5000 members.
There will always be a need for accurate financial information and this is what
accountants provide. This is one of the reasons why accountants are always in great
demand.
Accountants are responsible for keeping track of the company’s financial transactions.
This involves drawing up and keeping records of the following:
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The assets and liabilities of the company;
A register of fixed assets;
Cash receipts and payments;
Details of goods bought and sold;
Annual inventory statements; and
All financial statements.
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Under the terms of the Companies Act the financial statements of a company must be
audited, whether it is a private or public company. In the next section we shall look at the
activities of an auditor, which is a further qualification after becoming a Chartered
Accountants.
15. Auditing
All companies, whether public or private, are required to be audited once a year. Auditing
is the process of examining the accounts of a company to verify or establish the truth of
these accounts using receipts, invoices, cheques and other financial instruments. An
auditor is a qualified Chartered Accountant who performs audits or checks on company
accounts. S/he produces a report on the financial situation within the company being
audited, and the report is usually submitted to the Board of Directors for approval. The
law states that the reports must be submitted in one of South Africa’s 11 official
languages. The auditor may work alone or be part of a multinational corporation, such as
Arthur Andersen or KPMG. In larger companies auditing will be one of a range of
financial services offered to clients.
The main activities of an auditor are:
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Examining the financial statements of companies;
Verifying all financial documentation in the companies; and
Reporting on the financial status of the company to the relevant parties.
List three differences between what an auditor and accountant does.
16. Actuaries
Actuaries are highly specialised professionals who use their skills in economics,
mathematics and statistics to evaluate long-term financial prospects. The period of study
for becoming an actuary is a long and difficult one, with the usual time span being 6 more
years after an initial university degree. In addition, the failure rate for the examinations is
very high. This has meant that South Africa has a very small number of qualified
actuaries. Many actuaries are employed in life insurance offices, where their skills are
used to calculate risk and probability for long-term investments such as life insurance,
health insurance and retirement funds. As businesses start to focus on long-term,
strategic planning for the company, the demand for the forecasts of actuaries is
increasing.
The main activities of an actuary are:
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Calculating the likelihood of certain events;
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Calculating mortality tables for life insurers;
Working out appropriate premium charges for insurance products; and
Providing professional assistance to attorney, particularly those who are involved in
Third Party claims.
17. Friendly Societies / Stokvels
Friendly societies started in Britain during the Industrial Revolution when workers needed
funeral benefits and an income when they fell ill. This idea spread to South Africa and in
the late 19th and early 20th Centuries many small friendly societies developed based on
the British model. Friendly societies are particularly popular amongst the less affluent
sectors of South African society where they provide a form of collective saving.
Essentially, funeral insurance, which is sold by friendly societies, is a form of life
insurance with limited benefits. Usually the policies are very accessible to the potential
clients and cover is offered to the extended family with no discrimination on the grounds of
current state of health, the age of the policy holder and so on.
Traditional African culture attaches much importance to the funeral ceremony, and the
failure to provide an appropriate funeral would be seen as insulting to the loved one.
Many of the insurers who sell funeral policies have close ties with funeral homes, and the
policyholder may be offered discounted funeral services as an alternative to the cash
payment.
Stokvels act as informal savings mechanisms for their members. They fall outside the
formal sector of financial services but are widely used. Members of the Stokvels
contribute equal amounts of money on a weekly, monthly and quarterly basis, and this
money is then distributed amongst the group members on an agreed date.
18. The Post Office Savings Bank of South Africa (Postbank)
The Post Office Savings Bank takes deposits but it is not fully-fledged bank and is
governed by different laws. Like the friendly societies and Stokvels, it is more popular
amongst the poorer sections of societies as it has low minimum balances. The most
popular product of the Postbank is the book-based savings account, and in 1997 80% of
the book accounts held an amount of R500,00 or less. This makes administration costs
per account very high. Its main activity is acting as the custodian of funds, or looking after
the customers’ money. This contrasts with commercial banks, which are very active in
lending money to customers.
The Post Office is involved in the transfer of funds through postal orders as well. Postal
orders enable people who do not have a current account or access to cheques to send a
postal order as a form of payment. However, it has numerous outlets through the Post
Office system and so is well placed to meet the needs of the rural population.
19. Estate Planning
Estate planning refers to deciding how to manage your assets to obtain the greatest
benefit for yourself and for the people to whom you are leaving financial assets when you
die. It is a complex area of financial management because there are many factors to
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consider, including the return on investment, taxation (such as death duties), laws of
inheritance and so on. People who work in estate planning need to have a solid
grounding in the legal implications of planning an estate.
In the past, there were many companies that offered estate planning exclusively. In other
words, the planning of estates was their only business. Most of these companies have
been amalgamated into larger financial institutions such as banks and legal firms with the
deregulation of the financial sector.
20. Attorneys
Attorneys and other lawyers are also active in providing financial services to their clients,
through their involvement in the legal and contractual aspects of financial management.
Attorneys are lawyers who provide advice to their clients on matters ranging from the
wording of contracts to criminal matters such as drunken driving and robbery.
A notary is an attorney who specialises in drawing up and executing documents such as
ante-nuptial contracts and legally binding documents which stipulate access to and the
use of property.
A conveyancer is an attorney who specialises in the transfer of ownership of property
and the registration of mortgage bonds on property. Other attorneys specialise in estate
planning and the laws of taxation, and they provide a valuable service to their clients and
assist clients and assist clients with the effective management of their clients’ finances.
21. Electronic Switch Providers
As you learnt earlier, the role of the banking sector in financial management has changed
enormously over the past 30 years, as technology has played an increasingly important
role in the management of money. Earlier in this module you learnt about the new
electronic share system used by the Johannesburg Securities Exchange, STRATE, and
how it has made the buying and selling of shares even easier and faster.
Access to technologically advanced financial management systems is not restricted to
shareholders on the JSE, however, as the man in the street can do her/his banking
electronically as well. Technology has made banking easier and more accessible over
the last 20 years, and many of us barely go inside a branch of our bank, as we can do
everything electronically on the Automated Teller Machine (ATM).
The latest technological breakthrough in the world of personal banking is the development
of Internet and Cellphone Banking. Customers can carry out a range of banking activities
on the Internet in the convenience of their own homes. The addition of Cellphone
Banking to these services has opened up an element of mobility that has never been
available before.
It is now possible to make payments, do transfers or enquire about funds at any time of
the day and anywhere, as long as you have cellphone reception. Thus, Internet and
Cellphone Banking save customers inconvenience, time and money. These areas of
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banking are fast growing, although there is some consumer resistance because of the
fear of sensitive information falling into the wrong hands.
22. Insurance Intermediaries
Insurance intermediaries and advisors act as “go-betweens” between the individual or
organisation and the insurers. They will analyse the insurance needs of the client and
advise her/him on the insurance products that will fit their needs. In this way the client will
get the maximum benefit from her/his investments and, with long term insurance, will be
able to put money aside for future needs.
Conclusion
As you can see, there are many outlets for the provision of financial services in this country,
and the services that they offer are as diverse as the needs of their customers. They range
from highly sophisticated financial services offered by multinational service companies, to the
simple deposit taking activities of Postbank. However, certain activities are common to nearly
all of them. These include:
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Providing a safe depository for clients’ funds;
Paying the client interest on money deposited with them;
Assisting clients with the transfer of funds to third parties;
Offering a good return on investment for clients; and
Protecting clients’ money from loss through theft.
The structure of the financial sector has changed a great deal as many of the smaller financial
service providers are being swallowed up by large corporations. Nevertheless there are still
specialist companies in which only one financial service is offered. If you would like to get a
better understanding of how the South African financial system works, a very good book to
consider is: “Fundamentals of the South African Financial System” authored by Fourie,
Falkena and Kok.
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Find ten examples of companies in the financial services sector from
advertisements in the media and insert or paste it in your guide.
From these examples:
 Identify four of the main players (organisations) in the financial services sector.
 List the kind of financial services each of the identified players offer.
 Categorise similar organisations into groups.
 Describe the competitive advantage of each.
 Refer to page 49. Do these companies perform the five activities common to almost all
financial institutions? If not, point out the anomalies.
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Specific Outcome 2:
The Concept and Role of Insurance in Financial Planning
Earlier in this course we looked at the numerous providers of financial services that operate in
the South African economy and the role it plays as part of saving and investment. In this
section, we will look at insurance in more detail: what it is, how and where it originated and
the principles behind insurance.
The Concept of Insurance
The major principle underlying all insurance transactions is the pooling of risk. In this context
“pooling” means grouping together. This concept originated in China.
Many years ago, the boatmen and traders of the Yangste River saw that if they
spread their goods around the boats by placing a little in each boat, they were at
less risk of losing it all than if they put their entire cargo on one boat. If the entire
cargo was on one boat and that boat sank, the trader would be ruined. However, if the cargo
was loaded on to seven boats and one of them sank, the trader would lose only 1/7 th of his
cargo, and so the loss was minimised.
Ship owners and merchants in England took up this principle in the 17 th Century
when they began to underwrite insurance on their ships and cargoes at Lloyds’ of
London. A system developed whereby a group of ship owners and merchants
would take a share of the value of the liability of the ship and its cargo. As in ancient China,
this meant that if a ship was lost, it meant that many owners suffered a minor loss, rather than
one owner losing all of his cargo.
The same principle underlies insurance today.
An insurer provides protection or cover for the policyholder by grouping policyholders
together. If we look at an example you will see how it works.
Imagine that we have a one-man insurer who offers household insurance to the
market. He offers his household insurance to the public and gets 1000
policyholders, each of who pays a R100.00 monthly premium. That gives our
insurer a monthly income of R100 000.00 per month or R1 200 000.00 per annum. If we
assume that 10% of policyholders make a claim on their insurance each year, and each claim
is for R10 000.00, the insurer will pay out only R100 000.00 in claims, or 1/12th of his annual
income.
In this way, the insurer makes a profit and the policyholders get the peace of mind that comes
with knowing that their belongings are protected against loss or damage. Obviously there is
still a certain amount of risk involved, as the insurer will struggle to meet the claims if a
catastrophe occurs that leads to 600 of the policyholders making a claim. The insurer cannot
provide cover for all types of risks, as there are some events and risks that are almost
impossible to protect yourself against. Insurers have developed categories of insurable risks
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and uninsurable risks as a way of making sure that they do not provide cover where it is
inappropriate. You will encounter these categories later in this module.
The same principles apply to all forms of insurance. A group of members pay into a common
fund, which is administered by the insurer. All of the claims made by the members are then
paid out of the common fund as they occur. In this way the total losses of the group are
averaged out between members.
Insurance is one way of protecting yourself from the financial consequences of loss or
damage to your property or to yourself. Life insurance is a way of saving money to ensure
that your dependents are not left penniless in the event of the policyholder’s death or inability
to continue to work, and the same idea lies behind retirement funds. Both types of insurance
provide an investment in the future, a way of ensuring that neither your loved ones nor you
will struggle to make ends meet when you are no longer working. These are some of the
benefits of long term insurance cover. In some ways, the benefits of short term insurance are
seen more immediately. If you have spent a great deal of money on a car and you get caught
in a vicious hailstorm in the first week that you have the car, the benefits become immediately
available.
List some of your most valued possessions.
What would be the cost to replace or repair each one of those possessions, should they get
damaged, stolen or destroyed?
Would you have the ability to carry that cost?
You can see that insurance is an important part of financial planning, as it provides a
“safety net” against loss.
Life is full of risk, and it is up to the individual to protect her/himself from it. Some of the risks
that an individual may face during her/his lifetime are:
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Personal Risk – risks that affect the individual personally, such as accident, sickness or
death.
Physical Risk – loss or damage to property, which arises as a result of fire, explosion,
flood, storm, theft, robbery, lightning, vandalism, rioting, deterioration or damage or loss
as a result of human error.
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
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Legal Risk – the consequences of legal liabilities incurred to other parties, members of
the public, tradesmen, and employees. There is the additional risk of having to pay the
costs of legal action either against the other party or in defending yourself.
Financial Risk – as well as physical risks, property that has a monetary value will be
exposed to the risk of a drop in the value of that asset. Other financial risks include a loss
of income or changes in the economic system, which affect one’s income.
Social Risk – the consequences of unemployment, delinquency, incidents of arson, theft
and robbery.
Political Risk – changes in the laws of a country, new tax laws, the effects of inflation
may affect the individual’s financial, legal or personal situation.
Environmental Risk – examples of these would include a change in weather conditions
that causes the wet earth to subside and cause subsidence of a building, or an increase
in pollution affecting someone’s health. Changes in the weather also affect one’s safety;
just think of how many more motor accidents occur when there is wet or misty weather.
Insurable and uninsurable risk
You have seen the role that insurance plays in the financial planning of both individuals and
organisations, and the importance of the role of insurance in minimising risk. There are,
however, certain risks that cannot be insured.
For a risk to be insurable, the following criteria must be met:
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The cause of the loss must be accidental or fortuitous.
There must be insurable interest.
The risk must be one of a number of similar risks.
The insuring of the risk must not be against Public Policy.
Accidental or fortuitous means that the loss cannot be deliberate, it must happen by
accident. You cannot burn you house down because you no longer like it and then expect the
insurers to compensate you for your loss. If someone deliberately set fire to the building, then
it is a case of arson and is a criminal offence. The loss cannot be inevitable either. Even in
life assurance, we know that death is inevitable, but we can insure our lives because the time
of death is unknown and therefore it is insurable.
Insurable interest refers to the fact that there has to be a legally recognised relationship.
You cannot insure something that does not belong to you, e.g. as there would be no financial
relationship between the insured and the subject matter.
If the risk does not meet the above criteria, then it is an uninsurable risk.
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Explain in your own words what is meant by insurance and pooling of risk.
Describe the role of insurance in personal financial planning.
Refer to the glossary of terms and select four terms that you explain in your own words in
the space provided.
Use an example to explain what insurable interest means.
List five events/risks that can be insured. What is the advantage to the client for insuring
these risks?
Identify 2 events/risks that cannot be insured and explain why?
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Specific Outcome 3:
The insurance contract
The following activity affords you the opportunity to explore a contract of insurance. You are
required to discuss the results of this activity with you line manager for assessment purposes.
A good source would be car insurance for example.
Because of the wide variety of insurance contracts found in the market, you are
required to obtain a copy of an insurance contract and insert it in your guide. On the
contract, and in the space provided here, answer the questions as presented to you
in no longer than a paragraph.
Explain the purpose of a policy document (contract of insurance).
What is the purpose of the insurance schedule?
What are the main contents of the insurance schedule?
Explain the policy endorsement and give two examples of endorsements in a policy
document.
Explain the main rights and responsibilities of the insured in a simple insurance contract.
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A simple short term insurance could contain the following basic contents within the schedule:
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Definitions: Explaining important terminology used in the contract;
Introduction: A brief overview of the parties to the contract and what the contract is
about;
Cover provided: Explaining what you are insured for;
Exclusions: Explaining when the insurance will not pay out;
Conditions: Identifying the obligations of the parties to the insurance;
Claims procedure: Explaining how to claim in the event of a loss; and
Excess schedule: Explaining what the conditions for excess payments are.
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Specific Outcome 4:
Selecting an insurance product
In this module so far you have looked at the “big picture” with regards to financial services
and insurance. You started off by looking at the wide range of financial services providers
who are active in the South African economy, catering for the different income levels of
consumers. From that broad picture you went on to examine the concept of insurance and
the role that insurance plays in financial planning.
You learnt about the key concepts of insurance, such as the pooling of risk and the idea of
insurable interest. From looking at the principles of insurance you went on to look at
documents used in the insurance process; firstly at an insurance proposal form and then at a
contract of insurance. You learnt about the various items on these forms and why they are an
important part of the process.
In this section, you will have the opportunity to choose an insurance product that will meet
your needs.
The role of insurance in financial planning
Earlier in this module, mention was made of the role of insurance in one’s financial planning.
Insurance acts as a safety net for the protection of our possessions or assets. You work hard
to earn enough money to buy yourself things that you want, such as a television, a sound
system or possibly a car. If you do not insure these valuable items, then if they are damaged
or stolen you are left with nothing to show for them. If you, however, insured your valuables,
then the insurance company will compensate you for the loss, and you will be able to replace
the items. Clearly, insurance makes sound economic sense.
Think about your possessions and their value. If they were stolen or destroyed in a fire, could
you afford to replace them? Most of us do not have enough cash to replace items that are
stolen or destroyed. You may still be paying for your most expensive asset, whether that is a
car or a house. Usually insurance is tied in with the repayments, but if you have a private
arrangement with the seller and you car is stolen, you could end up having to pay monthly
instalments on something that you no longer own.
In this part of the module you have the chance to do some financial planning of you own. As
you can see from the outcome at the start of this section, you will be selecting an insurance
product to meet your own needs.
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The first step is to decide what you want to insure. For the purposes of this
exercise, choose items that would be covered by short term insurance, rather than
choosing a product such as life insurance or a retirement fund. Once you have
decided what to insure, list the items and their value in the space provided.
Once you have listed the items and their values, calculate the total value of the items. No
doubt the cost of replacing the items you have listed would make quite a dent in you monthly
income!
Remember: If you under insure your household content it implies that you will cover
half the damaged cost.
E.g. your house content is worth R200 000. You decide only to ensure it for R100 000. While
on holiday you house gets braked into. You claim for R100 000. The insurance company will
only pay for R50 000 of damages, since you were under insured, and you have decided that
you will carry half the cost. You now have to cover the other R50 000 yourself!
Once you decided to incorporate insurance into your financial planning, you need to
determine which insurance products are available to meet you needs.
Motor insurance
There is compulsory motor insurance for all motor vehicle drivers in terms of the Road
Accident Fund Act of 1966 in South Africa. The premium for this insurance is collected
through fuel sales. The insurance covers any third party for loss or damage s/he may suffer
caused by the negligence or other unlawful act of the driver of a motor vehicle or of the
vehicle owner.
Third party insurance will compensate the third party for either physical or bodily injury caused
by the motorist. The “third party” in terms of the Act is essentially the passenger. There are
certain exclusions in terms of the Act. For example a passenger who is part of a lift club, a
taxi passenger or someone who is being transported for business purposes will be subject to
a limited benefit. Someone on military service is excluded from cover under the Act.
It is evident that this cover is very limited and does not provide the insured with protection
from loss or damage to her/his car, nor to physical injury or death of her/himself. If you want
to be compensated for damage of the loss of you motor car, then you need to buy an
insurance product that offers more protection. Three types of motor insurance are discussed
on the following pages.
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1. Third Party only Cover
This is the most basic form of cover. It provides no cover for the policyholder’s own
vehicle, but does provide cover for any damages for which the insured may be liable as
a result of the use of the insured vehicle. There is a number of important exclusion to
this cover. They are:
 Death or injury to members of the insured’s household;
 Death or injury to people who are employed by the ensured;
 Loss or damage to property belonging to the insured or which is in her/his custody
or control; and
 Losses that are already covered by the Road Accident Fund Act of 1966.
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You can see that the cover provided by this type of insurance is fairly limited,
although extensions to the basic cover are available. These extensions are:
Cover when the car is being driven by someone other than the insured with the
permission of the policyholder, if the driver has no insurance of her/his own; and
Cover for damage caused by someone else’s car if it is being driven by the
insured. The cover is for the other car only; not the car that the insured is driving
at the time.
In the space provided, summarise the features of Third Party Insurance in
you own words.
2. Third Party, Fire and Theft
As the name suggests, this policy provides the same cover as the first one, but with the
additional benefit of cover for loss or damage resulting from:
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Fire;
Self ignition (bursting into flame);
Lightning;
Explosion; and
Theft, or any attempt to steal the vehicle.
The last point means that if the car is stolen, but recovered at a later date and is damaged,
then the insurance will cover the damage to the stolen vehicle.
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In the space provided, summarise the features of Third Party, Fire and
Theft in you own words.
3. Comprehensive Cover
Comprehensive cover includes all of the benefits from the other two covers as well as
cover for accidental damage to the insured vehicle and some limited medical expense
cover. Usually this cover extends to cover anyone driving the vehicle (with the
insured’s permission). As with any policy, there are certain situations where the cover
will not apply.
There will be no compensation for loss or damage in the case where the loss or
damage:
 Is caused by nuclear radiation;
 Is as a result of war, riot and other civil disturbance;
 Occurs outside of the following South African countries:
 Botswana;
 Lesotho;
 South Africa;
 Malawi;
 Zimbabwe; and
 Swaziland.
 If the vehicle is being used for purposes other than those stated in the policy (e.g.
it is being used for business rather than private purposes);
 If an unlicensed driver is driving the vehicle; or
 If someone is driving the vehicle under the influence of a drug such as alcohol or a
narcotic. If the insured was unaware that the driver was under the influence of a
drug, then the insurer may honour the claim.
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A point to remember is that no insurer will pay compensation if the driver has broken
the rules of the road. In other words, there will be no compensation if the driver does
not have a valid licence or has exceeded the legal limit for alcohol. This applies to all
categories of motor insurance policies.
It is important to be aware that, in the case of a loss, the insurer will usually pay the market
value of the vehicle as stated in “The Auto Dealer’s Digest”. In some cases the insurer will
pay the average between the price stated in the digest and the price that a car dealer would
be likely to pay for the vehicle. In some cases this has caused dissatisfaction with the
insurance industry, as the client has paid premiums for a higher value than the insurer is
willing to pay. In some cases, insurers may pay the actual price of the vehicle, so that the
client can replace the lost vehicle with a similar one. If the car is less than a year old, or has
done less than 30 000km, the insurer will usually pay the cost of a new car.
In the space provided, summarise the features of Comprehensive Cover in
you own words.
Personal lines insurance
Insurance policies that fall into the category of personal lines are:
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House owner’s policies (for the structure of the dwelling);
Householder’s policies (for the contents of the dwelling);
All risk insurance;
Personal accident insurance; and
Personal liability insurance.
1. House owner’s policies
These policies are designed to cover the structure of a private residence or home.
They do not apply to businesses. There is a standard premium to be paid for houses
of “standard construction”, in other words, houses that are built of brick, stone or
concrete and roofed with slates, tiles, metal, asbestos or concrete. If the house or
dwelling differs from the standard construction by, for example, having a thatched roof,
then the premium will be adjusted accordingly.
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The basic cover under the house owner’s policy is to protect the insured against loss
caused by the following perils:
 Fire, lightning, earthquake and explosion;
 Storm, wind, water, hail or snow;
 Impact of animals, vehicles of falling trees;
 Aircraft or aerial devices;
 Bursting or overflowing of water tanks, pipes and apparatus, including damage to
the pipes themselves;
 Theft or attempted theft of the owner’s fixtures and fittings; and
 Escape of oil from a fixed oil fired heating installation. It does not cover oil spills
from a mobile oil heater.
In addition to the cover described above, most policies include certain extensions at no
extra costs. These include:
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Loss of rent, when the cause of the loss of rent is one of the situations described
above;
Public liability. If a tile slips off your roof and injures a passer-by, s/he can sue
you. This policy will give you cover for the amount awarded by the court.
Accidental damage to the main municipal water pipes, electricity, gas and
telephone connections;
Accidental breakage of fixed sanity ware and glass, such as broken windows
or cracked wash hand basins;
Costs which arise from a loss for things such as architect’s fees, demolition of
buildings, rubble removal and the costs of adhering to municipal building
regulations, such as submitting plans and so on; and
Malicious damage to the property, other than that carried out by thieves.
2. House holder’s policies
These policies are designed to cover the content of a private dwelling, such as
furniture and appliances. It does not apply to houses used as business premises,
although, if the policyholder works from home s/he may inform the insurer of the
business items and they can be added to the policy through an endorsement, or the
insurer may issue a separate business policy.
A householder’s policy covers anything that is normal to a private house and which
belongs either to the policyholder or to a member of her/his family living in the same
dwelling. It also covers fixtures and fittings if s/he owns the house in which s/he lives.
If the home is rented, then the landlord’s policy will cover the fixtures and fittings, such
as the light fittings, permanent oil or gas heaters and other immobile items.
The premium is charged according to the area in which the home is situated, the type
of construction, the anti-theft measures that have been taken and the hours when the
home is occupied. Some insurers offer discounted rates for pensioners, e.g. as their
homes are occupied for more hours of the day than other people’s homes.
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The cover provided by this policy is very similar to that provided by the house owner’s
policy. The perils are:
 Fire, lightning and explosion;
 Earthquake;
 Storm, wind, hail or snow;
 Aircraft and aerial devices;
 Bursting or overflowing of pipes, tanks and apparatus (excluding damage to the
pipes);
 Theft or any attempt at theft (with certain conditions if the house is sub-let);
 Impact by animals, vehicles or falling trees; and
 Oil damage from a fixed oil fired heating installation.
Like the house owner’s policies, these policies can have many extensions, according
to the needs of the insured. Some examples of extensions would be for property
elsewhere in the country, accidental damage to audio-visual equipment and for
household goods in transit. It is important to note that the cover on the theft of cash is
very limited, usually to R1 000.00, and that anything not listed on the policy is not
included in the cover.
3. All Risks insurance
The first two types of policies cover property when it is at one’s premises, whereas All
Risks, as the name suggest, covers your belongings when you are away from home. It
is a policy of exclusion, in other words, unless an item is specifically excluded from
cover in the policy, it will be covered. There will, however, be certain exclusions on a
policy. Some typical exclusions are loss or damage to sports equipment that is in use,
or due to wear and tear of items, and of cash, cheques, coins and documents. Usually
an All Risks policy will have two sections: a list of miscellaneous items and a list of
specified items, which are more valuable.
Most All Risks policies have a first amount payable or excess, as well. This means
that the insured has to pay an amount of money each time s/he makes a claim. This
deters the insured from making small claims that would be expensive to administer.
The aim of this section is to select an insurance product to meet your personal needs. The
information you gathered up to now should have made it easier for you to select the
appropriate insurance policy. It may help you in your decision making to draw up a table in
order to compare the different policies.
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In the table below, compare the different features (advantages and
disadvantages) of the three types of policies discussed above.
House Owner
House Holder
All risk
Summary
In this module, you learnt about using insurance as an instrument of your financial planning.
You looked at the way in which insurance acts as a reserve or form of saving for
policyholders. You also looked at the security that insurance provides in an unstable
environment with high levels of crime.
The products described were:
Motor insurance
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Third Party Motor Insurance;
Third Party, Fire and Theft; and
Comprehensive Cover.
House Structure or Household/Possessions
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House owner’s insurance, which covers the structure of the dwelling;
House holder’s insurance, which covers the contents or everything inside you home; and
All Risks, which covers your possessions when you are not at home.
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Conclusion
You have now reached the end of this skills programme. Through the course of the
programme, you learnt:
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
How to attend to customer enquiries;
Manage your time and work processes; and
Identify the sub-sectors of the Financial Services Industry and the role of insurance in the
industry.
You were allowed the opportunity to do research, gather articles from the media and other
sources and reflect on situations from your own life. All this culminated in a lot of evidence
that your line manager can evaluate as part of your assessment.
You now have to prepare for and assessment where you will be given a number of questions
that you need to answer in order to assess the knowledge and skills you gained through the
skills programme. A mark of 100% is required in order to pass.
Make an appointment with your line managager, approximately an hour. The purpose of the
meeting will be to allow your line manager to discuss your progress through the skills
programme and the evidence with your.
If s/he is satisfied that you reached the outcomes as listed in the report, and then s/he needs
to complete the report and submit it for accreditation purposes.
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The table below clarifies common insurance terminology used.
Insurance term
Acceptance
Assets
Claim
Contributions
Cover
Deduct
Disclosure
Elected
Endorsement
Equal
Ex-gratia
Exclusions
First amount payable
Fund managers
Good faith
Household contents
Insurable Interest
Insurance contract
Insurance premium
Insurance proposal
Meaning
A willingness to accept the terms and conditions of a
contract/circumstance etc.
Property and possessions that are regarded as having value.
An application for compensation under the terms of an insurance
contract. To ask something, to say that something belongs to you.
When the policyholder claims compensation from the insurer for the
loss of or damage to her/his possessions.
What the company gives to the fund.
Funds used in insurance to meet a liability or to protect against loss.
Means to take or withdraw. Your company deducts money from your
salary. This means that your company takes money from your salary
each month.
Revealing all the facts relevant to the insurance proposal. If either
party fails to do this, the contract may be declared invalid.
Chosen people who vote for them
A change in the terms of the insurance contract. This may be a
minor change such as a change in the policyholder’s address, or a
major change such as a new and expensive item being added to the
policy.
All are the same.
Usually in reference to a payment done due to a sense of moral
obligation rather than legal requirement.
Situations under which insurance cover is no longer valid. For
example exclusion on household might be that the insurer would not
meet your claim if you went away for two weeks, leaving the alarm
off and a door open, and then you were burgled.
The amount that the policyholder has to pay when making a claim on
certain insurance policies, especially motor insurance policies and All
Risks insurance.
Experts who look after the fund or its investments.
When both the insurer and the insured provide all the relevant facts
and do not try to hide anything.
Everything that the house contains, such as furniture, kitchen
equipment, clothing, carpets and other household items.
The legally recognised relationship between the insured and the
financial loss that s/he suffers following a loss. This must exist for an
insurance contract to be considered valid.
The legally binding, written agreement between the insurer and the
insured.
The charge that the policyholder has to pay for the cover provided by
the policy. This may be paid monthly, quarterly or annually.
The first stage of the contract, which is often drawn up by an
insurance broker and submitted to the insurance company on the
client’s behalf. The proposal will include all the items to be covered
and the proposed premium to be charged.
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Insurance term
Interest
Liability
Literacy
Long-term insurance
Offer
Policy
Premium
Preserving
Proposal
Query
Ready to exit fund
Retirement fund
Risk
Schedule
Specified items
Subject matter
Tax deduction
Third party
Trustees
Withdrawal
Written request
Meaning
The money paid for the use of money that has been lent. When you
deposit money in the bank, the bank will pay you interest on your
deposit. Similarly, when you borrow money from the bank through a
credit card or home loan, you have to pay the bank interest on the
money that the bank lent you.
Responsibility for debt or financial obligations. When used in the
financial sense, the word “liabilities” refers to the money that you owe
or your debts.
The ability to read and write.
Insurance such as life, retirement funding, etc. where the client
places a value on the person insured.
A proposal of business – a plan for insurance for example.
A contract of insurance.
An amount to be paid for a policy of insurance. This is usually paid
on a monthly basis.
To preserve something is the same as saving something.
A document which suggests the terms and conditions of an
insurance contract.
Means to ask questions about something.
To go on retirement.
A special type of savings fund that companies set up with their
workers, to help them save money for retirement or illness.
Either the possibility of a loss against which insurance is taken out,
or the item that is being insured.
The list of items to be covered by the insurance contract. The
schedule will include specified and non-specified items.
Items that have been specifically described on the policy because
they are valued at a higher price than the “automatic” cover would
allow.
The items to be insured in an insurance contract.
An amount of money that a person does not have to pay income tax
on.
Someone other than the two persons who are primarily concerned,
e.g. in a car accident between two motor vehicles which collided
would be the first and second parties, and other people such as
passengers would be the third party.
People who are chosen to represent the employees. Employees
‘trust’ them to do a good job and to look after the retirement fund.
Take some or all of the money out of a fund.
To write down instead of asking orally.
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Exercises
Complete the following tables by filling in at least three features of the following types
of insurance products:
House owners
All risks
House owners
All risks
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Indicate whether the following statements are True or False:
T
F
1. Third Party Insurance is paid out of the income from toll roads.
2. A householder’s policy will protect your possessions against theft, even if they
are stolen from your car while you are away from home.
3. An exclusion policy, such as the All Risks policy, is one where everything that
is to be covered has to be specified in the policy.
4. If you go out drinking with a friend, and he drives you home because you seem
to be more drunk that he is, and he has an accident, the damage to or loss of
your car will be covered by a Comprehensive insurance policy.
5. If you have a house owner’s policy and your house has a thatched roof, you
may have to pay a higher premium that the owner of a house with a tiled roof
would have to pay.
6. If you have an expensive item to insure, it should be listed under “exclusion” on
your policy schedule
7. Insurers will calculate the premium for a householder’s policy based on factors
such as the alarm system in use and the area in which the policyholder lives.
8. The family of a driver with Third Party insurance will receive compensation
under the Road Accident Fund Act.
9. If you live in a rented house or flat, you are not eligible for a house owner’s
policy.
10. An All Risks policy will cover a tennis racquet that breaks during a tennis
match.
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Model answers to Exercises
To the features of the following policies, you should ideally be able to identify at least three
features for each of the types of policies.
House owners
Only the person to whom the property belongs
can own the policy.
The policy covers the structure of the dwelling
place.
The structure is covered against damage or
destruction caused by fire, lightning, impact by
animals, flood damage, snow, burst water pipes,
a fixed oil heater and so on.
Extensions to the policy include a public liability;
compensation for the loss of rent and cover for
damage to municipal fittings such as water pipes.
The policy covers fixtures and fittings in the
dwelling place.
All risks
The policy is designed to cover your possessions
while you are away from home.
It is a policy of exclusion; in other words
everything is covered by the policy unless the
insurer has specified that certain things be
excluded from cover.
Common exclusions are cash and coins,
cheques, sports equipment while in use, items
that have deteriorated through wear and tear, and
so on.
Usually it has a first amount payable clause,
meaning that the policyholder has to pay a certain
amount of all claims made.
Most All Risks policies have two sections, one
being for miscellaneous items and the other being
for specified items (which exceed a certain value).
Buildings that differ from the standard
construction drawn up by insurers will cost more
to insure than the standard ones.
House owners
All risks
The policy provides compensation to the
policyholder only when stipulated driver’s is/are at
the wheel.
This policy covers damage to or the loss of the
motorcar regardless of who is driving it at the
time, provided that the driver has a valid driver’s
licence and is not under the influence of a drug
such as alcohol.
Cover is restricted to countries in Southern Africa:
Zimbabwe, Namibia, Malawi, Swaziland, Lesotho
and Botswana.
The insurance contract will not be valid if the
motorcar is used for commercial purposes.
The policy provides cover not only for theft but
also for damage to the car from attempted theft.
If the stolen car is recovered at a later date and
has been damaged by the thieves, the insurer will
compensate the policyholder.
There is no compensation if the driver has no
licence or has exceeded the legal limit for alcohol,
or if the driver has taken drugs.
No cover is provided for damage caused by
nuclear radiation or by civil war/riots.
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True/False statements
1. False
2. False
3. False
4. False (because you were with him, and knew how drunk he was)
5. True
6. False, it should be listed under specified items.
7. True
8. True
9. True
10. False
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Self Assessment Questions
Question 1
Which of the following is not a function of a commercial bank?
a)
Investing depositors' money
b)
Dealing in foreign currency
c)
Issuing of banknotes and coins
d)
Managing the payment systems
Correct answer: c
Correct answer feedback: Absolutely correct. Issuing of banknotes and coins is a function
fulfilled by the South African Reserve Bank.
Incorrect answer feedback: Not quite. Commercial bank is responsible for all these
functions, except for issuing banknotes and coins.
Question 2
True or False?
In order to protect yourself against paying instalments on your car should it get stolen, you
would take out long term insurance.
Correct answer: False
Correct answer feedback: Indeed. Long term insurance is used to protect against
misfortune on fixed property, your life, health or for investment purposes.
Incorrect answer feedback: Not quite. To protect you against continued instalments, you
would take out short term insurance for the repayment period of the car finance.
Question 3
Which one of the following can usually not be regarded as a long-term investment option?
a)
Unit trusts
b)
Term deposits
c)
Pension funds
d)
Home mortgages
Correct answer: b
Correct answer feedback: Correct. Term deposits are usually used to invest money for a
specific purpose over a shorter period.
Incorrect answer feedback: Not quite. Term deposits are usually used to invest money for
a specific purpose over a shorter period.
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Question 4
True or false?
Long term insurance deals with things that MIGHT happen.
Correct answer: False
Correct answer feedback: Yes! Long term insurance deals with certainties, i.e. things that
must happen.
Incorrect answer feedback: Not so! Long term insurance deals with certainties, i.e. things
that must happen.
Question 5
True of false?
Short term insurance is a means of protecting yourself against misfortunes that might happen.
Correct answer: True
Correct answer feedback: Indeed! Short term insurance deals with misfortunes that might
happen.
Incorrect answer feedback: Not quite! Short term insurance deals with misfortunes that
might happen.
Question 6
True or False?
Pension funds and provident funds are profit-seeking institutions that administer employees'
and employers' provisions for when the employees are no longer able to work.
Correct answer: False
Correct answer feedback: Correct. Pension and provident funds are non-profit seeking
institutions.
Incorrect answer feedback: Please read again! Pension and provident funds are non-profit
seeking institutions.
Question 7
True or False?
Pension funds and provident funds are non-profit seeking institutions that administer
employees' and employers' provisions for when the employees don't want to work any more.
Correct answer: False
Correct answer feedback: Yes! These funds are utilised when employees are NO
LONGER ABLE to work.
Incorrect answer feedback: Not quite! These funds are utilised when employees are NO
LONGER ABLE to work.
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Question 8
True or False?
Provident funds provide a lump sum of money when the employee is no longer able to work.
Correct answer: True
Correct answer feedback: Correct. Pension funds provide a pension while provident funds
provide a lump sum.
Incorrect answer feedback: Not quite! Pension funds provide a pension while provident
funds provide a lump sum.
Question 9
Which one of the following is not an example of short term insurance?
a)
Reinsurance
b)
Business insurance
c)
Funeral insurance
d)
Personal lines insurance
Correct answer: c
Correct answer feedback: Brilliant! Funeral insurance is an example of long term
insurance.
Incorrect answer feedback: Oops! Not quite. Funeral insurance is not an example of short
term insurance.
Question 10
Which of the following institution(s) provide a financing service to low-income groups?
a)
Commercial Banks
b)
Postbank
c)
Micro-lenders
d)
Stockvels
Correct answer: c
Correct answer feedback: Correct! Micro-lenders provide financing service to the low
income group, sometimes at unreasonable interests.
Incorrect answer feedback: Incorrect! Micro-lenders provide financing service to the low
income group, sometimes at unreasonable interests.
Question 11
True or False?
When an insurer provides protection by grouping policyholders together, this is referred to as
pooling of risk.
Correct answer: True
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Correct answer feedback: Absolutely correct. Refer to pages 49 and 50 of your guide for
examples explaining pooling of risk.
Incorrect answer feedback: That’s not right. Refer to pages 49 and 50 of your guide for
examples explaining pooling of risk.
Question 12
True or false?
Insurance is the only way of protecting yourself from the financial consequences of loss or
damage to your property or to yourself.
Correct answer: False
Correct answer feedback: Correct! Insurance is one way of protecting yourself, not the
only.
Incorrect answer feedback: Not true! Insurance is one way of protecting yourself, not the
only.
Question 13
You suffer from a severe heart attack but doctors assure you that you will be able to work
again 6 months from now. As a result, your income drops dramatically for the period.
Which of the following insurance could have provided for the shortfall during this difficult
period?
a)
Life insurance
b)
Credit life insurance
c)
Severe illness insurance
d)
Short term insurance
Correct answer: c
Correct answer feedback: Correct. Severe illness insurance is a form of protection should
you suffer sever illness, but do not pass away, and you are only unable to work for a while.
Incorrect answer feedback: Not quite! Severe illness insurance is a form of protection
should you suffer severe illness, but do not pass away, and you are unable to work for a
while.
Question 14
You have a large personal loan with your bank. Which of the following insurance will protect
your family against severe debt obligations should you pass away unexpectedly?
a) Credit life insurance
b) Sever illness insurance
c) Short term insurance
d) Funeral insurance
Correct answer: a
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Correct answer feedback: Yes! Credit life insurance provides for the settlement of debt in
the event of death, releasing loved ones from the debt obligation.
Incorrect answer feedback: Actually not! Credit life insurance provides for the settlement of
debt in the event of death, releasing loved ones from the debt obligation.
Question 15
True or false?
An insurance proposal is drawn up on the client’s behalf and lists some of the items to be
covered by the insurance, as well as the premium to be charged.
Correct answer: False
Correct answer feedback: Yes! The proposal must specify all the items covered by the
insurance, as well as the premium to be charged.
Incorrect answer feedback: Actually not! The proposal must specify all the items covered
by the insurance, as well as the premium to be charged.
Question 16
True or False?
The first amount payable refers to the first instalment that must be paid when taking out
insurance.
Correct answer: False
Correct answer feedback: Yes! The first amount payable actually refers to the amount that
the policyholder has to pay when making a claim.
Incorrect answer feedback: Actually not! The first amount payable actually refers to the
amount that the policyholder has to pay when making a claim.
Question 17
Yes or No?
You own property near a river. Would the risk of a flood be regarded as insurable?
Correct answer: Yes
Correct answer feedback: Absolutely! The risk of a flood would be accidental and is thus
insurable. The premium, however, might be determined by the likelihood of the flood.
Incorrect answer feedback: Reconsider! The risk of a flood would be accidental and is thus
insurable. The premium, however, might be determined by the likelihood of the flood.
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Question 18
Yes or No?
Your brother’s camera got stolen while he was on holiday with you. Would you be able to
claim for the theft on your insurance?
Correct answer: No
Correct answer feedback: Correct! There is no legally recognised relationship between
your brother’s camera and you, and will not be able to claim on your insurance.
Incorrect answer feedback: Not so! There is no legally recognised relationship between
your brother’s camera and you, and will not be able to claim on your insurance.
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