Managing a

Business & a
Household:
Insurance
Unit 4
Risk Management
Def: A planned approach used by
businesses and households to deal with
risks that can affect them. It involves
identifying possible risks (fire, theft etc)
and calculating the cost of protecting
themselves against these risks
Ways to Minimise Risk
Install security • Security risks can be reduced by installing alarms,
systems CCTV cameras and motion-sensor lights

• Everyone should be aware of health and safety

Training procedures, e.g. what to do in the event of a fire

Appoint a health and • Appointed in the workplace to report safety issues

safety officer and conduct regular safety inspections
• Ensure that employees are aware of health and
Health and safety safety rules, e.g. wearing a hard hat on a
construction site
• Take out insurance cover to transfer the risk to an
Insurance insurance firm in return for paying a premium
Insurance Starbucks spend
more on staff
health insurance
Def: Financial protection against a possible loss than they do on
coffee beans

After doing a risk assessment, businesses and individuals can take out
cover to protect against these possible losses. In return for a fee
(premium) from the insurance company they receive protection in the
form of compensation for any loss suffered
Insurance Terms (The Forms)
• Proposal form: the form you fill in when
applying for insurance. Has to be filled out
truthfully by the person looking for insurance

• Claim form: the form you fill in when making a

claim e.g. after fire damages a building,
including all necessary details
Insurance Terms (The Documents)
• Insurance policy: the written document you receive after buying
insurance. It’s a written, legally binding document, setting out the
terms of insurance i.e. what risks are covered

• Renewal notice: a reminder sent to the insured reminding them that

their policy is up for renewal and quote of the cost

• Cover note: a document proving insurance is in place until the full

documents arrive to the insured
Insurance Terms (Other Terms)
• The insured: the individual/household/business taking out the policy

• The insurer: the firm that the insurance policy is taken out with e.g
Axa, Alliance, Chill, GloHealth etc.

• Insurance premium: the fee paid for insurance incl. the basic fee plus
any loadings or discounts that apply. Calculated by an actuary.
Depends on the level of risk
Insurance Terms (Other Terms)
• Policy excess: the cost not covered by insurance. The amount of each
claim which the insured party must pay e.g. €200 excess on a €1,000
claim. Insured pays €200, insurer pays €800

• Loading: an extra charge on top of the premium charged due to extra

risk involved e.g. provisional driver, house beside a river etc.

• No claims bonus: a reduction in the premium charged if no claim was

made since the last renewal
Insurance Terms (Other Terms)
• Compensation: the amount paid out by the insurer if a
successful claim is made. Less compensation will be paid if the
value of the item has depreciated or if the party was
partially/fully responsible

• Days of grace: a short period of time given to the insured to pay

their premium (doesn’t apply to car insurance)

• Exclusions: specific items or risks that are not insured, e.g. by

not covering snow sports, travel insurance companies can lower
the average of their premiums. You will have to pay more to add
snow sports to your cover as it is high risk
Insurance Terms (The People Involved)
• Actuary: the person responsible for calculating insurance premiums.
They must consider the risk involved and the cost for the insurance
company if the insured makes a claim. They may decide the risk is too
high to insure someone

• Assessor: a person that assesses damage and calculates the amount

of compensation to be paid to the insured

• Broker: a person that sells insurance policies on behalf of several

insurance companies in return for commission. They shop around
impartially for households/businesses in return for a fee
Insurance Terms (The People Involved)
• Tied agent / Insurance agent: a broker that only sells policies on
behalf of one insurance company

• Loss adjuster: when a loss occurs the amount of compensation is

decided by the insurance firm’s assessor. If the insured isn’t happy
with this amount an independent loss adjuster will be appointed to
assess the situation and may change the amount of compensation
awarded

• Proximate cause: the actual cause of the damage/loss. If the cause

isn’t covered by the premium no compensation will be paid
 Match the correct term to the example

Insurance company
When your premium
not including cover
has an extra cost
for a more high risk
because there is a
items to lower their
The insured will get higher risk involved
costs
less _______ if their
car is stolen but they
were partially
responsible as they
didn’t lock it
 Match the correct term to the example

Insurance company
When your premium
not including cover
Compensation has an extra cost
for a more high risk
because there is a
items to lower their
The insured will get higher risk involved
costs
less _______ if their
car is stolen but they
Exclusions were partially Loading
responsible as they
didn’t lock it
Fun Facts
Gene Simmons
insured his
tongue for $1m

Japanese golfers can Jackie Chan covers

cover their ‘hole in his stuntmen’s
one costs’. They’re medical bills as
expected to buy insurance
gifts and drinks for companies wont
their friends if they cover them
get one! Alien abduction
insurance has
been available
in the US since
1987
 The 5
Principles of
Insurance
Principle 1: Insurable
Interest
This means that the insured person
must own the item to be insured. They
must benefit from its existence and
suffer financially from its loss.

I cannot insure the Spire.

I can insure my car, but I cannot insure

my neighbor’s car
Principle 2: Utmost Good Faith
This means that when you are completing the proposal and claim
forms, you must be completely truthful. All material facts must also be
included

What are material facts?

Information that may not be asked for by the insurance company but is
relevant to your premium e.g. I live beside a river that floods and I
don’t mention it when insuring my house. If my house floods as a result
it’s unlikely I’ll get compensation
Principle 3: Indemnity
This means that you cannot make a profit from insurance.
You cannot be better off after a loss has occurred than you
were before the loss happened.

• Insurer only pays out to the value of the loss suffered

• It’s the insured responsibility to ensure adequate cover
• If you underinsure to make a cost saving on your
premium, the average clause rule applies
Average Clause
Used by insurance companies to calculate compensation when an item
is insured for less than it’s actual value. If the item is fully destroyed,
the insurance company will pay to the value of which it was insured.

e.g. I insure my house for €300,000. It burns to the ground. To rebuild

the house it costs €270,000. I do not get the extra €30,000 as I cannot
profit from insurance
Average Clause
But what if there is only a partial loss to the value of an insured item?

I insure my house for a value of €300,000 to cut down on my premium

costs, but it’s actually worth €400,000. A fire destroys some of it, doing
€100,000 worth of damage.

Amount item insured for x loss suffered €300,000 x €100,000 =€75,000

Real value of the item €400,000
Average Clause
There’s no point in over-insuring an item either, as you will only get up
the actual value of the item in compensation if something happens it

Over-insurance only means you’ll pay a higher premium

You need to know this

formula and write it if
you’re asked to calculate the
average clause in an exam!
Principle 4: Contribution
When a household or business insures an item with two or more
insurance firms

• Linked to indemnity
• Might happen if someone tries to claim from multiple insurance
companies
• Any compensation paid will be split between them in proportion of
the value insured with each
• Ensures the insured cannot make a profit
Principle 4: Contribution
Formula used to calculate how much compensation each company will
pay the claimant:

Amount insured with the insurance company x claim

Total amount insured (all insurance companies)
Principle 4: Contribution
My car is worth €28,000. With Company A I insure it for €22,000. With
Company B I insure it for €10,000. How much do I get from each
company?
Company A Company B
€22,000 x €28,000 €10,000 x €28,000
€32,000 €32,000
Compensation
Payable: €19,250 €8,750

Total compensation: €28,000

Principle 5: Subrogation
Once you have received compensation, you give up your right to make any
further claims. Insurance company can pursue the person/business that
caused the damage for compensation and has the right to scrap/salvage
the item

E.g. my car goes on fire and my insurance company pays. I cannot go and
sue BMW now or else I am profiting. The insurance company can though.

My car is crashed and written off. The insurance company pays. I cannot
sell the it for scrap or else I am profiting. The insurance company can
though.
Insurance Premium Calculations
• Actuaries calculated premiums based on a number of factors:
• The more likely the risk is to occur, the higher the premium.
Risk The actuary uses statistics when calculating the risks
• The amount paid out by insurance firms in the past
Claims will affect the level of the premium
• The higher the value of the item, the higher the
Value premium
• These increase the cost of insurance premiums as
Loadings they add extra risk to the policy
• The person seeking insurance can reduce the
Discounts premium by taking steps to reduce the risk
Insurance Premium Calculations

Why is car insurance so expensive for younger drivers? Is it fair?

 Calculating Insurance Premiums
Ross and Sarah want to insure their Dublin house and it’s contents. The
homes rebuild value is €600,000 and it’s contents are 25% of this amount.
They have an monitored alarm and no previous claims.
This is the quote they got from O’Dowd Insurance Ltd
Buildings: €1.40 per €1,000 valuation
Contents: €4.10 per €1,000 valuation
Loadings: Dublin address 10%, previous claims 8%
Discounts: No previous claims 2%, alarm system 9%

Calculate the premium they’ll have to pay for a new policy with O’Dowd ltd.
 Calculating Insurance Premiums
Ross and Sarah want to insure their house and it’s contents. The homes
rebuild value is €600,000 and it’s contents are 25% of this amount. They
have an monitored alarmWork it out
and no by doing:
previous claims.
Basic premium
This is the quote they got from O’Dowd Insurance Ltd
+
Buildings: €1.40 per €1,000 valuation
Loadings
Contents: €4.10-per €1,000 valuation
Discounts
Loadings: Dublin address 10%, previous claims 8%
Discounts: No previous=claims 2%, alarm system 9%
Premium due

Calculate the premium they’ll have to pay for a new policy with O’Dowd ltd.
 We do:
Basic
premium
+
Loadings
-
Discounts
=
Premium due
Calculating Insurance Premiums
Jane and Karl want to insure their Carlow house and it’s contents. The homes
rebuild value is €355,000 and it’s contents are 18% of this amount. They have
an monitored alarm and 1 previous claim for a burglary.
This is the quote they got from Smyth Insurance Ltd
Buildings: €1.60 per €1,000 valuation
Contents: €2.90 per €1,000 valuation
Loadings: Dublin address 10%, previous claims 7%
Discounts: No previous claims 3%, alarm system 6%

Calculate the premium they’ll have to pay for a new policy with Smyth ltd
 We do:
Basic
premium
+
Loadings
-
Discounts
=
Premium due
Calculating Insurance Premiums
Matt and Ciara want to insure their Galway City apartment and it’s contents.
The homes rebuild value is €120,000 and it’s contents are 22% of this
amount. They have a monitored alarm, security cameras and no previous
claims.
This is the quote they got from Tracey Insurance Ltd
Buildings: €1.80 per €1,000 valuation
Contents: €3.10 per €1,000 valuation
Loadings: City address 8%, previous claims 5%
Discounts: No previous claims 6%, alarm system 4%, security cameras 2%

Calculate the premium they’ll have to pay for a new policy with Tracey Ltd.
 We do:
Basic
premium
+
Loadings
-
Discounts
=
Premium due
Insurance
Summary
Types of Insurance
Similarities Between Household & Business Insurance
Similarities Between Household & Business Insurance
Motor Insurance
There are 3 types of motor insurance cover:

• Third party: pays compensation for damage caused by the insured to

the third party and their property (minimum cover by law)
• Third party, fire & theft: covers third party as above as well as
damage to the insured’s property for fire or theft
• Comprehensive: includes all losses covered in the above two policies
as well as accidental damage to the insured’s vehicle
Common Insurance Policies for Households
Health insurance

Mortgage protection

Income protection

Personal accident insurance

Travel

Identity theft

Life assurance
Common Insurance Policies for Households
• Health insurance: protects against cost of hospital fees and day-to-
day medical expenses e.g. VHI, Laya Healthcare
• Mortgage protection: covers cost of mortgage repayments if
household can’t pay e.g. sick/redundancy. Often essential in order to
get a mortgage.
• Income protection: covers loss of money to a household if main
earner can’t work for a short period/permanently. E.g. 75% of salary
Common Insurance Policies for Households
• Travel insurance: covers risk such as missed flights, lost luggage, lost
passports, cancellation costs due to emergencies
• Identity theft: covers loss due to identity being stolen e.g. bank
account emptied, lost wages/salaries etc.
• Personal accident insurance: covers loss is a person has a serious
accident. People who rely on their body/parts of often have this cover
Daniel Craig’s body
Michael Flatley
was insured for
insured his legs for
America Ferrera €6.6m when filming
€34.5m
insured her smile Casino Royale Tom Jones’ chest
for $7m after hair is insured for
signing with $3.5m
Aquafresh
Life Assurance
Assurance insures you against something that will certainly happen
e.g. death

There’s 3 main types of life assurance policies:

• Whole life: a person pays a premium until they die, the policy is then
paid out to a named person – often covers funeral costs etc
• Term life: a person pays a policy for a certain amount of time e.g. 25
years. Policy only pays out if they die within this time frame.
• Endowment: Policy pays out when (a) the policy reaches maturity e.g.
70th birthday or (b) person dies, whichever is first
Common Insurance Policies for Businesses
Product liability

Public liability

Employer’s liability

Key personnel

Fidelity guarantee

Consequential loss

Cash in transit

Plate glass
Common Insurance Policies for Businesses
Product liability: covers costs of customers who claim they got injured/sick from
using your product/service e.g. food poisoning

Public liability: covers costs of customers who claim they got injured on the
business premises e.g. slipped on a wet floor

Employer’s liability: covers cost of claims made by an employee for accident,

illness or injury in the workplace e.g. machinery fell on them

Key personnel: covers the cost if a key worker leaves the business e.g.
recruitment costs to replace them and train someone new
Common Insurance Policies for Businesses
Consequential loss: covers against a loss that happens due to another risk
happening e.g. shop goes on fire – covers lost profits while it’s closed.

Cash in transit: covers against the theft of cash while off the premises e.g. on the
way to the bank. Essential for high cash sale businesses e.g. nail salon

Plate glass: covers a business against their big shop windows being broken or
damaged

Fidelity guarantee: covers loss due to employees fraudulent activities e.g.

stealing money, giving away info to rival firms
Similarities Between Household & Business
Insurance
Similarities
1 Policies
Both households and businesses take out common types of insurance, e.g. motor,
contents, pay related social insurance and property.

2 Forms
Both truthfully complete insurance proposal and claim forms.

3 Risk Management
Both identify risks and take steps to manage risk, e.g. installing smoke alarms and CCTV
cameras to deter burglars.

4 Review Policies
Both regularly review their policies to ensure that the value of items insured is accurate.
Differences Between Household & Business
Insurance
Differences
1 Risks
Businesses are exposed to more risks than households. A business usually has to take out
more insurance policies than a household, e.g. plate glass and employer’s liability.

2 Premiums
Businesses tend to pay higher premiums than households.

3 PRSI
Households pay PRSI on their own earned income as employees. Businesses must pay PRSI
for all its employees.

4 Business Expenses
Insurance costs are a business expense and can be used to reduce the firm’s tax liability.
The Importance of Insurance
Cost saving The cost of the premium is usually less than the cost incurred if
the risk happens.
Legal Some types of insurance, e.g. motor insurance, are required by
requirements law. Failure to pay such policies can result in fines.
Risk Insurance helps households and businesses to reduce their risk
management as they must carry out a risk assessment before taking out
insurance.
Survival Allows businesses to cope with difficult or unexpected situations
and may prevent them from closing.
Safety People/companies will generally improve safety in order to avoid
higher insurance premiums e.g. install a security alarm
Key Terms
• risk management • insurance agent
• insurance • insurance broker
• proposal form • principles of insurance
• claim form • insurable interest
• insured • utmost good faith
• insurer • average clause
• premium • contribution
• loading • subrogation
• actuary • material facts
• assessor • indemnity
• loss adjuster • property insurance
Key Terms
• contents insurance • employer’s liability insurance
• motor insurance • key personnel insurance
• PRSI • fidelity guarantee insurance
• health insurance • consequential loss insurance
• mortgage protection insurance • cash in transit insurance
• income protection insurance • plate glass insurance
• personal accident insurance
• travel insurance
• life assurance
• product liability insurance
• public liability insurance
Past Exam Questions (Ordinary Level)
Past Exam Questions (Ordinary Level)
Past Exam Questions (Higher Level)
Past Exam Questions (Higher Level)