Insurance | Business Studies Form 2

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Insurance - Business Studies Form 2

Objectives

By the end of the topic, you should be able to:

  • Explain the meaning and concept of insurance
  • Discuss the importance of insurance
  • Explain terms used in insurance
  • Explain the principles of insurance
  • Distinguish between the classes of insurance
  • Explain the meaning of re-insurance and co-insurance
  • Describe the procedures of obtaining an insurance policy.
  • Describe the procedure of making an insurance claim.

INSURANCE

Businesses involve alot of risks.This is why they should have an insurance policy.Some insurance policies are mandatory by law for businesses for example workman compensation and third party policy in transport.

 

The Nakumatt Downtown Supermarket in Nairobi was burnt by fire.

Background

Entrepreneurs are faced with diverse types of risks such as fire outbreaks, thefts and accidents among others. The occurrence of the risks may lead to the collapse of a business as well as discouraging potential entrepreneurs. This therefore necessitates that they cushion themselves against eminent collapse

.

Meaning of Insurance

Insurance is an agreement between a person or an institution referred to as the insured and an insurance company which is the insurer. In this contract the insured pays certain of money (premium)to the(insurer) in exchange of protection against the specified risk.

All vehicles must have at least a third party insurance policy.

Concept of Insurance

Insurance operates on the basis of pooling of risks.In pooling of risks, people faced with the similar risk agree to share each others losses by contributing to a central fund (pool). The assumption is that out of the many people faced with similar risk it is only a few who will suffer the risk and be compensated comfortably from the pool.

Insured/Assured

-This is an individual or institution that takes an insurance policy

Insurer

-This is the insurance company or firm which gives out an insurance policy.p

Premium

This is the periodic amount of money paid by the insured to the insurer to cover for losses arising from a certain risk

.

Sum-insured/ Sum-Assured

-This is the declared value of the property at the time of taking

insurance policy.

Risk -

A risk is an event whose occurrence results in a loss. Risks can either be insurable or non insurable. Insurable risks are those risks whose occurrence can be predicted and easily to determined while non insurable risks are those whose occurrence can not be predicted and easily to determined.

Loss

-The value of the property destroyed by the occurrence of the insured risk.

Compensation

-This is the amount of money paid by the insurance company to the insured to

restore him/her back to the financial position he/she was before the loss Occurred.

Policy-

This is the document that contains the terms and conditions of theAgreement or contract between the insurer and the insured.

Surrender value-

It is a certain percentage of money that is refunded by the insurer to theinsured who terminates the contract prematurely

Under-Insurance

-This occurs when while taking a policy,one states a lower value than the actual value of the property insured.

Over-Insurance

-This occurs when while taking a policy,one states a higher value than the actual

Value of the property insured.

Double insurance

-This occurs when a person takes insurance policies with more than one

insurance company for the same property against the same risk.

Average clause

This a clause applied by the insurer to discourage this practice where the

insured under- insures the property so as to pay less premium .This is expressed mathematically as follows:

Compensation = value of the policy insured x loss
Actual value of property


Principles of Insurance

Utmost good faith/ubberimae fides

The principle states that both the insured and the insurer must disclose all the relevant information about the property to be insured. The policy binds both parties together.

Subrogation

The principle states that when the insured has been fully compensated the remains of the property or benefits arising from the property belongs to the insurance. However the principle does not apply to life assurance.


Indemnity

The principle states that no insured can be compensated beyond the value of the loss incurred. It aims at returning the insured back to the financial position he/she was before the loss occurred. This principle does not apply to life assurance.

Insurable interest

The principle states that the insured can only insure property or life whose loss may directly cause him/her to suffer financial loss.

Proximate cause

The principle states that the cause of loss should be directly or closely related to the occurrence of the insured risk.

Contribution

The principle states that if one insures his/her property with several insurance companies for the same risk, then the insurers will each contribute a certain percentage to compensate the insured incase of loss arising from the risk.

Classes of Insurance


Types of insurance and their policies

Co-insurance

This is spreading of same risk to more than one insurance company.It occurs when a property of high value is insured by more than one insurance company with each having a portion of the sum insured.This is common in maritime insurance where some vessels and their hull could be of very high value to be covered by one insurance company.

Re-insurance

This is where an insurance company insures itself with a larger insurance company.It insures itself against the risk it covers.Kenya Re-insurance company re-insures other insurance companies.

Importance of Insurance


 

Importance of Insurance

The following are the importance of Insurance:

  • It ensures continuity of a business in event of a loss.
  • It gives potential investors confidence to invest in risky businesses
  • The unused funds are re-invested in other businesses such as real estates and purchase of shares and this stimulates economic growth of the country.
  • It is a form of savings for life assurance holders
  • The government is able to get revenue from taxing company profits and employees salaries.
  • Life assurance policy may be used as collateral to obtain loans.
  • It plays an important role in creation of employment opportunities

Obtaining an Insurance Policy

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