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Published by Emmanuel George
This notes is prepared for the use of O'Level Commerce students of Cambridge University and London University.If you would like to get a copy of this document Please feel free to write to me at emmgeo@gmail.com
This notes is prepared for the use of O'Level Commerce students of Cambridge University and London University.If you would like to get a copy of this document Please feel free to write to me at emmgeo@gmail.com

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IMPORTANCE OF INSURANCE 1. Every individual business faces risks.

It could be the risk of loss and damage to property, vehicles and stock due to fire, burglary, flood, accident and even theft by its own employees. It could be the risk of being sued for claims by members of the public, its customers and even by its own employees due to damages and losses suffered by these people as a result of its negligence. It could also be the risk of financial loss due to bad business decisions or unanticipated changes in demand for the business' goods. 2. In return for a small premium, insurance underwriters are willing to offer a wide variety of insurance cover to the ordinary business to protect it against some of these eventualities. Should the insured risk occur, the business will be indemnified and protected !. It must be reali"ed, however, that not all risks faced by the business is insurable. Some, such as loss due to bad business decisions and unanticipated changes in demand, are non#insurable. $. %he insurance premiums collected by the various insurance companies in the country forms a very important pool of li&uid funds in the country. 'part from setting a certain proportion aside to meet the claims of those who do eventually suffer loss as a result of the insured risk occurring, the rest of the funds provide an important source of finance for the development of the national economy. NATURE OF INSURANCE: POOLING OF RISKS Insurance is a pooling of risks to enable people to share risks. In life, everyone including businessmen faces risks, resulting in losses. 1. %hose who wish to insure against loss in the event of a risk materiali"ing, will contribute periodical payments called premiums to a central pool which is managed by an insurance


the insurance company &uoted a rate of 2./2. It will consider all factors that may make the insured risk more likely to happen.. per year. the total amount of insurance premium payable would be+ 0ate &uoted to insure property against fire Insured value of property 'mount of premium payable 2. 3ut only a small percentage of the total population who buys fire insurance will eventually suffer a loss. the number of those who are willing to contribute to the central pool is very great. 2.. So. /1. (onse&uently. cents per /1. %he premium finally payable by the insured can be calculated based on+ .. 1... %he individual premium is small relative to the amount insured... the higher the premium charges....%he tariff rate or the rate of premium &uoted by the insurance company Illustration 'mer studying the risks involved for a certain proposal for fire insurance.. .. %he premium payable . i.is so small compared to the amount of possible compensation payable. %he basic principle is+ %he higher the risk. the central pool is very big even though each insured pay a small premium. %he insurance company will have to study the risk involved for each insurance proposal..%he insured value of the property .e.... %he indemnity will not e*ceed the amount originally insured for. %his is because the total number of people who face the risk of loss due to fire is very great... * 1..b.. Suppose the value of property was /1.. it is possible to pay the few unfortunate from the central pool. !..2. %herefore.. $. 2. cents per /1. It incorporates all owners of properties in the country.... 1 /2.a.. . 'ny loss due to the insurer's risk materiali"ing will be compensated for out of the common pool. %he amount of compensation will be )ust enough to indemnify or restore %he insured to the position he was in immediately before the loss. /1. It is a case of the fortunate many 2 Prepared By: Emmanuel George .(ommerce – Students’ Guide Computing Department of Business and (ompany.

who did not suffer any loss due to fire. failure of demand.b.(laims in the long run are less than the funds available to meet them 2. burglary. E*amples of insurable risks are perils at sea. in order to meet the various claims from the central pool. !. 2. no insurer can calculate the premium.will only undertake to cover anyone against insurable risks.who did suffer a loss due to fire-. E*amples of some risks involved in dispatch of goods by the foreign traders through airways and seaways.c. $. 7. %his must be high enough to ensure that the insurance company will not run at a loss in the long run.4nly a small number actually suffers loss . rise in costs. changes in fashion and bad debt. PRINCIPLES OF INSURANCE: ! Ut"ost Goo# Fait$ 3 . %he insurer is able to cover such a risk because+ . Insurable risks are those whose chances of occurring can be mathematically calculated by statisticians and actuaries from available statistical records. 5. %he calculated risk is then used as a basis for computing the premium to be charged. fire. insurance companies and insurance underwriters.a large number of people.i. 8. personal liability. Some risks are non#insurable because it is not possible to calculate the chances of their occurring as no statistical records of their occurrence are available.Insurance . %his is the whole principle of 'pooling of risks'. risks involved with cargo can assist foreign traders. motor accident and flood. are willing to pool their risks. INSURABLE AND NON-INSURABLE RISKS 1. 6ence. who are sub)ected to the risk.e.who help the unfortunate few . Insurers . E*amples of non#insurable risks are war and trade risks like business losses due to bad management. by contributing premiums to a central fund .a.

if the applicant. %his will form part of a legal contract between the applicant and the insurance company. truthfully.! Pro-i"at' Caus' 4 Prepared By: Emmanuel George . which comes to light later.s car. the applicant will not suffer a loss and so cannot insure his neighbour. %his is ruled out by the rule of contribution. if the insured. Rul' o* Su&ro+ation: Sometimes the insured can make a profit by selling the damaged car after receiving compensation. the applicant must fill in a proposal form. which states that the insurance company will become the owner of the damaged car after paying compensation.s 5 year old car is damaged< the insurance company will give the insured money to buy another 5 year old car. (! In#'"nit) %he aim of the insurance company is to restore the insured to the position he was in before the loss had occurred.(ommerce – Students’ Guide Computing Department of Business and 9hen an insurance policy is to be taken. %his is ruled out by the rule of subrogation. 3ut if the applicant. %he company likewise must have good faith in its clients by e*plaining all the terms of the insurance policy. Rul' o* Contri&ution: Sometimes the insured may insure the car with two companies and claim from both. so that no profit is made by the insured. which states that each company will pay a certain proportion. :or e*ample. %he principle of indemnity prevents the insured from making any loss or profit out of the accident. :or e*ample.s car were stolen. %he contract will become invalid if the applicant hides any information. . answering all the &uestions it contains. %! Insura&l' Int'r'st Insurance policies can be taken only if the applicant is to suffer directly from the loss or liability.s neighbour.s car were stolen he would suffer a loss and so can insure his car.

%he insurance company will first determine if the root cause is within the terms of the policy and then make a payment.o/'r 9hen an individual or a business wishes to take out an insurance cover the following are the procedures+ 1. %he underwriters prepare a provisional certificate confirming that the risk has duly been undertaken by the insurance company.Insurance %he root cause of the event is known as the pro*imate cause. %he individuals or the businesses should furnish all the true information along with the necessary supporting documents with duly filled proposal form and forward it back to the brokers 5. 'fter a thorough inspecting of the proposal form the underwriters ask the insured to pay the first premium 8. %hen the brokers give the proposal form to the person who wants to take insurance cover 2.' . T$' 1') in*or"ation in a stan#ar# 0ro0osal *or" is as *ollo2s: 5 . which has to be filled in by a person wishing to take out insurance. %he provisional certificate is known as cover note. :or e*ample. a person might insure himself against death by accident when flying. Sometimes the brokers themselves assist the individual and the business in the process of documentation 7. but if he dies of a heart attack. MAIN DOCUMENTS Pro0osal For" %his is the application form. Should first contact the insurance brokers and tell about the proposal 2. the insurance company is not re&uired to make any payment. 'll details about the person and the risks to be covered have to be filled in truthfully in the proposal form. E**'. %he underwriters scrutini"e the slip and e*press their willingness to undertake the risks $. %he insurance brokers make a slip and forward it to the underwriters !.tin+ insuran.

'n application form for insurance coverage by the proposer . %he name and address of the insurance company 2. the insurance company may consider him a bad risk and refuse to accept the proposal.%he circumstances affecting the risk .9hether or not to accept to give insurance coverage to the proposer.E*actly what type of cover he would get should he suffer a loss .a.such as the Ae*cessA clause in motor insurance policy6 Prepared By: Emmanuel George .iii. ' statement of declaration by the proposer that all the statements contained in the proposal form are true and correct and that he has not concealed misrepresented or mis#stated any material fact.ii. ' clear statement of the type insurance cover offered by the insurance company. .ii.iii.%he proposed assured or the property to be insured .%he insurance record of the proposed assured %he proposer has to answer all these &uestions %0>%6:>??@.%he e*clusion clause. . %he date the proposal is signed T$' *un.c.i.%he instances when he would not be covered. It is not a contract of insurance. including any 'e*tensions' to the policy !. $. =uestions designed to elicit facts concerning+ .i. %he signature of the proposer 5.%he proposer will also know+ .%he amount of premium to be charged.%he facts disclosed in the proposal form helps the underwriter to study the risk so that he can decide on+ .(ommerce – Students’ Guide Computing Department of Business and 1. 'fter studying all the information given. It is an offer from the proposer to the insurance company to buy insurance coverage.i.iv.ii. .b.customer-.tions o* t$' 0ro0osal *or" ar' as *ollo2s: .6is own liability in the event of a loss .%he nature of the risk . . 2.

(over will not be given if the vehicle is used for other purposes such as for business. then the insurance company can refuse to pay when a claim for loss is made. If it is subse&uently proven that what is written there is not true. %he name and address of the Insurance (ompany 2. %he insurance policy number !.in the case of a motor policy. %he cover note number . 'ny limitations as to the use of the property . %he period of cover 7. its make and model< the year of manufacture< the engine number< the chassis number< its cubic capacity and estimated value5. that is.in the case of a motor policy. etc.s. Co/'r Not' Sometimes while the policy is being prepared. it will be clearly stated that the vehicle is only for social domestic or pleasure use only. including his identity card number 2. T$' 1') in*or"ation in a . %his is because the insurance contract is based on Cutmost good faith'.8.d. by issuing a temporary document called the cover note.o/'r not' is as *ollo2s: 1. %he name and address of the policy holder.who are allowed to drive the vehicle will be clearly spelt outE.in the case of motor policy+ vehicle registration number. %he signature of the Feneral Ganager of the insurance company 7 .%he proposal form provides documentary proof of what the proposer has disclosed about the propertyBperson insured. It can be declared null and void if one of the parties is not acting in 'good faith'. the person .it is called a certificate of insurance for a motor policy$. Details concerning the property insured .Insurance . 'ny other conditions as set by the insurance company . the company will confirm that the risks have been accepted. he has lied or misrepresented or concealed the material facts. racing.

%he policy number !. %he signature of an officer who signs on behalf of the insurance company 8.a.(ommerce – Students’ Guide Computing Department of Business and 1.' 0oli. %he insurance company then issues the client with an insurance policy which is really the legal contract between the insured and the insurance company. Poli. It sets out the terms and conditions of the insurance. (lear statements of the 'e*clusions' or instances when the insurance company will H4% pay compensation 8 Prepared By: Emmanuel George . the company will issue a policy. %he procedure to be taken in the event of a claim and the method of ad)usting estimated premiums E. %he e*tent of the insurer's obligation and the types of losses that are covered under the policy and the period of the cover 2. 4nce the risk has been accepted and the premium paid.o/'r not' ar' as *ollo2s: . %he name and address of the insured $.) %his is a contract of insurance between the insurance company and the insured. %he name of the insurance company 2. Details of the property insured 5.%he evidence of an insurance contract between the proposer and the insurance company. .' temporary cover for a limited period.tions o* a .) is as *ollo2s: 1.. T$' 1') in*or"ation in an insuran.b. until such time as the insurance company can prepare and issue the insurance policy to the insured. %he amount of premium paid T$' *un. %he premiums to be paid 7.

who collects his commission after the premium is paid. the policy is prepared and taken to ?loyds Iolicy Signing 4ffice.tions o* an insuran. &uarterly. %he first underwriter to accept fi*es the premium.' 0oli. who accept part of the risk. It may be on a weekly. %he broker then contacts the other underwriters.) ar' as *ollo2s: . It is essential that the actuaries do their calculations correctly so that the insurance company does not run out of money through e*cessive claims. whose )ob is to find the best possible policy for their clients. 3efore fi*ing the premium some factors have to be taken into account and calculated. %he e*perts who calculate the premium are called actuaries. %he broker.tin+ 0r'"iu": %he following are factors taken into account before fi*ing the premium for a building+ 9 .b. Fa. He*t he finds underwriters. BROKERS ' member of the public can obtain insurance only through the brokers. %he other underwriters accept the same premium fi*ed by the first underwriter. %he broker first notes down the details of the cover re&uired by the client. who are willing to accept the risks. then gives it to the client.' written agreement or actual legal contract between the proposer and the insurer. where it is checked and signed by the members of the appropriate syndicate.%he original copy of the Insurance Iolicy has to be submitted when making a claim on the insurance company. half#yearly or annual basis.a.Insurance T$' *un.tors a**'. . PREMIUM %his is the amount paid by the insured on a periodical basis to cover the risk insured. 4nce all the risks are covered.

• 3alu' o* t$' &uil#in+: If the building is made of e*pensive material or has historical value.or#: If the owner has already claimed money from the insurance company. • Cont'nts o* t$' &uil#in+: If the building has highly inflammable contents. the chances of accident are less and so the premium will be low. If the owner has never claimed. the chances of accident are high and so the premium will be high. • Cost o* r'0airs: If the cost of repairs of the building is high. 3ut if the building has non#inflammable contents. the premium will be low. the premium will be high. • Buil#in+ r'. 3ut if the building is weak or made of glass. the chances of damage are high and so the premium will be high. the chances of damage are less and so the premium will be low. If the building has a good record.(ommerce – Students’ Guide Computing Department of Business and • T$' a+' o* t$' &uil#in+: If the building is old. the premium will be low.ation o* t$' &uil#in+: If the building is near an oil or sulphur factory. the chances of accident are high and so the premium will be high. the premium will be high and if the cost of repairs is low. the chances of damage are less and so the premium will be low. 10 Prepared By: Emmanuel George . the chances of accident are less and so the premium will be low. • R'. 3ut if the building is in a safe area. the chances of him claiming again will be high and so the premium will be high. the premium will be low. 3ut if the building is new.'nt . • T)0' o* &uil#in+: If the building is strong. the premium will be high.or#: If the building has a record of many accidents. the chances of damage are high and so the premium will be high. 3ut if it is an ordinary building.lai"s r'. the premium will be low. • Lo.

Insurance • Pr'.. 1 J!5.. alarms... 1 2$. * L 11 . p. =uarterly premium 1 J!5. * J8..a. * $. the premium will be high....autionar) "'t$o#s: If the building has precautionary measures like fire sprinklers. motorcycles %otal compensation 1 2$.....2 1. the premium will be low. J8... PREMIUM CALCULATION: %he following information is e*tracted from an insurance company+ Humber of motorcycles (ompensation for each accident Iercentage of accidents 12.2K @ou are re&uired to calculate the &uarterly premium for each motorcycle.. 'nnual premium for one motorcycle 1 J$!2.. 3ut if it has no such precautionary measures.. Humber of accidents 1 12. etc. 12. 1 J$!2. $.

12 Prepared By: Emmanuel George . 6e must also make a report to the police within 2$ hours after the accident.. %his form facilitates accurate compensation from the insurance company. %he police will make an independent report after its investigation as to the probable cause of the event. %he insured must then inform the insurer immediately. 6owever. %he principles involved are essentially the same for other types of policy as well.(ommerce – Students’ Guide Computing Department of Business and 1 JE. and re&uest for a survey of the goods by the underwriter's agents or the surveyors named in the policy or insurance certificate. :ailure to observe the instructions set down by the insurance company will pre)udice the claim. he is entitled to claim compensation from the insurance company. %he insured must inspect the goods before taking delivery if the loss or damage is apparent. CLAIM FORM 9hen the insured incurs a capital loss. PROCEDURE IN MAKING A CLAIM :or a claim in an insurance policy to be valid. 2. It is important that the condition of the goods and its packing must not be tampered with until the surveyor arrives. ' claim form must be filled when the insured is claiming compensation. the insured may take steps to ensure that there is no further damage to the goods. 1. the insured must follow certain procedures. motor. say. Hote+ In the case of a claim under other types of policies. 3elow is an e*ample of a typical procedure for a marine insurance claim in the event of loss or damage to cargo. the insured must inform the insurance company immediately of the event of the loss. or as soon as the loss or damage is discovered. %he vehicle will have to be towed to a workshop approved by the insurance company.

.landingBgeneral survey report .%o prove lossBdamage . If the latter is found to be guilty of negligence. the insured must submit certain documents to substantiate his claim+ .a.e. (ustoms.i.for cargo.iii.Survey report .iii.Invoices .i.%o prove insurance # original copy of the policy or certificate of insurance . forwarding agents.charter party .ii. the Iort 'uthority and other bailees to be present for a )oint survey.Insurance !.Sales receipt . %he insured must also re&uest ship#owners. %ogether with his claim form.ii.for motor. the insurance company can then sue them for damage or loss incurred.b.3ill of lading . other carriers.i. $. 2.d.%o prove value .to prove ownership .ii.i.c.Mehicle ownership card .%he police report 13 . Hotice of the loss or damage must be made in writing to the bailees within the time limit prescribed.%o enable the insurance company to make claims on third parties .Iacking lists . It is their responsibility to certify any loss or damage to preserve the insurance companies' rights against third parties.

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