Insurance and Pensions Management

STUDY PACK
ON
INSURANCE AND PENSIONS
MANAGEMENT
PROFESSIONAL EXAMINATION I
STUDY PACK ON
INSURANCE AND PENSIONS MANAGEMENT

PROFESSIONAL EXAMINATION I
@CIPM 2018
THIRD EDITION
CHARTERED INSTITUTE OF PERSONNEL
MANAGEMENT OF NIGERIA
CIPM House, 1 CIPM Avenue, Off Obafemi Awolowo Way,

Opposite Lagos State Secretariat, Alausa, Ikeja, Lagos.
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All rights reserved, no part of this publication may be reproduced, stored in retrieval system, or transmitted in any
form or by any means, electronically, mechanical, photocoping or otherwise without permission of CIPM
NIGERIA.
FOREWORD
II
This third edition of our study pack has been made available for the use of our professional students to
assist them in effectively accomplishing their HR professional goal as dictated by the Institute from time
to time.
The text is meant not only for Chartered Institute of Personnel Management of Nigeria (CIPM) students,
but also for researchers, HR practitioners and organisations embarking on the promotion of human capital
development in its entirety. It has therefore been written not only in a manner that users can pass CIPM
professional examinations without tears, but also to provide HR professional practitioners further
education, learning and development references.
Each chapter in the text has been logically arranged to sufficiently cover all the various sections of this
subject in the CIPM examination syllabus in order to enhance systematic learning and understanding of
the students. The document, a product of in-depth study and research is both practical and original. We
have ensured that topics and sub-topics are based on the syllabus and on contemporary HR best practices.
Although concerted effort has been made to ensure that the text is up to date in matters relating to theories
and practice of contemporary issues in HR, we still advise and encourage students to complement the
study text with other relevant literature materials because of the elastic scope and dynamics of the HR
profession.
Thank you and have a productive preparation as you navigate through the process of becoming a
professional in Human Resources Management.
Ajibola Ponnle.
REGISTRAR/CEO
III
ACKNOWLEDGEMENT
On behalf of the President/Chairman Governing Council and the entire membership of the Chartered
Institute of Personnel Management of Nigeria (CIPM), we acknowledge the intellectual prowess of Mr.
Solomon I. Nwankwo in writing this well researched text for Insurance and Pensions Management. The
meticulous work of our reviewer, Mrs. Chukwudum Victoria and Dr. (Mrs.) Olowokudejo has not gone
unnoticed and is hereby acknowledged for the thorough review of this publication.
We also commend and appreciate the efforts of members of the Education Committee of the Institute for
their unflinching support.
Finally, we appreciate the contributions of the National Secretariat staff competently led by the
Registrar/CEO, Mrs. Ajibola Ponnle and the project team, Dr. Charles Ugwu, Mrs. Nkiru Ikwuegbuenyi,
Miss Charity Nwaigbo, Mrs. Livina Onukuba and Miss Opeoluwa Ojo.
IV
INSURANCE AND PENSIONS MANAGEMENT
TABLE OF CONTENTS
CHAPTER ONE:
AN INTRODUCTION TO RISK 1
LEARNING OBJECTIVES 1
1.0 THE CONCEPT OF RISK 1
1.1 WHAT IS RISK 1
1.2 CLASSIFICATION OF RISK 3
1.2.1 WHAT ARE THE RISKS THAT AN ORGANISATION CAN FACE 4
1.3 SOURCES OF RISKS 4
1.4 RISK RELATED TERMS 5
SUMMARY 6
REVIEW QUESTIONS 6
REFERENCES 7
CHAPTER TWO:
AN OVERVIEW OF RISK MANAGEMENT 8
2.0 INTRODUCTION 8
2.1 WHAT IS RISK MANAGEMENT 8
2.1.1 RISK MANAGEMENT PROCESS 9
2.2 RISK MANAGEMENT FOR HEALTH AND SAFETY OF EMPLOYEES 14
SUMMARY 15
REVIEW QUESTIONS 15
REFERENCES 16
CHAPTER THREE:
HISTORICAL DEVELOPMENT OF INSURANCE 17
3.0 INTRODUCTION 17
3.1 ORIGIN AND DEVELOPMENT OF INSURANCE 17
3.2 THE EVOLUTION OF INSURANCE BUSINESS IN NIGERIA 18
SUMMARY 20
REVIEW QUESTIONS 20
REFERENCES 20
CHAPTER FOUR:
FUNDAMENTALS OF INSURANCE 21
4.0 INTRODUCTION 21
4.1 CONCEPT OF INSURANCE 21
V
4.2 BENEFITS OF INSURANCE 22
4.3 WHAT RISKS ARE INSURABLE 22
4.4 UNINSURABLE RISKS 23
4.5 RISKS THAT HUMAN RESOURCE MANAGERS MAY HAVE TO DEAL
WITH IN THE COURSE OF THEIR JOB 24
SUMMMARY 24
REVIEW QUESTIONS 24
REFERENCES 25
CHAPTER FIVE:
TYPES OF INSURANCE COMPANIES 26
5.0 INTRODUCTION 26
5.1 INSURANCE COMPANIES 26
SUMMARY 28
REVIEW QUESTIONS 28
REFERENCES 29
CHAPTER SIX:
INSURANCE CONTRACT 30
6.0 INTRODUCTION 30
6.1 ELEMENTS OF AN INSURANCE CONTRACT 30
SUMMARY 31
REVIEW QUESTIONS 32
REFERENCES 32
CHAPTER SEVEN:
PRINCIPLES OF INSURANCE 33
INTRODUCTION 33
7.0 PRINCIPLES OF INSURANCE 33
7.1 INSURABLE INTEREST 34
7.1.1. INSURABLE INTEREST IN DIFFERENT CLASSES OF
INSURANCE BUSINESS 34
7.1.2. WHEN INSURABLE INTEREST MUST EXIST 34
7.1.3. THE TRANSFER OF INSURABLE INTEREST (ASSIGNMENT) 35
7.2 UTMOST GOOD FAITH 35
7.2.1. DEFINITION OF UTMOST GOOD FAITH 36
7.2.1.2 FACTS WHICH MUST BE DISCLOSED 37
7.2.1.3. FACTS THAT NEEDS NOT BE DISCLOSED 38
7.2.1.4. WHEN IS THE DURATION OF THE DUTY OF DISCLOSURE 38
VI
7.2.2 REPRESENTATION AND WARRANTIES IN INSURANCE 38
7.3 PROXIMATE CAUSE 40
7.3.1. PROXIMATE CAUSE DEFINED 40
7.4 INDEMNITY 42
7.4.1. METHODS OF INDEMNITY 42
7.4.2. FACTORS LIMITING THE PAYMENT OF INDEMNITY 43
7.5 SUBROGATION 44
7.5.1 DEFINITION OF SUBROGATION 45
7.5.2. HOW DOES SUBROGATION ARISE 46
7.5.3. WHEN DOES THE RIGHT OF SUBROGATION ARISE 47
7.6. CONTRIBUTION 47
7.6.1. WHEN WILL CONTRIBUTION APPLY 48
7.6.2. BASIS OF CONTRIBUTION 48
SUMMARY 49
REVIEW QUESTIONS 50
REFERENCES 50
CHAPTER EIGHT:
STRUCTURE OF THE NIGERIAN INSURANCE INDUSTRY 51
8.0 INTRODUCTION 51
8.1 STRUCTURE OF THE NIGERIAN INSURANCE INDUSTRY 51
8.2 NATIONAL INSURANCE COMMISSION 53
8.3 NIGERIAN INSURER’S ASSOCIATION 55
8.4 NIGERIAN COUNCIL OF REGISTERED INSURANCE BROKERS 55
8.5 INSTITUTE OF LOSS ADJUSTERS OF NIGERIA 56
8.6 THE CHARTERED INSURANCE INSTITUTE OF NIGERIA 57
8.7 PROFESSIONAL REINSURERS ASSOCIATION OFNIGERIA 57
SUMMARY 58
REVIEW QUESTIONS 58
REFERENCES 58
CHAPTER NINE:
INSURANCE PRACTICE 59
9.0 INTRODUCTION 59
9.1 PROPOSAL FORM 59
9.2 UNDERWRITING 60
9.2.1. SOURCES OF UNDERWRITNG INFORMATION 60
9.2.2. UNDERWRITNG REMEDIES 61
9.3 INSURANCE POLICY 62
9.4. CLAIMS IN INSURANCE 66
VII
SUMMARY 66
REVIEW QUESTIONS 67
REFERENCES 67
CHAPTER TEN:
INSURANCE PRODUCTS 68
10.0 INTRODUCTION 68
10.1 NON-LIFE INSURANCE PRODUCTS 68
10.2 LIFE ASSURANCE PRODUCTS 75
10.3 TAX BENEFITS THAT ARE AVAILABLE TO EMPLOYERS AND
EMPLOYEES FOR PURCHASING SOME CLASSES OF INSURANCE 89
10.4 ACTUARIAL VALUATION 90
10.4.1. IMPORTANCE OF ACTUARIAL VALUATION 91
10.4.2. ACTUARIAL VALUATION METHODS 92
SUMMARY 93
REVIEW QUESTIONS 93
REFERENCES 93
CHAPTER ELEVEN:
REINSURANCE 94
11.1 BENEFITS OF REINSURANCE 95
11.2 TYPES OF REINSURANCE ARRANGEMENT 95
11.3 METHODS OF TREATY REINSURANCE 96
SUMMARY 97
REVIEW QUESTIONS 97
REFERENCES 97
CHAPTER TWELVE:
PENSIONS 98
12.1.1 PENSION REFORM ACT 2014 99
12.1.2. PROVISIONS OF THE PENSION REFORM ACT 100
12.2.1 PERSONS EXEMPTED FROM THE CONTRIBUTORY PENSION SCHEME 101
12.2.2. RETIREMENT BENEFITS 101
12.2.3 FEATURES OF PROGRAMMED WITHDRAWAL UNDER
THE PENSION REFORMACT 2014 102
12.2.4 FEATURES OF ANNUITY PAYMENT UNDER THE PENSION
REFORM ACT 2014 102
VIII
12.3 BENEFITS IN RESPECT OF MISSING OR DECEASED EMPLOYEE 103
12.4 THE NATIONAL PENSION COMMISSION 103
12.5 FUNDING OF THE NATIONAL PENSION COMMISSION 104
12.6 FUNCTIONS OF THE PENSION TRANSITIONAL ARRANGEMENT
DIRECTORATE 105
12.7 PENSION FUND ADMINISTRATORS 106

12.7.1. PENSION FUND CUSTODIAN 106
SUMMARY 107
REVIEW QUESTIONS 107
REFERENCES 107
CHAPTER THIRTEEEN:
SOCIAL INSURANCE 108
13.1 NIGERIAN SOCIAL INSURANCE TRUST FUND 108
13.1.1. CATEGORIES OF PERSONS EXEMPTED FROM THE NIGERIAN
SOCIAL INSURANCE TRUST FUND 109
13.2 CONTRIBUTIONS 109
13.3 CATEGORIES OF BENEFITS UNDER THE NIGERIAN SOCIAL
INSURANCE TRUST FUND 110
13.4 EMPLOYEE COMPENSATION ACT 2010 111
13.5 SCALE OF COMPENSATION UNDER THE EMPLOYEE
COMPENSATION ACT 2010 113
13.6. RECEIVING COMPENSATION UNDER THE EMPLOYEE

COMPENSATION ACT 2010 118
13.7 POWERS TO RECOVER FROM ANOTHER PARTY THAT IS
RESPONSIBLE FOR THE DEATH OR INJURY OF EMPLOYEE 120
13.8 NATIONAL HEALTH INSURANCE SCHEME 120
13.8.1. BENEFITS 121
13.8.2. METHOD OF OPERATION 121
13.8.3 NHIS VOLUNTARY CONTRIBUTION SCHEME 123
13.9 OTHER SOCIAL INSURANCE PROVISIONS IN NIGERIA 123
SUMMARY 125
REFERENCES 127
IX
CHAPTER FOURTEEN:
NON-OCCUPATIONAL LIFE INSURANCE ARRANGEMENTS 128
14.1 CLUBS, ASSOCIATIONS, SOCIETIES LIFE INSURANCE COVER 128
14.2 POST-RETIREMENT ISSUES 129
14.3 HANDLING POST- RETIREMENT ISSUES 129
SUMMARY 132
REFERENCES 132
PRACTICE QUESTIONS 133
BIBILOGRAPHY 141
X
CHAPTER ONE:
AN INTRODUCTION TO RISK
LEARNING OBJECTIVES
1. To provide a deeper understanding of risk
2. To understand the classifications of risk
3. To understand the sources of risks
4. To understand the terminologies in risk and their application in insurance
INTRODUCTION
1.0 THE CONCEPT OF RISK
Risk, both as a concept in insurance and fiscal management or as a phenomenon inheres in
almost all aspects of human endeavour. We are exposed to varying degrees of risk from the
moment we are up for work in the morning, to the moment we return to our beds. By
implication, risk is not only present in all human activities; every human being is expected
to take a risk at some point –whether they are aware of it or not. In other words, taking a risk
is both voluntary and involuntary, or explicit and implicit. While some of these risks may be
trivial, others may significantly be life changing. Therefore the need to understand the risk
attached to each activity we set out to do becomes an important exercise in the process of
decision making in business both public and private.
Considering that risk is configured into the nexus of humans and their society, the need to
understand risk cannot be over emphasized. However, it is important to note that risk abounds
in our society in the guise of terrorism, robbery attacks, war, insurgency, boat and vehicle
mishaps, plane crash, epidemic, liquidation and natural disaster like earthquake. And in
human resources management, loss of job, death and occupational health hazard are some of
the risk factors employers and employees are confronted with in their work spaces.
Even the human resources managers are not immune against these risk factors already
mentioned.
With so much emphasis on risk in a course book on insurance and pension management,
human resources managers or practitioners are likely to wonder why so much attention on
risk. While such concerns are not unusual, it is important to note that risk is an integral part
of insurance and discourses on insurance; and therefore, cannot be isolated from insurance.
To such extent, providing a deep understanding of risk is vital to the teaching, learning and
practice of insurance and pension management.
1.1 WHAT IS RISK

Authors from diverse disciplines have varying conceptions of risk. For some like Hopkins
(2010), Derek and Bates (2008), Bikelhaupt (1979), Kaye (2001), Huntingford (1998), -risk
translates to danger, hazard, or an outcome that is undesirable or unwanted. These
perceptions of risk are correct to the extent of context they deal with risk; for if risk is situated
1
within the context of insurance and pension management –where risk is evaluated in relation
to its advantages and disadvantages, or where we can talk about the attending opportunities
and advantages in taking certain risk in businesses and other enterprises, then the meaning
becomes a conceptual terminology within the discipline of insurance.
Attributing risk to” uncertainties about outcomes in given situations” brings risk within close
range of chance; but chance cannot be taken as a synonym of risk in the context of insurance
and pension management.
Risk could therefore imply some form of uncertainties about outcomes in a given situation;
the occurrence of which may be favourable or unfavourable to us.
How then do we differentiate between the concept of risk and that of chance? Although both
implies some doubt about the outcome in a given situation, chance will have an outcome that
is normally favourable.for examples while we talk about the risk of an accident, risk of losing
our job; we talk about the chance of passing an examination; performing well in an interview
or winning a bet.
To support the above claim, it will be helpful to mention various authorial definitions of risk
in the field of risk management and insurance. Some of these definitions are:
Risk as uncertainty of an event occurring (Institute of Internal Auditors)
Risk as event with the ability to impact (inhibit, enhance or cause doubt about) the mission,
strategy, projects, routine operations, objectives, core processes, key dependencies and/or the
delivery of stakeholders expectation (Hopkins, 2010).
Risk as uncertainty of outcome, within a range of exposure, arising from a combination of

the impact and the probability of potential events (Orange Book)
Risk is the chance of loss (Holyoake & Bill, 1999)
Risk is uncertainty or lack of predictability of outcome in given situation (Dickson, 1984)
Risk as effect of uncertainty on objectives (ISO Guide 73)
Risk is the combination of the probability of an event occurring and its consequences (Derek
& Atkins, 2008)
Risk is potential variation in outcomes (Williams, Michael & Peter, 1995)
Although not exhaustive, these are the definitions of risk, as stated above have over the years
been identified as the identifying markers of risk in insurance and pension management.
However, certain concepts have also been associated with risk; these are:
a. Loss
2
b. Uncertainty
c. Doubt
a. Loss: Risk has no meaning without loss being the outcome of concern to the individual or
business. According to Webster (2010), loss has been defined as the decrease or
disappearance of value usually in an unexpected or relatively unpredictable manner. In
insurance, it is the diminution of value within the limit provided in an insurance policy. It is
important to note that not all losses are related to risk. Some losses are actually expected, for
example the depreciation of an asset. On the other hand, some losses cannot be predicted but
are risky if they occur; for example, loss of property due to fire, theft, weather, business
interruption and many others.
b. Uncertainty: This can be described as not having sufficient information about the future
or doubt about the future based on a lack of knowledge. Hence if we know what is going to
happen there would be no risk.
c. Doubt: This is the state of uncertainty as a result of the lack of knowledge about the
outcome of an event.
1.2 CLASSSIFICATION OF RISK

Risks can be broadly classified into two broad categories which are namely: financial
and non-financial risk.
Financial Risks: this form of risk means that the outcome of risk can be measured in
monetary terms; examples include material damage to property; theft of property; fire
loss; employee liability/litigation cases etc.
Non-financial Risks: This means that the outcome of risk cannot be measured in
financial terms, though the affected party may attach financial sum in terms of their
subjective considered financial value. Examples include emotions and sentiments
consequent upon the inconvenience under each of these examples, the affected party may
fix an amount as the value of their loss in financial terms.
Other specific classifications of risk which are referred to as risk dichotomies in insurance
are:
Pure risk: This occurs in situations where only a loss or no loss / breakeven situation
exist. Examples include injury at the workplace; flood damage; fire damage, motor
accident, earthquake. Pure risk will only present two outcomes of a loss or no loss.
Speculative risk: This type of risk can have three outcomes of a loss, breakeven or gain.
Examples include; investment in shares, currency dealing and some other business
decisions that an organisation may undertake such as pricing of their products;
diversification, expansion or acquisition and market analysis. Each of these may result in
3
a gain, loss or breakeven. Both pure and speculative risk are referred to as outcome
classification of risk.
Particular risk: This is used to describe risks whose cause and effect are personal in
nature. In other words, particular risks are risks which affect only an individual and not
everybody in the community. The incidence of a particular risk falls on a particular
individual affected. For example if your textbook is stolen, the full impact of the loss of
the book is felt by you alone and not by the entire members of the class. You will bear
the full incidence of the loss. The theft of the book therefore is a particular loss. Other
examples include injury at work, fire damage, motor accident, and death of a
breadwinner.
Fundamental risk: These are risks that arise from causes outside the control of any one;
both as an individual or as a group of people. Its effects are usually on a large number of
people at the same time. Therefore, it could be said that fundamental risks are impersonal
in nature. Examples include; war, economic depression, earthquake, flood, famine and
other natural disasters. . Both particular and fundamental risks are also referred to as
effect classification of risk.
Dynamic risk: These are risks that result from economic or social change. Examples
include the laws of the land, consumer tastes, and technological changes.
Static risk: A risk is said to be static if it is not capable of changing its form. That is the
essential nature of such risk never significantly changes.e.g. the risk that a property will
be destroyed by fire is ancient. And if causes of fire are considered over a long period. It
will always be from cooking, heating and lighting, or from a malicious act. Such
unchanging risks are termed static. Dynamic and static classification of risk is also
referred to as nature of risk classification of risk.
1.2.1 WHAT ARE THE RISKS THAT AN ORGANISATION CAN FACE?

While there is no specific number of times an organisation should be exposed to risk; its
managers should be conscious of its existence and try to pro- actively dealing with them,
rather than waiting and reacting when it occurs. The bad thing about risk is that it can, if
not properly managed, bring an organisation to ruin with a follow up of adverse economic
and social consequences. However there are some risks which an organisation may be
faced with, though not exhaustive, as a result of their being in business. These risks
include material damage to property, loss of reputation, employee accident/litigations,
credit risk, political risk, technological risk, professional indemnity, terrorism, liability
risk, corporate governance risk etc.
1.3 SOURCES OF RISKS

There are various sources through which risk may emanate and these are:
4
Physical environment: Earthquake, windstorm, flood, landslide and other risks
emanating from nature.
Social environment: Social unrest, insurgency, militancy, terrorism and religious

upheaval. All these could be sources of loss or damage to lives and property.
Political environment: Tax policies which could be discriminatory or punitive, and

confiscation of property by a host government.
Legal environment: Sanctions imposed by courts
Operating environment: The processes and procedures of an organisation generating

risks and uncertainties e.g.an employee filing litigation for dismissal.
Economic environment: Inflation, recession, depression etc that hampers the

organisation from achieving its set objectives.
1.4 RISK RELATED TERMS

Understanding the terms used in any discipline is very important as this will form the basis
of communicating and comprehending such subject and for the purposes of insurance, the
following terms are important in order to have a clear understanding of insurance. These
terms are:
Perils: This term in insurance means the cause of a loss, or the cause of risk. Examples of
likely causes of loss will include: fire, motor accident, theft, earthquake, flood, storms,
hurricanes and many other. In explaining peril, if fire is the cause of a loss to an individual
or organisation. That fire in insurance is said to be the peril that led to the loss.
Hazard: This is another term which is used in insurance to mean a circumstance or factor
which promotes the frequency and or severity of a loss. In insurance, hazard can be classified
into the following:
Physical hazard: These are the physical or tangible aspects of risk that is likely to influence
the occurrence and or severity of a loss. It usually depends on the type of object that is under
consideration Example, a motor car without brake or with poor headlights at night will
constitute a poor physical hazard that will increase the frequency or severity of that vehicle
being involved in an accident. Similarly, a building whose roof is constructed with thatch is
more likely to be totally destroyed if there is a fire outbreak when compared to that which
has its roof constructed with aluminum roofing sheet.
Moral hazard: This is often described as an intangible human aspect of risk. It includes the
mental attitude of individuals as well as the character of a person that can increase the
frequency and or severity of a loss. Examples of moral hazard includes being dishonest about
5
an event, faking an accident to collect insurance money, submitting a fraudulent claim,
inflating the amount of a claim or murdering in order to collect the life insurance proceeds.
Morale hazard: Some authors have drawn a subtle distinction between moral hazard and
morale hazard. While moral hazard refers to dishonesty by the insured morale hazard is
carelessness or indifference to a loss because of the existence of insurance. Some insured are
careless or indifferent to a loss because they have insurance which increases the frequency
and severity of loss,. For example, leaving car keys in an unlocked car which increases the
chance of theft or leaving a door unlocked which allows a burglar to enter. Careless acts like
these increase the chance of loss.
An understanding of these terms is very important to an insurance company as they become
part of what they rely upon to arrive at the price they will charge a proposer for insurance
coverage.
SUMMARY
Risks constitute the background for the study of insurance. The concept of risk is that which
is worth studying as it is present in all human endeavours. An understanding of this concept
will be useful in decision making to determine how risk can be managed; whether by
insurance or non-insurance means. This enables the individual or organisation to achieve
their set out objectives. In this chapter the classification of types of risks was given and the
sources through which risk can arise were also discussed.
In conclusion, risk related terms were also discussed.
REVIEW QUESTIONS
1. Explain with examples the difference between fundamental and pure risk?
2. What are the sources of risk to an organisation engaged in the manufacturing of plastic
products?
3. The degree of hazard is considered by insurance companies in helping them to fix their
premium, explain with examples the various types of hazard that the insurance companies can
consider in order to fix their premium?
4. Explain five risks that an organisation may be faced with in carrying out their daily activities
5. The human resource manager has a vital role to play in the management of an organisation’s
risk. Explain five workplace risks that the human resource manager of an organisation can
manage as part of their job.
6
REFERENCES
Atkins, D. & Ian.B. (2008).Insurance.London.Global Professional Publishing.

Holyoake, J., & Bill, W. (1999).Insurance.London.Selwood Publishing.
Huntingford, K. (1998) .One Stop Insurance.London.ICSA Publishing.
Nwankwo, S.I. & Asokere, A.S. (2010). Essentials of Insurance: A Modern Approach.
Lagos. Fevas Publishing.
Hopkin, P,. (2010).Fundamentals of Risk Management:Understanding,Evaluating and
Implementing Effective Risk Management.London.Kogan Page.
Redja.G.E. (2008). Principles of Risk Management and Insurance. Boston. Pearson
Education Inc.
Read,W.A(2010).The New International Webster’s Comprehensive Dictionary of the
English Language.U.S.A.Typhoon Media Corporation.
Williams,C,A,Michael,L.S & Peter,C.Y(1995).Risk Management and Insurance.U.S.A.Mc
Graw Hill.
Dickson,G.A. (1984).Elements of Insurance. London. Chartered Insurance Institute
“Orange Book” London.HM Treasury.
7
CHAPTER TWO:
AN OVERVIEW OF RISK MANAGEMENT
LEARNING OBJECTIVES
1. To understand what risk management is
2. To understand the risk management process
3. To understand how risk management can be applied for the health and safety of
employees
2.0 INTRODUCTION
Risk, as discussed earlier, is present in all human undertaking. It is equally true that not all
risky situations can be avoided. Therefore; there is the need to manage risk so that the
objectives of the individual and organisation can be fulfilled. The management of risk is a
step by step process which begins with risk identification through to risk control.
2.1 WHAT IS RISK MANAGEMENT?

The first chapter of this study pack has explained the concept of risk and its various
classifications. It is imperative to note that risk is the sugar and salt of life-too little or too
much of either is unhealthy; and in order to achieve a good diet there must be a balance
between quantity of salt and sugar one consumes. Similarly, there must be a right balance
between risk taking and risk avoidance while comparing its reward and consequences.
Nevertheless, some risk must be exploited in order to maximize individual and corporate
opportunities whilst taking steps to mitigate risks that threaten individual and organisational
success. As highlighted earlier, risk is ever present; as one is being addressed, others may
emerge. Therefore, it is important to regularly review risks, as this will help to determine
whether the desired objective is attained. The following objectives could be achieved if risk
is managed properly:
• Reduce their frequency of occurrence.
• Reduce their severity if they eventually occur.
• Reduce the social and economic cost in terms of pains and sufferings that will be
associated with the occurrence.
The concept of risk management is an intrinsic part of human nature, as a result that most
people naturally avoid task that are considered potentially dangerous. For example
nobody will normally play with exposed electric wire; or run across a road when a fast
moving car is approaching. This is because of the high risk of danger associated with it;
for example some organisations will not venture into certain businesses or employ certain
categories of people who pose certain kind of risk.
8
Since its appearance in business lexicon in the 1950’s and 1960’s, several authors have
defined risk management from perspectives relating to their disciplines and professions
as well as whether they are writing from the British or American viewpoint. But a look
at these two perspectives of risk management will lead us to discover that they may use
different, and sometimes confusing, expressions for what are essentially similar concepts.
For this reason some of the leading risk management bodies have come together to
develop a risk management standard. One of these standards is the institute of risk
management framework 2002 which explained the risk management process as that
which covers the following:
a. The organisation’s strategic objectives.
b. Risk assessment /analysis under which are: risk identification; risk description; risk
estimation; risk evaluation and risk reporting.
c. Decision on how significant they feel the risks are to the organisation.
d. Risk treatment which involves the selection and implementation of measures that are
aimed at modifying the risk.
e. Residual risk reporting.
f. Monitoring.
2.1.1 RISK MANAGEMENT PROCESS

Like every other business activities, managing risk requires a process that has clear purpose
and well-designed activities. The risk management process reveals all the steps an
organisation needs to take so as to effectively implement risk management in their firm. Risk
management process, when embarked upon systematically, enables frequent development in
decision making. Therefore, it is important for an organisation intending to venture into any
decision making (which may include decisions relating to employing a new staff) to fully
understand the risk management processes associated with that particular project.
This will help to effectively and efficiently manage any risk associated with the decisions
and also, the project will yield a better result. The most important reason why a company
should understand and undertake a risk management audit is to take advantage of the
opportunities while minimising the consequences of the risky event.
With regards to the above explanation, it is necessary at this stage to have a detailed
evaluation of the risk management process.
Risk Assessment: If risk is to be properly managed it needs to be subjected to risk

assessment. Risk assessment is the measurement of the variables which generate risk and is
linked to both the identification of probable accident, estimation of the rate of occurrence of
the event and an estimation of the consequences of those accidents. Risk assessment also
attempts to analyse triggering causes of risk so as to be more efficient in reducing its
probability and impact. Risk assessment can be divided into:
9
1. Risk Analysis: This is the methodical assessment of uncertainty about the scope, cost, and
period of a project. The uncertainty could be in form of risks which the project might meet
during the course of its progress or in form of unidentified opportunities for improving the
cost and duration of the project. It could be said that risk analysis helps in understanding the
nature of the risks that affect an organisation. Risk analysis typically involves assessing the
probabilities and impacts of the risk that could arise in the course of a project, ranking the
risks and screening out trivial risks. The probability and impact of each risk is estimated,
either qualitatively or quantitatively. It may require that the risk be categorized in terms of
impact as high, medium or low and in terms of probability as probable, possible or remote.
However, the risk must first be identified by looking at the significant activities of the
organisation and defining the risks that result from them. Risk identification will have as its
aim the determination of an individual or organisation’s exposure to uncertainty, which will
require knowledge of the individual’s activities, occupation, lifestyle, hobbies, etc. and for
the organisation, their objectives, products/services, market, their external environment in
which they operate, which includes legal, socio-cultural, political, economic, technological
environment etc.
Risk identification involves looking at all the significant activities of the individual or
organisation and defining the risks that emanate from them. It can be internally or externally
induced and must be methodical so as to capture all the activities to make the process of risk
management much easier.
For an organisation, it may adopt a top-down (management knows best) or a bottom up
(operatives know best) approach to identifying risk or a combination of both methods.
Sources such as persons, past experiences and methods can also be helpful. Once these risks
are identified they should be described in a structured format. Some risk identification
methods are here listed and explained.
i.Physical Inspection: This is by visiting the organisation’s premises, to ascertain the

risks that the organisation may face and suggest ways by which there can be
improvement. Physical inspection will include the inspection of the factory, workshop,
training shed, offices and the production (manufacturing) processes. This helps to
highlight the current situation of the organisation, their attitude towards risk, loss control
in place, health, safety and general housekeeping of the organisation’s handlers. It also
exposes how the premises and plants co-habit with their surroundings.
ii.Organisation Chart: This provides an overview of the structure of the company and
can reveal areas of risk concentration or possible dependencies between different
business areas. The organisation’s chart will also show the analysis of the risk exposures
of a business for several reasons that include:
• To reveal crucial information about the nature and scope of the organization’s
activities
10
• To reveal the interrelationships and interdependences among various parts of
the organization
• They also show the breakdown of the organisation into various profit and loss
centers, which are facts to be considered when decisions on risk financing are
being made.
• Organisational charts also reveal crucial authority pervading the organization.
• Structural defects in the organization, which have an effect on loss exposures,
may also be identified through analysis of these charts.
iii. Flow chart: This is a pictorial representation of production stages or distribution in a

place of business such as an organisation’s relations with suppliers, customers, utilities
and modes of transportation. Flowchart enables the organisation to discover areas of
potential risk.
iv. Contract Terms: This include purchase agreement, sales agreement, lease agreement,
mortgage agreements and other form of contract entered into which may expose the
individual or organisation to risk.
v. Accounting Records: (including balance sheets, profit and loss statements, and
analysis of sources and application of funds): These provide the needed data on which
assets and other resources are valued. A good inspection of these documents may reveal
some frauds that were perpetrated in the past and other intended ones that may be
attempted or actually perpetrated in the future.
vi. Checklist: This is used where the person identifying the risk is not based at the
premises, a checklist can be produced for completion by someone on –site. Drafting a
checklist should be carried out with utmost care if it is to capture all the information that
is required.
vii. Hazard and Operability studies (HAZOP): This is an extremely detailed

examination of plant or process. Commonly used in high risk industries where areas of
general risk is already known, but specialized risk analysis needs to be undertaken.
viii. Fault Tree Analysis and Event Tree Analysis: This starts from potential risks and
trace backwards the range of events and sequences of events that could result in risk
occurring.
ix. Delphi technique: Here, a group technique for aggregating the opinion of a number
of experts is used. Questionnaires may be completed independently, and these are
11
circulated anonymously between the panel members. This process is repeated several
times to achieve a convergence of opinion.
x. Failure Mode and Effect analysis: This involves an analysis of all the components
of an activity with a view to discover what effect there may be if any of the components
fails in the process of carrying out such activity. Under failure mode and effect analysis,
for each component of a system, the effect of its failure is identified together with the
consequential failure on the rest of the system. The likelihood and consequence of failure
can then be estimated. Failure mode and effect analysis and fault tree/event tree analysis
are used in complex manufacturing industry such as automobile.
xi. Human Reliability Analysis (HRA): This aims at identifying failures due to human.
Processes are broken down into decision points at which correct or incorrect performance
can result.
xii. Decision Trees: This is the use of graph or model of decisions and their possible
consequences, including chance event outcomes and resources costs. A decision tree is
used to identify the strategy most likely to reach a goal.
2. Risk Evaluation: This method implies evaluating risk after they have been analysed.
Risk evaluation helps in determining the degree of devotion and level of efforts that
should be channelled towards managing and mitigating various risks in relation to their
potential effect on the business as a whole. There are various standards used to evaluate
the importance of risks and they are as follows: the cost and benefits related with risks,
concerns of the different stakeholders and the regulatory and legal necessities.
Risk Reporting: The risk manager will need to report risks to different stakeholder as
the need arises. The report could be to the board, business units such as accounting,
marketing, research and development, production etc.
The risk manager reports the findings of the risk assessment exercise for consideration of
senior management.
3. The senior management decides how significant they feel the risks are to the
organisation and whether each risk should be accepted as it is or should be treated in
some way to make it acceptable. The risk manager will also need to report the risks to
different stakeholder as the need arises. The report could be to the board, business units
such as accounting, marketing, research and development, production etc.
Risk Treatment: Notwithstanding the consequences and potential impact of the risk,
there has to be a decision on how those risks will be handled. Risk treatment is the process
of reducing risks, making plans for possible crises, and controlling any remaining risk in
the organisation. Mostly, the methods of treating risks involve avoiding the risk,
minimising the negative effect of the risk by making it less possible to happen,
transferring the risk to a third party or planning for the risks to be removed. Any measure
12
adopted will depend on the type of risk that is under consideration. It is advised that such
measure should be cost effective for it to achieve its goal. Thus, the treatment measures
that are available include:
Risk Avoidance: As the name suggest, this is ceasing or putting on hold the activity that
will expose the organisation to risk. This may not be feasible in all instances because it
may mean the organisation losing a substantial part of its revenue source.
Risk control: This is the process of modifying a risk to reduce its severity or frequency
of occurrence. The control measures adopted can be:
i. Physical risk control: These are concerned with the physical steps which can be taken
in order to control risk i.e. reduce the frequency of its occurrence as well as the severity
when it occurs. The physical risk control can be pre-loss control in which case, the loss
is anticipated and steps are taken to reduce their effect e.g the installation of equipment
such as fire alarms, cctv cameras, goggle, safety boot, smoke detectors etc. Physical risk
control can be post- loss control: where the risk had occurred and steps are taken to reduce
the effect of loss example are fire extinguishers, automatic fire sprinkler systems.
ii. Non-physical risk control: This for a human resource practitioner will include
recruitment procedures and every other method that will be adopted to reduce the
concentration of risk such as segregation of risk by not allowing a large number of the
organisation’s top echelon to travel in one mode of transportation at the same time.
iii. Financial risk control: This also can be divided into two, namely:
(a) risk retention within the organisation i.e those risk that the organisation has decided
not to insure or are unable to insure.
(b) risk transfer which means that the loss is transferred to another party outside the
organisation.
The various means of risk transfer will include:
Insurance: This is by far the most common means of transfer.
Contract agreement: this is a statement holds that a party to the contract shall be held
responsible for any loss that does occur. Examples are tenants being held responsible for
damages that occur during their occupancy; commercial haulers being held liable for losses
or damages that occur to goods which they carry on behalf of their clients; bailees being held
liable for losses or damage caused to items in their custody.
Risk Financing: This is the last step in risk treatment and will include the risks that are
retained as well as those for which insurance is bought to cover. The question of risk
financing is very important because any means by which risk must be controlled, cost should
be a major consideration. If a risk is small and its occurrence not frequent, buying insurance
may not be a cost effective option. If insurance is bought, the premium paid becomes the
finance; while if the risk is retained, the organisation will have to decide on whether to handle
losses that occur as part of its expense; take a loan after the event has occurred to deal with
13
the loss; set up a contingency fund (special fund) to deal with any loss that may occur and if
the organisation is large enough, setting up a captive insurance company to handle the risks
of the organisation.
Risk Reporting: The risk manager will need to report risks to different stakeholder as the
need arises. The report could be to the board, business units such as accounting, marketing,
research and development, production etc.
Monitoring: This is the last stage in the risk management process as there should be regular
monitoring to see if earlier set out objectives have been met and if not, what other measures
should be put in place.
The Organization’s Strategic

Objectives
Risk assessment
• Risk analysis
• Risk identification
• Risk description
• Risk estimation
• Risk evaluation
Modification Audit • Risk reporting Formal Audit
Risk treatment
Residual risk reporting
Monitoring
The risk management process

Source: Atkins & Bates 2008
2.2 RISK MANAGEMENT FOR HEALTH AND SAFETY OF EMPLOYEES.

Every organisation should have a health and safety policy that sets out the arrangements that
are put in place for managing the health and safety of their employees, customers and
members of the public who may be affected by their work and some of this safety measures
include:
Making the workplace safe and eliminate or control risk to health.
14
Ensure that plant and machinery are safe and that safe systems of work are followed.
Ensure that materials are moved, stored and used safely.
Provide adequate welfare facilities.
Give workers information, instruction, training and supervision necessary for their health and
safety.
Organise health and safety induction training when new workers commence work.
Monitor the health and safety policy that is put in place to ensure that they are effective.
This can be by carrying out physical inspection by the supervisors and other superior officers
in the organisation.
Since safety is not only the preserve of management and the organisation,the employee will
also be required to play a part in order to achieve its intended objectives and promote the
organisation.
SUMMARY
The concept of risk has been discussed in this chapter. The process of risk management has
been broken down into five which are: that before any process of managing risk is put in
place, it will be important to understand the context in which it exist by defining the
relationship between the organisation’s operating environment known as strategic context;
this is aligned with the organisation’s context which should set out the objectives, core
activities and operations of the organisation. The processes of risk identication, risk analysis,
risk evaluation, risk treatment and monitoring can now take place.
If risk is properly managed, there is the likelihood that there will be an improved performance
by the organisation in achieving their set out goal.
REVIEW QUESTIONS
1. What risk management measures can an organisation put in place to safeguard its
employees and other visitors to their premises?
2. The identification of risk is a core activity in the process of risk management. As a human
resource executive explain five sources of identifying risks in an organisation?
3. Explain the following as they relate to risk management.HAZOP, FMEA and DELPHI
TECHNIQUE?
4. The management of risk is central to the survival of any organisation. As a human resource
practitioner, explain two physical control and two non-physical control measures that could
be adopted to manage the risks that your organisation is faced with.
15
5. The risks that organizations face are diverse. As a human resources practitioner, classify
these risks and explain from among this classification the risks that are insurable?
REFERENCES
Pritchett,S.T.,Schmit,J.T.,Doerpinghaus,H.I.& Athearn,J.L.(1996).Risk Management
and Insurance (7th edition).New York. West Publishing Company.
Trieschmann,J.S.,Hoyt,R.E.& Sommer,D.W.(2005).Risk Management and Insurance
(12 edition).Thomson.South Western.
Dorfmann, M.S. (2005).Introduction to Risk management and Insurance.U.S.A.
Prentice hall Inc.
Kaye,D.(2001).Risk Management.London.Chartered Insurance Institute Tuition
Service.
Banks,E.& Richard,D.(2003).Practical Risk Management: An Executive Guide to
Avoiding Surprises and losses.London.John Wiley & Sons.
Collier,P.M.(2009).Fundamentals of Risk Management for Accountants and Managers:
Tools and Techniques.London.CIMA Publishing.
Reuvid,D.(2008).Managing Business Risk Management: A Practical Guide to
Protecting
Your Business. London.Kogan Page.
Redja.G.E. (2008), Principles of Risk Management and Insurance, Boston, Pearson
Education.
http//www.theirm.org retrieved 3/7/2017.
16
CHAPTER THREE:
HISTORICAL DEVELOPMENT OF INSURANCE
LEARNING OBJECTIVES
1. To understand the origin of insurance
2. To understand the history of insurance in Nigeria
3.0 INTRODUCTION
From when history recorded the existence of human society; there have being situations when
adverse situations have affected them with no solution other than to resort to self help, or if the
situation can be avoided, this is chosen as an option.
Insurance as a concept came to existence when individuals decided to come together to share the
responsibility of catering for losses that may arise from their daily living.
3.1 ORIGIN AND DEVELOPMENT OF INSURANCE

The concept of insurance is closely related to group life. In primitive society, people lived
together in families or tribes in which their needs were fully met and protected through co-
operation and mutual help. They therefore did not feel the need for insurance because they were
fully protected against all sorts of risks by the community. When this family or tribal life was
replaced by urban life in the ancient civilizations, the individual found himself open to a number
of different kinds of risk and without the family or tribal protection. But this was not true of the
ancient civilizations of Egypt, Phoenicia, Greece and Rome in which the individual found
himself exposed to numerous risks without recourse to the family community. Under these
circumstances, the individual was completely deprived of family or tribal protection and
therefore, looked for other kinds of safeguards, thus insurance originated from the human need
to find safeguards against the possible risks to himself and his property or interest.
It is not yet agreed among the authorities the exact origin of insurance; however, there is
substantial evidence establishing that what is now regarded as insurance, started nearly a
millennium ago among the ocean-going Italian merchants of Rome. Therefore, the earliest form
of insurance was marine which operated through the mechanism of the ship-owners/merchants
agreeing with every owner of goods which was to be transported that owners of goods arriving
safely at the destinations would compensate those whose goods either got damaged or lost during
the voyage; that each good merchant, at the commencement of the voyage, would pay into a
common pool a charge (later called premium). This charge was based on the value of goods to
be shipped and it was also used to compensate merchants with losses.
The Italians later introduced this practice to the United Kingdom and Western Europe. The most
popular coffee shop in the United Kingdom where the marine transactions of this type were
conducted in the 17th Century was owned by a man named Edward Lloyds and it later became
the centre of marine insurance in the world. By the year 1601, the practice of insurance was so
developed in Britain that its parliament passed an Act to regulate the business.
17
After marine insurance came fire insurance, life and engineering insurance. This changes
occurred as societies developed.
The present concept of modern insurance was introduced into Nigeria by the British. Although
some form of social insurance had existed in parts of the society long before their arrival. This
was in the form of mutual and social schemes which evolved through the existence of the
extended family system and social associations such as age grades and town unions.
The means of operating this kind of social insurance was by the means of providing cash
donations, materials or sometimes organised collective labour to assist members of the extended
family and social or communal associations who suffered a debilitating event. Funds for meeting
these needs are usually contributions or levies imposed on members on a regular basis or when
the need arises. These funds are not only used to improve members’ deleterious circumstances
but also ceremonial events such as weddings and other social obligations.
Harsh economic realities and urbanization has however, worsened this family communal ties.
Nevertheless, the act is still practiced one way or the other by some people, communities and
trading/artisan associations.
3.2 THE EVOLUTION OF INSURANCE BUSINESS IN NIGERIA

Modern insurance business was introduced in Nigeria in the late 20th century. This was because
many European trading companies only established trading posts in Nigeria during the wave of
colonialisation in Africa (towards the end of the 19th century). The establishment of British
trading companies in Nigeria such as the Royal Niger company in 1879 and the Elder Dempster
shipping company which dominated trade on the West African coast, brought about increased
activities in shipping and banking. Since many of the companies then in existence were British
owned, they placed their insurance businesses in the London insurance market.
As commercial activities developed in Nigeria, it became necessary for these trading posts to
handle some aspects of their insurance business locally and in order to do this some British
insurance companies appointed agents to represent their interest in Nigeria. These agents were
given “Powers of Attorney” i.e. the right to act for someone else in their financial or legal matters.
These powers extended to obtaining insurance business, issuing cover notes and the servicing of
claims on behalf of their principals in London. At first these agents were mainly foreign banks,
traders and merchants.
These agencies later gave way to full branch offices of the parent companies of which Royal
Assurance agency became the first in 1919 and later upgraded to a branch on February 28th 1921.
This also opened the way for other agencies such as Patterson Zochonis (PZ), Liverpool, London
and Globe, BEWAC’S Legal and General Assurance, (1949) and the Law union and rock (1951)
the first agency of a British Company to be given to a Nigerian citizen, Sir Mobolaji Bank
Anthony. All of these companies were British owned and were majorly established for the
18
purpose of providing insurance for their trading activities in Nigeria. It was not until 1958, that
the first indigenous company, African Insurance Company limited was established.
In 1960, when Nigeria became independent, the number of indigenous companies had risen to 4
out of the 25 insurance companies in operation at the time, these were, African insurance
companies, Nigerian General Insurance Company, Great Nigeria insurance company and
Universal insurance company. After independence the Nigerian government as well as some
regional political sub-units established their own insurance companies. Examples of these are
NICON Insurance Plc., established by a decree of the federal government in 1969, Great Nigeria
Insurance Co. Ltd., Nigeria General Insurance Co. Ltd., LASACO Assurance Plc., etc. all of
which belong to and are established by various geo-political sub-units at different times.
However, the insurance industry reform of 2005 established with the intent of restoring the
confidence of the public in the market, enhance capacity and make insurance companies in
Nigeria to be internationally competitive has led to a reduction in the number of insurance
companies significantly. While many companies merged, others had to change their line of
business from reinsurance to pure underwriting, while some stood alone and did not merge with
any other company to achieve the new capital level.
Various laws have also been enacted to regulate insurance business in Nigeria, These laws
deal mainly with ownership, management, share capital requirements, professionalism and
professional standards, ethical practices and investment of funds.
The Insurance Act of 2003 provided that insurance companies in Nigeria must have the
following paid-up share capitals:
(1) Life Assurance Company - ₦150million
(2) Non-Life (General Business) Insurance Company - ₦200million
(3) For composite company - ₦350million
(4) For reinsurance companies - ₦350million
However, the act in section 9 (4) provides that the commission(National Insurance Commission
may increase from time to time the amount of minimum paid up share capital referred to in
subsection (1). This was carried out by the National Insurance Commission in 2005 when it
directed that the minimum paid up share capital for insurance companies operating in Nigeria
be increased as follows to:
a. Life Assurance Business – ₦2billion
b. Non-life (General) Insurance Business – ₦3billion
c. Reinsurance Company – ₦10billion
19
SUMMARY
History has shown that in many societies there existed various methods by which citizens
assisted one another in the event of adversity. This could be by drawing from contributions
made by members or assisting through labour to mitigate losses suffered by any member.
There is substantial evidence establishing the fact that what is now known as Insurance
started among the ocean-going Italian merchants of Rome. Holyoake & Bill (1999),
This operated through the mechanism of the ship-owners/merchants agreeing with every
owner of goods which was to be transported; these owners of goods that arrived safely at
their destinations would compensate those whose goods either got damaged or lost during
the voyage. Under this arrangement each good merchant, at the commencement of the voyage
would be required to pay in to a common pool a charge (later called premium).This charge
was based on the value of goods to be shipped. It provided a fund from which good
merchants with losses on that particular voyage were compensated.
The development that has taken place in the field of insurance has been such that for the
payment of premium, the insured will be compensated for losses that are covered within the
terms of their contract.
REVIEW QUESTIONS
1. Distinguish clearly a composite insurance company from a reinsurance company?
2. What is the main essence of the insurance industry reform of 2005. And what changes
did it bring into the insurance industry?
3. The law that has been enacted to regulate insurance business in Nigeria has touched
on many areas. Explain seven areas where this law has laid focus on?
4. Before the advent of conventional insurance communities in Nigeria have provided

for themselves through various means. Explain these various means and how they
were funded?
5. The indigenous insurance companies coming into the insurance scene in Nigeria is
largely aided by political developments of that era. Explain two factors that aided
their coming up as players in the insurance market?
REFERENCES
Clayton.G. and Trenerry.C. (1926) “The Origin and Early History of Insurance”
London, Walford .C. (1876) “The Encyclopedia of Insurance” 1014 pp.290-309.
Holyoake, J. & Bill, W. (1999).Insurance.London.Selwood Publishing.
CHAPTER FOUR:
20
FUNDAMENTALS OF INSURANCE
LEARNING OBJECTIVES
1. Understand what insurance is.
2. Understand the benefits of insurance.
3. Understand which risks are insurable.
4. Understand which risks are not insurable.
4.0 INTRODUCTION
Insurance has become a key component of modern day commercial activities. This is because
risk which insurance helps us to mitigate can occur anytime. Insurance provides succor by
assisting the affected person in getting back to their activities within a short time.
4.1 CONCEPT OF INSURANCE

Insurance has earlier on been described as the most common means of transferring the risk that
an individual organisation may face. It is in fact a sub set of risk management and since it is
traceable to the former Roman societies. One prominent society is the burial society. In this
society, people gather and contribute to burial cost of a deceased member and family. Ever since,
other changes and development have taken place in the field of insurance such that it has become
an important pillar in the promotion of commerce and the welfare of citizens across different
countries of the world.
And as a result several insurance policies are now available in the market to cater for the diverse
needs of individuals and organisations. An understanding of insurance will not be complete
without discussing some viewpoints, objectives and techniques that are associated with it, and
these are:
a. Economic viewpoint: Its objectives centres on the reduction of uncertainty by the use of the
transfer and combination technique.
b. Legal viewpoint: Its objectives centers on the transfer of risk using the technique of payment
of premium by the insured to the insurer in a contract of indemnity.
c. Business viewpoint: This viewpoint has its objectives around the sharing of risk by transfer
from individual and businesses to a financial institution specializing in risk.
d. Social viewpoint: This has an objective on collective bearing of loss with the technique that
all members of a group contributing to pay losses suffered by the unfortunate ones in that group.
e. Mathematical viewpoint: The main objective here is predicting and distributing losses by
actuarial estimates based upon the principle of probability.
It is the social and business viewpoint of insurance that is now being referred to as the pooling
and transfer schools of thought in insurance with the former describing how the insurance
21
companies come by the fund with which they pay compensation and the latter explaining the
relationship between the contracting parties in insurance.
Bikelhaupt (1979) clearly using the legal viewpoint defined insurance contract or policy as being
used to transfer risk for a premium (price) from one party known as the insured or policyholder
to another party known as the insurer. He continued by saying that by this legally binding
contract, the insured exchanges the possibility of an unknown large loss for a comparatively
small certain payment (premium). He also said that insurance is not a guarantee against losses
occurring, but a method of assuring that repayment or indemnity will be received for losses that
do occur as the result of risk provided that the insured has fulfilled all their obligation under the
contract.
4.2 BENEFITS OF INSURANCE

Insurance as a risk management mechanism has the following benefits to individuals,
organizations and the society at large.
1. Loss control: the primary responsibility of insurance is to restore the insured to their
pre-loss position by the payment of compensation. This payment will assist in controlling
the loss to which the insured is faced with.
2. Peace of mind: the purchase of insurance takes care of the financial consequences of
risk giving the insured a peace of mind knowing that in the event of a loss, the insurance
company will compensate them.
3. Provision of investment capital: the large pool of fund collected by insurance

companies especially in their life class of business can be invested in different sectors of
the economy.
4. Source of invisible earning: countries whose insurance markets are well developed
attract businesses from other countries of the world thus generating revenue into their
economies.
2. Keeps families and businesses together by the various policies that are available in the
insurance market.
3. Acts as employer of labour:
4.3 WHAT RISKS ARE INSURABLE?

Insurance companies do not provide cover for all types of risk and even within those that are
covered there are exclusions. The reasons could be for economic or social consideration. It will
not be economical to provide cover for an event whose occurrence is almost certain. So also it
will be against public policy to cover a criminal act.
For insurance purposes, the features of insurable risk are:
22
a. Pure Risks: These are risks that do not have any element of gain i.e. either the insured
suffers a loss or does not suffer a loss e.g. fire, theft, vehicle accident e.t.c.
b. Particular Risks: The risk must arise from an individual cause and affect same in that
position rather from a large group of people.
c. Fortuitous (accidental): The cause of loss must be accidental in nature during the normal
course of that individual or organisation’s activity. In other words the event leading to
loss must not be pre-planned.
d. Financial Measurement: The object (subject matter of insurance) must be capable of

being assigned a monetary value so that in the event of a loss, such value will form the
basis for the receipt of compensation from the insurance company. Emotional and
sentimental value (losses) cannot form the object of an insurance contract.
e. Insurable Interest: The party buying insurance must have a legally recognizable
financial relationship with the subject matter of insurance. Meaning that the loss of or
damage of the subject matter will create a direct financial loss of which the insured will
be required to meet from their pocket.
f. Homogenous Exposure: There must be a sufficient number of exposures to similar risks

in order for the insurance company to be able to forecast the expected extent of the loss.
g. Public Policy: Insuring the risk by the insurance company must not be against public
policy and the laws of the land e.g. insuring the proceeds of a criminal activity or insuring
the fines that will be imposed for committing a traffic offence.
4.4 UNINSURABLE RISKS

These are risks which an insurance company will not provide cover for. It will include those
which are clearly spelt out in the policy as excluded and those whose features are the opposite of
that which are stated earlier i.e.
a. The proposer has no insurable interest.
b. Subject matter cannot be assigned a financial value.
c. The cause of loss is not accidental.
d. The outcome of loss has element of gain (they are not pure in nature).
e. They are not homogenous in exposure.
f. Their effect is not particular in nature.
23
4.5 RISKS THAT HUMAN RESOURCE MANAGERS MAY HAVE TO DEAL
WITH IN THE COURSE OF THEIR JOB.
a. Loss of skilled personnel.
b. Industrial relations problem.
c. Workplace accidents or Occupational health hazard.
d. Unethical conduct of employees.
e. Security of assets.
f. Theft.
g. Litigation by employees on the organisation.
SUMMARY
Insurance has been explained in this chapter using various viewpoints of practitioners in different
fields of study. The benefits of insurance to individuals, businesses and government were also
explained. All risks are not insurable; the features of those that are insurable were also given.
In conclusion, risks that a human resource practitioner may likely encounter in the course of
carrying out their duty was also mentioned.
REVIEW QUESTIONS
1. What are the risks that a human resource manager may have to deal with in the course
of their carrying out their job?
2. The board of your organisation has directed that all the risks faced by your
organisation should be insured as the officer in charge of administration explain to
them the features of insurable risk?
3. What are the benefits available to an organisation from the purchase of insurance?
4. Explain the features of risk which the insurance company will not be willing to sell
insurance to?
5. Explain the difference that exists between the pooling and transfer perspectives of
insurance?
24
REFERENCES
Bickelhaupt, D. (1979).General Insurance.U.S.A. Richard.D.Irwin.
Holyoake,J.& Bill,W.(1999).Insurance.London.Selwood Publishing.
Huntingford, K. (1998).One Stop Insurance.London.ICSA Publishing
Nwankwo, S.I. & Asokere, A.S. (2010) Essentials of Insurance: A Modern
Approach.Lagos.Fevas Publishing.
Redja.G.E. (2008). Principles of Risk Management and Insurance. Boston. Pearson Education
Inc.
25
CHAPTER FIVE:
TYPES OF INSURANCE COMPANIES
LEARNING OBJECTIVE
1. Understand the types of insurance companies that are available for a client to transact
insurance business with.
5.0 INTRODUCTION
There is a need for the person desirous of purchasing insurance to understand where they can
transact insurance business. The reason for this is that the nature of some companies may
preclude them from doing business directly with the public or selling certain classes of insurance
products.
5.1 TYPES OF INSURANCE COMPANIES

The essence of this section is to give a brief insight into the various types of companies that
render insurance service and to guide their prospective client on where they can place their
business. The types of insurance companies available are:
a. Proprietary Companies: These are insurance companies that are formed by registration under
the Companies and Allied Matters Act with authorized share capital; shareholders liability
limited to their shares and profits made belonging to these shareholders
b. Mutual Companies: These are registered by the companies act but with a feature that it is
owned by the policyholders who also share any profit that is made.
c. Specialist Companies: These are registered insurance companies that underwrite only one
class of insurance; they can be proprietary or mutual company.
d. Captive Insurance Companies: These are set up as subsidiaries by parent companies to

underwrite the risks of their parent companies. A captive is a special purpose insurance or
reinsurance company established primarily to finance risks arising from its parent group or
groups and thereby contributing to a reduction in the parent’s total cost of risk.
Captive insurance companies can take a number of different forms as follows:
i. Pure Captive
A pure captive is owned and controlled by a single parent organisation and is formed as a
subsidiary of that organization. The captive insures the parent organisation or other subsidiaries
of the parent. Subject to regulatory approval it may also insure the risks of controlled third parties.
ii. Group Captive

A group captive is owned and controlled by multiple non-related organisations. It is formed as
an independent entity and insures the risks of its owners.
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(c) Association Captives
An association captive is owned by members of a common industry or trade association and is
designed to insure the risks of that industry among its members. Participation in the captive
program is limited to members of the association. They exist to deliver services to its members.
iv. Risk Retention Groups

A risk retention group is an entity licensed under the Federal Liability Risk Retention Act. In the
United State of America. It is owned by its insureds and is authorized to underwrite the liability
risks of its owners only. Owners must be from a similar industry group.
v. Reciprocal Insurer
A reciprocal insurer is an unincorporated association of subscribers operating individually and
collectively through an attorney-in-fact to provide reciprocal insurance among themselves. This
type of captive refers to the organisational structure. It is an alternative to a stock or mutual
form. Most domiciles allow for group captives, association captives or risk retention groups to
be formed as reciprocal insurers.
vi. Rent-a-Captive
A rent-a-captive is an insurance company that rents its capital and services to insureds who wish
to create a captive program but do not want to invest in and own an insurance company. The
owners of rent-a-captive facilities will usually require collateral from insureds to protect the
aggregate participation in the captive program.
vii. Sponsored Captives, Segregated Cells and Protected cells

These entities are all forms of rent-a-captives. Their distinguishing feature is that the assets and
liabilities of one captive program (cell) are legally separated from the assets and liabilities of
other captive programs. Traditional rent-a-captive structures have no such legal separation but
require an indemnification from their insureds for liabilities from their captive programs.
viii. Agency Captive

An agency captive is owned by insurance agents and typically allows the agency to share in the
underwriting profits and investment income of its book of business. It also demonstrates to
insurers and reinsurers that the agent is committed to the profitable underwriting of that business.
ix. Branch Captive

A branch captive is an on-shore United State of America arm of an off-shore captive. Branch
captives are typically used to underwrite employee benefits under ERISA. These benefits can
only be offered by a United State insurer.
REASONS FOR SETTING UP A CAPTIVE INSURANCE COMPANY

Several reasons have being given on why large organisations may set up a captive insurance
company and these include:
i. It reduces reliance on the conventional commercial insurance company
ii. It reduces the cost of risk management.
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iii. It enables that the organisation is covered where there is no insurance policy in the
conventional insurance market to cover such organisation.
iv. Setting up a captive insurance company could provide the organisation with direct
access to the reinsurance market.
v. It provides the organisation with the ability to customize insurance program to meet
their need.
e. Lloyds syndicate: These are associations of individuals and, nowadays, corporate members
of Lloyds, who provide capital for insurance. The underwriting is managed on their behalf by
managing agents. There has however been a change in Lloyds in recent years as corporate
members have been admitted to join syndicates who used to be private individuals with wealth.
These corporate members now provide majority of the capital used at Lloyds.
f. Reinsurance companies: These are companies that provide cover for direct insurance
companies for risks that are beyond their carrying capacity or which they lack the needed
experience to cover.
SUMMARY
This chapter gave an insight into the type of companies that render insurance service to the
public. While some will have direct dealing with the individuals; others will only transact
business with their registered members. Reinsurance companies will not transact business
directly with individuals but rather with insurance companies as they are described as second
carriers of risk. It is important that individuals and organisations are informed so that they are
properly guided to know where to purchase insurance to meet their varying needs.
REVIEW QUESTIONS
1 a. What is captive insurance companies?
b. What are the benefits of having a captive insurance company?
2. Distinguish clearly a proprietary insurance company from a mutual insurance company?
3. The place of Lloyds’ in the global insurance market cannot be ignored. Explain the process
of placing business at Lloyds
4. Explain the types of captive insurance companies that are in existence in the insurance
Market
5. What differences exist between an association captive and a pure captive?
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REFERENCES
Huntingford, K. (1998).One Stop Insurance.London.ICSA Publishing.
http//www.sas.com.Types of captives.retrieved 3/5/2017.
29
CHAPTER SIX:
INSURANCE CONTRACT
LEARNING OBJECTIVES
1. Understand insurance contract.
6.0 INTRODUCTION
The contract of insurance like any other contract must fulfill the following basic elements of a
contract which are:
a. Offer and acceptance.
b. Consideration.
c. Capacity to contract.
d. Insurable interest.
e. Consensus ad idem.
In addition to all these, an insurance contract will be required to meet all other conditions and
these are that the party desirous of purchasing insurance (proposer) will be required to
a. Have insurable interest.
b. Exercise utmost good faith in information disclosure.
c. Insurer to pay indemnity (compensation) in the event of a loss.
d. Contribution rule to apply if more than one policy is purchased by the same party to cover
the same subject matter.
e. Subrogation right to be allowed the insurer where a third party is responsible for the loss.
f. Proximate cause or there must be a direct relationship between the cause of loss and that
which the insurance cover provides for.
Lastly, the party buying insurance must also abide by certain conditions and warranties which
the insurance company may impose.
All of these are discussed in the section below

6.1 ELEMENTS OF AN INSURANCE CONTRACT
a . Offer and acceptance: In insurance contracts, the proposal form completed by the proposer
is by law the offer, the insurer’s prospectus or advertisement is merely an invitation to receive
offers. When this proposal form is favourably considered by the insurer, a letter of acceptance is
issued which the proposer can accept or reject by paying the first premium. In Nigeria, there is a
clause that expressly states as follows “no premium no cover” on the policy document.
The letter of acceptance is at law, a counter offer.
b. Consideration: A contract that is not under seal must have consideration to be valid. And in
all forms of insurance this is always present in the form of premium. This premium is payable
once the proposer for a new contract and an insured for an existing contract, at renewal accepts
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the letter of the insurer. This can be paid by standing order, cheque, cash or any other means that
is acceptable to both parties.
c. Capacity to Contract: Both the insurer and proposer must have the legal capacity to contract
because there are certain restrictions on contractual powers in certain cases as the following
parties will not have such capacity
i. Minor: in Nigeria, these are persons below 18 years of age.
i. Insane persons: i.e. mentally challenged.
d. Insurable interest: The proposer must have insurable interest or financial relationship
recognized at law with the subject matter of insurance.
e. Consensus ad idem: This term means “in complete agreement of mind” i.e. both contracting
parties must be ad idem-of the same mind as to the subject matter of the contract. This section is
seen in insurance contract primarily by the duty of utmost good faith which the proposer and the
insurance company are required to abide by.
In addition to all of the above, an insurance contract will require the proposer and insurance
company to abide by certain principles known as the principles of insurance these shall be
discussed in the next chapter of this course book.
SUMMARY
Insurance transactions like other commercial transactions is a form of contract that requires
parties to it to fulfill certain duties in order to be entitled to some rights which can be enforced
in a court of law if breached. In addition to the elements of all contracts i.e. the existence of offer
and acceptance; consideration; capacity to contract; the presence of insurable interest and
consensus ad idem.
The parties to any insurance contract are also required to ensure that the following exist: insurable
interest by the buying party, utmost good faith by both parties, payment of indemnity by the
selling party, exercise of subrogation right by the selling party, application of contribution by the
selling party and the existence of proximate cause on the subject matter before there can be said
to be an insurance contract. It is the contract document that is used by courts in the settlement of
disputes if any should arise between the insured and the insurance company.
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REVIEW QUESTIONS
1. What are the elements of on insurance contract?
2. What additional requirements will the party desirous of buying insurance meet before they can
enter into a valid contract of insurance?
3. Insurable interest is a key requirement of all insurance contracts; explain insurable interest and
the various ways it can be acquired by the party buying insurance.
4. Consideration is an important element of any contract. For the insurance company what is this
consideration and how is it arrived at?
5. Explain Consensus ad idem within the context of an insurance contract
REFERENCES
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CHAPTER SEVEN:
PRINCIPLES OF INSURANCE
LEARNING OBJECTIVE
1. Understand the principles of insurance.
INTRODUCTION
The insurance contract unlike other commercial contract is that which is guided by rules.
Parties are required to act in accordance with these rules as it is a requirement in all insurance
transactions.
7.0 PRINCIPLES OF INSURANCE

7.1. INSURABLE INTEREST: This principle forms the basis of all insurance contracts because
without it, there will not be insurance as an insurance contract can only be legally enforced when
the proposer/insured has insurable interest in the subject matter of insurance. To have such
interest, there must be a legally recognized financial relationship between the proposer for
insurance and the property or event for which insurance is sought.
Such that the proposer would suffer financial loss if the property were destroyed or the insured
event happened or would benefit by the continuing safety of the property or non-occurrence of
the event. This position has been established in insurance case law of CASTELLIAN V PRESTON
(1883) and later MACAURA V NORTHERN ASSURANCE COMPANY (1925). In Nigeria,
insurable interest in life insurance have been extended to include relationships recognized as
existing between people under Islamic or customary law. Sec 56( 3 ) of the insurance act 2003.
a. At common law, insurable interest has been recognized to arise from

i. Ownership of property
ii. A person owing a duty of care towards other people such as hotel operators and owners
of other public places on the property of their clients
iii. Bailees on the property in their possession or in their custody.
iv. Where a tenant, as part of the agreement with the landlord, is made responsible for the
maintenance; this will confer on such tenant insurable interest.
b. Insurable interest can also arise from statute such as that which provides for married
women to have insurable interest for their own benefit on the lives of their husbands.
c. Finally, insurable interest can arise from contract agreements.
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7.1.1 INSURABLE INTEREST IN DIFFERENT CLASSES OF INSURANCE
BUSINESS
Life assurance policies
i. A person has unlimited insurable interest on their own life or in the life of their husband or
wife.
ii. Partners in a business have insurable interest in each other’s lives to the extent of their financial
involvement in the business.
iii. Creditors in a debtor’s life to a maximum of the amount owed by such debtor.
Section 56(2) of the insurance act 2003 in Nigeria provides that a person shall be deemed to have
an insurable interest in the life of any other person or in any other event where he still stands in
any legal relationship to that person or other event in consequence of which he may benefit by
the safety of that person or event or be prejudiced by the death of that person or the loss from the
occurrence of the event.
Property insurance policies

i. Husband and wife have a mutual insurable interest in each other’s property.
ii. An agent may take out insurance on behalf of a principal who has insurable interest.
iii. Bailees have insurable interest in the goods left in their possession through their
responsibility to take reasonable care of them. e.g. Motor mechanics, dry cleaners, watch
repairers and other categories of repairers.
iv. Trustees and executors of wills have a legal responsibility to look after property which they
control. This duty confers insurable interest on them.
v. Mortgagors (borrowers) and mortgagees (lenders) have insurable interest on the property
mortgaged.
vi. Part or joint owners have insurable interest to the extent of the full value of the property;
this is limited to their financial interest in the property.
Liability insurance
i. A person has insurable interest to the extent of any potential legal liability he may incur by
way of damages and other costs.
7.1.2 WHEN INSURABLE INTEREST MUST EXIST

Insurable interest will vary for different classes of insurance as follows:
Life assurance: When the policy is taken out i.e. at the inception of the contract. And section
56(1) of the insurance act 2003 in Nigeria provides that a policy of insurance made by a person
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on the life of any other person or on any other event whatsoever shall be null and void where the
person for whose benefit, or on whose account the policy of insurance is made has no insurable
interest in the policy of insurance or where it is made by way of gaming or wagering.
Property and other general insurances: At the inception and at the time of loss.
Marine cargo policy: At the time of the loss.
7.1.3 THE TRANSFER OF INSURABLE INTEREST (ASSIGNMENT):

Assignment which means “transfer” in insurance can be considered under two headings namely
i. Assignment of the proceeds of contracts/policy
ii. Assignment of contracts/policy.
Assignment of the Proceeds of the Policy:
This arises when there is an instruction from the policyholder to the insurer that moneys due
under the policy should be paid to another person. Unless there are clauses in the contract
specifically providing to the contrary, the proceeds of insurance contracts are freely assignable.
Assignment of the Policy:

This is the complete transfer of all rights and responsibilities under the policy, so that a third
party who was not an original party becomes the policyholder in respect of the subject matter of
the insurance. The transfer cannot be generally effected without the consent of the insurer. It
can only be done under “novation”. Generally this means that a fresh contract must be drawn up
between the insurer and the new policyholder, to release the departing party from all obligations
under the contract. With respect to assignment, the insurance act 2003 in Nigeria provides that
an assignee of life policies may be sued in their own names.
Additionally the insurance act 2003 in section 61(1) provides that no assignment of a policy of
life insurance shall confer on the assignee or his personal representatives any right to sue for the
amount of the policy or the insured money, unless a written notice of the date and purport of the
assignment is given to the insurer liable under the policy at his principal address of business.
7.2 UTMOST GOOD FAITH (UBERRIMA FIDES)

A requirement of every contract is that parties to it remain truthful and sincere particularly in the
information that will be disclosed, this requirement applies more to insurance contracts because
of the nature of the products that are offered for sale which is intangible with proposer not having
the opportunity to see or touch the product and the insurance company not knowing anything
about the proposer or the object of insurance. With these characteristics, the only option left to
both parties to the contract is to remain truthful to each other. And also because of the information
asymmetry that exist between the proposer for insurance and the insurance company, i.e. at the
inception of insurance contract it is the party wanting to purchase insurance that has all the
information about the subject matter of insurance (or item for which cover is needed) as well as
35
information about the proposer himself. This information will be important to insurance company
as they will rely on them to fix or price the policy as well as determine whether they want to
carry such risk; and at what terms and conditions.
The principle of utmost good faith is that which has long ago being summed up by Lord Justice
Scrutton in the case of ROZANES V BOWEN(1928) where he said
“As the underwriter knows nothing and the man who comes to him to ask him to insure knows
everything. it is the duty of the assured…………to make a full disclosure to the underwriter
without being asked of all material circumstances. This is expressed by saying it is a contract of
the utmost good faith”
It must also be emphasized here that the duty of utmost good faith is a reciprocal duty as the
insurance company must not withhold information from the person buying insurance which leads
him into a less favourable contract. This position was made in the case of CARTER V BOEHM
(1766).
The information required to be disclosed to the proposer by the insurance company will include
the following:
i. That the proposer will be entitled to a discount on premium if he has taken steps to reduce
the severity or frequency of occurrence of a loss. Such as the installation of a water sprinkler
to minimize fire damage losses.
ii. That they may not be able to sell to the proposer their desired insurance on grounds of their
restriction by law or lack of capacity.
iii. That they will not make any untrue statements during the period of negotiation for contract.
7.2.1 DEFINITION OF UTMOST GOOD FAITH

It can be defined as “a positive duty to voluntarily disclose accurately and fully all facts material
to the risk for which the proposer is seeking to purchase insurance to cover”
One can see from this definition some gap which can become subject of contention and litigation
particularly at periods of loss and claim. This gap is what information will be considered material,
which facts (information) must be disclosed and which facts (information) will need not to be
disclosed.
The definition of what will constitute a material fact in insurance transaction has been given in
the marine insurance act 1906 adopted by the marine insurance act 1961 section 18(1)-(5) in
Nigeria as “every circumstance is material which would influence the judgment of a prudent
insurer in fixing the premium or determining whether he will take the risk”
In Nigeria, several litigations have come up as to what information or fact will be considered
material particularly when the company wants to rely upon this to refuse to pay compensation to
the insured. However, the insurance act 2003 in section 54(1) required that where an insurer
requires an insured to complete a proposal form or other application form for insurance, the form
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shall be drawn up in such manner as to elicit such information as the insurer considers material
in accepting the application for insurance of the risk and any information not specifically
requested shall be deemed not to be material. It must also be said here that the fact must be
material at the date at which it should be communicated to the insurance company. But where a
fact is immaterial when the contract was made, but later become material, it need not be disclosed
in the absence of a policy condition requiring continuous disclosure.
Information about a contract will just be for the duration of that contract and at every renewal
which the insurance company sees as a new contract. The insured will be required to also disclose
particularly any changes as concerns that subject matter which has taken place during the
previous insurance period. See the case of PIM V REID (1843).
If also during the currency of the contract it is necessary to alter the nature of the subject matter
by increase of the sum insured or alteration in the description of property insured. Then there is
a duty to disclose all material facts relating to this alteration.
7.2.1.2. FACTS WHICH MUST BE DISCLOSED

i. Full facts relating to and description of the subject matter of insurance.
ii. Facts which show that the particular risk being proposed is greater internally than would
be expected from its nature or class e.g. for fire insurance, the form of construction of
building and the use to which it is put.
iii. If external forces make the risk greater than normal e.g.in theft insurance, the type of goods
and its value; for example, Jewelry.
iv. Facts which may make the likely amount of loss greater than that normally expected e.g.in
motor insurance, vehicles with poor maintenance.
v. Previous losses and claims under other policies.
vi. Previous refusal of insurance by insurance companies or the imposition of strict terms and
conditions.
vii. Facts where the insured have relieved third parties of liabilities thus making the insurer to
lose subrogation rights.
viii. Existence of other non –indemnity contract such as life and accident insurance policies.
In like manner, there are also facts which the proposer need not disclose to the insurance
company in their wanting to purchase an insurance policy as their not disclosing such
information will not put the insurance company at disadvantage.
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7.2.1.3 FACTS THAT NEEDS NOT BE DISCLOSED
i. Facts of law: everyone is deemed to know the law and ignorance is not an excuse to
absolve the defendant of responsibility or liability.
ii. Facts that an insurer is deemed to know i.e. facts of common knowledge such as in
Nigeria (2016) that there is boko haram insurgency in the north east or militancy in the
Niger delta.
iii. Facts which lessen the risk such as that the existence of fire extinguishers will reduce
damage in the event of a fire outbreak.
iv. Facts about which the insurer has been put on enquiry such as where the proposer has
given the name of a previous insurer for further information and the insurer does not
make recourse to them for further information.
v. Facts that the insurer’s survey or representative should have noted in their visit.
vi. Facts that are covered by policy conditions whether impliedly or expressly e.g. that an
installed CCTV camera is regularly maintained.
vii. Facts which the proposer does not know.
viii. In Nigeria, facts which the insurance company does not incorporate in the proposal form.
7.2.1.4 WHEN IS THE DURATION OF THE DUTY OF DISCLOSURE

The duration of the duty of disclosure is that which is provided for at common law and starts at
the commencement of negotiations for a contract and ends when the contract is formed. Another
provision on duration of the duty of disclosure can be that provided by contractual duty which
extends the common law position by giving the insurance company the right to refuse to
underwrite the change.
Additionally, the duty of disclosure for all parties operates until the conclusion of the contract
and new facts emerging while the proposal is being considered must be disclosed to each other.
For non-life policies, the duty of disclosure revives at every renewal. However, a policy condition
may oblige the insured to notify material changes in the risk that occur during its currency and
the insurance company may then have an option to decide whether to continue the insurance and
the terms to be imposed.
7.2.2 REPRESENTATION AND WARRANTIES IN INSURANCE

Representation: These are written or oral statements made during the negotiations for a contract.
Some of these statements will be about material facts while others are not. Those which are
material must be substantially true to the best of knowledge or belief of the party making it.
38
Other feature of representation is that there is room for the contract to be repudiated if the breach
(misrepresentation) is material.
Representation does not normally appear on the policy.
Warranties: This in insurance is completely different from those in ordinary commercial
contracts where it is a promise subsidiary to the main contract, a breach of which would leave
the aggrieved party with the right to sue for damages only.
In insurance, warranties are fundamental conditions which go to the root of the contract allowing
the aggrieved party to repudiate the contract. In other words, warranties in insurance must be
strictly and literally complied with and in practice is usually requiring the insured to:
i. Do a thing.e.g. Switching on security lights within premises at night.
ii. Not do a thing: e.g. storing inflammable materials in one’s home.
iii. That certain state of affairs exists: e.g. that a premise is fully covered by Closed
Circuit
Television Cameras.
iv. That a state of affairs does not exist: e.g. that employees with known criminal records
are not employed.
The reasons for inserting warranties in insurance policy document are to:
i. Ensure that there is good management of the risk.
ii. Ensure that certain features that may make the risk higher than normal are not
introduced.
Warranties can relate to present, past and future situations.
TYPES OF WARRANTIES
i. Expressed: These are specified in the policy and place a responsibility on the insured
to do or not to do a thing; e.g in a fire policy it could include a requirement that
inflammable materials are not kept at home or that all lights and electrical appliances
are switched off when a person is not at home.
iii. Implied: These are not written into the policy but would be understood by both
parties to apply to the contract. They are only encountered in marine insurance
where the seaworthiness of the vessel to be insured is an implied warranty in any
marine adventure.
iv. Continuing warranties: These are warranties that relate to past, present and future
situations.
The penalty for breaching warranty in insurance is that the insurer can repudiate the whole
contract or cease to have any liability from the date of the breach. If the warranty relate to
information provided during the contract negotiation then the contract will be void ab-initio(from
39
the beginning),but where the breach occurs midway through the contract, then the insurer
remains liable for any losses prior to the date of the breach.
Section 55(1) provides that in a contract of insurance, a breach of term whether called a warranty
or a condition shall not give rise to any right by or afford a defence to the insured unless the term
is material and relevant to the risk or loss insured against.
7.3 PROXIMATE CAUSE (CAUSA PROXIMA)

This is another important principle of insurance, because in every insurance contract, it is
necessary to state without ambiguity the perils against which the insurance company is giving
cover; e.g. fire, theft, employer’s liability, business interruption e.t.c., so that the intention of the
parties to the contract is clearly defined and there won’t be unneeded dispute when a loss occurs.
This is because whether or not a policy will provide cover will depend upon the actual cause of
the loss.
In certain types of losses, this may be straight forward and easy to find out, while in others it
may not be easy and the insurance company will need to take decision on whether the insured is
entitled to receive compensation or not. Example, a shop losing its wares following a break in
will be a clear case of theft. Suppose on the other hand, that same shop losses it wares by the
operation of a sprinkler system which is used to extinguish a fire outbreak and the policy the
shop owner bought is a fire policy what will be the cause of loss here? Will it be fire or water
that is used to extinguish the fire?
This is just some of the dilemma which insurance companies face because if they are wrong in
determining the true cause of a loss, they will either be paying money to someone who does not
deserve it or they will be facing litigation from a party who thinks that he is entitled to receive
compensation. But case laws over time have assisted the insurance companies in overcoming
this challenge.
7.3.1. PROXIMATE CAUSE DEFINED

The legal case that defined this principle was that of PAWSEY V SCOTTISH UNION AND
NATIONAL (1907) “ the active, efficient cause that sets in motion a train of events which brings
about a result, without the intervention of any force started and working actively form a new and
independent source”
This means that the proximate cause of a loss is the dominant cause from which a direct chain of
events can be seen to lead to the loss.
To simplify all this, “proximate” means “nearest” and may not be the first cause nor the last
cause but rather the dominant cause.
In LEYLAND SHIPPING CO.V NORWICH UNION (1918), proximate cause was said to be the
efficient or operative cause. So also was decided in the case of P.SAMUEL V DUMAS (1924).
40
In illustrating the principle of proximate cause the following example may help.
There are ten houses in line on a street and there is a fire outbreak in house one and this extends
to house six, the dominant cause of the fire in house six could be traceable to that in house one.
However, if there is an interruption by someone say arsonist who in the course of the fire sets
house number nine on fire and this affects house ten, the course of the fire in house ten will no
longer be traceable to that in house one because the arsonist have become a new and intervening
force that caused the fire in house ten. And will therefore be referred to as the dominant cause.
However, because of the complex nature of determining proximate cause in certain

circumstances efforts have been made to help insurance companies to speedily take decision after
a loss have occurred so as to know whether to pay compensation to the insured or not.
Efforts is to define peril are:
i. Insured peril: These are perils that are named as covered by the policy.
ii. Excepted/excluded perils: These are named as not covered by the policy.
iii. Uninsured perils: These are not named or mentioned in the policy.
If all the events leading to a loss are insured, then it is not important to identify the proximate
cause of such loss as the policy cover will automatically operate. But where one of the events
leading to loss is an uninsured or excluded peril, then finding the proximate cause becomes
important. As a rule,
i. If the proximate cause is found out to be an excluded peril, then the insurer is not
liable for the loss.
ii. If the proximate cause is an insured peril, then the insurer is liable for the loss even
if the actual loss is caused by an uninsured peril.
iii. If both an insured peril and an excluded peril led to the loss, it is essential to
establish which came first. If the insured peril follows the excluded in unbroken
sequence, the insurers have no liability.
iv. If the excluded peril follows the insured peril, insurers are liable for damage
consequent upon the operation of the insured peril, but only that incurred before
the intervention of the excluded peril.
Further examples of proximate cause are:

Fire seriously damaged a building
A wall was in danger of collapsing onto the building next door
For safety reasons, the local authority ordered demolition.
During demolition the wall fell on the neighbouring premises.
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Once again, the danger of collapse had not been removed and fire (or its cause) was the proximate
cause of damage to the neighbouring building.
Insurance literature have given many other examples backed by case laws on proximate cause
particularly in the United Kingdom and this have been relied upon by our courts in Nigeria.
7.4 INDEMNITY
This principle is central to insurance, because it is the basis for which a party enters into an
insurance contract. i.e. being compensated if he suffers a loss or the event insured against occurs.
In the ruling of Lord Justice Brett, in the case of CASTELLAIN V PRESTON(1883) he said that
indemnity is the “controlling principle in insurance law and defined this principle as “the very
foundation in my opinion of every rule which has been applied to insurance law is
this,namely,that the contract of insurance contained in a marine or fire policy is a contract of
indemnity and of indemnity only,……………if ever a proposition is brought forward which is at
variance with it, that is to say, which either will prevent the assured from obtaining a full
indemnity or which gives the assured more than a full indemnity, that proposition must certainly
be wrong”
Essentially, it means that following a loss, the insured should be returned to the exact same
financial position as he or she was in before the loss occurred. However, the interpretation of
what constitute indemnity is not as easy as many would expect as it is the insured’s financial
interest in the subject matter of insurance that is insured. But will this statement apply for life
assurance contract, the answer is no. For what financial interest can be located to life or any part
of the human body?
For this reason, life and personal accident policies are therefore described as policies of non-
indemnity, as they only guarantee to pay a fixed pre-arranged sum on the happening of the
insured event. Nevertheless, the insurance company must take care to ensure that the amount of
cover being sought under these policies is not excessive when compared to the amount of
insurable interest.
7.4.1 METHODS OF INDEMNITY

When a loss occurs the insurance company has a number of options on how to compensate the
insured and these are:
i. Cash payment: By cheques, transfers and any other related means
ii. Repair: This is the repair of the subject matter in question. This is common with
motor insurance where some motor workshops are accredited to repair the vehicles of
clients if they are not totally damaged.
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iii. Replacement: This is most common in glass insurance or insurance of jewelry
where window and other items are replaced by companies in that field for insurance
companies or part of a jewelry (like pendants) are replaced by jewelers if that is part of
the jewellery that is lost or damaged. Insurance companies also use this method in motor
insurance.
iv. Reinstatement: This is a form of insurance where the insurer may pay more than the
actual worth of the article damaged by fire (New for Old basis).for example the insurance
company undertakes to rebuild a house that is damaged by fire, better than it was before
the fire incident. It is a specialised method of providing indemnity as the insurance
company rather than restore insured property to its pre-loss condition, pays more. It is
not presently popular with Nigerian insurance companies because of the difficulties that
are associated with it.
7.4.2 FACTORS LIMITING THE PAYMENT OF INDEMNITY

There are factors which can limit the amount of indemnity that an insured can receive in the
event of a loss and these are:
i. Sum insured: If a policy has a sum insured specified then indemnity cannot exceed
this sum insured even if the insured’s loss is greater. That is why it is important to review
sums insured regularly especially at times of significant inflation, to ensure that
compensation received reflects the full value of the property.
ii. Average: If a loss occurs and the insured is found not to insured the full value of the
property, then the insurer’s liability will be reduced in the same proportion as the
underinsurance because the insurer only received a premium for a proportion of the
entire value at risk.
iii. Excess: This is an amount of each and every claim which is not covered by the policy.
Common in motor insurance, where there is excess clause in an insurance contract, the
insured is his own insurer for the value of the excess and thus do not receive full
indemnity from the insurance company.
iv. Franchise: This is a fixed amount which is to be paid by the insured in the event of
a claim. However, once the amount of the franchise is exceeded, the insurer pays the
whole of the loss, including the value of the franchise. Below is an example to illustrate
excess and franchise in practice.
Ade has insured his car for N 1million which is its true value, the car is involved in an
accident with a damage of N 500,000.If Ade has an excess clause in his contract of N300,
000 and a franchise of N300, 000 it means that Ade will bear N300, 000 of the loss and
the insurance company will pay N200, 000 while for the franchise clause, the insurance
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company will pay the total sum of N500, 000 because the franchise limit of N300, 000
has been exceeded.
vi. Deductible: This is simply explained as a large excess. And it is commonly used in
large commercial contracts.
vii. Limits: These are placed by the wording of the contract as the maximum amount
that the insurance company will pay on any policy irrespective of the amount of loss.
Just as the insured can receive less than the value of their loss, they can also under
certain circumstance receive more than indemnity under the following situations:
EXTENSIONS IN THE OPERATION OF INDEMNITY

i. Reinstatement: The insured can request that his policy be subject to the reinstatement
memorandum and as a result the method of settlement will provide the insured with an
amount that has been calculated without deduction of wear, tear and depreciation. The
insurer agrees to pay the full cost of the reinstatement. At the time of reinstatement, sum
payable includes indemnity, plus wear, tear and depreciation plus the effects of inflation
between the date of loss and eventual date of reinstatement.
ii. Household Contents insurance: In the event of a loss, the insured receives the
replacement value of the damaged or lost property at the time of loss excluding deduction
for depreciation or wear and tear. With a proviso that the insured items are less than a
specified number of years.
iii. Agreed Additional cost: Where the insured is allowed to include the costs associated
with the aftermath of a loss e.g. costs incurred to remove debris after a fire loss, architects
and surveyors fees incurred as required by government building authorities before
rebuilding. This amount is paid in addition to the amount of the actual loss.
iv. Valued Policies: Here the amount to be paid in the event of a total loss is fixed at
inception of the policy. Indemnity will still operate in the event of a partial loss.
7.5 SUBROGATION
The whole essence of insurance is to restore the insured to their pre-loss position and insurance
contracts for non-life business are contracts of indemnity which means that a person can only
recover the exact amount of their loss and no more nor less. Indemnity thus rules out a person
from recovering twice for the same loss.
For an understanding of the principle of subrogation, the following example will be of help.
Ade was driving to work and is hit from behind by Chike who was not paying attention to see
that the traffic light had changed to red (stop sign), Ade’s car is severely damaged but because
Ade have an insurance policy the insurance company pays for the repair of his car. Clearly, it
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can be seen that legally Ade has a case against Chike for being the cause of the accident and so
can institute a case for compensation. But the principle of subrogation forbids this as receiving
money from the insurance company and from Chike will mean receiving more than the loss
amount which is contrary to the principle of indemnity that forbids receiving more than one’s
loss if an event occurs.
The principle of subrogation is premised upon that of equity in law by providing that when an
insurance company has paid a claim to their policyholder, and another party outside of the
contract is in law liable for the cause of the loss; such third party should not avoid his or her
financial responsibilities as doing so will be unjust to the insurance company who is only
managing the premium fund of various insured with it and which must be protected to avoid not
having money to meet the primary obligation of paying compensation to those that have
insurance policies with it.
7.5.1. DEFINITION OF SUBROGATION

“This is the right of one person, having indemnified another under a legal obligation to do so,
to stand in the place of that other and avail himself of all the rights and remedies of that other,
whether already enforced or not”
In the case of BURNAND V RODOCANACHI, the principle was put forward that an insurer,
having indemnified a person was entitled to receive back from the insured anything he may
receive from any other source.
The following points are to be noted with respect to the principle of subrogation and these are
that:
i. That the insured is entitled to indemnity but no more than that.
ii. Subrogation allows the insurer to recoup any profit the insured might make from
the insured event.
iii. Subrogation allows the insurer to pursue any rights or remedies which the
insured may possess, but always in the name of the insured, which may reduce
the loss.
iv. When an insured after a loss recovers from a source in addition to his own
insurer, whatever is recovered is held in trust for his own insurer who has already
paid compensation.
Subrogation applies when the contract is one of indemnity and this is decided in the case of
CASTELLIAN V PRESTON (1883) where Preston was in the course of selling his house to Rayner
when it was damaged by fire, he recovered from his insurers, Liverpool, London and Globe,and
when the conveyance of the property was completed,which was prior to repairs being carried
out,Preston also received the full purchase price from Rayner,the insurer sued in the name of
their chairman,Castellian,and were successful in recovering their outlay.
45
The contract of sale placed an obligation on Rayner to pay the full contracted price of £3100
even though the building had been damaged and not repaired. In accepting that figure, Preston
had enforced his rights against Rayner, the recovery of £330 from Preston being the cost of
repair. This is an example of an insurer availing himself of rights which had already been
enforced.
It must be mentioned here that life contracts are not subject to the doctrine of subrogation because
they are not contract of indemnity meaning that if death was caused by the negligence of another
person then the deceased’s representative may be able to recover from the third party as well as
from his insurance policy.
The duty of subrogation is a reciprocal one, in that just as the insured cannot receive more than
their loss from the insurance company,the insurers must not make any profit for exercising their
subrogation right. The case of YORKSHIRE INSURANCE CO.LTD V NISBET SHIPPING
COMPANY LIMITED (1961) is a case law in this regard.Here,settlement had been made at
£72,000 by the insurer but due to the lapse of time between the claim payment and the recovery
from the third party and due to the fact that the pound sterling had been devalued in the
interval,the insured was paid £127,000. It was held that the insurers were only entitled to £72,000.
So the insurance company can only subrogate to the extent that they have provided indemnity.
Other points that need to be taken notice of concerning subrogation are that:
Where the insured has been considered his own insurer for part of the risk, as in the case of an
excess or the application of average; such insured will be entitled to retain an amount equal to
that share of the risk out of the money recovered.
Where the insurer makes an ex-gratia payment to the insured, then the insurer will not be entitled
to subrogation rights should that insured also recover from another source. Since ex-gratia
payment is not indemnity and so subrogation cannot apply.
7.5.2 HOW DOES SUBROGATION ARISE

The following are the ways by which subrogation may arise:
i. Out of tort: This is a non –contractual civil wrong that forms part of the common law
of England and adopted by Nigeria as part of its legal system. It includes negligence,
nuisance, trespass, defamation and other civil wrongs where the insured has sustained
some damage, lost rights or incurred a liability due to the actions of others. His insurers
having paid compensation for the loss is entitled to take action to recover from such
party that is responsible for the loss.
ii. Out of contract: Another part of the common law is contract and relating it to
subrogation is concerned with those cases where:
A person has a contractual right to compensation regardless of fault.
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The custom of the trade to which the contract applies dictates that certain bailees are
responsible e.g. being that of a common carrier where they are held responsible for
damage to the property of their client such that if that client has insurance, in the event
of a loss they may decide to claim from the common carrier or from their insurance
policy. Where they choose the latter, they will be required to allow the insurance
company to sue in their name to recover any compensation that they have paid.
iii. Out of statute: The motor vehicle (third party) act of 1945 compels the motor insurer
to indemnify the insured for death or bodily injury to a third party even where the breach
of the policy condition entitles them to repudiate liability. However, the insurer has the
right to recover from the insured any compensation paid; although this is rarely exercised
in practice.
iv.Out of the subject matter of insurance: Where an insured has been indemnified in
the case of a total loss he cannot also claim the salvage as doing so will give him more
than indemnity.
7.5.3 WHEN DOES THE RIGHT OF SUBROGATION ARISE

The common laws position on exercising the right of subrogation by the insurer is when the
insurance company have admitted the insured’s claim and paid it. In order to achieve this,
insurance policies include subrogation condition which gives the insurer the right to begin actions
to recover against a third party as soon as their insured notifies them of a claim. This is helpful
to insurers because it enables them to start investigating the circumstances of the incident giving
rise to the claim while it is still fresh in the minds of the people involved and of any witnesses.
7.6 CONTRIBUTION
Contribution is another principle of insurance which operates to ensure that an insured does not
recover more than the actual loss in respect of a loss. As stated earlier, the purpose of insurance
is to restore the insured to the financial position that they enjoyed before the loss, then permitting
the insured to profit from a loss would defeat this goal. So the principle of subrogation and
contribution are referred to as corollaries to the principle of indemnity.
Contribution therefore is defined as “the right of an insurer to call upon others similarly, but not
necessarily equally liable to the same insured to share the cost of an indemnity payment”
The rule is that if an insurer has paid a full indemnity, he can recoup an equitable proportion
from the other insurers of the risk. But where full indemnity has not been paid, then the insured
will wish to claim from the others also to receive an indemnity.
The principle of contribution enables the total claim to be shared in a fair manner.
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7.6.1 WHEN WILL CONTRIBUTION APPLY
Contribution will apply under the following conditions:
i. Two or more policies of indemnity exist
ii. The policies cover a common interest.
iii. The policies cover a common peril which gives rise to the loss.
iv. The policies cover a common subject matter.
v. Each policy must be liable for the loss.
Examples of contribution in practice are: a policy covering the insured’s stock in their Lagos
warehouse will contribute with one covering his stock in all their warehouses;also a policy
insuring Ade’s interest will contribute with another policy insuring Ade’s and Chike”s interest
in the same property.
The leading case on contribution is that of NORTH BRITISH & MERCANTILE V LIVERPOOL
& LONDON & GLOBE (1877) here merchants Rodocanachi had deposited grain at the granary
owned by Barnett. Barnett had a strict liability for the grain according to the custom of the trade
in London and had therefore insured it. The owner had also insured to cover his interest as owner.
When the grain was damaged by fire, Bennett’s insurers paid and sought to recover from
Rodocanachi’s insurer. Because the interests were different, one as a bailee and the other as
owner. The court held that contribution should not apply.
Common peril: the perils insured by each policy do not have to be identical under each contract
example in the case of AMERICAN SURETY CO. OF NEW YORK V WRIGHTSON (1910), an
insurance covering dishonesty of employees was held to be in contribution with one covering
dishonesty of employees, fire and burglary, the dishonesty was the common peril
Common subject matter: If the object of insurance is the same in two insurance policies,both will
contribute towards the settlement of any claim that may arise.As an example,if policy A covers
motor vehicle and stock in a warehouse, against fire and Policy B covers motor vehicle and
building. In the event of fire damage to the vehicle; both will contribute to settle the insured;
with motor vehicle being the common subject in both policies of insurance.
7.6.2 BASIS OF CONTRIBUTION

Once it has been agreed that policies will contribute the proportion due from each must be
established. Two main methods are used namely:
i. Sum insured method: under this method the loss is shared in proportion to the sum insured
involved and is commonly applied in property policies covering identical subject matter and
the formula for calculating this is given as follows:
Sum insured × loss

Total sum insured on all policies
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Example: Two policies A and B with sum insured of N40, 000 and N80,000 were bought by an
insured covering the same subject matter and a loss of N60,000 occurred. Both policies will share
the loss as follows:
Policy A N40, 000 × N60, 000
N120, 000
= N20, 000.
Policy B N80, 000 × N60, 000

N120, 000
= N40, 000
ii. Independent liability method: This method determines contribution by calculating the
liability of each insurer separately, as if it was the only provider of cover. It is used more
commonly for commercial property insurances where average applies, where the sum insured
is subject to a loss limit or in liability insurances. The formula for calculating contribution
by this method is:
Sum insured × loss

Total value at risk
Using our earlier figures of N40, 000 and N80, 000 and assume a total value of risk of N120,
000,then the calculations would be the same.However,if the insured had underinsured the risk,
and the total value at risk was, say N150,000,then the results would be calculated as follows:
Policy A N 40,000 × N60, 000
N150, 000
= N16, 000
Policy B N80,000 × N60,000

N150, 000
= N32, 000
Because of the underinsurance the contribution from both policies would be N48, 000, leaving
the insured to bear the proportion of the loss related to the amount of the underinsurance which
is N12, 000.
SUMMARY
The principles of insurance are standards which must exist before an insurance contract can be
valid. It concerns the proposer, insured, insurance company and the subject matter of the contract
of insurance. This standard will also have effect on what the insured pays as premium and what
is received as compensation in the event of a loss.
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The principle of insurance can also be used to back up the insurance contract document in the
event of there being a dispute between the insured and the insurance company.
REVIEW QUESTIONS
1. The insurance company in a proposed insurance contract will not provide cover to the
proposer where insurable interest does not exist. As the head of personnel department of
your company explain to management four elements that relate to insurable interest
before a proposer can enter into a valid insurance contract?
2. The contract of insurance is based on utmost good faith from both parties involved in it.
As a human resource practitioner, explain five information that the proposer for insurance
needs not disclose to the insurance company in an insurance contract?
3. The goal of every organization is to receive compensation in the event of the occurrence
of a loss. As a human resource practitioner, explain six factors that may make it
impossible for the insured to get full compensation if a loss occurs?
4. Explain the circumstances under which the principle of contribution will apply in
insurance?
5. The insured will not be entitled to subrogation in all circumstances; explain when
subrogation right may arise in insurance contracts.
REFERENCES
Nwankwo, S.I. & Asokere, A.S. (2010) Essentials of Insurance: A
Approach.Modern Lagos.Fevas Publishing.
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CHAPTER EIGHT:
STRUCTURE OF THE NIGERIAN INSURANCE INDUSTRY
LEARNING OBJECTIVE
i. Understand the structure of the Nigerian insurance industry
8.0 INTRODUCTION
The arrangement of the insurance industry is to enable us to understand the different participants
and their role.
8.1 STRUCTURE OF THE NIGERIAN INSURANCE INDUSTRY

Like other markets, the insurance market comprises the following:
i. Sellers.
ii. Intermediaries and those rendering support service to insurance companies.
iii. Buyers.
iv. Market associations of the practitioners.
v. Regulator.
In other markets, the buyers, sellers and intermediaries (if they are involved) can come together
to examine the product that is to be the subject of sale, This is not the case with insurance, as the
nature of the insurance product is basically classified as an intangible product that is represented
by the policy document issued by the insurance company which can best be described as a
promise that the insured will be paid compensation if the event insured against occurs, provided
that the insured has met all the terms and conditions of the contract and have paid their premium.
The insurance marketplace provides financial services that is supportive to other industries
producing goods and service. The parties involved in insurance market will be discussed below:
i. Sellers: These are the various insurance companies that sell insurance products to
individuals, corporate bodies and the government. It also includes reinsurance companies
and Lloyds in the United Kingdom. They come by different names such as insurance
companies, assurance companies and reinsurance companies. They could be life only
companies, general business or non –life companies, specialist companies, mutual
companies etc.,irrespective of the name that is used, they all have a common goal which
is to render insurance service to their clients or subscribers.
ii. Buyers: These are the various parties that purchase insurance policies that are offered for
sale by the sellers. The policies could be life or non- life policies. While it is not easy to
ascertain the number of buyers that are in the Nigerian insurance market, with increased
awareness, good economy and market practice, these numbers will increase.
iii. Intermediaries and those rendering support service to insurance companies: These groups
come into perspective where the party wanting to purchase insurance does not approach
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the insurance company directly. They include insurance brokers, Lloyds brokers,
reinsurance brokers, insurance agents, insurance consultants, actuaries, risk surveyors,
loss adjusters and those who are professionals in other fields but by the nature of their
job sell or make known to their clients insurance policies, for example, motor workshop
owners, lawyers etc. for all categories of intermediaries a commission is paid to them for
any business that come through them to the insurance company.
Difference between Insurance Agents and Insurance Brokers

Though agents and brokers are both regarded as intermediaries in the insurance industry,
there are clear differences between the two as follows:
(a) An Insurance agent or the person running the agency must possess in his personal
name at least a certificate of proficiency before the agency can be registered by the
National Insurance Commission. The Certificate of Proficiency is to be based on an
examination conducted by the Chartered Insurance Institute of Nigeria. A brokerage
firm is to operate as a company – whether partnership or limited liability.
(b) The licence issued to an agency or agent is restricted to an insurer or a number of

insurers. It is not permitted to deal with any insurer not stated on its licence. A
broker, literally speaking, deals with all insurers in the market.
(c) An insurance broker may handle reinsurance broking – based on the right experience.
An insurance agent or agency is not so permitted.
(d) An insurance agent or agency acts as a go-between (post office) between the insured
or insurers. An insurance broker holds himself out as an expert on insurance matters
and is expected to display a far higher level of competence than an agent.
(e) A brokerage firm is statutorily required to maintain at all times a professional

indemnity cover for at least a limit of N10million.The insured relies only on the
integrity of the agent as a form of security.
(f) An insurance agency or agent must pay immediately to the insurer any premium
collected in order not to invalidate the clients policies. An Insurance firm has a grace
period of 30 days from policy inception or renewal.
(g) An insurance brokerage firm is statutorily required to establish and maintain at all
times a clients accounts for all monies, premiums, claims and recoveries relating to
clients, insurers and reinsurers. This does not apply to an agency or agent.
(h) The books and accounts of an agency or agent need not be audited. It is a statutory
requirement that the books and accounts of a brokerage firm should be audited
annually and a certificate issued to confirm payment of all premium collected by the
52
broker to the insurers concerned. False declaration of income or premium remittance
and even failure of premium remittance by the brokerage firm are grounds for
cancellation of its registration certificate by National Insurance Commission.
(i) An insurance brokerage firm must have on its senior management level at least one
person with a professional insurance qualification or possessing at least seven years
experience at senior management level with an insurance company or insurance
broking firm.
(j) An insurance agent or agency is entitled to only 50% of the comparable commission
payable to an insurance brokerage firm in respect of any line of business.
(k) An insurance brokerage firm is statutorily required to keep the record of all insurance
business that it handles. In particular, separate records are to be kept in respect of
transaction with insurers based in Nigeria and those overseas.
(l) An insurance brokerage firm is statutorily required to submit annually to National

Insurance Commission audited statement of account (comprising Revenue Account,
Profit and Loss Account and Balance Sheet).
iv. Market association of practitioners: These are the various bodies that are set up by
insurance operators with a primary responsibility of overseeing the activities of their
members to ensure that best practices are maintained and the interest of operators are
protected. They include the Nigerian insurers association (NIA) for insurance companies;
Nigerian council of registered insurance brokers (NCRIB) for insurance brokers; institute of
loss adjusters (ILAN) for loss adjusters; Association of registered insurance agents of Nigeria
(ARIAN) for insurance agents and Professional reinsurers association of Nigeria (PRAN).
v. Regulator: in Nigeria, this is the National Insurance Commission, whose broad role is to
regulate the activities of all insurance practitioners. They also sanction erring practitioners.
8.2 National Insurance Commission Act (NAICOM)

In 1997, the Federal Government passed two major pieces of legislation relating to insurance
businesses. These are the:
National Insurance Commission Act of 1997 which created the National Insurance Commission
and which is now saddled with all regulatory functions and authorities carried out previously by
various bodies. The Board is made of four part time members. (Chairman and three persons to
represent the interest of the public) and seven full time members (the Commissioner for
Insurance, his two deputies and one representative each from the Federal Ministry of Finance,
Central Bank of Nigeria, Chartered Insurance Institute of Nigeria and the Federal Ministry of
Commerce).
As stated in the Act, its functions and scope among others include:
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i. Approving rates of insurance premium to be paid for tariff-based insurance business
ii. Establishing standards for conduct of insurance business in Nigeria
iii. Approving standards, conditions and warranties applicable to all classes of insurance
Business
iv. Protecting insurance policy-holders, beneficiaries and third parties to insurance

Contracts
v. Publishing for sale and distribution to the public, annual reports and statistics on the
insurance industry
vi. Contributing to the educational programmes of the Chartered Insurance Institute of
Nigeria and the West African Insurance Institute.
vii. Acting as adviser to the Federal Government on all insurance related matters. In order to
finance its activities, the commission derives funds from Federal Government allocation,
and the one percent levy on turnover of insurance institutions, apart from investment
incomes and penalties payable by insurance institutions.
The commission also has the power of registration, administration, supervision and winding-up
over all insurance institutions. For registration purpose, an application is to be made to this Board
in a prescribed form and this application may be (I) granted; (ii) granted subject to conditions
and (iii) rejected (though appeal could be made to the Minister for Finance within 30 days of
refusal). The principal requirements for registration/approval of the commission among others
are:
h. Possession of adequate and valid reinsurance arrangements
ii. Engagement of competent and professionally qualified persons
iii. Provision of proposal forms, terms and conditions of insurance policies acceptable to
the commissioner
iv. Possession of appropriate share capital relative to the class of insurance business to be
transacted
v. Payment of the statutory deposit to the Central Bank of Nigeria
vi. Disclosure of any person and his or her associates having over 25% ownership of the
company.
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The commission is empowered to set up an inspectorate department that will conduct regular
checks and inspection of insurance companies. In addition, it is to set up a complaints bureau to
handle grievances from members of the public against insurers and intermediaries.
8.3 Nigerian Insurers Association (NIA)

This is the principal organisation that regulates the practices of insurance companies in Nigeria.
The association was founded in 1971 as a body comprising insurance companies and reinsurance
companies that are registered to carry out insurance business in Nigeria. The body has as its
objectives the following:
i. Prescription and enforcement of self regulation and code of ethics.
ii. The protection and advancement of the common interest of insurers transacting insurance
business in Nigeria.
iii. The creation of a better understanding of insurance by all the community.
iv. To consult and co-operate with other associations or similar bodies in matters of mutual
interest and to obtain affiliation with such associations whether within or outside the
territory of Nigeria
8.4 The Nigerian Council of Registered Insurance Brokers (NCRIB)

Before the passing of the 1976 Insurance Act, anyone could set up the business of offering
insurance advice to the public. There were no statutory stipulations as to the experience and
qualifications of such persons parading themselves as insurance brokers, agents, advisers or
consultants. The insurance brokers and agents are the intermediaries between the members of the
public and insurers.
The statutory intervention, supervision and registration of insurance brokers in 1976 (improved
upon in 1991 and 1997) notwithstanding, there was still dissatisfaction among members of the
public about the conduct and status of some insurance brokers. There was a groundswell of
opinion for a self-regulatory mechanism to set the appropriate standards of practice, code of
conduct, admission requirements and maintain discipline.
Following discussions with the National Insurance Commission of Nigeria (NAICOM) and the
Chartered Insurance Institute of Nigeria (CIIN), a bill entitled “The Nigerian Council of
Registered Insurance Brokers Bill” was presented in year 2001 to the Nigerian national assembly
by the then Nigerian Corporation of Insurance Brokers. This led to the passing of the Nigerian
Council of Registered Insurance Brokers Act which became effective from June 6th 2003.The
Nigerian Council of Registered Insurance Brokers Act 2003 has the same features (except for a
few amendments) as the Insurance Brokers (Registration) Act of 1977 passed in Britain. The
main features or sections of the Act are as follows:
55
Section 1 (Establishment of the Council) – This gives legal backing to the
establishment of a body known as the Nigerian Council of Registered Insurance
Brokers as a body corporate. It is to be referred to as “the Council”.
Section 2 (Duties of the Council)- These include

i. Establishment and maintenance of a central organisation for insurance brokers,
ii. Establishment and maintenance of a library,
iii. Arbitration and settlement of dispute or questions between the members and other
parties and disciplining of members,
iv. Enrolment of insurance broking corporate body,
v. Establishment and maintenance of a register of Insurance Brokers indicating

names, addresses, qualifications and other particulars of all persons who apply to
be regarded as insurance brokers. This list of persons is to be published
periodically.
8.5 Institute of loss adjusters of Nigeria. (ILAN)

The loss adjusters are experts in dealing with claims. They usually follow claims through from
the moment they are reported to the insurance company to the point of settlement. As employees
of insurance companies, loss adjusters perform the duty of minimizing further losses by promptly
informing insurance companies about insurers’ losses, ascertaining the premium at the time of
loss, investigating any unusual circumstances and determining the rate of indemnity.
The loss adjuster can also be of help to the insured by providing advice and guidance on steps
that are to be taken after a loss has occurred.
In carrying out their duties to the insurance company, the loss adjuster will write reports for the
insurance company. In this report the following information will be contained:
i. Description of premises and the type of business carried on in it.
ii. Cause and extent of damage.
iii. Safety measures taken to protect the premises.
iv. Whether the insured has complied with all the warranties that are contained
in
the contract.
v. Possible rights of recovery against any third party (subrogation).
vi. Recommended amount insurers should reserve for settlement of the claim.
vii. Details of the claim and any adjustments made.
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Adequacy of the sum insured.
viii. Salvage.
ix. The existence of other insurances so that the principle of contribution can
apply.
x. Payment details.
This intermediary in the transaction of insurance business in Nigeria has an association referred
to as the institute of loss adjusters of Nigeria with a broad aim and objectives that include:
i. To engage in activities that will ensure the general welfare and public well-being
of insurance adjusters in Nigeria.
ii. To take necessary actions for the advancement of education in the field of loss
adjusting.
iii. Promoting their activities by the establishment and maintenance of institutions

and schools.
8.6 The Chartered Insurance Institute of Nigeria (CIIN)

Historically, what is now known as the Chartered Insurance Institute of Nigeria was founded in
1959, as the Insurance Institute of Nigeria. However, it became a chartered body in 1993 through
the passing of The Chartered Insurance Institute of Nigeria Act of the same year and is charged
with the duties of:
i. Determining the standard of knowledge and skill to be attained by persons seeking
to become registered members of the Insurance Profession.
ii. Reviewing the set standards from time to time as circumstance may permit.
iii. Conducting examinations and setting the entry requirements.
iv. Creating insurance awareness through seminars, training, conferences, etc.
The Chartered Insurance Institute of Nigeria is the overall professional and educational body for
the entire industry and draws membership from all individual practitioners working in the
different sections of the industry The membership is categorized into four namely :(i) Fellows;
( ii) Associates; (iii) student/ordinary and (iv) senior members
8.7 Professional Reinsurers Association of Nigeria (PRAN)

Even though professional reinsurance practice was introduced into Nigeria in 1977, with the
establishment of the Nigerian Reinsurance Corporation, the need for self-regulation led to the
formation of the Professional Reinsurers Association of Nigeria. It has among others the
following objectives:
i. Fostering co-operation and understanding among members.
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ii. Assisting ceding companies (insurers) on technical matters and to offer training
programmes.
iii. To reducing outflow of foreign exchange by ensuring maximum retention of
business written in Nigeria.
iv. Encouraging members to maintain the highest professional standards.
SUMMARY
This chapter describes the various participants as well as their role in the insurance industry.
While the buyers are concerned with how to get the best solution to their needs in terms of the
purchase of the appropriate insurance policy; the sellers interest is on how to boost sales and
grow their premium income; the intermediaries interest on the other hand will be on how to
properly serve as a link between the buyers and sellers of insurance policies at a profitable rate.
The regulatory bodies will be more concerned about ensuring that best practices are strictly
adhered to in the interest of both the buyers and sellers so that the expected contribution of the
industry to the overall economy can be achieved.
REVIEW QUESTIONS
1. Differentiate clearly an insurance broker from an insurance agent
2. What are the functions of the National Insurance Commission?
3. What are the objectives of the Nigerian Insurers Association?
4. What information will be contained in a loss adjuster’s report?
5. The chartered insurance institute is charged with the responsibility of promoting
professional development in the insurance industry. What are the duties of this body?
REFERENCES
National Insurance Commission Act 1997. Abuja. Federal Government of Nigeria.
Insurance Act 2003. Abuja. Federal Government of Nigeria.
Nigerian Council of Registered Insurance Brokers Act 2003
Chartered Insurance Institute of Nigeria Act 1993. Abuja. Federal Government of Nigeria.
http//www.ciinigeria.com-membersretrieved3/5/17
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CHAPTER NINE:
INSURANCE PRACTICE
LEARNING OBJECTIVE
i. To understand how insurance is practiced
ii. To understand what documents are used in insurance transactions
9.0 INTRODUCTION
The insurance contract like other forms of contract is that in which documentation is required. This
documentation will not only serve as an evidence of the existence of a contract between the parties,
but will also be relied upon in the eventuality that disputes arise between them especially where
such disputes are to be settled by the court of law.
In insurance contract, the first document that the insurance company will require the proposer
(party wanting to purchase insurance cover) to fill is the proposal form.
9.1 PROPOSAL FORM

This is the first document that will be issued by the insurance company to the proposer. The
proposal form is drafted by the insurance company to seek answers to the main material aspects of
the risk. In essence, it is used to gather information about the proposer as well as the object of
insurance known as the subject matter of insurance which could be a material property or life of
the proposer or some other subject matter which will be shown in the proposal form.
The importance of a proposal form cannot be overemphasized as it helps insurance companies

elicit information from the proposer regarding the subject matter of insurance, as well as their
personal information. It is important, at this juncture, for the proposer to co-operate by supplying
every useful information required of them. This is because, insurance companies can only assess
risk and determine the appropriate premium charges through the information supplied by the
proposer.
A typical proposal form will be divided into two question sections namely:
i. General question section: This contains questions such as name of the proposer, age,
contact address, e-mail and occupation. All proposal forms whether for life or non-life
cover have this section and are similar in outlook.
ii. Risk particular question section: where questions that relate to the type of cover required
are asked. This section will vary according to the class of business concerned. For example,
for a proposer who wants to buy a life insurance policy, such question as medical history,
family medical history any disability will be asked; while for motor insurance, the type of
vehicle and the use to which it will be put will be asked.
The answers given on the proposal form will form the basis of the insurance contract.
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Proposal forms may vary in length according to the complexity of the cover to be provided. Upon
the completion of the proposal form, the proposer will be required to sign on the declaration section
of the form to confirm that all the answers given are to the best of the proposer’s knowledge. After
the proposal form has been completed and submitted to the insurance company, the process of
assessment begins, to enable the insurance company decide whether to provide cover or not and at
what terms and conditions. This process in insurance is known as underwriting.
9.2 UNDERWRITING
When a risk is offered to an insurance company, someone assesses the risk being proposed in order
to determine whether it will be accepted for insurance cover or otherwise. This is because it is not
every risk that is brought to the insurance company that will be suitable for cover, either for legal,
social or technical reasons. If acceptable, the insurance company must decide on the rate of
premium to be charged and the terms and conditions to be imposed. The underwriters of an
insurance company are those who have the task of accepting, rejecting or revising insurance
contracts which the marketing system brings to the insurance company.
The aim of underwriting in insurance is to ensure the following:

i. That every insured pays according to the degree of risk exposure to which they are bringing
into the insurance pool.
ii. The preservation of the insurance pool so that it is not wiped out by avoidable claims.
iii. To ensure equity to the various purchasers of insurance since premium charges should be
reflective of the degree of risk that is brought into the pool.
iv. To assist the insurance companies to appropriately fix the premium that will be paid by the
proposer
v. To discourage those who have a higher than average chance of loss from buying insurance
at the standard rate.
9.2.1. SOURCES OF UNDERWRITING INFORMATION

Underwriting will not just be a technique of saying no to all difficult risks but will require that the
insurance company can in some way explain to the proposer some loss prevention advise that may
make their risk more acceptable.
The following are the sources which the underwriter can go through to gather information about
the proposer and the subject matter of insurance
i. Proposal forms i.e. information provided in the proposal form by the applicant.
ii. Information from agents i.e. information from insurance agents who either work for the
insurance company on a full time or freelance basis.
iii. Inspection report: i.e. report from the insurance company’s employees or appointed
representative with a mandate to conduct inspection and prepare a report on findings.
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iv. Other sources will include the insurance companies consulting specialist such as engineers
who are knowledgeable about safety requirements or financial or other industry rating
publications to gather information about the proposer. This may help in identifying sources
of potential hazards.
The underwriting process will require that the insurance company assesses both the physical, moral
and morale features that are associated with the risk.
As example, two insurance policies will be looked at to explain what an insurance underwriter will
consider before charging their premium:
a. Fire and special perils insurance policy:

i. Type of construction materials used.
ii. Availability of loss control appliances such as fire extinguisher, smoke detectors,
water sprinklers e.t.c.
iii. Activities carried out in the premises.
iv. Activities carried out in adjoining premises.
v. Loss experience over time.
b. Theft insurance policy:

i. Nature of business carried out.
ii. Security protection provided.
iii. Risk location and environment.
iv. Type of construction materials used.
v. Loss experience over time.
9.2.2 UNDERWRITING REMEDIES

Having assessed the information which has been obtained on the particular risk being proposed for
insurance, the underwriter is faced with three choices which are:
a. Accept the risk on standard rates: If the risk is satisfactory and perceived to be
“standard” type, the underwriter will accept the application on the normal terms
and rate for the class of risk
b. Accept the risk on modified terms: If the risk cannot be insured at the standard
rate, but the underwriter is willing to provide cover, the following underwriting
remedies may be imposed on the contract.
i. Reduce cover: the underwriter may offer a reduced form of coverage or a cover that
is narrower in scope.
ii. Impose an excess: this is an amount of each and every claim which is not covered
by the policy. Common in motor insurance, where there is excess clause in an insurance
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contract, the insured is his own insurer for the value of the excess and thus do not
receive full indemnity from the insurance company
iii. Impose a franchise: this is a fixed amount which is to be paid by the insured in the
event of a claim. However, once the amount of the franchise is exceeded the insurer
pays the whole of the loss, including the value of the franchise.
iv. Exclude specified event or losses: Asking the proposer to refrain from certain
activities that is considered to possess a risk level that the insurance company is not
willing to provide cover for.
v. Impose deductible: This is simply explained as a large excess. Commonly used in

large commercial contracts.
vi. Impose limit: These are placed by the wording of the contract as the maximum
amount that the insurance company will pay on any policy irrespective of the amount
of loss.
vii. Charge higher premium: Here the insurance company charges an amount that is
high to reflect the degree of risk presented by the proposer.
c. Reject the risk: The underwriter always has the choice of refusing to accept the risk
which is proposed, if they are considered poor. It is usually used as a last resort.
After the underwriting process is completed if the proposer is found suitable for cover
the insurance company will now activate the process of issuance of the policy.
9.3 INSURANCE POLICY

This document shows that the proposer has now moved to be called the insured and the policy
shows that he/she now has an insurance policy. The insurance policy document will show what
class of business the insured has, the terms, conditions and warranties of the contract and every
other information that pertain to the contract.
A typical insurance policy will have the following sections:
i. The heading: Contained here is the name of the insurance company, their address
and logo.
ii. Preamble: This comes at the beginning of each policy in words which vary little
from policy to policy. But essentially covers three areas namely:
That the proposal form is stated as forming the basis of the contract.
a. ii. That premium has been paid. In Nigeria, there is a clause that is inserted in the
policy document that reads thus “no premium no cover”.
b. iii. That the insurer will provide the cover that is detailed in the policy subject to
its terms and conditions.
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iii. Operative clause: This is the most important section of the policy and where the
actual cover that is provided by the insurance company is outlined. Each operative
section of a policy normally begins with the phrase “the company
will………………………..”and then goes on to say exactly what the company is
promising to do. This is the cover under the policy.
iv. Exceptions/exclusions: These are risks which are not covered by the policy.
Exclusions can be:
i. Specific exclusions: Those relating to a particular type of insurance, or to just part of

a contract.
ii. General exclusions: Those relating to the entire contract and if they come into
operation, usually enables the insurance company to repudiate any liability under the
policy.
Iii .Market exclusion: Some of the general exclusions appear in all general insurance
policies. Such as;
a. War and related perils.

b. Riot and civil commotion.
c. Radioactive contamination and explosive nuclear assemblies.
Other exclusions which are common to all property insurance policies are:
i. Pollution and or contamination.
ii. Terrorism.
iii. Sonic bang.
iv. Marine policies.
All motor and liability policies will also carry contractual liability exclusion which enables the
insurance company to avoid any claims arising from a contract of which it was unaware when
negotiating the contract of insurance. The language used by insurance companies in the exclusion
section must be clear and easy to understand by the insured so as to reduce disputes over claims
with the insurance company.
v. Conditions: Every policy of insurance will contain a list of conditions. These conditions
usually places a requirement upon a party to the contract to do something or not to do
something in a particular situation. Conditions can be implied or expressed
i. Implied conditions: These do not appear on the policy and include the following:
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a. The insured have insurable interest.
b. Utmost good faith has been complied with during negotiations.
c. The subject matter of insurance actually exists and can be identified.
Ii. Expressed condition: These conditions will appear on the printed policy. An example
of which are as follows:
a. That the insured notify the insurance company of any changes in the risk.
b. That the insured if possible takes steps to minimize that risk of loss or damage.
c. Procedure to follow in the event of a claim.
d. Arbitration condition.
e. Contribution condition.
f. Fraud and its effect.
All conditions that are found in insurance contract fall into three categories namely:
i. Conditions that are precedent to the contract: These are conditions which must
be fulfilled prior to the formation of the contract, meaning that a breach will result in
the whole contract becoming void. Conditions precedent to the contract is usually
implied conditions.
ii. Conditions subsequent to the contract: These are conditions which have to be
complied with for the cover to continue. An example will be that the insurance
company must be notified immediately about any alteration to the risk.
iii. Condition precedent to liability: These conditions relate to claim and must be
complied with if there is to be a valid claim. Breach of a condition precedent to liability
can result in liability for a particular loss being refused, but not in the whole contract
being avoided. Example of this type of condition is the prompt notification of claims
in the proper manner.
vi. Policy schedule: This is that part of the policy which makes it personal to the insured,
no two policy schedules are the same in insurance. The schedule section of an
insurance policy contains such information as: the insured’s name,address,nature of
the business, insurance period, premium paid, sum insured, policy number and any
specific exclusions and conditions of the policy.
vii. Signature: Contained in this section is the signature of an official from the insurance
company.
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The next document that the insurance company will issue the insured in certain classes of insurance
is the cover note for motor insurance which is a temporary document to cover the insured pending
the time the certificate of insurance will be ready. The cover note is issued normally by the agent
through whom cover is arranged, but sometimes by the insurance company themselves so that the
policy holder can prove that there is insurance cover in place.
The cover note contains brief details of the cover and a confirmation that the policy holder is
insured. The following information is contained in atypical cover note:
i. A statement to the effect that the insured is held covered.

ii. The terms of cancellation applicable.
iii. The date and time of commencement of the cover.
iv. The validity period of the cover note usually 30 days at first instance but not more
than 60 days.
v. The registration mark of the vehicle and its make.
vi. The name and address of the insured.
vii. Use to which the vehicle is to be put and for which cover has been granted.
viii. Any special term applicable.
ix. A certified statement that the cover note is issued in accordance with the road traffic
act.
The next insurance document that may be issued will be a certificate of insurance which is issued
where insurance is legally compulsory, to prove that the party concerned has complied with it. The
certificate of insurance will be for those policies which the government feels will protect the
citizens in the society and the excuse that the person does not have money to meet the financial
obligation that may arise from their action or inaction will not be tenable.
In Nigeria, this certificate will be in the following classes:

i. Motor vehicle third party liability.
ii. Professional indemnity for health care providers under the national health insurance
scheme.
iii. Occupier’s liability (public buildings).
iv. Cover for building that will be above two floors for public liability.
v. Employer’s liability.
vi. Group life for all employers: for more than four staff in both the public and private
sector.
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It must also be stated that a typical insurance policy will lapse after a year except for term insurance
policy which expires after a stated period usually shorter than one year period.
9.4 CLAIMS IN INSURANCE

This is a demand made by an insured or insured’s beneficiaries for the payment of benefits or
indemnity following a loss in accordance with the terms of the insurance contract. Claims could
be described as the end product of an insurance contract. Most claims are settled by the insurance
company’s claims department.
The process of claims settlement places an obligation on both the insured and the insurance
company. And these obligations are as follows:
i. Insured to prove that they have suffered a loss by a peril which is insured by the policy
ii. To show the value of the amount of loss.
What is a genuine claim?: A claim is genuine when the loss or damage suffered by the
insured is presented to the insurer without any intention to defraud.
Insurance claims procedure: In the event of sustaining a loss which is covered by an

insurance policy, the following are the steps to be taken:
i. Notify your agent, broker or insurance company.
ii. Comply with subsequent instructions of the insurance company.

iii. Completion of a claims form which is the most important document for claims
processing.
iv. Provision of relevant documents such as receipts, police report etc.
v. Other documents (depending on the class of insurance) such as letters from third party
claimants, vouchers, cover notes, certificate of insurance, claim form, independent
investigator’s report(motor vehicle assessment/loss adjusters),etc.
SUMMARY
This chapter focused on the customary way of operation of insurance companies known as
practice. A process that begins with the completion of the proposal form which is described as the
basis of all insurance contracts; the issuance of a policy document to the application of the
principles of insurance. It ends if a loss occurs by the payment of claim. Underwriting mechanism
was also explained.
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REVIEW QUESTIONS
1. The amount of claim received by an insured can be less than the amount of loss. As a
human resources executive, list five factors that may make it impossible for the insured to
get full indemnification in the event of a loss?
2. Explain five procedures that an insured is required to comply with after a loss has occurred
before they can receive compensation?
3. What information is contained in a typical cover note that is issued by the insurance
company?
4. Explain five sections of a typical insurance policy that is issued by an insurance company?
5. What underwriting remedies does an insurance company have over risks that are
considered poor?
REFERENCES
Akintayo, L, (2001).Fundamentals of Insurance Claims.Lagos.Perfect Touch Ltd.
Roff,N,A,.(2004).Insurance Underwriting Process. London.Chartered Insurance Institute.
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CHAPTER TEN:
INSURANCE PRODUCTS
LEARNING OBJECTIVE
i. To understand the types of insurance products that are available in the Nigerian
insurance market
10.0 INTRODUCTION
By product we mean what an organisation has on offer for sale, this could be goods or services.
And for an insurance company, it is the various life and non- life insurance policies that are on
offer for sale. But one feature of the insurance product is that it is intangible, only represented by
the piece of paper that is issued to the insured called insurance policy. With the expectation that if
the event insured against occurs, the insurance company will pay compensation and restore the
insured to their pre-loss position.
Insurance products are designed with the customer in mind so that they will have the peace of mind
to carry on their daily activities, knowing that there is a party (the insurance company) who is
helping them to carry the risk that relates to daily living.
10.1 NON-LIFE INSURANCE PRODUCTS

There are many types of this product in the insurance market with some of them being sold as
individual policies and others as combined or packaged policies. Some of these products
(insurance policies) are as follows:
A. Motor insurance policy: This policy has different types from which an individual or
organisation can buy to cover motor vehicles, motor cycles and other mechanically propelled
objects whether for private or commercial use the type of policies sold in this market include:
i.Third party only liability cover: Providing protection against the risk of liability from death,
bodily injury and damage to third party’s property arising from the use of the vehicle on the road.
With the benefit that an innocent third party is protected from the risk arising from the use of a
motor vehicle on the road.
ii.Third party, fire and theft cover: This policy covers all that is covered above and in addition
will cover for fire and theft of the insured’s vehicle.
iii.Comprehensive cover: This has the most benefit when compared with those above as it covers
both the insured’s vehicle and those of third parties, losses from fire, theft and loss of accessories
are also covered.
iv. Motor trade policy: In the motor insurance market, there is also the motor trade policy which
caters for those whose interest is not to use the vehicles but sell them as their means of business.
Under the motor trade policy, three products are offered for sale namely:
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a. Road risk cover: Which provides cover for loss or damage to any vehicle under the care or
custody of the insured or motor trader whilst such vehicle are away for repairs or being test driven
within the scope of the standard cover arranged which could be third party, comprehensive or any
other basis.
b. Premises risks: Also known as internal risk covers the insured’s exposure to risks of loss or
damage to vehicles whilst they are within the insured’s premises or show room.
c. Combined Road and Garage: This is a combination of road risks and internal risks. It also
covers damage to petrol pumps that may be in insured premises.
B. Fire and special perils policy

The cost of fire damage to individuals and businesses annually are quite enormous rendering
people homeless as well as closing businesses thus having a huge social and economic cost. A
standard fire policy will cover damage to property caused by fire, lightning or explosion, where
the explosion is brought about by gas or boiler not used for any industrial purpose. While the
special perils section is added to cover for losses to property from such sources as storm, tempest,
flood, burstpipes, subsidence and landslide, earthquake, malicious damage, aircraft and articles
dropped from them, explosion and impact by vehicles and any other specified peril.
C. Theft insurance policy: The policy pays compensation to the insured in the event of loss of
the property insured, but the insured will be required to give a detailed definition of stock if it is a
business premises or details of content if it is a private residence.
D. Goods in transit insurance policy: this policy pays compensation to the owner of the goods
if such goods are damaged or lost in transit. Different policies also exist here depending on whether
the goods are carried by the owner’s own vehicle or by a firm of commercial haulier (carrier) as
this will give insurable interest to such carrier as they are often responsible for the goods while
they are in their custody.
E. Money insurance: This policy provides compensation to the insured in the event that money
is stolen from their business premises or home whilst being carried to or from the bank.
F. Packaged policies: these are umbrella policies covering diverse risks which an individual or
business may encounter such as fire and special perils, employer’s liability, theft etc.The policy
has a feature that only one set of condition, terms and warranties as well as one premium will be
paid for the policy.
G. Engineering insurance: this policy is of different types covering civil engineering works,
mechanical works, computer, electrical and electronic work and related subject matter. The losses
that are covered will include fire, theft, liability, business interruption and any other specified risk.
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H. Glass insurance: this policy replaces broken glass which has become a feature of modern day
architecture,it is increasingly not sold as a stand-alone policy except to known clients. It is
available as an addition to another material damage policy.
I. Business interruption insurance policy: This policy is also called consequential loss insurance
policy.it covers the loss of profits resulting from a physical property having been damaged and the
incidental costs incurred thereafter. These losses come about because certain overhead cost will
remain at their full level even though sales may be reduced. The most common business
interruptions policies are those which cover losses from:
i. Fire and special perils
ii. Engineering breakdown risks and
iii. Computer damage and breakdown risks.
J. Employers liability insurance policy: This policy covers the employer against the risk of claim
by the employee. For example, wrongful dismissal of the employee who later brings up a litigation
against the employer; sexual discrimination; employees being injured at work from slips, falls,
trips, faulty equipment, hazardous materials, repetitive strain injuries or a former employee
becoming ill as a result of their work while in an organisation’s employment. The policy will pay
the following benefits:
a. Payment of medical expenses of the insured employee.
b. Temporary disability benefits
c. Permanent disability benefits
d. Vocational rehabilitation services.
e. Death benefits to dependents of an employee should the employee die from work related
accidents
f. All costs and expenses with the insurance company’s written consent.
The policy will not cover the following:

i. Insured’s liability to employees of contractors to the insured.
i. Bodily injury intentionally caused or aggravated by the employer.
iii. Any injury by accident or disease directly attributable to acts of foreign enemy, war and
nuclear risk.
iv. Any liability of the insured which attaches by virtue of an agreement.
v. Punitive or exemplary damages because of bodily injury to an employee employed in
violation of the law.
vi. Accidents resulting from riot,strike,and civil commotion.
vii, Accidents occurring outside the workplace or outside working hours
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K. Health insurance policy: This policy provide cover for the cost of private treatment for
illnesses and other medical conditions often referred to as private medical to differentiate it from
a type known as permanent health insurance. That is a long term insurance designed to protect the
insured’s income.
L. Credit insurance policy: This cover protects an organisation or trader from default on the part
of buyers of their goods or insolvency of the organisation which they supplied goods that makes
them unable to pay.
M. Fidelty guarantee insurance policy: Provides cover against loss by reason of the dishonesty
of person’s holding positions of trust such as accountants, stores officers etc.The subject matter of
insurance can be money or stock. It covers against all pecuniary loss sustained through any act of
fraud or dishonesty of employees in connection with their occupation during the period of
guarantee and discovered while the fidelity guarantee policy is still in force or within a particular
period of its expiry or termination of the employee’s employment whichever shall come first or as
specified by the policy. The policy of fidelity guarantee can be of the following types:
a. Named policy: Under which a schedule of named employees is produced with the amount
guaranteed for each and every one of them or a total amount (floating sum) for the policy
shown.
b. Position basis: This guarantees the position for a set amount regardless of the position
holder who might change. The policy schedule will show the designations of the persons
covered with the specific amount that is guaranteed for each.
c. Blanket policy: This includes all employees without showing their names or position.
N. Liability insurance policy: individuals and organisations can be held liable for bodily injury
or damage to the property of others caused by their acts or omissions or by those of their agents or
even employees for which such individuals or organisations legally will be held liable and made
to pay compensation.The liability insurance policy if purchased will be invoked to pay
compensation up to the policy’s limit in each instance.
There are several types of liability insurance policy in the market and some which are:
i. Employer’s liability insurance policy: which provides cover where an employer is held legally
liable to pay damages to an injured employee, or the representatives of someone fatally injured.
This policy will ensure that the stipulated amount is paid as well as the cost of legal representation
or doctor’s fee charges where an injured person has been medically examined. This policy is
restricted to damages payable in respect of injuries and does not pay for damage to an employee’s
property.
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ii. Public liability insurance policy: members of the public may suffer injury or damage to their
person or property due to the activities of someone else. The public liability insurance policy have
been designed to provide compensation for those who may have to pay damages and legal costs
for such injuries, and or for damage to property. There are particular types of policy available for
each different types of risk namely:
a. Business public liability policy: This covers a company if customers or a member of the public
was to suffer a loss or injury as a result of that company’s activities and if claim for compensation
is made. It covers claims from members of the public, visitors, passers-by, and bonafide sub
contractors both on the organisation’s premises and at third party premises where the
organisation’s employees have gone to work. Compensation is for property damage payment, legal
costs, payment for bodily injury all caused by the activities of the organisation. The policy can be
extended by the payment of extra premium by the insured to cover for the following:
a. strike, riot, civil commotion. Here, the liability of the insured is extended to cover accidental
bodily injury or accidental property damage to any third party occurring at specified premises
directly caused by strike, riot and civil commotion.
b. overseas liability: the insured can also ask that the policy be extended to cover the insured’s
employees or directors against legal liability for bodily injury or property damage to any third
party incurred in a personal or official capacity temporarily outside Nigeria.
c. contractual liability: by policy extension, cover can be against any claim made in respect of
liability assumed by the insured under any contract or agreement for bodily injury and property
damage to any third party provided that such contract or agreement has been declared to the
insurance company.
iv. product liability insurance policy: this policy pays compensation to the insured if a person is
injured by any product they purchase example foodstuffs and can show that the seller,or in some
cases the manufacturer is to blame.
v. personal public liability: everyone owes a duty of care to their neighbours not to cause them
injury or damage to their property, this could be from the ownership of house and the activities
that are carried out there.
O. Director’s and officers’ liability insurance policy: This is where the directors and officers of
companies are personally held responsible for their negligence. This is the case in certain
companies and as such shareholders, creditors, customers, employees and others can take action
against directors as individuals. The policy provides cover for defence costs as well as the amount
of compensation for which a director may be liable to pay for their negligence in operating a
company.
P. Professional indemnity insurance policy: This policy provides compensation for liability
arising out of professional negligence which can arise when lawyers, doctors, accountants,
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insurance brokers and other professionals do or offer advice which result in others suffering. For
example, having further health complications, losing money, dying or other adverse condition. The
affected person or their representative can then sue such a professional for an amount equal to what
has been lost. And such a professional can also effect a professional indemnity insurance to meet
the cost of the award against them.
Q. Bond and suretyship insurance policy: This is an insurance policy whereby the insurance
company agrees to be answerable for debt, default, or miscarriage of another. This policy involves
three parties namely:
i. The principal: The party obligated to perform in some way for the benefit of the obliged
ii. The surety: The party that guarantees that the principal will fulfill the underlying obligations
iii. The obliged: The project owner
For example: using a construction project, the performance bond is a common type of bond. Here,
the project owner is known as the oblige for example, Lagos state government; the contractor
handling the project is known as the principal e.g. Julius Berger Plc; while any party that sureties
that Julius Berger will perform according to plans and specifications is known as the Surety. This
can be an insurance company who serves as a corporate surety by agreeing to compensate Lagos
state government if Julius Berger defaults in carrying out their agreed assignment with the
government.
R. Travel insurance policy: This policy covers for when the insured embarks on a journey outside
their normal area of residence. It could be within a country or overseas. The cover pays the
following compensation:
i. Personal accident benefit covering death, loss of limbs or eyes or permanent total disablement .a
lump sum is paid to the insured or to their legal personal representative.
ii. Medical expenses covering medical treatment, hospital charges, surgical fees, emergency dental
treatment, additional hotel or travelling expenses incurred as a result of the patient’s accident or
illness.
iii. Repatriation cost including the use of air ambulance if necessary.
iv. Additional expenses (subject to specified limit) incurred by third parties in the insured’s party
due to delay caused by the insured party’s illness.
v. Baggage, personal effects and money: Loss of, or damage to personal baggage, clothing and
personal effects up to a specified limit.
vi. Loss of deposits due to the cancellation of travel from reasons that will be specified in the
policy.
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vii. Personal liability: Where the insured incurs a legal liability in respect of injury to a third party
or accidental loss of, or damage to their property whilst travelling. Compensation will be up to a
specified limit.
Other benefits are: delayed baggage, hospital cash benefits, travel interruption and travel delay.
S. Marine insurance policy: This is a policy that covers water moving vessels from losses or
damage of the vessel, cargo on board the vessel, or liabilities that may be incurred from their use.
This policy has a long history in insurance with a rich tradition that has lasted over time. Covers
available under this policy are:
i. Hull: covering loss of or damage to the actual structure of the ship itself.
ii. Cargo: covering loss of or damage to the cargo carried or in the process of being loaded.
iii. Freight: covering loss of the fees paid for the carriage of cargo.
iv. Liabilities: Part insured under hull policies and the other part by protecting and indemnity
clubs.
Cover in the marine insurance market can be effected for different time periods as follows:
a. Voyage policy: The cover is operative from the port of departure to the port of destination,
irrespective of the time taken. Cargoes insured on this basis have a clause attached
“warehouse to warehouse” endorsement, and the cover would terminate sixty days after
unloading at the port or place of destination.
b. Time policy: Specifies the period of cover example from January to December.
c. Mixed policy: This is a combination of time and voyage policy. It should be noted that a
longer period of time is allowed after the vessel has arrived its destination.
d. Construction policy: Covers during construction, trials and until delivery.
e. Floating policy: Cover for agreed sum large enough to cover a number of shipments.
f. Open cover: Cover arranged in general terms, which applies to all shipments within its
provisions subject to adequate declaration of details of each cargo despatch.
T. Aviation insurance policy:
It covers air moving crafts including spacecraft. Areas of coverage are:
i. Hull: Covering the actual structure of the craft.
ii. Liability: Covering losses arising from the use of these crafts.
iii. Cargo: Losses to cargo carried by this craft.
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The aviation insurance market is governed by conventions such as the Warsaw convention of 1929
which stipulates that subject to monetary limit, compensation must be paid to passengers without
the carrier’s negligence having to be proven. The Hague protocol 1955 however raised some of
the limits of the Warsaw convention 1929.
There are also other rules like that of the International Air Travelers Association (IATA);
international civil aviation organisation (ICAO).National laws of individual countries may
however place higher limits on the provisions of international conventions.
U. Health insurance policy: It helps to pay for medical expenses in case of sickness and/or injury
but not loss of income. Health insurance or medical expenses insurance are of two types- managed
care and fee for service. Managed care is relatively inexpensive but the choice of doctors/medical
facility is restricted. On the other hand, fee for service gives the policy holder the option to visit
any doctor/medical facility.
10.2. LIFE ASSURANCE PRODUCTS

This is another classification in the type of insurance products that are sold by the insurance
companies.
The life assurance products are unique in that they are not policies of indemnity as there is no limit
to the amount of life cover a person can purchase. A life assurance policy can assist the family of
the deceased to cushion some of the effects of premature death of a breadwinner; helping in the
payment of school fees, mortgage or meeting the liabilities from a business loan. There are also
certain types of life assurance products that have investment element wherein fund are
accumulated while the policy is in place for the purchaser to have access to upon maturity in the
event that the policy matures in their life time.
There are different types of life assurance products in the market namely:
A. Term assurance policy: This is the simplest and cheapest form of life assurance available in
the market. It provides a life cover with a fixed and defined tenor, meaning that it has a start and
end date. It provides for the payment of the sum assured on death, provided death occurs within a
specified term. Should the life assured survive to the end of the term, then the cover ceases and no
money is payable.
There are different types of term assurance policy in the market and these include:
i. Decreasing term assurance policy: This is designed to cover the reducing outstanding
balance of a repayment of mortgage. As the debtor gradually repays the capital sum, so the
sum assured reduces year after year until exhausted at the end of the mortgage period.
ii. Convertible term assurance policy: In this type of term assurance, there is a clause in the
contract that allows the insured to convert the policy into an endowment or a whole life
contract at normal rates without additional medical evidence required.
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iii. Family income benefits: This type is a decreasing term assurance with the benefit on death
paid by installments over an agreed period. These installment payments are paid from the
date of death until the expiry date. It is intended to replace the income, which the life assured
would have produced for their family if they were still alive.
The benefits of a term life assurance policy are:

a. Life insurance benefits that are paid are tax free.
b. It provides a lump sum to meet unforeseen expenses.
c. it can be used to off- set outstanding balance on a loan or debt
d. it can be used to provide inheritance to heirs.
Another type of product in the life assurance market is:

B. Endowment assurance policy: This is a policy that is designed to pay out the sum assured
(plus bonuses if the policy is written on ‘with profit basis’ at the end of a specified period or on
earlier death of the life assured. Premiums paid depend on the size of the sum assured, the age of
the life assured at the start of the policy and the length of the term.
The endowment policy can be used as a collateral security for loan as well as for mortgage
protection.
C. Whole life assurance policy: This policy provides life cover for the duration of the life assured,
not just a fixed term. Premium payment remains level throughout the period of cover, being
calculated from the age of the life assured at the inception of the policy and the amount of the sum
assured. Premium payments may cease when the assured reaches a particular age (say 60 or 65).
Whole life policies can either be based on ‘with profit’ or ‘non-profit’.
i. With profit whole life policy:
This policy provides that the insured can share in any profit made by the assurance company from
its investment; the assurance company in return, pays higher compensation. The share of the profit
takes the form of bonus added to the sum assured. These bonuses can take any of three forms:
a. Reversionary bonuses: These are usually declared each year as a percentage of the sum
assured with the bonus being added to the original sum assured. In subsequent years, the
bonus would be calculated on the original sum assured plus any bonuses that had already
been added to it. The policy guarantees to pay any reversionary bonuses that have been
declared.
b. Terminal bonuses: This is calculated at the date of claim and is not guaranteed in advance.
c. Interim bonuses: This type declares what bonus rate will apply to any claim that arise
between the last bonus declaration and the next one due.
ii. Without profit whole life policy: In this type, the premiums and sum assured have been
determined from the inception of the policy and cannot be changed.
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A whole life policy can also be paid-up meaning that if the policy holder cannot afford to pay
further premium, he or she can ask for the policy to make “paid-up”. Premium cease to be payable,
but cover continues at a reduced rate. This can also apply to endowment policies.
Whole life policies can also allow for surrender value meaning that the policy is cashed in before
it becomes a claim, i.e. it is “surrendered” and there may be a small return on premium paid.
Although accrued bonuses can be included. A surrender value is usually less than the premium
paid in, because of acquisition and administrative costs that will be deducted.
The assured in a whole life policy can ask for extended benefits such as:
a. The addition of a permanent disability benefit and
b. Critical illness covers benefit.
The benefits of a whole life policy include:
i. Payment of a guaranteed sum assured.
ii. Benefits are tax deductible.
iii. It provides a lump sum to meet unforeseen expenses.
iv. It provide surrender value if the contract is terminated.
D. Group life assurance policy: This is a type of insurance policy in which a single contract
covers an entire group of people. Typically the policy owner is an employer or an entity such as
clubs, associations, organisations or members of any group. Group life insurance is often provided
as part of a complete employment benefit package.
The group life insurance policy can be:
i. Occupational basis: however, section 5(1) of the Pension Reform Act 2014 has made it
compulsory for all employers,especially those in the private sector with a mininmum of 15
employees, to put in place a compulsory pension scheme and an occupational life insurance
policy with a minimum of three times the annual emolument(defined as basic salary plus
housing and transport allowances) this is contained in section 2(2) and 5(1) of the Pension
Reform Act 2014. The policy is operational in respect of any employee whose name appears
on the schedule with the insurance company and still in the service of the employer at the
time of death. The compensation is payable to the Pension Fund Administrator of the
deceased or to his legal personal representative in accordance with the provisions, guidelines
or amendments of the Pension Reform Act 2014.
The occupational group life policy will cover against the following:
a. Death i.e. compensation is paid to the dependents of the employees who may die while in
service.
b. Disappearance: Here, compensation is paid in the event of disappearance of an employee
and who is not found within a stipulated time.
Other optional payment will include:

i. Additional compensation for permanent disability (mental or physical) (through accident
or stroke) especially at a time when pension contribution is still small.
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ii. Compensation for temporary total disability and medical expenses following accident.
The occupational group life insurance policy also provides for list of compensation that will be
payable to payroll employees as follows:
i. For death: three times the total annual emolument.
ii. For disappearance: three times the total annual emolument.
iii. For stroke: three times the total annual emolument.
iv. For permanent disability: three times the total annual emolument.
v. For temporary disability: a percentage of the total annual emolument based on the degree
of disability.
vi. For medical expenses: a maximum of 25% of the total annual emolument.
While for non-payroll employees, the provision is that a selected capital sum, reasonable enough,
in case of death, to take care of the employee’s family or the employee in case of disability.
In all occupational group life assurance policy, the premium is paid 100% by the employer.
ii. Non-occupational basis: cover is arranged for members of affiliation groups such as clubs,
town unions, market associations etc.
The group life insurance policy provides financial protection against the risk of death of an
employee or a member of an enlisted scheme at the commencement date. Members can also be
added to the scheme at any time while the policy is still in force.
The scheme is renewable annually and the employer or association bears all costs in relation to the
purchase of the policy. To an employer, the group life insurance policy is different and should be
separated from the contributions made by the employer to its employee’s retirement saving
account.
The group life insurance policy will come with certain terms and condition which will include:
The benefits under the policy will commence automatically on the entry date on which the member
first becomes eligible.
i. Medical examination is conducted on any member of the scheme whose sum assured is
above a certain threshold (free cover limit), determined at the inception of the scheme and
thereafter once every three years.
ii. Premiums are paid annually in advance by the employer or the association in respect of
employees or members in the service of the insured.
iii. A group life policy does not accumulate cash surrender value; rather, it is renewable on
an annual basis.
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iv. The premium payable is computed on a pro-rata basis as may be applicable where an
employee joins the scheme in the course of the year.
v. Where an employee leaves the service of the employer before the expiration of the 12
month period, the premium paid relating to the unexpired term is set aside as a credit to
reduce the renewal premium payable on the scheme.
vi. A member will cease to be covered if premium is not paid; attains the retirement age or
leaves the organisation.
EXCLUSIONS UNDER THE GROUP LIFE INSURANCE POLICY

The following are circumstances in which the liability of the insurer will not be engaged.
a. Death or disablement directly or indirectly approximately or remotely occasioned by, or in
connection with invasion, effects of nuclear processes and from radiation caused by the
acceleration of atomic particles the act of foreign enemies hostilities or war like operations
(whether war be declared or not) civil war, riot, strike, civil commotion mutiny rebellion revolution
insurrection military or usurped power
b. Death or disablement caused by or consequent upon suicide or attempted suicide

whether felonious or not, willful self-breach of law on the part of the Insured,
voluntary, willful or negligent exposure to needless peril (except for the purpose of
saving human life) indulgence in drink, narcotic or drugs.
c. Death or disablement caused by or consequent upon participation in wild beast or

big-game hunting, mountaineering, winter sports, racing of any kind polo, football
or motor-cycling.
d. Death or disablement resulting from accident to any aircraft in which the Insured is
travelling other than aircraft operating on a regular passenger service in which the
Insured is travelling as a fare-paying passenger or a multi-engine aircraft licensed
for the carriage of fare-paying passengers and operated by a licensed passengers
carrier between established airports.
e. Execution of judicial sentence of death.
f. Taking part in acts that are contrary to public policy.
By extension, the insured can be covered by a group life insurance policy under the following
circumstances.
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a. Disappearance - if the insured person disappears during the time frame or duration
of the insurance and the body is not found within twelve months after such an
incident, the insurer shall forthwith pay the death benefit. This is on the
understanding that the person or persons to whom such sum is paid shall sign an
undertaking to refund such sum to the insurer if the Insured Person is subsequently
found to be living;
b. Riot, Strike and Civil Commotion - The cover granted by the policy is extended to
include the risk of riot and civil Commotion;
c. Motorcycling - policy is extended to cover bodily injury consequent upon the use
of a motorcycle, motor scooter, moped or mechanically pedal cycle by any of the
insured persons;
d. Woodworking machinery -The cover granted by the policy is extended to cover

bodily injury arising from use of woodworking machinery driven by mechanical
power;
e. Funeral expenses – purchase of casket, burial ground; vehicle access benefit- for
car services during funeral arrangement or cash in lieu; memorial benefit to pay for
the unveiling ceremony expenses; cash payout of a fixed limit subject to percentage
increase for inflation, etc.;
f. Disability due to illnesses which are specified and life threatening
g. Flights by Helicopter, Chartered Aircraft.
Other insurance policies that can be bought on group basis are:

i. Group Medical Expenses Policy
ii. Group Funeral Expenses Policy
iii. Permanent Health Insurance Policy
E. Annuities: Life Annuities are insurance contracts usually taken with or separately from life
assurance policies. Annuities are denominated in terms of annual amount, though in practice,
payable monthly, quarterly, and half-yearly. It can be payable in advance or arrears. Where payable
in arrears, it can be with or without proportion as each payment is made at the end of the period to
which it relates. Therefore, when an annuitant dies, there is a period between the last payment or
installment and date of death. Under a proportion annuity, a pro-rata or proportionate payment will
be made to cover this period.
Purchasing an annuity guarantees a steady stream of income or payment until the death of the
annuitant notwithstanding the future financial market or economic conditions. Conversely, the
insurance company assumes all the investment risks in the financial and economic climate as well
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as the longevity risk of the annuitant. Strictly, an annuitant is not a life assurance policy as no lump
sum is payable on the death of the annuitant. Rather, it is a contract to pay a pre-arranged sum to
the annuitant while alive.
Annuities are of various types namely:

i. Fixed Annuities which are like certificates for money deposited with a bank, having a
guaranteed fixed interest rate based on predetermined amount payable to the annuitant.
They are often purchased with a lump sum payment e.g. benefit from Retirement Savings
Account. It could also be by regular contribution over a period of time (e.g. deductions
from salary), in which case, the guaranteed fixed interest rate is used to build the annuity
up to an amount that will be used to fund the regular payment once it is annualized. This
period of growing up the annuity fund is known as ‘’accumulation period’’.
In life Annuities, a fixed amount is paid until the death of the annuitant. Upon the death of
the annuitant, payment ceases, both to his estate and/or survivor. Except it is one of joint
life with last survivor still alive, in which case, payments continue to be made to the
surviving spouse.
ii. Term Certain Annuities: This is when a set amount is to be made, over a particular period
or up to a specified date. In the event of the death of the annuitant within the specified
period, payment ceases and the balance of the annuity reverts to the insurance company.
Also, payment ceases at the expiration of the period stated in the contract even if the
annuitant is still alive.
Generally, payments from an annuity are based on the amount of the principal, the
guaranteed interest rate and the calculated life expectancy of the annuitant. Therefore, it
can be said that the higher the life expectancy, the lower the annualized payments.
iii. Annuity certain is for a specified period whether the annuitant dies or not.
iv. Guaranteed annuity is an immediate annuity guaranteed for a minimum period whether or
not the annuitant dies. It is payable for life or the specified period whichever is longer. If
the annuitant dies during the guaranteed period, the balance of the guaranteed installments
is payable to the deceased’s estate.
v. Capital Protected Annuity is where the total payment is guaranteed to be at least the
equivalent of the premium paid. When the annuitant dies, the insurer adds up the annuity
payments so far made and make up the shortfall if the total is below the total premium paid.
F. Personal accident insurance policy: This policy provides financial help to the individual
in the case of an unfortunate event occurring which would temporarily or in extreme cases
permanently affect their means of livelihood. The policy will pay compensation in cases of
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disability, injury or death resulting from accident. And for non-fatal accidents, it can pay weekly or
monthly benefits to provide for the income lost as a result of the accident.
The benefits payable under the personal accident insurance policy include:
i. Death benefit in the event that the insured dies from the accident, the entire sum
insured is paid to the listed beneficiaries of the deceased.
ii. Permanent disability: A lump sum payment is made in the event that the accident
prevents that insured from being able to engage in a gainful employment for the
rest of their life.
iii. Temporary disability: This pays compensation if the accident renders the insured
temporarily unable to pursue gainful employment. Benefits are usually paid as
specified in the policy.
iv. Medical expenses: This provides compensation to enable the insured to pay for
medical expenses incurred as a result of the accident.
The policy by extension can pay additional benefits such as:
i. Overseas medical expenses. This is medical expenses incurred outside the
insured’s country of residence. The sum payable will be up to a stated limit.
ii. Burial expenses. This is the expenses incurred in preparing for the burial of
the deceased insured. This is usually a percentage of the lump sum benefit
under a death benefit.
iii. Repatriation benefit: This benefit is only paid to expatriates and covers the
cost of returning the corpse of the deceased to their country of residence.
The following cause of loss will be excluded by the policy:

i. War and allied perils.
ii. Terrorism.
iii. Suicide.
iv. Self-inflicted injuries.
v. Engagement in hazardous sports.
vi. Criminal activities.
Vii. Misuse of alcohol or drugs.
viii. Failure to follow medical advice.
ix. Childbirth, pregnancy or miscarriage.
G. Group personal accident insurance policy: This policy unlike the one before it covers
a group of persons such as employees in an organisation, members of clubs, associations etc.
An employer can put in place a group personal accident policy for their employees. This
may be used to complement the Employees Compensation Scheme with the Nigerian Social
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Insurance Trust Fund (i.e. to be operational for non-work related incidences) or as a
standalone (i.e. operational for 24 hours). The Group Personal Accident policy is a benefit
insurance policy based on contract between the employer and the insurer for the benefit of
the employees in respect of accidents occurring in:
i. Circumstances that are not work-related; and/or
ii. Circumstances not covered by the Employees Compensation Fund of Nigerian
Social Insurance Trust Fund; and/or
iii. In any circumstance whatsoever.
The typical operative clause of this class of insurance policy reads thus “if during
the period of insurance the person described in the policy schedule shall sustain
bodily injury solely and independently of any other cause by accidental, violent,
external and visible means resulting in death or disablement, the insurer will pay to
the insured or in the case of death to his personal representatives, compensation as
provided in the policy schedule”.
Based on the operative clause, it becomes obvious that this class of insurance policy is purely a
contract of benefits as payment of compensation is based on the level of benefits and terms as
agreed between the insured and the insurance company.
UNDERWRITING GROUP PERSONAL ACCIDENT POLICY

For underwriting/rating purposes, occupations are classified into four, according to the degree of
hazards presented and consequent injuries that may arise. The classifications are as follows:
i. Sedentary Workers i.e. Persons in administrative, managerial and non- manual
jobs.
ii. Commercial travelers or supervisors that do not use tools or machinery
extensively
iii. Manual workers using tools, plant or machinery that are not of particularly
hazardous nature.
iv. Persons engaged in manual work of hazardous nature.
Persons in more hazardous work than the last category are to be generally regarded
as unacceptable and even if accepted, will be specially or specifically rated.
Examples of these are aircraft crews, divers, miners, members of the armed forces.
There are five benefits of this policy, though some insurance companies put four under the policy.
The benefits are:
i. Death: This must result from the incident covered by the policy and should occur within the
period stipulated (three to twelve months) in it. The amount payable is as fixed in the policy
(multiples of earnings/salary or flat amount) while the period is calculated from the date of the
incident giving rise to the claim.
ii. Permanent total disablement or total permanent disablement
These are injuries that result in the insured being permanently bedridden or causing
permanent total disablement from engaging in or giving attention to profession or
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occupation of any kind. The amount payable is fixed in the policy (multiple
earnings/salary or the basic sum insured) and the insurer will only be liable on
satisfactory proof that the disablement has continued for a period which could be
up to 104 weeks from the date of the injury and in all probability will continue for
the remainder of the insured’s life. The confirmation could be by agreement
between the claimant and the insurer; the medical examination conducted by two
surgeons-one by claimant and the other by the insurer; or if the two surgeons are
unable to agree, a third surgeon may be selected and the decision in writing on any
of the two surgeons will be binding on both the claimant and the insurer. While the
word “total” is to be interpreted in its complete and absolute meaning and is not
necessary for the insured to be confined to the house/hospital, he must be entirely
incapacitated from attending to his usual business
iii. Partial permanent disablement

These are injuries that will leave permanent deformities or scars on the claimant
without necessarily making him bed-ridden for life or ceasing to engage or giving
attention to any profession or occupation after the incident. For this purpose, a
table of disabilities (known as continental scale) is either printed as part of the
policy schedule or attached to it (see appendix 3). In the event of a claim, the
compensation payable is based on the amount fixed by the policy (multiplied by
the disability percentage in the “continental scale”). Permanent Partial
Disablement must be determined within the period stipulated in the policy (three or
twelve months) after sustaining the injury.
iv. Temporary total disablement

This is the compensation payable for the period the claimant is undergoing medical
treatment in the hospital, nursing home or house as a result of injury sustained from
any cause covered by the policy. The compensation payable is based on salary of
the sum insured and is on weekly basis up to a maximum of 104 weeks from the
date of injury. The word “Temporary” implies that the disablement will not last
long and that the insured will recover and resume his normal duties.
v. Medical; surgical and hospital expenses

These are medical expenses (including operation fees, cost of medicine, surgical
appliances and hospital or nursing home charges) necessarily incurred and
expended in connection with any injury caused by an accident as provided for by
the policy. The maximum compensation payable is the amount fixed in the policy
and it is applicable per accident. By endorsement, the insured can add the following
to be covered by their policy. Some of these risks could be written back either free
of charge or at additional premium. These are listed below as follows:
i. Riot and strike
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ii. Motorcycling
iii. Excluded activities (“dangerous sports”) such as hunting, climbing, polo,
hockey etc – though on amateur basis.
iv. Disappearance – a suitable period (at least twelve months) is to elapse before
the death benefit becomes payable.
v. Age limit of 16-70 years
vi. Helicopter, Charter or Non-scheduled flights
vii. Funeral/burial expenses
viii. Repatriation Expenses-injured man, spouse and accompanying medical doctor
ix. Motorcycling, Riot/Strike and Amateur sports.
x. Transport Expenses
xi. Modification of vehicle/house expenses
xii. Riot/Strike/Civil Commotion
It should also be noted that in a group personal accident insurance policy, death and permanent
total disablement benefits are not regarded as indemnity contracts. Therefore, it is possible for an
insured to have more than one policy covering the benefits. If a proposer is already suffering from
a permanent deformity, or compensation paid for partial total disablement to an existing client,
this should be excluded without being surcharged.
Temporary total disablement and medical expenses benefits are contracts of indemnity and are
generally not permitted to be duplicated.
Generally, the premium rate increases according to the level of hazard involved in the occupation
of the proposer. Rates for permanent disablement should be higher than that of the Death benefit
followed by temporary total disablement and lastly medical expenses.
It is often better to use salary instead of earnings to arrange Group Personal Accident policy. This
cut out the problem of defining earnings and computing the same especially for top management
staff that are entitled to benefits in kind.
CLAIM PROCESS IN GROUP PERSONAL ACCIDENT POLICY

In all cases, any claim must be lodged with the Insurance Company within a reasonable time of its
occurrence and substantiated with the following documents:
a. Claim form: The claim form helps in gathering information about the claimant i.e. his
marital status, earning etc, as well as circumstances pertaining to the accident.
b. Evidence of earnings: Earnings includes wages paid as well as food, fuel or quarters
supplied to the employee plus any overtime payment or other special remuneration
including bonus if of consistent character or for work habitually performed. Excluded
are casual payments, traveling allowance, and contribution by employer towards any
pension or provident fund or sum to cover any special expenses. Evidence of earnings
is not necessary where the policy is not occupation-linked.
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c. Excuse duty certificates: These are sometimes called Medical Certificates and must be
issued by a Medical Practitioner who is registered under the Medical and Dental
Practitioners Act of 1963 (or equivalent where overseas treatment is involved). The
certificates show the period of time for which the claimant is certified medically unfit
to carry out his duties. Production of these certificates helps in determining the level of
compensation payable under the Temporary Incapacity heading.
d. Discharge certificate: This shows the actual date the injured workman is certified
medically fit to resume his normal duties or discharged from receiving further medical
treatment. Though the actual discharge date is sometimes determined from the dates
shown on the excuse duty certificates, discharge certificate is to be produced where the
claimant is transferred from one medical practitioner to another or where after being
certified medically fit to resume his normal duties, he still gets treatment on an outpatient
basis.
e. Medical/transport expenses: Though there is limit for this benefit, it is the duty of the
claimant to produce evidence in support of the medical expenses. This evidence is often
a medical bill/receipt showing the breakdown of the total figure into different
components e.g. consultation, accommodation, drugs etc. However, expenses relating
to food/drinks supplied to the claimant are not recoverable even if placed on special diet.
Noteworthy, is the expenses incurred in respect of services rendered by non-orthodox
medical practitioners e.g. orthopaedic cases. The general attitude of insurer is to
accommodate bills and therefore other documents from these “hospitals” so far evidence
can be produced that they are recognized and licenced by the Government.
f. Medical reports: This is to be issued by the medical practitioner handling the treatment
of the injured workman. The treatment may be carried out by a medical practitioner
nominated by the employer or the employee (subject to the employer’s approval). The
medical report is a summary of events from the date of first examination by the medical
practitioner to the date of discharge (either to another medical practitioner or to resume
duties). It shows the percentage of disability resulting from the injury and whether the
injured man can resume his normal duties or be redeployed to lesser strenuous one.
Sometimes the details in the medical report obviate the need for excuse and discharge
certificates. In addition, especially for small claims, the total expenses incurred may be
stated therefore making demand for separate bill/receipt unnecessary
In a great majority of Permanent Partial Incapacity claims, insurers do request the
injured workman to present himself for re-examination by a medical practitioner
appointed by them. This exercise is often carried out to verify the percentage of
disability awarded by the employer’s or employee’s nominated medical practitioner as
well as to determine the percentage of disability for injuries not stated in the continental
scale.
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Sometimes the injured workman do refuse to present himself for medical re-examination
and even in extreme cases, fails to turn up or cooperate with medical practitioners
nominated by the employer or the injured workman himself. This situation makes it
difficult for insurers to finalise claims quickly as the provision of the policy is that the
claim is to be put in abeyance even though no compensation is payable for the period of
suspension.
g. Burial expenses: this is claimable by the dependents of the insured up to the policy limit.
h. Death Certificate, coroner’s inquest and burial certificate

It is almost impossible to process successfully any death claim without the submission
to the insurers of:
i. Death Certificate (issued by the medical practitioners who last examined the
deceased workman or who confirmed him dead)
ii. The Coroner’s Inquest (issued under the authority of the criminal prosecuting
body of the area in which the death took place) and;
iii. Burial Certificate.
Due to the difficulties often encountered in procuring these documents, most insurers have now
adopted the attitude of accepting any two of the three documents and in extreme cases even one
(e.g. drowning without trace of the corpse, when insurer would have to use the coroner Inquest
and possibly sworn affidavit).
CLAIM DISCHARGE
By signing the discharge voucher in respect of permanent disablement/partial total
disablement/temporary total disablement/medical expenses, the insured or any other person frees
the insurer from any further liability from the particular accident. In respect of a death claim, this
will be done by the claimant’s employer, the group that effected the policy or his personal
representatives. No assignment, lien, charge or any dealing whatsoever with the policy by the
insured will affect the insurer’s liability.
H. Critical illness insurance policy: The policy pays out the agreed sum assured on the insured
being diagnosed as suffering from certain specified illnesses or conditions such as:
i.Cancer
ii.Stroke.
iii.Coronary heart disease.
iv.Heart attack.
v.Kidney failure.
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vi.Major organ transplant.
The policy does not pay on death, just on diagnosis to meet immediate financial needs.
I. Long term care insurance policy: The policy provides benefits to individuals who
become unable to care for themselves without external assistance. The policy options are:
a. Fee care plans for residents in nursing homes or residential accommodation.
b. Disability benefits for insured who are unable to perform a specific number of activities
of daily living such as:
i.dressing unaided.
ii.Going to toilet.
iii.washing.
iv.eating and drinking unaided.
v.getting into and out of bed or chair.
Benefits are either payable for life or paid until a personal trust fund is exhausted.
J. Key person insurance policy: An organisation may purchase insurance policy to

protect it from the loss of an employee who is vital to the continued profitability of the
organisation. Such as a marketing executive with valuable contacts or an inventor in a
manufacturing company whose ideas devises new products.
The sum assured will be that required to compensate for the loss of profits on the death of
the key person and, in particular, to cover the expenses of finding, securing and training a
successor.
10.2.1 UNDERWRITING LIFE ASSURANCE

i. Proposal form as in all insurance contracts: The proposer will be required to complete a
proposal form to enable the insurance company gather information about the life to be
assured. Additionally, the information provided in the proposal form can be broken down
into three sections namely:
a. The first identifies the life/lives or subject matter to be covered;
b. The second specifies the details of the contract required – whole life, with or
without bonus/profit, annuity etc;
c. The third gives the details of the risks pertaining to the life to be assured.
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d. Medical Factors – Medical attendant’s report of the life to be covered may be sent
to the doctor named in the proposal form by the proposer. However, most life
offices do request for medical examination of the life proposed to be carried out by
doctors from a list with it. Most likely to be examined are medical factors pertaining
to longevity – heart diseases, digestive system diseases, cancers, liver diseases,
kidney diseases, mental disorders, diabetes, HIV/AIDS etc.
e. Occupational Factors- Occupation of proposers does have significant impact in the

assessment of any life assurance proposal. Examples of occupations that may give
room for serious concern are:
1. Divers- drowning
2. Miners- pneumoconiosis
3. Chemical workers- poisoning
4. Asbestos workers- asbestosis
5. Bomb disposal workers
6. Professional boxers/athletes/footballers etc
7. Professional musicians/artists/actors/actresses etc
8. Pilots and air crew members
9. Members of the armed forces
10. Handlers of radioactive materials
11. Persons engaged in hazardous pastimes or hobbies – motor racing,
polo, biking, parachuting, and boxing.
f. Residential factors- political instability and/or warfare in certain parts of the country or
world e.g. Asia and Africa. Also, the prevalence of certain diseases, poor sanitation and
medical facilities.
10.3 TAX BENEFITS THAT ARE AVAILABLE TO EMPLOYERS AND

EMPLOYEES FOR PURCHASING SOME CLASSES OF INSURANCE
There are a lot of benefits that employers of labour will enjoy if they purchase some types of
insurance. These benefits are usually in the area of tax relief that they will receive from tax
authorities. These types of cover include the following:
i. Contributions under the employees’ compensation scheme are tax deductible expenses to
the employer;
ii. Contributions under the Pension Reform scheme are tax deductible expenses to both the
employer and employee;
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iii. Premium under the occupational group life cover is tax deductible expense to the employer;
iv. Premium under individual life assurance, personal pension and annuity plans are tax
deductible;
v. Benefits/Compensations under the Employee Compensation Act 2010 are tax exempted;
vi. Benefits/Compensations under the contributory pension scheme are tax exempted
vii. Benefits/Compensations under the occupational group life insurance are tax exempted;
viii. Benefits/Compensation under non-occupational group life schemes, individual life

assurance policies, personal pension and annuity plans are tax exempted.
ix. Interest portion of annuity payments are taxable –only the capital portion is tax exempted.
10.4 ACTUARIAL VALUATION

One of the jobs of the insurance underwriter is to determine the appropriate premium for the risk.
The premium is the insured’s contribution to a common fund from which the insurance company
will pay all claims that may arise.
It is important that the premium represents the amount of risk that the insured brings into the fund
otherwise the fund will be depleted and less able to meet claims that may arise.
The premium charged by an insurance company can be of the following types:
a. Flat premiums: used more frequently in personal lines business, a flat premium is charged
for risks of a particular sort. The different levels of hazard associated with different types of
risk are assessed and a rating table is produced to give set rates for particular combination of
hazards. The private motor insurance policy will be a good example.
b. Adjustable premiums: This is used where it is not always possible to know exactly what
the premium base will be at the start of the policy term. In this instance, the premium rate
would be applied to the premium base estimated by the insured at the beginning of the year
and then adjusted at the end of the insurance year, when the actual premium base was known
with the insured been obligated by the policy to make a declaration of the actual figure to the
insurer. The employer’s liability insurance policy will be an example of an insurance type
using this method.
c. Level premiums: In life assurance, the risk of death increases each year as a person’s age
increases. If the premiums were to increase in line with the increased risk at renewal each
year, the policy will be unaffordable. In view of this, at the inception of policy the proposer
will be told what the premium for the risk will be and this figure will not change throughout
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the term of the policy, as long as premium payments continue to be made and the policy
continues in force.
Consequently, the excess premium of the early years are accumulated and kept in reserve to
meet shortfalls in later years. Additionally all premiums receivable in respect of the various
life policies of an insurance company are kept in a life fund from where all payments for
claims and expenses are to be made. Any excess left thereafter will be invested.
In order to protect the interest of life assurance policyholders, it is necessary to periodically

investigate the insurance company as to the state of their life fund. The assets are mainly what
the insurance company has invested the excess premium in, while the liabilities are the policy
value of all life insurance contract entered into at the date of valuation.
It is expected that the excess premium accumulated must be at least equal to the policy values
at any point in time based on the assumption that the premium charged are adequate and the
projections as to earning from investment and any other expenses are as anticipated. Hence
the need for actuarial valuation to establish if the fund has more asset than liabilities.
10.4.1 IMPORTANCE OF ACTUARIAL VALUATION

a. Helps in establishing if the fund has more assets than liabilities. If the valuation result is
positive, there is a surplus out of which policyholders having with-profit covers will share
as bonuses. If however, the result is negative, the insurance company will have to make
up the deficit.
b. Used to test the solvency of a pension scheme. If the scheme is on a defined benefit basis
(non-contributory basis) and a deficit results, then a reduction in the benefits level may be
recommended while if the scheme is a contributory one a deficit valuation could lead to
increase in contribution levels.
c. Used to fulfill regulatory requirement. In Nigeria, the Insurance Act 2003 sections27(1)
and 29 makes it mandatory for every life insurance company to submit to National
Insurance Commission an actuarial valuation report every three years on its operation.
d. Used to determine the funding pace of a pension scheme in order to forestall having a
deficit and also to determine where there is a surplus how much should be paid out.
e. A requirement in case of court ordered merger, amalgamation, acquisition and dissolution

of a life insurance company as stipulated by sections 31 and 32 of the insurance act 2003.
f. Could be used by regulatory bodies to investigate the affairs of any life insurance
company.
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10.4.2 ACTUARIAL VALUATION METHODS
The process of determining the insurance liabilities of a life insurance company will involve an
assessment of the value of all the life assurance contracts in existence at the date the exercise is to
be carried out. The format for calculation can be the insured’s age next birthday or their age last
birthday depending on how the mortality rates. Interest rates and expense provisions is assumed in
premium calculations.
The methods for calculating liabilities of a life insurance company using actuarial valuation are:
A. Net premium method: Here, the premium to be used for calculations is the net
premium i.e. gross premium less loading for future expenses and bonuses. The
underlying assumption of this method is that the policy value starts with zero on its
commencement date and is built up with the duration and finally equals the sum assured
and declared bonuses. Another assumption of this method is that the difference between
the gross and net premium called valuation loading will not be absorbed by actual
expenses or contingencies in order to increase the assets and disposable surplus.
Therefore, if the net premium, expenses and contingencies remain unchanged, then the
surplus will tend to be constant and will emerge every year if the mortality, interest and
expenses remain unchanged.
B. Modified net premium method: This is basically like the net premium method except
that there will be provision for heavy initial expenses involved in acquiring the business.
This provision is made by using in the calculation the next higher age in arriving at the
policy value.
C. Gross premium method: In this method, it is the actual gross premium receivable that
will be used but with specified percentage deducted for expenses. This method also adopts
a rate of interest that is lower than the yield earned on the life fund and the mortality rate
is heavier than the estimates of future experiences. Therefore, the method overstates the
liability of the insurer and reduces the bonuses due to policyholders.
D. Gross premium bonus reserve method: Under this method, the rate of expected future
bonus is assumed to be uniform throughout the duration of the policy. In calculating the
premium rates, the interest and mortality rates too are subject to adjustment in order to
provide safety margins. Any change however as a result of volatility in the value of assets
due to changes in the market rate of interest will attract a corresponding decrease or
increase in the valuation rate of interest and therefore an opposite effect on the reserves.
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SUMMARY
It is important that people are informed about the types of products that the insurance companies
have on offer for sale. This will enable them to understand which among the products will best
meet their need. Broadly; speaking insurance products can be life or non-life. In this chapter, the
tax benefits that are available from the purchase of some insurance products was also discussed.
REVIEW QUESTIONS
1. The increasing awareness and agitations by employees have made it necessary that
organisations protect themselves from litigations against them by the purchase of
insurance. Explain, as the head of human resources to your board.
a. The type of insurance policy that could be bought to meet this need
b. Explain four (4) benefits that are payable in the event of this happening
2. You have been appointed as the Head of a conglomerate of workers union; and workers in
these various unions are agitating that they be all covered by a life assurance policy
a. Explain five occupations that it may be difficult for insurance companies to provide life
insurance covers
b. Explain 2 factors that the insurance companies may consider before accepting to sell life
policies to these groups of workers
3. Explain the benefits of carrying out actuarial valuation by regulators
REFERENCES
Layinka.A. (2006), Insurance Marketing, Lagos, C.S.S.Bookshop.
Marshall,C.(2001).Life Assurance. Chartered Insurance Institute of Nigeria.Coursebook
A 735.
Couchman,A.(2004).Health Insurance Products.London.CII Tuition Service.
Evans,G.C.(1988).Insurances of the Person.London.CII Tuition Service.
Mc Callum,D.S,(2002).Liability insurance Underwriting and Claims.London.Chartered
Insurance institute.
Kotler,P,& Armstrong,G,(2008).Principles of Marketing.U.S.A.Prentice Hall.
Atkinson, D.B, & Dallas, J.W, (2000).Life Insurance Products and Finance; Charting a
Clear Course.U.S.A.Society of Actuaries.
Businessday (2016, May).Critical Illness insurance.AxaMansard, Monday 18th.
Businessday (2016, July).Personal Accident Insurance.AxaMansard, Monday 4th.
Businessday(2017,January).Understanding Compulsory Insurance Products,Monday 16th
Dixit.S.P, Modi.C.S.and Joshi.R.V. (2008), Mathematical Basis of Life Assurance. India,
Insurance Institute of India.
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CHAPTER ELEVEN:
REINSURANCE
LEARNING OBJECTIVES
i. To understand what reinsurance is
ii To understand the benefits of reinsurance to an insurance company
iii. To understand the types of reinsurance arrangement available to an insurance company
11.0 INTRODUCTION
Reinsurance is the act of transferring risk assumed by an insurance company to another insurer or
a company set up for that purpose called reinsurer. In other words, reinsurance is the “insurance
of insurers”. It is a transaction through which an insurance company or insurer transfers a part or
the whole of the risk it has assumed to another company (insurance company or reinsurer) in order
to spread the risk and reduce the effect of any potential loss on its financial strength.
In a reinsurance transaction, the insuring public has no direct relationship with the reinsurance
company. Rather they deal with the direct insurance companies who in turn deal with the
reinsurance companies. It is worthy of being mentioned here that reinsurers too may reinsure the
same risk(s) which they accepted from the direct office with other reinsurance companies through
a process known as a retrocession.
Reinsurance should not be confused with co –insurance which is when an insurance company
shares the risks brought before it with other insurance companies with the main insurance company
being referred to as the lead insurer. Under this arrangement each participant receives a percentage
of the premium proportionate to the percentage of risk given it and will be required to contribute
same as claim in the event that a loss occurs.
11.1 BENEFITS OF REINSURANCE

Insurance companies seek for reinsurance due to various reasons. These include:
i. Need for protection against catastrophic losses: the primary insurer (i.e. ceding company)
do experience claims in respect of catastrophic losses at times or even accumulation of a
series of small losses which may exceed its financial resources (i.e. capacity). The
reinsurance which is in place operates to indemnify the ceding company thereby protecting
it against the crippling effects of such claims.
ii. Capacity to handle large or big risks: The treaty reinsurance enables the ceding company
to accept insurance proposals with sum insured in excess of the ceding company’s retention
capacity. This enhances the business of the ceding company by enabling it to grant cover in
respect of large or big risks presented by long standing good customers who would have been
discouraged or disappointed by being turned down just for the reason that the value of the
risk that they present for insurance cover is beyond the retention capacity of the insurer. This
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means that reinsurance helps to promote the ideals of relationship marketing in insurance
business.
iii. Stability of underwriting (or technical) results: By indemnifying the ceding company,
reinsurance helps to reduce the ceding company’s claims fluctuation and thereby reduce the
volatility of underwriting results over the years.
iv. Further spread of risk geographically: Reinsurance helps to further spread risks even across
national borders (by international reinsurances) and thereby removes the likelihood that the
impact of any heavy loss will only concentrate locally on an economy.
v. Creation of larger pool: Reinsurance helps to create pools of risk especially in such classes
of risk where the value of each loss is usually very high for exampe Aviation Pool.
vi. Expert advice to ceding company in the areas of underwriting claims administration and
management.
vii. Technical assistance to primary insurers especially at infancy.
viii. Helps the primary insurer to avoid possible financial strain which may result from rapid
growth of portfolio.
11.2 TYPES OF REINSURANCE ARRANGEMENT

The basic methods of reinsurance agreement are:
i.Facultative method
ii.Treaty method
11.2.1. Facultative Reinsurance: This is the original and oldest form of reinsurance with a
characteristic that the risks brought before the reinsurance company is assessed individually with
the ceding office having the choice to decide whether to buy reinsurance and the reinsurer also
having the power to decide whether to provide reinsurance cover. It may be proportional or non-
proportional. Two main features distinguish a facultative reinsurance from other forms of
reinsurance and these are.
a. Freedom of each party: The ceding company is free to cede or not to cede any business to
the reinsurer who is equally free to accept or not accept any business placed by the ceding
company.
b. Individuality of cover: The cover granted individually and the decision to cede and to
accept is made on the basis of the quality or features of each risk under consideration. The
ceding company pays a share of the original premium (less commission) to the reinsurer
which represent the share of the risk which is now ceded facultatively and in the event of
claim, the reinsurer is called upon to contribute the same proportion of the risk ceded (to
reinsurer) to the claim.
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11.2.2.1 Treaty Reinsurance: This is a type of reinsurance which is arranged between the ceding
company and the reinsurer. Both parties agree that every risk of a particular class of insurance
which is covered by the ceding company must have a proportion of it ceded (transferred) to the
reinsurer. The proportion of the cession depends on the type of treaty and there are two types of
this nature namely :(i) Quota share treaty, and (ii) Surplus treaty.
11.3 METHODS OF TREATY REINSURANCE

Treaty reinsurance can take various forms, depending on the needs of the insurance company.
Treaties are either written on a proportional or non-proportional basis.
Proportional reinsurance
In proportional treaties, the insurance company decides how much to reinsure and the balance is
then reinsured under the treaty. The premium received by the direct insurance company for the
risk is shared in the same proportion as the retention bears to the reinsurance, between the
insurance company and the reinsurance company. Any losses that also occur under the policy will
be shared in the same proportion. Examples of this type of treaty are the quota share and surplus
treaty.
i. Quota Share Treaty: In this type of treaty, the gross retention of the ceding company is shared
with the reinsurer. This means that an arrangement is made whereby the primary insurer cedes a
certain percentage of every risk insured by it to its quota share reinsurer provided that the risk falls
into the class of risks under quota share treaty; and in an event of a loss resulting in claim payment,
the claim is shared in the same proportion at which the risk had been shared between the primary
insurer and its reinsurer.
ii. Surplus Treaty: In this type of treaty, the ceding company after retaining up to its retention
capacity cedes the surplus amount to its reinsurers. This means that the ceding company accepts
risk that is above its gross retention capacity and passes the surplus on to its surplus treaty
reinsurers. The surplus treaty reinsurance settles claims in the same proportion at which the risk
was covered between the ceding company and its surplus treaty reinsurers.
Non-proportional reinsurance
In non-proportional treaties, the insurance company and the reinsurance company agree on a level
loss and the treaty then provides reinsurance cover for any losses that occur beyond that level. The
types of treaty under the non-proportional type are:
i. Excess of loss: Under this type of treaty, the insurance company and Reinsurance Company
agree on the amount that the insurance company is to retain. If losses under the policy remain
within this limit, the reinsurance company does not become involved. But if loss exceeds the
amount agreed, the reinsurance company is liable to pay the balance up to an agreed limit. Excess
of loss treaties are arranged in layers, with different layers being called upon as a claim moves
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from one layer into the next. The first layer, which is most likely to be called upon, is known as
the working layer; and it also happens to be the most costly to put in place.
ii. Excess of loss ratio (stop loss): This type of treaty is designed to protect the insurance
company’s whole account from higher than expected losses. It pays out when the loss ratio (total
losses divided by total premiums) on the insurance company’s account exceeds a certain
percentage. Like other treaties, there is a ceiling placed on the reinsurance company’s liability
SUMMARY
Reinsurance companies have been described as secondary carriers of risk and hence do not transact
business with the individual directly; rather provide insurance cover to insurance companies who
may also want to cover some of the risks that they have assumed from the insured. The various
type of reinsurance method was also discussed in this chapter.
REVIEW QUESTIONS
1. a. Differentiate clearly reinsurance from co-insurance
b. Explain clearly the difference between proportional and non-proportional methods of

reinsurance.
2. What are the benefits available to an insurance company that purchases reinsurance?
3. Explain the quota share method of arranging reinsurance
4. What are the features of the facultative method of reinsurance?
5. Explain the term treaty reinsurance and its various types
REFERENCES
Nwankwo, S.I. & Asokere, A.S. (2010) Essentials of Insurance: A Approach
Modern.Lagos.Fevas Publishing.
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CHAPTER TWELVE:
PENSIONS
LEARNING OBJECTIVES
i. To understand what pension is
ii. To understand the origin of pension in Nigeria
iii. To understand the types of pensions that are available
iv. To understand Pension reform act 2014 in Nigeria.
12.0 INTRODUCTION
Pension can be defined as a regular installment payment to persons who have disengaged from
service either by attaining a mandatory retirement age, by putting in the maximum number of years
of service that can be put into the service of the organisation or by requesting to be voluntarily
retired and in some cases being compulsorily retired by the organisation.
The first known cases of pension systems in history were non-contributory(cash transfer) programs
targeting the elderly and can be traced to the late 19th century and early 20th century in countries
as brazil 1888,Denmark 1891,New Zealand 1898,Australia 1908 and Sweden 1913.
Historically, pension business or practice came in to Nigeria as an extension of the British social
security system, though principally, for the benefit of its citizens working in the public service of
the country. Later, due to the agitation of the Nigerian Labour leaders and their unions and to an
extent the politicians, the system was extended to Nigerians during the colonial period.
The first formalized pension legislation in Nigeria was the Pension Ordinance of 1951 which had
retroactive effect from January 1, 1946. The law provided public servants with both pension and
gratuity. This piece of legislation was carried in to independence in 1960 and amended several
times until 1979 when two decrees namely: Pension Decree 102 and Armed Forces Decree 103
were passed with retroactive effect from April 1 1974. These two decrees and subsequent
amendments (Armed Forces Pension Act 1990; Police and Other Agencies Pension Act 1993)
between 1979 and 2004 several government circulars and regulations were issued to alter the
provisions and implementations of the pension scheme An example being that of 1992 that reduced
the qualifying period for gratuity from 10 years to 5 years and that of pension from 15 years to 10
years. Other changes during this period was that in 1997,parastatals were allowed to have
individual pension arrangement for their staff and appoint board of trustees(BOT) to administer
their pension plans as specified in a standard trust deed and rules prepared by the head of service
of the federation. Each board of trustees was at liberty to decide on whether to maintain an insured
scheme or a self-administered scheme.
On the other hand, the first private sector pension scheme was set up for the employees of the
Nigerian breweries in 1954; this was followed by United African Company (UAC) in 1957 while
the National Provident Fund was the first formal social protection scheme in Nigeria established
in 1961 for non-pensionable private sector employees. It was largely a saving scheme where both
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the employee and employer would contribute N4 each on monthly basis. The scheme provided for
only one-off lump sum benefits. The pension scheme that was operational before 2004 was non-
contributory and thus referred to as ‘’Defined Benefit Schemes’’ with the following features:
a. Non-uniformity of pension and gratuity rules/formulae in the public service;
b. Non –contribution by the employees
c. Basis of payment was on the terminal salary or gross pay of the employee
d. Combination of gratuity, pension, disability and survivor benefits
e. Retirement on reaching age 60 or serving for 35 years in the public service, whichever
came first
f. Reduced pension benefits option for voluntary disengagement after serving between 10
and 34 years;
g. Limitation of statutory backing for pension/gratuity benefits to only public servants and
members of the armed forces/ Para military
h. Payment of gratuity as a lump sum payment at retirement or resignation after a number of
years
i. Funding of schemes as operating expenses from provisions in the annual budgets i.e. Pay-
As-You-Go (PAYG) basis
j. Utilization of gratuity and pension left to the individual retiree.
k. Diversion of budgetary provisions for pension/gratuities by government and /or officials
who had access to such funds.
l. No formal method of channeling savings from pension and gratuities for the economic
development of the country.
m. Granting of permission (in 1997) to parastatals under Federal Ministries to make individual
pension arrangements – maintain a self-administered pension scheme; transfer scheme to
a third party fund manager or place the risk with an insurance company
n. Fixing of minimum number of years to be served before eligibility to join pension scheme
o. Theoretically, pension was to be paid for life but practically serious challenges in
continuing five years after retirement
p. Non- portability of pension/gratuity even within the public service and with the private
sector
q. A lot of bureaucracy in setting up Trustees and obtaining permission of the Joint Tax Board.
12.1.1 PENSION REFORM ACT 2014

This act repealed the pension reform act No 2, of 2004 and was signed into law on the 1st of July,
2014 by President Goodluck Jonathan and provides that, it shall continue to govern and regulate
the administration of the uniform contributory pension scheme for both the public and private
sectors in Nigeria.
It has as its objectives the following to:

i. Ensure that every person who worked in either the Public Service of the Federation, Federal
Capital Territory, states and local government or private sector receives his or her
retirement benefits as and when due.
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ii. Assist improvident individuals by ensuring that they save in order to cater for their
livelihood during old age.
iii. Establish a uniform set of rules, regulations and standards for the administration and
payments of retirement benefits for the public service of the federation, public service of
the Federal capital territory, the public service of the states and local government and the
private sector.
iv. Make provision for the smooth operations of the contributory pension scheme.
12.1.2 PROVISIONS OF THE PENSION REFORM ACT 2014

• In the case of the private sector, the scheme shall apply to employees who are in the
employment of an organisation in which there are 15 or more employees.
• Employees of organisations with less than 3 employees as well as self-employed persons
shall be entitled to participate under the scheme in accordance with guidelines issued by
the commission.
• The contribution for any employees to which the act applies shall be made in the following
rates relating to their monthly emolument.
i.a minimum of 10% by the employer; and
ii.a minimum of 8% by the employee.
• The rates of contribution may upon agreement between any employer and employee be
revised upward from time to time with the commission being notified of such revision.
• Any employee to whom the act applies can also make voluntary contributions to his
retirement savings account.
• The employer may agree on the payment of additional benefits to the employee upon
retirement.
• The employer can elect to bear the full responsibility of the scheme provided that in such
case, the employer’s contribution shall not be less than 20% of the monthly emolument of
the employee.
• Every employer shall maintain a group life insurance policy in favour of each employee
for a minimum of 3 times the annual emolument of the employee.
• Where an employer failed, refused or omitted to make payment as and when due, the
employer shall make arrangement to effect the payment of claims arising from the death of
any staff in its employment during such period.
• In the case of professors covered under the universities (miscellaneous
provisions)(amendment) act 2012 and category of political appointees entitled, by virtue
of their terms and conditions of employment to retire with full benefits, the commission
shall issue guidelines to regulate the administration of their retirement benefits provided
that any shortfall shall be funded from the budgetary allocations by the employer.
• The retirement savings account of the employees are portable, they can be moved from one
pension fund administrator to another or when the employee changes job, such employee
only needs to inform the new employer of his retirement savings account details.
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• It empowered the national pension commission to subject to the fiat of the attorney general
of the federation, to institute criminal proceedings against employers who persistently fail
to deduct or remit pension contribution of their employees within the stipulated time.
• The law reduced the waiting period for accessing benefits in the event of loss of job from
six months to four months.
• It exempted the personnel of the military and security agencies from the contributory
pension scheme.
• It vested the jurisdiction in pension matters in the national industrial court.
• It provided for an employer to be compelled to open a temporary retirement savings
account on behalf of an employee who fails to open a retirement savings account within
three months of assumption of duty.
12.2.1 PERSONS EXEMPTED FROM THE CONTRIBUTORY PENSION SCHEME

The people exempted from the contribution of pension scheme are members of the armed forces,
the intelligence and secret services of the federation.
Any employee who is entitled to retirement benefits under any pension scheme existing before the
25th day of June 2004.
12.2.2 RETIREMENT BENEFITS

The act also provide that A holder of a retirement savings account shall, upon retirement or
attaining age 50 years whichever is later, utilize the amount credited to his retirement savings
account for the following benefits:
i. Withdrawal of a lump sum from the total amount credited to his retirement savings account
provided that the amount left after the lump sum withdrawal shall be sufficient to procure
a programmed fund withdrawals or annuity for life in accordance with guidelines issued
by the commission.
ii. Programmed monthly or quarterly withdrawals calculated on the basis of an expected life
span.
iii. Annuity for life purchased from a life insurance company that is licensed by national
insurance commission.
iv. Professors covered by the universities (miscellaneous provisions (amendment) act 2012
shall be according to the university act.
v. Other categories of employees entitled, by virtue of their terms and conditions of
employment, to retire with full retirement benefits shall still apply.
vi. Where an employee voluntarily retires, disengages or is disengaged from employment. The
employee may with the approval of the commission, withdraw an amount not exceeding
25% of the total amount credited to his retirement savings account. Provided that such
withdrawals shall only be made after 4 months of such retirement or cessation of
employment and the employee does not secure another employment.
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12.2.3 FEATURES OF PROGRAMMED WITHDRAWAL UNDER THE PENSION
REFORM ACT 2014
1. Administration: programmed withdrawal is a product that is offered by pension fund
administrators and regulated by the national pension commission.
2. Payment period: pays pension over an expected lifespan and for as long as the retirement
savings account has funds.
3. Payment to beneficiaries when the retiree dies: whenever the retiree dies, the beneficiary
under a will or letter of administration is paid en bloc the balance in the retirement savings
account.
4. Frequency of payment: pension payment can either be monthly or quarterly, based on the
retiree’s choice.
5. Account updates: retiree receives retirement savings account statements monthly or
quarterly.
6. Custody of funds: programmed withdrawal retirements assets are held by pension fund
custodian thereby providing enhanced security.
7. Change of withdrawal mode: a retiree on programmed withdrawal with a pension fund
administrator can choose to terminate the programmed withdrawal and convert to annuity
contract with an insurance company at any time.
8. Growth of funds: returns on investment belong to the retiree and credited to retirement
savings account provides opportunity for enhanced payments.
12.2.4 FEATURES OF ANNUITY PAYMENT UNDER THE PENSION REFORM ACT

2014
1. Administration: annuity is a product offered by life insurance companies regulated by the
national insurance commission.
2. Payment period: pays pension for life with a minimum guaranteed payment period of 10
ye3. 3. Payment to beneficiaries when the retiree dies: if the retiree dies within the
guaranteed payment period of 10 years, the surrender value of the remaining amount within
the period shall be paid as lump sum to the estate of the retiree or named beneficiary.
However, if the retiree dies after 10 years, the named beneficiary will not receive any
payment.
4. Frequency of payment: annuity payment can either be monthly or quarterly.
5. Account updates: no statement of account is given to the retiree.
6. Custody of funds: annuity retirees fund are to be held by the pension fund custodian.
7. Change of withdrawal mode: a retiree on annuity with an insurance company cannot
change to programmed withdrawal with the pension fund administrator.
8. Growth of funds: returns on investment belong to the pool of insurance funds and not the
retiree. Payment is fixed ab- initio.
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12.3 BENEFITS IN RESPECT OF MISSING OR DECEASED EMPLOYEE
Where an employee is missing and is not found within a period of one year from the date he was
declared missing and a board of inquiry set up for that purpose cannot provide any information, it
will be reasonable to presume such employee as dead and the benefit paid shall be:
i. His entitlement under the life insurance policy.
ii. Amount standing in the retirement savings account.
12.4 THE NATIONAL PENSION COMMISSON

There were three regulators in the pension industry prior to the enactment of the pension reform
act 2004; namely Securities and Exchange Commission(SEC),National Insurance
Commission(NAICOM),and the Joint Tax Board(JTB).while Securities and Exchange
Commission licenced Pension Fund Managers; National Insurance Commission was and is still
responsible for licencing and regulating insurance companies while the Joint Tax Board approved
and monitored all private pension schemes with enabling powers from schedule 3 of the personal
income tax decree 1993.
The Pension Reform Act 2004 re-enacted in 2014 is the most recent legislation of the government
of Nigeria at reforming the pension system in the country. It established a uniform pension system
for both the public and private sector and also established a single authority to regulate all pension
matters and this is the National Pension Commission (PENCOM) with the following objectives:
i. Enforce and administer the provisions of the act.
ii. Co-ordinate and enforce all other laws on pension and retirement benefits.
iii. Regulate, supervise and ensure the effective administration of pension matters and
retirement benefits in Nigeria.
While the functions of the commission is as follows:

i. Regulate and supervise the scheme established under the act and other pension schemes in
Nigeria.
ii. Issue guidelines, rules and regulations for the investment and administration of pension
funds.
iii. Approve, licence, regulate and supervise pension fund administrators, custodians and other
institutions relating to pension matters as the commission may from time to time determine.
iv. Establish standards, benchmarks, guidelines, procedures, rules and regulations for the
management of the pension funds under the act.
v. Ensure the maintenance of a national data bank on pension matters.
vi. Carry out public awareness, enlightenment and education on the establishment, operations
and management of the scheme.
vii. Promote capacity building and institutional strengthening of pension fund administrators
and pension fund custodians.
viii. Receive, investigate and mitigate complaints of impropriety made against any pension fund
administrator, custodian, employer, staff or agent.
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ix. Promote and offer technical assistance in the application of the contributory pension
scheme by the states and local government councils in accordance with the objectives of
the act.
x. Perform such other duties which, in the opinion of the commission, are necessary or
expedient for the discharge of its functions under the act.
12.5 FUNDING OF THE NATIONAL PENSION COMMISSION

The act provided that the commission shall establish and maintain a fund into which shall be paid
or credited the following:
i. Take off grants, annual subventions and budgetary allocations received from the government
of the federation.
ii. Monies as may be appropriated to the commission, from time to time, by the national
assembly.
iii. Monies as may, from time to time, be lent, deposited with or granted to the commission by
the government of the federation, states or local governments.
iv. Fees, fines, charges and commissions made by the commission.
v. Income from any investment made by the commission.
vi. Grants, gifts or donations from international organisations and donor agencies.
vii. All sums of money or income accruing to the commission by way of testamentary dispositions
and endowment.
viii. Other funds which may, from time to time, accrue to the commission.
The act also provided that the funds mentioned above shall be managed according to the extant
financial regulations that is applicable in the public service of the federation.
Other provisions of the act include the setting up of a pension transitional arrangement directorate
for the public service to include representatives of the following departments:
i. The civil service pension department.
ii. The police pension department.
iii. The customs, immigration and prison pension department.
iv. The treasury funded parastatals pension department.
v. The pensioner service department.
vi. The information technology department.
vii. The support services department.
viii. All other relevant departments as may be determined by the commission, from time to time.
The establishment of the pension transitional arrangement directorate shall extend to the federal
capital territory and this shall comprise of:
i. The federal capital territory pension department.
ii. The area councils pension department.
iii. The pensioner service department.
iv. The information technology department.
v. The support service department.
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vi. All other relevant departments as may be determined by the minister of the federal capital
territory from time to time.
12.6. FUNCTIONS OF THE PENSION TRANSITIONAL ARRANGEMENTS

DIRECTORATES
This directorate is charged with the responsibility of ensuring greater efficiency and accountability
in the administration of the defined benefits scheme.
i. Carry out the existing functions of the relevant pension boards or offices in the public service
of the federation and the federal capital territory.
ii. Make budgetary estimates for existing pensioners and officers that are exempted from the
scheme.i.e those who are entitled to retirement benefits under any pension scheme existing
before the 25th day of June 2004 being the commencement date of the Pension Reform Act,
2004, but as at that date had 3 or less years to retire.
iii. Prepare and submit the monthly pay roll of pensioners to the office of the accountant general
of the federation for direct payment from the budgetary allocation maintained with the
Central Bank of Nigeria.
iv. Issue payment instructions to the office of the accountant general of the federation.
v. Maintain a comprehensive database of pensioners under their respective jurisdiction.
vi. Ascertain deficits in pension payments, if any, to existing pensioners or the categories of
officers exempted as stated earlier in point b and carry out such other functions aimed at
ensuring the welfare of pensioners as the commission may from time to time direct.
vii. Render monthly returns to the commission on existing staff, pensioners, deceased pensioners,
details of next of kin of deceased pensioners and any other issue as may be required by the
commission, from time to time.
The act also provided for transition of pension for the private sector as follows:
Any pension scheme in the private sector existing before the commencement of the act may
continue to exist provided that:
i. The pension scheme shall be fully funded and any contribution standing in favour of the
employee shall be credited to a retirement savings account opened for the employee.
ii. The pension funds and assets shall be fully segregated from the funds and assets of the
company.
iii. The pension funds and assets shall be held by a custodian.
iv. The employer shall undertake to the commission that the pension fund shall be fully funded
at all times and any shortfall to be made up within 90 days or as may be prescribed by the
commission.
v. Any existing pension scheme shall be closed to new employees and such employees shall be
required to open a retirement savings account.
vi. Any employer operating any defined benefits scheme shall undertake, at the end of every
financial year, an actuarial valuation to determine the adequacy of his pension fund assets.
vii. The employee who has retired before the commencement of the act shall continue to receive
their pension in accordance with the provisions of the trust deed and rules of the scheme.
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12.7 PENSION FUND ADMINISTRATORS
The act provides that it is only the pension fund administrator that shall manage pension fund and
they must be licenced by the national pension commission.
Other functions of the pension fund administrator are:
i. Open retirement savings account for all employees with a personal identity number.
ii. Invest and manage pension funds and assets in accordance with the provisions of the act.
iii. Maintain books of account on all transactions relating to pension funds managed by it.
iv. Provide regular information on investment strategy, market returns and other performance
indicators to the commission and employees or beneficiaries of retirement savings
accounts.
v. Provide customer service support to employees including access to employees account
balances and statements on demand.
vi. Cause to be paid retirement benefits to holders of retirement savings account in accordance
with the provisions of the act.
vii. Be responsible for all calculations in relation to retirement benefits.
viii. Carry out other functions as may be directed, from time to time, by the national pension
commission.
12.7.1 PENSION FUND CUSTODIAN

They are to hold pension funds and assets and are to be licenced by the national pension
commission.
Other functions of the pension fund custodian are:
i. Receipt of the total contributions remitted by the employer on behalf of the pension fund
administrator.
ii. Notify the pension fund administrator within 24 hours of the receipt of contributions from
any employer.
iii. Hold pension funds and assets in safe custody on trust for the employee and beneficiaries
of the retirement savings account.
iv. On behalf of the pension fund administrator, settle transactions and undertake activities
relating to the administration of pension fund investments including the collection of
dividends, bonus, and rental income. Commission and related activities.
v. Report to the commission on matters relating to the assets being held by it on behalf of any
pension fund administrator at such intervals as may be determined, from time to time, by
the commission.
vi. Undertake statistical analysis on the investments and returns on investments with respect
to pension funds in its custody and provide data and information to the pension fund
administrator and the commission.
vii. Execute in favour of the pension fund administrator relevant proxy for the purpose of
voting in relation to the investments.
viii. Carry out other functions as may be prescribed by regulations and guidelines issued by the
commission, from time to time.
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SUMMARY
Every employee is concerned with what will happen to them when they are past their active work
life. Pension payment initially started as a social provision to cater for employees in the public
service. Developments over time have also made it imperative that private sector employees be
brought under this scheme. The pension reform act 2014 in Nigeria provided the regulatory
framework for the operation of pension.
REVIEW QUESTIONS
1. The Pension reform Act 2014 requires a holder of retirement savings account upon
retirement to utilize the amount credited to his account to procure a programmed fund
withdrawals or annuity for life. Explain five types of annuity products that are available in
the market?
2. The pension reform act 2014 was a bold attempt at tackling the problem of non -payment
of pension after retirement. As the head of human resources department addressing a group
of new employees, explain to them six distinguishing features between the defined benefit
scheme and the new pension scheme?
3. Explain five features of annuity payment under the pension reform act 2014
4. Explain five features of programmed withdrawal under the pension reform act 2014
5. Explain five functions of a pension fund administrator
REFERENCES
Ahmad, M.K. (2006).The Contributory Pension Scheme: Institutional and Legal Frameworks.
Central Bank of Nigeria Bullion vol 30 2.1-6.
Huntinford, K. (1998).One Stop Insurance.London.ICSA Publishing.
Mbatomon, R.A. (2006).Contributory Pension Scheme: The Case of Brazil. Central Bank of
Nigeria Bullion 30 (2) 43.
Uzoma.P. (1995), Pension Scheme in Nigeria, Lagos, Gentle Press Ltd.
Businessday(2016,May).Retirement Planning-Annuity and Pensions.AxaMansard, Monday 2nd
Pension Reform Act 2014
Dixit.S.P, Modi.C.S.and Joshi.R.V. (2008), Mathematical Basis of Life Assurance. India,
Insurance Institute of India.
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CHAPTER THIRTEEN:
SOCIAL INSURANCE
LEARNING OBJECTIVES
i To understand what social insurance is
ii. To understand social insurance schemes in Nigeria.
iii. To understand regulation of insurance with reference to social insurance schemes.
13.0 INTRODUCTION
Social security schemes are hinged on the premise that the members of a community shall be
protected by collective action against social risks causing undue hardship and privation to
individuals whose private resources will not be adequate to meet. These risks are essentially
contingencies against which the individuals of little earning cannot effectively provide for by their
own ability or by private combination with their colleagues or family members.
Social security provides protection through a series of public measures against economic and social
distress that are usually associated with the loss or substantial reduction of earnings resulting from
sickness, maternity, employment injury, unemployment, invalidity, old age and death.
Social security benefits are subject to test of need and usually funded out of general taxation and
could be awarded to every member of the community within a properly defined category.
While social insurance on the other hand applies to schemes which provide benefits to individuals
or their dependents in return for payments of contributions by those individuals, their employers
or both. In this case, the insurance principle is strictly adhered to; this means that qualification for
benefits depend on the payment of contributions and not subject to a test of need. Typical examples
of social insurance in Nigeria are the National Health Insurance Scheme; motor third party
liability; victims of collapsed structures; victims of medical professional negligence; victims of
plane crashes; work- related disabilities under employee’s compensation act.
13.1 NIGERIAN SOCIAL INSURANCE TRUST FUND

The Nigerian Social Insurance Trust Fund was established through decree number 73 of 1993 and
was meant to replace the National Provident Fund with effect from 1st July 1994.The decree
creating the fund provided that contributions would be made for the provision of social insurance
for workers in the private sector to cover against loss of employment income in old age, invalidity
or death. Though the rate of contribution by employers and employees was not specified in the
decree, but the regulations to the decree provided for contributions to be fixed at 6.5% for the
employer and 3.5% from the employee based on the employees basic salaries to be contributed
monthly. With the effective date for this contribution to be from the 1st of July, 1994.
Different sections of the NSITF decree provided for varying needs and requirements.
1. This Act shall apply in respect of every person who-
(a) Is employed by a company in,
(b) Is employed by a partnership irrespective of the number of persons employed by the
company or partnership; or
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(c) In any other case, where the number of persons employed is not less than five.
(2) All employers and employees to which this Act applies shall be registered with the Board
in such manner as may be prescribed by regulations made under this Act.
(3) The existence of a private pension scheme in respect of workers to whom this Act applies,
shall not exempt an employer or employees referred to in subsection (I) of this section from
the provisions of this Act.
13.1.1 CATEGORIES OF PERSONS EXEMPTED FROM THE NIGERIAN SOCIAL

INSURANCE TRUST FUND
The following persons are exempted from the provisions of this Act, that is-
i. A person employed in the public service of the Federation or a State or Local Government
who is entitled to the benefit of any scheme or pension on terms substantially similar to
those prescribed by the Pensions Act; or
ii. A person who is entitled to diplomatic or equivalent status under the Diplomatic Privileges
and Immunities Act; or
iii. A person not being a citizen of Nigeria who is employed in Nigeria for a period less than
six years at a time, if the employee is liable to contribute to or is prospectively entitled to
benefits from social security scheme of any country other than Nigeria or any benefit
scheme by virtue of his employment which would provide the employee with benefits
substantially not less favourable than the like benefits to which he would have been entitled
to under this act; or
iv. A minister of religion who is engaged in the propagation of his faith.
13.2 CONTRIBUTIONS
CATEGORIES OF CONTRIBUTIONS
Subject to the provisions of this Act, an employee referred to in section 10 of this Act shall be
required to make the following contributions to the Fund established by section I of this Act, that
is-
Contributions of the first category, being contributions payable by or on behalf of the employees
against the contingencies of retirement, pension, death, invalidity and emigration; or
Contributions of the second category, being contributions payable on behalf of the employee by
the employer against the contingency of employment injury.
Contribution to be paid monthly: amount thereof

Contributions of the various categories shall be paid on a monthly basis at the rate prescribed by
regulations made under section 40 of this Act which shall be computed by reference to the wages
of the employee concerned.
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The contributions payable in respect of each month shall fall due on the last day of the month
concerned.
13.3 CATEGORIES OF BENEFITS UNDER THE NIGERIAN SOCIAL INSURANCE

TRUST FUND
Subject to this act, the following benefits shall be payable to or in respect of a contributor who has
satisfied the applicable conditions prescribed by regulations made under this act, that is-
i. Retirement pension benefit.
ii. Retirement grant.
iii. Survivors benefit.
iv. Death grant.
v. Invalidity benefit.
vi. Invalidity grant.
vii. Such other benefit as may be approved from time to time by the Board.
OTHER BENEFIT METHODS UNDER THE NIGERIAN SOCIAL INSURANCE TRUST

FUND ACT
A further provision of this act is that a contributor or contributors can chose to have their benefits
converted to credits to meet specific need such as the purchase of a residential building for personal
or family use. Additionally, this method can also be used to purchase equity holdings in the
company where such employee is employed.
The approval of the board will be sought before an employee can be compensated using this
method.
The act further provides for the following with respect to the Nigerian social insurance trust fund:
i. The funds contributed to them by any person before the registration of a pension fund
administrator including any attributable income thereof not required for the purpose of
administering minimum pension as determined by the commission shall be computed and
credited into the respective retirement savings accounts opened under the act by each
contributor or beneficiary of contributions made under the Nigerian social insurance trust
fund act.
ii. Where a person who contributed any fund under the Nigerian social insurance trust fund
act has retired before the commencement of the act, the funds due to him shall be paid to
him in accordance with section 7 of the act. i.e. by programmed withdrawal, annuity and
other provisions under this section.
iii. Where a person who contributed any fund under the Nigerian social insurance trust fund
act has died before the commencement of the act, the estate or beneficiary of the deceased
shall be paid the entitlement of such deceased person subject to the provisions of the
Nigerian social insurance trust fund act.
iv. All pension funds and assets held and managed by the Nigerian social insurance trust fund
shall be transferred to a pension fund custodian or administrator.
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13.4 EMPLOYEE COMPENSATION ACT 2010
HISTORY OF EMPLOYEE COMPENSATION

The first formalized social security legislation in Nigeria began with the passage of the Workmen’s
Compensation Act of 1942 while still under colonial rule. It was meant for both public and private
sector employees and further amended in 1957 and 1987 (Workmen’s Compensation Decree). The
immediate past Workmen’s Compensation Act 2004 was deemed to:
i. Have insufficient and inequitable provisions for workmen who got injured in the course of
employment;
ii. Have been operated more in the breach as most employers did not set aside funds as
prescribed by law to take care of employees injured in the course of employment;
iii. Have failed as the alternative insurance machinery in the act was not activated by the
minister with such powers;
iv. Lack of acceptance among the workers due to the general negative impression of Insurance
by Nigerians.
v. In order to address these flaws, the Workmen’s Compensation 2004 was repealed and
replaced with the Employees Compensation Act 2010.
The Employee Compensation Act 2010 is basically the outcome of the agitations by organized
labour ( Trade Union Congress and Nigeria Labour Congress – TUC and NLC) against the
employers (Local, State and Federal Governments as well as Nigerian Employers Consultative
Association – NECA) for improved welfare of Nigerian workers. The Act reflects broadly the
interests of all the parties (Nigerian Social Insurance Trust Fund for government; Nigerian
Employers Consultative Association for employers and both the Trade Union Congress and
Nigerian Labour Congress for workers) that were involved in the negotiations leading to its
passage by the National Assembly.
The Nigerian Social Insurance Trust Fund was mandated to run the scheme and have in their board
representatives of the government (Federal), employer (Nigerian Employers Consultative
Association) and workers (Trade Union Congress and Nigerian Labour Congress) appointees.
The objectives of the act are to:
i. Provide for an open and fair system of guaranteed and adequate compensation for all
employees or their dependents for any death, injury, disease or disability arising out of or
in the course of employment.
ii. Provide rehabilitation to employees with work-related disabilities.
iii. Establish and maintain a solvent compensation fund managed in the interest of employees
and employers.
iv. Provide for fair and adequate assessments for employers.
v. Provide an appeal procedure that is simple, fair and accessible, with minimal delays.
vi. Combine efforts and resources of relevant stakeholders for the prevention of workplace
disabilities, including the enforcement of occupational safety and health standards.
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The Employee Compensation Act defines an “employee” as “a person employed by an employer
under oral or written contract of employment whether on a continuous, part-time, temporary,
apprenticeship or casual basis and includes a domestic servant who is not a member of the family
of the employer including any person employed in the Federal, State and Local Governments, and
any of the government agencies and in the formal and informal sectors of the economy.”
The Employee’s Compensation Act, 2010 is a social security/welfare scheme that provides
comprehensive compensation to employees who suffer from occupational diseases or sustain
injuries arising from accidents at workplace or in the course of employment. The basis or
justification for ‘compensation’ is the employer’s duty of care.
The idea of compensation suggests that someone has suffered a wrong for which he has to be
compensated monetarily. This implies that another person has a duty to prevent the occurrence of
the wrong suffered.
Payment of compensation by the employer to the employee is rooted in the accepted principle that
the employer has a duty of care, a duty to protect the health, welfare and safety of workers at work.
Where the worker sustains injuries, gets ill or dies in work-related circumstances, the employer is
liable to pay compensation to the worker or to his dependents, in the event of death.
The Employee Compensation Act (ECA). The ECA is an act that directs employers to contribute
1% of their total emolument cost to the NSITF (Nigerian Social Insurance Trust Fund).where Total
emoluments were defined as the summation of basic salary, transport and housing allowances
based on a clarification meeting with Nigerian Social Insurance Trust Fund by Nigerian Employers
Consultative Association on what constitutes total emoluments which the 1% will be applied to.
The amount is set aside as insurance to employees with compensation for injury in work place,
mental stress, occupational hazard, and even death.
The act allows the board to prescribe different contribution and assessment rates to be made by
each employer based on the categorization of the risk factors of the particular class or sub-class of
industry to which the employer belongs.
The act also defined injury to include “bodily injury or disease resulting from an accident or
exposure to critical agents and conditions in the workplace”. All employees suffering from mental
stress, occupational injuries and diseases, as well as the dependents of a deceased employee, whose
death is due to occupational injuries, are entitled to compensation under the act.
In addition, the act empowers the Board to provide health care and disability support to affected
employees. It is should be noted that “mental stress” was not included as part of” occupational
injury” under the repealed Workmen’s Compensation Act.
The Employee Compensation Act also provides for the compensation of an employee who suffers
mental stress not resulting from an injury for which the employee is otherwise entitled to
compensation, only if such mental stress is an acute reaction to a sudden and unexpected traumatic
event arising out of or in the course of the employee's employment, or where such mental stress is
diagnosed by an accredited medical practitioner to have arisen out of the nature of the work, or the
occurrence of any event in the course of the employee's employment.
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Other benefits provided by the employees compensation act include:
Compensation for injuries sustained where the nature of the business of the employer extends
beyond the usual workplace i.e. where the employee is required to work both in and out of the
workplace or where the employee has the permission of the employer to work outside the normal
work place.
An employee will also be entitled to payment of compensation with respect to any accident
sustained while on the way between the place of work and—
The employee’s principal or secondary residence;
The place where the employee usually takes meals; or
The place where he usually receives remuneration, provided that the
Employer has prior notification of such place.
Where an employee suffers from hearing impairment of non- traumatic origin, but arising out of
or in the course of employment under this act, the employee shall be entitled to compensation
under this Act.
13.5 SCALE OF COMPENSATION UNDER THE EMPLOYEE COMPENSATION ACT

(1). Where death results from the injury of an employee,
compensation shall be paid to the dependents of the deceased:
Where the deceased employee leaves dependents wholly dependent on his earnings a
widow or widower
(i) and two or more children, a monthly payment of a sum equal to 90 per cent of the total monthly
remuneration of the employee as at the date of death,
(ii) and one child, a monthly payment of a sum equal to 85 per cent of the total monthly
remuneration of the deceased employee as at the date of death,
(iii) without a child who, at the date of death of the employee, is 50 years of age or
above, or is an invalid spouse, a monthly payment of a sum equal to 60 per cent of
the total monthly remuneration of the deceased employee, and
(iv) who, on the date of the death of the employee is not an invalid spouse, is under the
age of 50 years and has no dependent children; a monthly payment of a sum that is
equal to the product of the percentage determined by subtracting 1 per cent from 60
per cent for each year for which the age of the dependent, at the date of death of the
employee, is under the age of 50 years, and provided that the total percentage shall
not be less than 30 per cent ;
(b) Where there is no surviving spouse eligible for monthly payments under this
section, and the
(i) Dependent is a child, a monthly payment of a sum equal to 40 percent of the total
monthly rate of compensation under this Act that would have been payable if the
deceased employee had, at the date of death, sustained a permanent total disability,
(ii) Dependents are 2 children, a monthly payment of a sum equal to 60 per cent of the
monthly rate or compensation under this Act that would have been payable if the
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deceased employee had, at the date of death, sustained a permanent total disability,
or
(iii) Dependents are 3 or more children, a monthly payment of a sum equal to 80 per
cent of the total monthly rate of compensation under this act that would have been
payable if the deceased had, at the date of death, sustained a permanent total
disability ;
(c) Monthly payments to eligible children under this Act shall be made to children up
to the age of 21 or until they complete undergraduate studies, whichever comes
first;
(d) Where the surviving child is disabled, the Board shall determine the period of the
monthly payment for such time as the board believes that the disabled child would
not have been dependent on the deceased employee ;
(e) Where the deceased employee does not leave a dependent spouse or child entitled
to compensation under this section, but leaves other dependents or next of kin who
were wholly dependent on him or her, the board shall determine a sum reasonable
and proportionate to the pecuniary loss suffered by such dependents or next of kin
by reason of death of the employee;
(f) Where
(i) No compensation is payable under subsection (1) (a)-(e) of this
section; or
(ii) The compensation is payable only to a spouse, a child or children or a parent or
parents; but the employee leaves a spouse, child or parent who, though not
dependent on the remuneration of the employee at the time of the death of the
employee, had a reasonable expectation of pecuniary benefit from the continuation
of the life of the employee, the
Board shall make monthly payment of an amount to be determined by the Board to
such spouse, child or children, parent or parents; and
(g) Where the employee leaves no dependent widow or widower, or the widow or
widower subsequently dies, and the Board considers it desirable to continue the
existing household, and when a suitable person acts as a foster parent or an
administrator of the estate of the deceased employee in keeping up the household
and taking care of and maintaining the children entitled to compensation, in a
manner satisfactory to the Board, the same allowance shall be payable to the foster
parent or administrator and on behalf of the children as would have been payable
to a widow or widower and children, and shall be continued as long as those
conditions continue.
(2) Where a disabled spouse ceases to be disabled, or a widow or widower with
dependent children no longer has dependent children or there is a reduction in the
number of dependent children, the spouse, widow, widower or children shall be
entitled to the same category of benefits as would have been payable if the death of
the employee had occurred on the date the disabled spouse ceases to be disabled or
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the widow or widower no longer has dependent children or the number of
dependent children is reduced, as the case may be.
(3) Where there is a widow or widower and a child or children, and the widow or
widower subsequently dies, the allowances to the children shall, if they are in other
respects eligible, continue and be calculated in the same manner as if the employee
had died leaving no dependent spouse.
(4) Where at the date of death a spouse is not disabled, but is suffering from a disability
that results in a substantial impairment of work ability and earning capacity, the
Board may, having regard to the degree of disability or the extent of impairment of
work ability or earning capacity, pay the spouse a proportion of the compensation
that would have been payable if the spouse had been disabled.
(5) For the purpose of this Act, where 2 employees in a workplace are married to each
other and both are contributing to the support of a common household, each is
deemed to be a dependant of the other.
(6) Where 2 parents contribute to the support of a common household in which their
children also reside, the children are deemed to be dependents of the parent whose
death is compensable under this Act.
(7) Where compensation is payable as the result of the death of an employee, or of
injury resulting in death, and where at the date of death the employee and dependent
spouse were living separate and apart and there was in force at the date of death a
court order or separation agreement providing periodic payments for support of the
dependent spouse or children living with that spouse, no compensation under sub-
section (1) of this section
shall be payable to the spouse or children living with the spouse, but monthly
payments shall be made in respect of that spouse and those children equal
to the periodic payments due under the order or agreement ; or
(b) no court order or separation agreement in force at the date of death providing
periodic payments for support of the dependent spouse, or children living with that
spouse, and the employee and dependent spouse were
(i) living separate and apart for a period of less than 3 months preceding the date
of death of the employee, compensation shall be payable in accordance with the
provisions of sub-section (1) of this section, or
(ii) separated with the intention of living separate and apart for a period of 3
months or longer preceding the death of the employee, monthly payments
shall be made up to the level of support which the Board believes the spouse
and those children would have been likely to receive from the employee if the
death had not occurred.
(8) The compensation payable under sub-section (7) of this section shall not exceed the
compensation that would have been payable under sub-section 1 of this section had
there been no separation.
(9) Where an employee has lived with and contributed to the support and maintenance
of a wife or husband and the employee and the wife or husband have no children,
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for a period of 3 years; or children, for a period of one year, immediately preceding
the death of the employee, and where the employee does not leave a dependent
widow or widower, the Board may pay the compensation to which a dependent
widow or widower would have been entitled under this Act to the wife or husband.
(10) Where an employee has lived with and contributed to the support and maintenance
of a wife or husband for the period set out in sub-section (9) of this section ; an
employee also left, surviving, a dependent widow or widower from whom, at the
date of death, the employee was living separate and apart ; and there is a difference
in the amount of compensation payable to the widow or widower by reason of the
separation and the amount of compensation that would have been payable to that
spouse if that spouse and the employee had not been living separate and apart, the
Board may pay compensation to the wife or husband up to the amount of the
difference.
(11) Where in any situation there is a need to apportion allowances payable to
dependents among those dependants, the formula for apportionment shall be
determined by the Board, unless the Board has grounds for a different
apportionment, the sharing formula shall be where there is a dependent spouse and
one child, two-thirds to the dependent spouse and one-third to the child ; is a
dependent spouse and more than one child, half to the dependent spouse and half
among the children in equal shares ; and are children but no dependent spouse,
among the children in equal shares.
(12) If a dependent is entitled to receive compensation as a result of
The death of an employee; and subsequent death of another employee, the total
compensation payable for the dependant as a result of those deaths shall be an
amount that the Board has reasonable grounds to believe is appropriate, provided
that the compensation payable to a dependant shall not be less than the highest of
the amounts that would otherwise be payable in respect of the death of any of the
employees; and more than 90 per cent of the average remuneration of an employee.
(13) Where a situation arises that is not expressly covered by this section, or where some
special additional facts are present that would, in the opinion of the Board, make
the strict application of this section inappropriate, the Board may make rules and
take decisions it considers fair in the circumstances.
This piece of legislation is credited with the following features:

• Comprehensive provisions for compensation to employees or their estates for death, injury,
illness or any disability arising out of or in the course of employment;
• A very open and fair system of guaranteed and adequate compensation for all employees
or their dependents for any death , injury, disease or disability of any kind arising out of or
in the course of employment;
• A solvent compensation fund which will be managed in the interest of the employees and
employers;
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• Provision for rehabilitation of employees affected by work -related disabilities including
mental illnesses;
• A fair , equitable and adequate assessment in terms of contribution to the fund by the
employers and compensation from the same fund due to injured employees;
• Establishment of an appeal procedure which is simple , fair and accessible to both
employers and employees;
• With the exception of members of the Armed Forces (not engaged in civilian capacity) it
is applicable to all employees in both the public and private sectors whether permanent,
temporary or casual including privately engaged domestic hands;
• There are statutory procedures by employers for reporting and making claims in respect of
work place incidents resulting in death, injury, disability and illness. Failure to comply is
an offence which attracts a penalty;
• Clearly stated procedures for paying compensation to any employee in respect of any
injury, disease or death arising in the course of employment. Failure to comply might lead
to forfeiture of benefits;
• Making the Nigerian Social Insurance Trust Fund (NSITF) regulator on all matters
pertaining to Employee Compensation due to accident resulting in to death, disability,
injury or disease while in the course of employment. And the National Industrial Court the
court where employees can launch their appeal if need be.
• Prohibition of any employee from waiving his compensation or any employer to make
mandatory contributions to the Nigerian Social Insurance Trust Fund. Any infringement
attracts criminal conviction and fine.
• Unfettered discretionary powers of the Nigerian Social Insurance Trust Fund Board in
respect of accepting and assessing compliance with procedures for making compensation
to injured employees or their estates;
• Unfettered discretionary powers of the Nigerian Social Insurance Trust Fund Board in
respect of accepting and assessing compliance by employers with procedures for reporting
and making claims;
• The enormous power of the Nigerian Social Insurance Trust Fund Board to increase the
assessment of any employer to any percentage from the statutorily imposed one per centum
(1%) of the total annual payroll after the initial two years commencement of the act;
• Creation of statutory liability for every employer to make its contribution of one per cent
of payroll to the Fund even where the Nigerian Social Insurance Trust Fund Board has not
raised any assessment;
• Regarding an insolvent individual employer as a debtor to the Nigerian Social Insurance

Trust Fund in respect of his contribution for a period of five years commencing from the
end of the calendar year when the outstanding contribution was levied. This lien of the
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Board ranks far and above any other liens, charges or mortgages however created on the
employer’s property;
• Where the insolvent employer is a corporate body, unpaid contributions to the Nigerian
Social Insurance Trust Fund is a lien on its property which includes the property of any
director, manager, secretary or other officer of the organisation used in connection with its
business.
• Granting of power to any injured employee or the dependants (in case of death) to opt for
litigation against the employer instead of compensation from the Fund. In this case
negligence need to be proved against the employer;
• Where the accident resulting in to death, injury, disability or disease in the course of
employment is caused by any other party apart from the employer, the employee is entitled
to compensation from both the Nigerian Social Insurance Trust Fund and the negligent
third party
13.6. RECEIVING COMPENSATION UNDER THE EMPLOYEES COMPENSATION

ACT
Every case of injury, disabling occupational disease or death shall be notified to the employer
within 14 days of the occurrence or receiving information of the occurrence stating:
i. The name of the employee,
ii.The time and place of occurrence, and
iii.In ordinary language, the nature and cause of the disease or injury, if known.
• In the case of disabling occupational disease, the employer to be informed of the death or
disability is the one who last employed the workman in the employment to the nature of
which the disease was due;(employee, on the request of the employer, and if fit to do so,
provide to the employer particulars of the injury or occupational disease on a form
prescribed by the Board and supplied to the employee or dependents of the employee;
• Failure to comply with sub-section (1) means forfeiture of benefits or compensation under
the Act, except the Board is satisfied that:
i) Information, although imperfect in some respects, is sufficient to
describe the disease or injury suffered;
ii) Employer or its representative has no knowledge of it; or
iii) Employer has not been prejudiced and the Board considers that the
interest of justice requires that the claim be allowed.
• Additionally employers are to report to the Board and the nearest office of the
National Council for Occupational Health in the state within 7 days of its
occurrence, every injury to an employee that is or is claimed to be one arising out
of and in the course of employment;
• As well as report to the Board within seven days of receiving information about
every disabling occupational disease or claim for or allegation of an occupational
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disease; and death of an employee arising out of and in the course of employment
to the Board and its local representative;
• The report on injury, occupational disabling disease and death must be in the form
and manner prescribed by the Board stating:
i. Name and address of employer;
ii. Time and place of the disease, injury or death;
iii. Nature of injury or alleged injury
iv. Name and address of any specialist or accredited medical practitioner who
attended to the employee; and
v. Any other particular required by the Board under this Act or any regulation
made under it. Report may be made by mailing the copies of the form
addressed to the Board at the address prescribed by it. And Failure to make
a report as required under this section, unless allowed by the Board on the
ground that the report for some sufficient reason could not have been made
constitutes an offence under this Act.
The Board may by regulation, define and prescribe category of minor injuries not to be reported
under this section.
The Board, prior to the settlement of any claim, shall verify if the injury or disease for which a
claim had been reported to the National Council for Occupational Safety and Health Office in the
state where the accident or disease occurred are as required by the Occupational Safety and Health
Act 2005.
The Board may also make rules of procedures for making claims for compensation under this Act,
and these are:
a. The application for compensation (different from reporting) shall be made on the form
prescribed by the Board and shall be signed by the employee or the deceased employee’s
dependent;
b. Application not filed or determined within one year after date of death, injury or disability
arising from an occupational accident or disease shall not attract any compensation;
c The Board, if satisfied about the existence of special circumstances concerning application
for compensation, may pay the compensation if the application is made within three years;
d Compensation made shall only be for the period commencing on the date the Board
received application for compensation
e The time limits of 1 and 3 years are not applicable to compensation for an occupational
disease under this act if the application is re-filed and sufficient or scientific evidence was
not available on those dates for the Board to recognize the disease as an occupational
disease and this evidence became available at a later date.
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13.7. POWERS TO RECOVER FROM ANOTHER PARTY THAT IS RESPONSIBLE
FOR THE DEATH OR INJURY OF THE EMPLOYEE
The Board is at liberty to subrogate to the rights of an employee against any party liable for injury
to a workman.
(i) Employer of an injured or deceased employee is at liberty to maintain an action
upon contract or indemnity agreement against another employer or independent
contractor in respect of personal injury or death of an employee.
(ii) Where the Board has the opinion that another employer or independent contractor
caused the injury or death of another employer’s worker, it may order that the
compensation be charged in whole or in part to the negligent employer or
independent contractor.
13.8 THE NATIONAL HEALTH INSURANCE SCHEME (NHIS)

General – This is a form of social security system with the aim of providing good and adequate
health services to Nigerians based on the payment of small contributions in advance to selected or
nominated health services providers on a regular basis. The scheme was established by the
National Health Insurance Scheme Act of 1999 which states the benefits; sets out the general rules;
and specifies the guidelines for its operations.
Participants – These are:
Government as the regulator through the NHIS determines the standard and guidelines aimed at
protecting the rights of the contributors as well as enforcing the obligations of all the stakeholders;
Employees in both the private and public sectors who must contribute 5% of their basic salary
monthly to the scheme;
Employers in both private and public sectors with at least 10 employees who must pay 10% of the
employees’ monthly basic salaries; while the employee will contribute 5% of their monthly basic
salary to enjoy health benefits.
Health Maintenance Organizations (HMO) which are limited liability companies formed by
private or public establishments or individuals solely for participating in the NHIS as regards
contributors in the Formal Sector Social Health Insurance Programmed.
Health Care Providers – These are licensed government or private health care practitioners or
facility (including in-house health facilities of employers) registered under the scheme for the
provision of prescribed health benefits to the contributors and their dependents.
Health care providers are categorized in to two as follows:

Primary Health Care Providers who will serve as the first contact in the system. These are mainly
private clinics/ hospitals, primary health care centres, nursing/maternity homes, outpatient
departments of the Armed Forces/Police/other uniformed services, University medical centres and
Federal Staff clinics.
Secondary/Tertiary Health Care Providers which are for referral cases. These include general
hospitals, pharmacies, laboratories, dental Clinics, physiotherapy clinics, and radiography clinics
etc.
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Other Contributors include the self-employed, retirees, any child over the age of 18 years and
extra-dependents of family already covered by the scheme.
Programmes- These are designed to cover various segments of the society and are mainly:
• Formal Sector Social Insurance Programme;
• Urban Self-Employed Social Health Insurance;
• Rural Community Social Health Insurance;
• Children under Five Social Health Insurance;
• Permanently Disabled Persons Social Health Insurance;
• Prison Inmates Social Health Insurance;
• Tertiary Institutions and Voluntary Participants Social Health Insurance;
• Armed Forces, Police and Uniformed Services Social Health Insurance;
• Diaspora Family and Friends;
• International Travel Health Insurance
13.8.1 BENEFITS
i. Outpatient care including consumables and prescribed drugs (as contained in the Essential
Drugs List)
ii. Antenatal Care;
iii. Maternity Care for up to four (4) live births for every insured person;
iv. Post- Natal Care;
v. Routine immunization as contained in the National Programme on Immunization;
vi. Family Planning;
vii. Consultations with a defined range of specialists i.e. surgeons, physicians etc;
viii. Care in a public or private hospital in a standard ward for a specified duration in respect of
physical or mental disorders;
ix. Eye examination and care but excluding prescription glasses/spectacles and contact lenses;
x. Dental care.
13.8.2 METHOD OF OPERATION

• Employer to register itself and the employees under the scheme;
• Employer to choose an National Health insurance Scheme -approved Health
Maintenance Organisation that will provide a list of National Health Insurance
Scheme approved Health Care Providers in order to make choices;
• Employees to be registered by National Health Insurance Scheme/Health
Maintenance Organisation and issued with personal identification number (PIN)
as a contributor within 30 days. However, only the contributor, the spouse and
four biological are covered. If the contributor is single, the relations cannot benefit
from the scheme;
• When sick the contributor presents the card to the chosen Primary Health Care
provider for treatment. All diseases are covered except AIDS;
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• Contributor may change primary health care provider after three months if not
satisfied with the quality of services being rendered. In this case the Health
Maintenance Organisation must be contacted;
• Health Maintenance Organisation will make payment for services to health care
provider for services rendered to a contributor. There is no limit to the medical
bills that National Health Insurance Scheme will pay as long as the treatment is
within the provisions of the benefit package. Payment to Primary Health Care
provider is by capitation i.e. a certain amount is paid monthly in advance whether
the services are utilized or not.
13.8.3 NHIS VOLUNTARY CONTRIBUTORS’ SCHEME

This is designed for:
• Employers with less than ten (10) employees;
• Interested individuals;
• Interested families;
• Actively self-employed persons;
• Retirees not currently covered by any of the NHIS prepaid programmes;
• Political office holders;
• Foreigners to Nigeria or persons with temporary residency status;
• Nigerians in diaspora
• Those not currently covered by any NHIS programmes but wish to enjoy the Formal
Sector benefit package.
The benefit package comprises:

• Outpatient care including necessary consumables;
• Prescribed drugs, pharmaceutical care and diagnostics tests as contained in the National
Essential Drugs List and Diagnostics Test List;
• Maternity care and delivery;
• Preventive care including immunization;
• Consultation with specialists ;
• Hospital care in a standard ward for a stay limited to cumulative 15 days per year;
• Eye examination and care excluding provision of spectacles and contact lenses;
• Provision of prostheses i.e. Nigerian produced artificial limbs;
• Preventive dental care and pain relief (including consultation, amalgam filling and simple
extraction.
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13.9. OTHER SOCIAL INSURANCE PROVISION IN NIGERIA
Includes:
Motor Third Party Liability
a. The Motor Vehicle (Third Party) Insurance Ordinance 1946 makes it
unlawful for any person to drive or permit another person to drive a vehicle
on the public road without any form of insurance cover on it. The minimum
requirement is that the insurance should cover the vehicle owner against
liability for death and bodily injury caused to third parties while using the
vehicle. This is a piece of legislation meant to enhance social welfare of
Nigerians by compelling insurance companies to provide financial succor to
victims of automobile accidents and their dependents. Even where there are
breaches of policy conditions by vehicle owners, insurance companies are
under legal obligation to compensate victims of road accidents and thereafter
seek reimbursement from their policyholders.
a) The Insurance Act 2003, makes it is compulsory for every motor vehicle to
have insurance cover for a minimum of N1m (One Million Naira) only against
any damage to property of any person apart from the vehicle owner and/or the
driver.
b) In order to take care of victims that are permanently disabled or killed by

uninsured or unidentified drivers, the Act has also compelled the setting up
of ‘‘The Security and Development’’ fund by the insurance industry. The
fund is to be managed by the National Insurance Commission. (NAICOM).
c) The benefits provided for by the motor third party insurance policy are for
disability an unlimited amount; this also goes for death.
d) Additional benefits such as claim for loss of use of damaged vehicle used for
business and the cost of towing and medical expenses are also provided for.
13.9.1 Victims of Collapsed Structures

The Insurance Act 2003 has also provided that compensation is paid to victims of
collapsed building whether completed or not. This is a form of social insurance for
victims of such circumstances.
It further made it compulsory for owners of buildings or structures under
construction (with more than two floors) to effect an insurance policy against
liability arising from the:
a. Death of any employee, workman or member of the public;
b. Damage to the property of any employee, workman or member of the
public, due to construction risks of every description at the size of the
project.
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This also applies for owners of completed and inhabited buildings, schools, churches, offices
etc to have in place an insurance policy against any liability due to:
a. Death or injury to any person who is not residing within the premises;
b. Damage, loss or destruction of property belonging to third parties or
members of the public resulting from the following perils to the building:
• Collapse
• Fire
• Earthquake
• Storm
• Flood
Benefits provided for by this policy include:
A. Non- pay roll site workers or members of the public
a. Death N2, 000,000
b. Permanent disability N2, 000,000
c. Other level of injury depending on level of disability a % of N2, 000,000
d. Medical expenses (local maximum) N2, 000,000
e.Medical expenses (foreign maximum) N5, 000,000
B. property damage
a. site worker,3rd party or surrounding properties N50,000,000
maximum in total legal cost and expenses
b. reimbursement for defence cost to the contractor
In case the matter goes to court N1, 000,000
Note: the building contractor pays the premium.
13.9.2 Victims of Medical Professional Negligence.

The National Health Insurance Scheme (NHIS) 1999 stipulates that medical professionals (medical
centres, instructors etc) running and managing Health Management Organisations (HMO) must
have Professional Indemnity cover against:
Negligence i.e. failure of practitioner to exercise the required standard of care for the protection of
the patient;
i. Errors i.e. healthcare intervention not carried out as they ought to have been;
ii. Mistakes i.e. errors in judgment or the misunderstanding of a diagnosis;
iii. Omissions i.e. oversight in the clinical management of a patient.
This is to further protect the public from damage that may be caused to them by the activities of
these medical professionals.
The amounts of benefit payable by this policy to an injured patient are:
a. Death N2, 000,000
b. Permanent disability N2, 000,000
c. Other level of injury depending on level of disability a % of N2, 000,000
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d. Medical expenses (local maximum) N2, 000,000
e. Medical expenses (foreign maximum) N5, 000,000
Note: the hospital pays the premium
13.9.3 Victims of Plane Crashes

It is compulsory to have in place an insurance policy for every type of non-military plane before
it can be permitted to be airborne. In respect of the death of passengers there is a strict liability (i.e.
negligence on the part of the airline owner or operator, airport owner, plane manufacturer, aircrew
etc need not to be proved) for a minimum of the equivalent of $100,000.00 (One Hundred
Thousand United States of America Dollars per seat in case of air crash. There is no financial limit
in case of permanent or partial disablement and medical expenses to passengers due to the air
crash.
All these direct compensations are without prejudice to the rights of the dependants of the deceased
or the injured passengers to approach the courts for additional compensation where negligence is
established against the airline, its crew members, the airport operator, the manufacturer or any
other third party.
13.9.4 Work- Related Disabilities

The Employees Compensation Act 2010 is very elaborate in its attempts to provide for the social
welfare and rehabilitation of employees who get disabled while in the course of employment. The
scales of benefits include:
i. The payment of compensation and rehabilitation of employees suffering mental
stress that is not due to visible, external and violent means;
ii. The payment of compensation in respect of hearing impairment;
iii. The provision of monthly compensation for a very long time to the dependants of
employees after his death in the course of employment;
iv. The provision of healthcare such as medical, surgical, hospital, nursing, crutches,
apparatus etc should be provided in case of disability.
SUMMARY
Social security schemes are put in place by countries to cater for citizens who cannot pay for the
cost of insurance because of their financial state. The cost associated with this scheme is paid for
by the country’s annual budget. However, in contrast, social insurance scheme is to be paid for by
the individual, their employer or other organisations. This chapter explained and establishes the
availability of these schemes.
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REVIEW QUESTIONS
1. As part of government efforts to encourage citizens to be part financiers for the costs that
are associated with their health care, the National Health Insurance Scheme (NHIS) Act
1999 was promulgated. Explain five categories of persons for whom the voluntary NHIS
contributors’ scheme is designed for.
2 (a) Explain the concept of Social Insurance Scheme

(b) Explain 5 types social insurance scheme legislation that have being undertaken to
improve the welfare of citizens in Nigeria
3. The tripartite agreement between employers (NECA), Labour (NLC and TUC) and the
government in Nigeria led to the enactment of the Employee Compensation Act 2010 to
further improve the welfare of employees. Explain five benefits that are provided by this
Act.
4. The following is the total remuneration of an employee as captured in the accounts

department:
Basic N10, 000,000
Housing N5, 000,000
Transport N2, 000,000
Ward robe allowances N1, 500,000
Medicals N1, 000,000
Conferences N3, 500,000
Utilities N500, 000
Bonus N2, 000,000
Entertainment allowance N2, 000,000
Calculate the amount that the employer will contribute under the employee compensation
act to Nigerian social insurance trust fund.
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REFERENCES
Adeyemi,B & Tade,O.(2013).A Review of the Employees Compensation Act 2011.Lagos.
DCSL.
Dugeri,M.(2013).The Employee’s Compensation Act 2010:Issues,Prospects and Challenges.
Employees Compensation Act 2010.
Nigerian Social Insurance Trust Fund Act 1993
National Health Insurance Act 1999.
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FOURTEEN:
NON- OCCUPATIONAL LIFE INSURANCE ARRANGEMENTS
LEARNING OBJECTIVES
i. To understand non-occupational insurance policies that employees can purchase to
supplement those purchased on their behalf by employers.
ii. To understand insurance policies that employee could purchase to cater for post-
retirement period.
14.0: INTRODUCTION
Non – occupational life insurance schemes may be effected by any
• Person while in employment in order to supplement the various statutory employment –
related schemes;
• Person in employment but not covered by various statutory employment-related schemes
• Self – employed person
• Student , apprentice artisan etc that is above the age of 18 years
• Any retired person
• Cooperative societies
• Alumni Associations
• Amateur sports clubs
• Trade unions or Associations
• Social or Friendship clubs
• Town age grade groups
• Community or Residents Associations
14.1 CLUBS, ASSOCIATIONS, SOCIETIES LIFE ASSURANCE COVER

Non-occupational insurance cover for clubs, associations, cooperative societies etc has the
following features:
• A master-policy having a list of all members as to full name and possibly occupation is
issued to the administrator of the group.
• The sum assured for each individual member is often a flat or uniform amount.
• Depending on the sum assured, a flat premium per member may be charged irrespective
of age, occupation etc.
• Again, depending on the sum assured per member no medical examination may be
required.
• Cover is for all members of the group until death.
• Premium is far lower than effecting the policies on individual basis.
• They are put in place by a group of persons with a common purpose or intention
• There is no statutory compulsion to effect an insurance policy
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14.2 POST-RETIREMENT ISSUES
In a culturally and religiously strong society like that of Nigeria, it is the wish of most
inhabitants to live to very old ages. However, inherent in living to old ages are a number of
issues which are mainly:
a. Longevity risk
b. Increasing, modern but expensive health care cost.
c. Disability due to age, accident or disease.
d. Failure of annuity and/or programmed withdrawal plans
e. Changes in the financial and economic environment due to government policies
Of all these issues, the most challenging ones are:
a) Longevity Risk. This is the possibility of a person outliving his retirement income and
accumulated assets or financial resources. Unfortunately, it is rarely recognized or
planned for by individuals. Also, defined contributory pension schemes are likely to
fall short of saving needs at the time of retirement. Finally, women are more exposed
to longevity risk than men though with health challenges. Longevity could be due to
modern and improved healthcare facilities which unfortunately could turn out to be
very expensive due to financial and economic policies of the government.
b) Disability Risks. This is the possibility of the retiree being unable to subsist
independently. This connotes inability or difficulty in performing routine daily living
activities (eating, bathing, dressing, walking, loss of memory etc) due to age, accident,
chronic disease etc. It must be noted that unlike the developed countries (USA, UK,
Canada, Germany etc), Nigeria (like most African countries) is yet to have the law and
practice of the employer providing health care and prescription drug costs for retirees.
14.3 HANDLING POST RETIREMENT ISSUES

In handling post-retirement issues, the two practical ways are:
i. Life Assurance
ii. Annuities
Life Assurance
Individuals effect Life Assurance covers for a number of reasons such as for:
1. Protection of mortgage if there is a loan on a house/building. Without insurance, the
dependents would have to shoulder the responsibility of repayment. However, with
insurance, the outstanding mortgage balance as at the time of death or even disability will
be paid by the insurer.
2. Helping the surviving spouse as on death two sources of income are reduced to one though
there are bills and other financial obligations to be settled. Lump sum or periodic payment
from a life assurance policy will go a long way in replacing the lost income.
3. Paying for funeral costs which are often high and of great importance at the time of death.
4. Paying for children education especially post primary where the tuition and other fees are
on the upward trend.
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5. As a backup in case of failure or inadequacies of the occupation-linked schemes and/or
social insurance schemes.
6. To handle post-retirement life.
Non –occupational Life Insurance covers are often effected either to supplement the benefits
of statutory employment-related schemes or as standalone.
The individual covers are;
a. Term Life Assurance- This is life assurance cover for a specific or specified period say,
12 months (as prescribed by the Pension Reform Act 2004). The policy expires at the
end of the period stated and no payment is made if the life assured survives the period.
Generally, it is the cheapest form of life assurance cover and premium rates increases
as the age gets higher on the premise that younger persons are less likely to die before
the older ones.
b. Whole Life Assurance- This is to cover the life assured until death. Basically, the
premium or rate remains the same for the entire existence of the policy as it has an
element of investment or saving. A feature of Whole Life Assurance is DOUBLE
ACCIDENT BENEFIT which stipulates that double or twice the death sum assured
becomes payable under the Life Assurance cover if death is due to accident rather than
illness. It is common on individual life assurance cover rather on occupation-linked
schemes.
c. Critical Illness Insurance. This is either an addition or alternative to the death sum
assured under a Life Assurance policy (Term, Whole Life and Endowment). It could
be made to pay regular installments of capital rather than a lump sum. It is activated
only when the life insured has been medically confirmed to be suffering from some
specified ailments or diseases (basically life-threatening or terminal) for at least a
specific period.
d. Personal Accident Insurance- This is on the format of the Group Personal Accident
policy but will be in the name of a specific or specified individual.
e. Permanent Health or Permanent Sickness or Income Protection or Non Cancellation
Sickness Insurance- all these means the same type of insurance cover where renewal
must be offered on the original terms for the agreed duration of the policy. It becomes
operational when the insured is unable to work due to illness or accident by paying
/providing a regular income (weekly or monthly) which the insured would have earned.
It is activated if the insured is not in the position to work and has paid premiums up to
a pre-arranged retirement age i.e. it is effected while the assured is still at work. On the
other hand a Group Personal Accident policy which is an annual contract limits
payment of benefit to a specified number of weeks and renewal may be refused by the
insurer or subject to more stringent conditions. There is little point in effecting a good
life cover to protect a family when an individual or breadwinner is unable to earn any
income or is unable to continue paying the life assurance premium. The incapacity of
the breadwinner usually leaves many families worse off than if they had died. The main
thrust of the income protection plan(IPP) and permanent Health Insurance(PHI) is to
130
make a weekly benefit to the insured for as long as the incapacity lasts or until he/she
recovers or dies- whichever occurs first. Payment becomes effective after a specified
period of incapacity (a month, six months or twelve months) as selected by the insured.
The payment ensures continuation of income and therefore maintenance of the standard
of living, albeit on a reduced basis. The benefit payable is restricted to a particular
percentage of the insured’s earning capacity including government benefits. This class
of insurance is particularly important for self-employed persons, partners, sole
proprietors and those not covered by Employees Compensation Act and Pension
Reform Act. The main objective of this policy is to reduce abject poverty so often
associated with disability.
f. Long Term care Insurance- A long-term care insurance policy (LTC) pays out only if
the insured is physically and/or mentally incapable of carrying out a number of normal
daily activities and may pay up till the insured dies- the policy is often effected by
retired/self-employed persons.
g. Health Insurance. In its basic form, a life assurance policy covers a person’s income.
health insurance or medical expenses insurance are of two types- managed care and fee
for service. Managed care is relatively inexpensive but the choice of doctors/medical
facility is restricted. On the other hand, fee for service gives the policy holder the option
to visit any doctor/medical facility. Health insurance helps to pay for medical expenses
in case of sickness and/or injury but not loss of income.
h. Mortgage Protection insurance. This is often demanded by banks and lending
institutions from borrowers in order to protect the amounts advanced to borrowers. It
is an insurance policy which pays the balance of the loan to the bank if the borrower or
the person listed on the mortgage passes away. Therefore as the mortgage is repaid,
the insurance coverage amount or sum assured decreases.
i. Endowment assurance has elements of savings (part of the premium is invested) and
life protection as guaranteed death benefit is provided. On the maturity of the policy,
only the accumulated amount based on the savings element is paid to the insured.
Where the life assured dies before the maturity of the policy, only the guaranteed death
benefit becomes payable.
One outstanding feature of endowment policy is surrender value. This is the amount of
money which a life insurance company will pay in respect of a life assurance policy with
investment and/or savings element if the cover is voluntarily terminated before its expiry
date. It is based on the investment component of the policy which builds up gradually or
slowly and as such the policy becomes eligible for surrender value only after at least two
years from inception. The surrender value will always be less than the sum assured or death
benefit on the policy as insurers are entitled to make deductions for administrative charges.
This a common feature of individual life covers rather than occupation and/or association
life assurance schemes.
j. Long Term Care Insurance policy which covers:
i. Provision of skilled nursing care
ii. Provision of custodial care at the patient’s home
131
iii. Assistance with household chores
Annuities
Life Annuities are insurance contracts usually taken with or separately from life assurance policies.
Annuities are denominated in terms of annual amount though in practice payable monthly,
quarterly, and half-yearly. It can be payable in advance or arrears.
Purchasing an annuity guarantees a steady stream of income or payment until the death of the
annuitant notwithstanding the future financial market or economic conditions. Conversely, the
insurance company assumes all the investment risks in the financial and economic climate as well
as the longevity risk of the annuitant. Strictly, an annuity is not a life assurance policy as no lump
sum is payable on the death of the annuitant. Rather, it is a contract to pay a pre-arranged sum to
the annuitant while alive.
SUMMARY
This chapter explained non-life policies that could be bought by clubs, associations or retirees to
augment any insurance that their employer may have bought to protect them.
REVIEW QUESTIONS
1. One benefit embarking on staff welfare schemes is that the amount expended is treated as
tax deductible expenses to the employer. Explain five types of compensation and insurance
schemes which will be treated as tax deductible to an employer in Nigeria.
2. As part of government efforts to encourage citizens to be part financiers for the costs that
are associated with their health care, the National Health Insurance Scheme (NHIS) Act
1999 was promulgated. Explain five categories of persons for whom the voluntary NHIS
contributors’ scheme is designed for.
3. (a) Explain the concept of Social Insurance Scheme

(b) Explain 5 types social insurance scheme legislation that have being undertakes to
4. (a) Explain the concept of Social Insurance Scheme

(b) Explain 5 types social insurance scheme legislation that have being undertaken to
REFERENCES
Couchman,A.(2004).Health Insurance Products.London.CII Tuition Service
Businessday (2016, May).Critical Illness insurance.AxaMansard, Monday 18th.
Businessday (2016, July).Personal Accident Insurance.AxaMansard, Monday 4th.
132
PRACTICE QUESTIONS
Question 1
You are Human Resources manager of a medium-sized company with total wage rolls of N260m,
N300m, N343M, N365m and N380m respectively over a period of five years spanning 2008 to
2012. One of your female staff was killed by electrocution while working on the company's
machinery. She left behind a widower as well as four children and details of her remuneration as
at time of death were:
i.Basic salary per month - N12,500.00
ii.Housing allowance per month - N12,500.00
iii.Transport allowance per month - N6,250.00
iv.Outfit allowance per month -N1,250.00
v.Leave allowance per month -N1,250.00
vi.Medical allowance per month - N1,250.00
You are required to work out:

a) The contribution per year made to the Nigerian Social Insurance Trust Fund by the company
b) The total contribution over the five-year period made by the company to the NSITF
c) Compensation due to the widower and four children from the Nigerian Social Insurance
Trust Fund per month
Answer 1
a) 2008 ---- N260,000.00× 1% = 2,600,000.00
2009 ---- N300, 000.00×1% = 3,000,000.00
2010 --- N343, 000.00×1% = 3,430,000.00
2011 --- N365, 000.00 ×1% = 3,650,000.00
2012 --- N380, 000.00 ×1% = 3,800,000.00
b) Total for 2008/2012 16,480,000.00
c) Basic salary/month 12,500.00

Housing allowance/month 12,500.00
Transport allowance/month 6,250.00
Outfit allowance/month 1,250.00
Leave allowance/month 1,250.00
Medical allowance/month 1,250.00
35,000.00
Multiply by 90% = N31, 500.00
Monthly payment due to the widower and children below the age of 18 years.
133
Question 2
Your company has a reputation for good corporate governance and has put in place:
a) A gratuity scheme based on the total or gross pay for every completed 12 months using the
remuneration details as at the time of death or disengagement.
b) An occupational Group life cover and a pension scheme as required by Pension Reform Act
2004 with employer contributing 10% of the total monthly employment and the employees
5%.
One of your employees who joined the organization on January1 2009 died in an air crash on
July 1 2014 while on official duty. As at the time of his death, the details of remuneration
maintained through the period of employment was as below:
a) Basic salary per month -N75,000.00
b) Housing allowance per month -N75,000.00
c) Transport allowance per month - N75,000.00
d) Children education allowance per month - N7,500.00
e) Medical allowance per month - N7,500.00
Calculate what is due to the dependants on his death from the company.
Answer 2
OGL Gratis RSA

Basic salary/month 75,000 75,000 75,000
Housing allowance/month 75,000 75,000 75,000
Transport allowance/month 75,000 75,000 75,000
Medical allowance/month 0 7,500 7,500
Children Education allowance/month 0 7,500 7,500
Lump sum payment 0 0 0
Sub-Total 225,000 240,000 240,000
Multiply by 36mths 5 mths 66mths
Sub-Total 8,100,000 1,200,000 15,840,000
Multiply by - - - 15%
Total 8,100,000 1,200,000 2,376,000
Grand Total due to dependants - N8, 100,000.00 + N1, 200,000.00 + 2,376,000.00
= N11, 676,000.00
QUESTION 3
You are the Human Resources Director of a conglomerate with a workforce of 1,000. In
compliance with the extant legislation on employee safety, health and retirement, you have
registered the employees through RSA with ABC Pension Fund Administrators. One of the
employees has approached you and requested for an indication of the amount that would have
134
accumulated in the RSA for a period of twenty years commencing from July 1 2004 using the
following details as at July 30 2004:
(a) Basic Annual Salary N2.5m

(b) Annual Housing Allowance 75% of basic salary
(c) Annual Transport Allowance 50% of basic salary
(d) Entertainment Allowance 10% of basic salary
(e) Children Education Allowance 5% of basic salary
(f) Medical Expenses Allowance 20% of Basic salary
(g) Utility Allowance 10% of Basic salary
(h) Employer’s contribution As stated in Pension Reform Act 2004 and
Pensions Act 2014 based on minimum
total emolument
(i) Employee’s Contribution As stipulated in Pension Reform Act 2004
and Pension Act 2014 based on
Minimum total emolument.
(j) Salary Increment 15% every 120 months of
completed service.
Answer 3
Item N
Basic Salary 2,500,000.00
Housing Allowance 1,875, 000.00
Transport Allowance 1,250, 000.00
Total 5,625,000.00
First 10 Years
Employer’s Contribution- 7.5% 421,875.00
Employee’s Contribution- 7.5% 421,875.00
843,750.00× 10 =
8,437,500.00
Next 10 Years
Underlying Total Emolument 5,625,000.00
Increment in pay (15%) 843,750.00
New Total Emolument 6,468,750.00
Employer’s Contribution - 10% 646,875.00
Employee’s Contribution - 8% 517,500.00
1,164,375.00 × 10 =
11,643,750.00
Total 20,081,250.00
135
Question 4
You are in charge of Human Resources management of a manufacturing company which has
migrated to the Nigerian Social Insurance Trust Fund and put in place an occupational Group
Life policy as required by law. During the lunch break time as recognized by the company, some
of your staff members drove themselves in a car to eat in a restaurant not owned, rented, hired or
controlled by the company. Unfortunately, one of them died while coming back to the office. As
at time of this incident, the following formed part of his remuneration:
N
(a) Basic salary per month 100,000.00
(b) Housing Allowance per month 150,000.00
(c) Transport Allowance per month 75,000.00
(d) Dressing Allowance per month 25,000.00
(e) End of the year productivity bonus 150,000.00
(f) Medical Expenses Allowance per month 10,000.00
Advice your management of what his due to the dependants (a widow and three children) of the
deceased if:
i. Due to his hearing impairment which was a result of the working condition in the factory
already made known to the management, he was crushed by a vehicle while trying to
cross the road.
ii. He suddenly collapsed in the car as a result of his well-known hypertensive condition.
Answer 4
i.
Item OGL (N) NSITF (N)
Salary per month 100,000.00 100,000.00
Housing Allowance/month 150,000.00 150,000.00
Transport Allowance/month 75,000.00 75,000.00
325, 000.00 325, 000.00
× 36 months 11,700,000.00 Nil
x 90% Nil 292,500. 00
Total entitlement by dependants is a lump sum of N11, 700,000.00 plus a monthly pay of N292,
500. 00.
ii. The dependants are entitled to only the lump sum payment of N11, 700,000.00 as
hypertension is not one of the work-related diseases specified under Employee
Compensation Act 2010.
136
Question 5
ABC University, Lagos has both the Employee Compensation and Occupational Group Life
Schemes as required by law. In addition, out of generosity, the governing council approved that a
Group Personal Accident Insurance policy be effected for senior staff as below at a cost of N5m:
Death Benefit ------ 4 × Annual Basic Salary

Permanent Disablement -------6 × Annual Basic Salary
Temporary Total Disablement… -Weekly salary for up to 52 weeks
Medical Expenses ------------ N500, 000.00/capita
Funeral/Burial Expenses --------- N500, 000.00/capita
Fifteen members of staff were traveling to another part of the country for a conference in a bus
owned by the institution which somersaulted and regrettably resulted in:
i. Instant death of 3 members
ii. Death of 4 members after 12 weeks in the hospital
iii. Amputation of two legs each for 3 members after 26 weeks in the hospital.
iv. Incurring total medical expenses of N400,000.00 for all the other members who sustained
very minor injuries which did not require hospitalization and those that died instantly
v. Incurring medical expenses of N400,000.00 each for 4 members who died after 12 weeks
and N700,000.00 each for 3 members who lost their limbs that made them become
permanently deformed
vi. Burial/Funeral expenses of N750,000.00 each for the first 3 dead members and
N450,000.00 each for 4 other dead members
Calculate what is due to the institution from the insurer under the Group Personal Accident
policy if each of the concerned staff members is on an annual basic salary of N1,200,000.00.
Answer 5
The total recoverable by the institution is calculated as below
1. Death Benefit ----7 × 4 × N1,200,000.00=N33,600,000.00
2. Permanent Disability -3 × 6 × N1,200,000.00=N21,600.00.00
3. Temporary Total Disability --------
i. N1.2m
× 12 × 4 = N 1,107,692. 00
52
ii. N1.2m
× 26 × 3 = N 1,800,000. 00
52
137
4. Medical Expenses
i. 4 × N400, 000. 00 = N 1,600,000. 00
ii. 3 × N500, 000. 00 = N 1,500,000. 00
iii. 1 × N400, 000. 00 = N 400, 000. 00
5. Funeral/Burial Expenses
i. 3 × N500, 000. 00 = N 1,500,000. 00
ii. 4 × N450, 000. 00 = N 1,800,000. 00
Total N 64,907,693.
00
Question 6
You are in charge of the human resources function of a university. One of your professors was
severely injured in a lone automobile accident on a Tuesday on his way to meet the students. He
became medically certified wheel-chair bound after nine months in the hospital. Out of
sympathy, university governing council deployed him to the Vice-Chancellor’s office. Three
months after the redeployment, he died in an air crash during a weekend while seeking further
medical treatment in another part of the country.
Calculate what is due to him and his dependants under the Employees’ Compensation Act 2010,
Pension Act 2014 (Occupational Group Life based on basic salary+ housing allowance+
transport allowance) and Nigerian Civil Aviation Act 2006 using the following monthly
remuneration details:
a) Basic Salary ------------------------- N140,000.00
b) Housing Allowance-------------------- N140,000.00
c) Transport Allowance------------------ N70,000.00
d) Children Education Allowance------ N21,000.00
e) Students Supervision Allowance---- N21,000.00
f) Medical Expenses Allowance-------- N10,500.00
g) Furniture Allowance------------------- N10,500.00
Answer 6
ECA (NSITF) - N PA (OGL) - N
Basic Salary 140,000.00 140,000.00
Housing Allowance 140,000.00 140,000.00
Transport Allowance 70,000.00 70,000.00
Children Education Allowance 21,000.0 Nil
Students Supervision Allowance 21,000.00 Nil
Medical Expenses Allowance 10,500.00 Nil
Furniture Allowance 10,500.00 Nil
138
Total Emolument 413,000.00 350,000.00
Multiply by 90% 36
Compensation due 371,700.00 12,600,000.00
The Professor is entitled to N371, 700.00 for the three months after discharge from the hospital
and time of death from Nigerian Social Insurance Trust Fund. The dependants are entitled to
lump sum payments of N12, 600,000.00 under Occupational Group Life cover and
US$100,000.00 or its equivalent from the airline.
Question 7
XYZ Nigeria Plc, a well known bank in Nigeria has complied with the requirements of the
Employees Compensation Act 2010 and Pension Act 2014 in terms of staff welfare. Its financial
year runs from January 1 to December 31 and senior management staff are entitled to
membership of not more than six social, recreational and sports clubs or associations with
subscriptions borne by the bank and paid yearly in advance. In July, it carried out a restructuring
exercise and one of the top management staff affected regrettably passed away in a motor
accident two weeks thereafter. Advise her dependants as to compensation from the bank and
social, recreational and sports clubs and association to which she belonged using the following
details as at the time of disengagement from paid employment:
a) Basic Salary per month-------------------- N400,000.00
b) Housing Allowance ------------------------- N400,000.00
c) Transport Allowance------------------------ N300,000.00
d) Children Education Allowance------------ N20,000.00
e) Medical Expenses Allowance-------------- N30,000.00
f) Gratuity paid------------------------------- N17,500,000.00
g) Membership of Ikoyi Club- Group Life Assurance cover of N2m and Group Personal
Death benefit of N4m
h) Membership of Lagos Country Club- Group Life Assurance cover of N2m
i) Membership of Ikeja Golf Club- Group Personal Accident Death benefit of N5m
j) Membership of Town Union in Lagos-Group Life Assurance cover of N3m and Group
Personal Accident death benefit of N4m
k) Membership of University Alumni Association (paid for by the deceased)- Group
Personal Accident death benefit of N500,000.00
l) Registration due of Community Development Association (paid for by the deceased)-
Group Life Assurance cover of N400,000.00.
139
Answer 7
Non- Group
Occupational Occupational Personal
Accident
Group Life Life Assurance Insurance
NSITF
cover (N) (N) covers (N) covers (N)
Basic salary per month Nil Nil Nil Nil
Housing Allowance per month Nil Nil Nil Nil
Transport Allowance per month Nil Nil Nil Nil
Children Education
Allowance/month Nil Nil Nil Nil
Medical Expenses
Allowance/month Nil Nil Nil Nil
Ikoyi Club membership Nil Nil 2,000,000.00 4,000,000.00
Lagos Country Club membership Nil Nil 2,000,000.00 Nil
Ikeja Golf Club membership Nil Nil Nil 5,000,000.00
Town Union membership Nil Nil 3,000,000.00 4,000,000.00
University Alumni membership Nil Nil Nil 500,000.00
Community Development
membership Nil Nil 400,000.00 Nil
Total 7,400,000.00 13,500,000.00
Grand Total due to dependants – N7, 400,000.00 + N13, 500,000.00= N20, 900,000.00.
The unfortunate incident occurred after the disengagement of the deceased from paid employment
and therefore the dependants are not entitled to any compensation under Nigerian Social Insurance
Trust Fund and Occupational Group Life schemes of the Bank.
140
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Atkins,D.& Ian.B.(2008). Insurance.London.Global Professional Publishing.
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Charting a Clear Course.U.S.A.Society of Actuaries.
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Avoiding Surprises and Losses.London.John Wiley & Sons.
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Business day (2016, July 4).Personal Accident Insurance.AxaMansard.
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142

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STUDY PACK

INSURANCE AND PENSIONS MANAGEMENT

CIPM House, 1 CIPM Avenue, Off Obafemi Awolowo Way,

12.7 PENSION FUND ADMINISTRATORS 106

13.6. RECEIVING COMPENSATION UNDER THE EMPLOYEE

1.1 WHAT IS RISK

Risk as uncertainty of outcome, within a range of exposure, arising from a combination of

Risk is the chance of loss (Holyoake & Bill, 1999)

Risk is uncertainty or lack of predictability of outcome in given situation (Dickson, 1984)

Risk as effect of uncertainty on objectives (ISO Guide 73)

Risk is potential variation in outcomes (Williams, Michael & Peter, 1995)

1.2 CLASSSIFICATION OF RISK

1.2.1 WHAT ARE THE RISKS THAT AN ORGANISATION CAN FACE?

1.3 SOURCES OF RISKS

Social environment: Social unrest, insurgency, militancy, terrorism and religious

Political environment: Tax policies which could be discriminatory or punitive, and

Legal environment: Sanctions imposed by courts

Operating environment: The processes and procedures of an organisation generating

Economic environment: Inflation, recession, depression etc that hampers the

1.4 RISK RELATED TERMS

Atkins, D. & Ian.B. (2008).Insurance.London.Global Professional Publishing.

2.1 WHAT IS RISK MANAGEMENT?

2.1.1 RISK MANAGEMENT PROCESS

Risk Assessment: If risk is to be properly managed it needs to be subjected to risk

i.Physical Inspection: This is by visiting the organisation’s premises, to ascertain the

iii. Flow chart: This is a pictorial representation of production stages or distribution in a

vii. Hazard and Operability studies (HAZOP): This is an extremely detailed

The Organization’s Strategic

Residual risk reporting

The risk management process

2.2 RISK MANAGEMENT FOR HEALTH AND SAFETY OF EMPLOYEES.

Ensure that materials are moved, stored and used safely.

Provide adequate welfare facilities.

3.1 ORIGIN AND DEVELOPMENT OF INSURANCE

3.2 THE EVOLUTION OF INSURANCE BUSINESS IN NIGERIA

4. Before the advent of conventional insurance communities in Nigeria have provided

4.1 CONCEPT OF INSURANCE

4.2 BENEFITS OF INSURANCE

3. Provision of investment capital: the large pool of fund collected by insurance

4.3 WHAT RISKS ARE INSURABLE?

For insurance purposes, the features of insurable risk are:

d. Financial Measurement: The object (subject matter of insurance) must be capable of

f. Homogenous Exposure: There must be a sufficient number of exposures to similar risks

4.4 UNINSURABLE RISKS

5.1 TYPES OF INSURANCE COMPANIES

d. Captive Insurance Companies: These are set up as subsidiaries by parent companies to

Captive insurance companies can take a number of different forms as follows:

ii. Group Captive

iv. Risk Retention Groups

vii. Sponsored Captives, Segregated Cells and Protected cells

viii. Agency Captive

ix. Branch Captive

REASONS FOR SETTING UP A CAPTIVE INSURANCE COMPANY

2. Distinguish clearly a proprietary insurance company from a mutual insurance company?

5. What differences exist between an association captive and a pure captive?

All of these are discussed in the section below

1. What are the elements of on insurance contract?

5. Explain Consensus ad idem within the context of an insurance contract

7.0 PRINCIPLES OF INSURANCE

a. At common law, insurable interest has been recognized to arise from

iii. Bailees on the property in their possession or in their custody.

c. Finally, insurable interest can arise from contract agreements.

Property insurance policies