INSURANCE

Principles of Business
 Students should be able to :
OBJECTIVES:
2. Explain
3. Evaluate the
1. Define principles upon 4. Explain the 5. Explain how
briefly the
clearly the which various types insurance
purpose of
term insurance insurance is of insurance facilitates trade
insurance
based
 ◦ This is a policy which is a written agreement between an
insured party (policy holder) and insurance provider which
provides compensation if a particular loss occurs.
◦ Another definition is an agreement between an insurance
company ( the insurer) and someone who wants financial
protection (the insured – the proposer) that compensation
(indemnity) will be paid if a particular loss occurs
What is
insurance?
 ◦ The purpose is to uphold the principle of indemnity
What is the which means to put someone who has suffered a loss
back into the position that they would have been in
Purpose of had the loss not been suffered. Insurance is vital to all
forms of business and the economy as well as
Insurance? individuals. Insurance relieves individuals and
businesses of some of the risks they face
 Principles of insurance
An agreement to provide insurance is based on a number of principles. These are the legally binding guidelines for entering into an insurance
contract and for preparing, filing and managing lawful claims for compensation. These include:

Pooling of risks

Subrogation

Proximate cause

Indemnity

Utmost good faith

Contribution

Insurable interest
 ◦ A known expense, called premium
which many individuals and business
pay a relatively small sum of money into
WHAT IS a ‘pool of funds’ that will be used by the
insurance company to compensate the
POOLING insured party in the event a loss is
OF RISKS? incurred. The risk is therefore spread
over all those individuals or businesses
that have contributed to the pool of
funds.
 Subrogation

◦ This means to “take the place of”. When you make an insurance
claim for compensation to replace damaged items such as machinery
or vehicle their ownership passes to the insurance company once it
has paid the compensation, this is the principle of subrogation.
Subrogation means that the insurance party will be able to sell the
damage assets for their scrap value; or if it can be proved that the
damage was caused by another party, it can recover its costs from
them.
PROXIMATE CAUSE
Is the main or primary cause of an injury or damage that give
rise to a financial loss. Proximate cause is the original event
that caused the injury or loss that is being claimed for.
e.g. If stock from Clarke Fashion is damaged in its warehouse
by a fire, then this will be covered in the company’s insurance
policy. However, if stock is damaged by a collision with
another truck while in transit, the other truck driver is to be
blame and Clarke Fashion will have to claim for compensation
from the truck’s owner
 Indemnity

The principle of indemnity means that in the event of a loss, the insured person should not be better off
or worse off than before the loss. Indemnity restores you to the same financial position before the loss
occurred. There should be no profit-making from the compensation. The amount of compensation is
limited to the value of the insurance policy or the amount of the loss incurred (which ever is less)

E.g. A garment factory located in Jamaica is valued at $ 1 000 000. It has been insured for $ 900 000.
This means that nine-tenths of the factory has been insured, if a fire occurs leading to damage of $500
000, then compensation will be nine-tenths of $ 500 000, which is $ 450 000.
 What is Utmost Good Faith
This is a very important
principle, and sets out that all
parties in an insurance
agreement have entered into
the agreement and disclosed all
relevant information with
absolute honesty. Utmost good
faith means that both parties
disclose all relevant facts and
issues related to the insurance
contract.
The principle affects the
proposer more than it does the
insurer, because it is the
proposer who provides the
information (what is to be
insured) upon which the
insurer decides the premium
and issues the policy. But the
insurer must also be truthful
about the effectiveness of the
insurance cover offered.
The basic principle of insurance is contribution. This
means that someone taking out insurance cannot claim
multiple times for the same even with multiple
insurance companies.

Contribution
This means that if there is a claim of $ 10 000, the
different insurance companies will contribute money
towards the claim. Each insurance company will pay
only a portion of the $ 10 000. However, you will not get
more than $ 10 000 in total from the insurance
companies, as then you will have profited from the
event.
Insurable interest
◦Insurable interest is monetary interest in what is being insured. This
means that an insured person will lose money if the event they have
insured against occurs.
◦E.g. A stranger can insure his/her own life (because he/she has an
insurable interest in it) but he/she cannot insure your life. The same
is true fir businesses. A business can insure its own factory because it
has an insurable interest in it, but cannot insure the building of
neighbouring firm or a competitor.
Uninsurable risk
◦The success of insurance is dependent upon the ability of insurance
companies to meet a loss if it occurs. The companies are able to
ensure that they can meet any claims that arise by using statistical
analysis to predict the frequency of an event occurring.
◦The people within insurance companies who accept the risk
involved (underwriters) use their records of past claims to
calculate the probability of the risk involved occurring. The
specialist who calculates the probability is called actuary.
Uninsurable risk cont’d
The following are few typical examples of uninsurable
risks:
When the loss is inevitable
Where there is insufficient past experience to assess risk
It the proposer does not have insurable interest
Against fair wear and tear such as rust and corrosion
That a business will be successful
Types of Insurance – Insurance vs Assurance

Insurance allows your risk of loss

from known events (such as a car
accident, fire and theft) to be
Assurance is concerned with an
transferred from one party to
event that was inevitable (death or
another in exchange for payment
reaching a particular age).
(premium). It is the protection
against a risk that might not
happen.
YES!! THERE ARE 1. LIFE INSURANCE
TWO MAIN
CATEGORIES OF
INSURANCE:
Are there
categories of
insurance?

2. NON-LIFE
INSURANCE
 Life insurance is sometimes referred
to as assurance rather than
insurance. There are two main types

Life Insurance of life insurance:

Whole life policies – provides for a

Endowment policies- provide a
payment to be made after the death of
payment of a sum at a certain age or
the insured. Premiums are typically
on the death of the insured, whichever
paid quarterly or annually by the
occurs first. This provides not only for
person whose life in insured, or by
dependents, but also pays out a useful
his/her spouse. The idea is that when
sum of money for the insured if he/she
the insured person dies, someone will
survives the period covered by the
benefit from the policy (e.g. spouse or
policy
dependent)
Non-Life Insurance

◦There are many types of non-life insurance policies that

re relevant to business, which involve an insurance
contract between an insurance company and the
insured. The size of the premiums will depend on the
likelihood of the risk and possible amount of
compensation that the insurance company may need to
pay out.
Type Description
General Liability or Public Liability Insurance If employees or goods/services cause or are
alleged to cause harm or damage.
Property Insurance In the event of fire theft, Smoke, vandalism and
loss of earnings due to stoppage of production as
a result.
Auto Insurance To cover company vehicle that carry employees,
goods and tools. Third party policies pay
compensation to the victim only. Comprehensive
policies pay compensation to the insured party as
well.
Worker’s Compensation Insurance To provide for employees injured on the job:
wage compensation and medical benefits

Professional Liability Insurance To cover damages for mistakes or failure to

properly render professional services (lawyers,
accountants, real estate, etc)

Types of Non-Insurance Policies used by Businesses

Types of Non-Insurance Policies used by
Businesses cont’d
Type
Product Liability Insurance
Health Insurance
Accident and Sickness Insurance
Fidelity Insurance
Description
To cover damages or harm caused by goods and
services
Sometimes used as part of an employee’s
compensation package, to help cover medical
expenses under a company (group) health plan
To cover against death or disability occurring
during flights and holidays.
Is used particularly by businesses to protect
against loss by fraud and stealing including theft
by employees.
Types of Non-Insurance Policies used by
Businesses cont’d
Type Description
Motor Insurance Must be held by businesses for vehicles they own
Trade Credit Insurance To cover against the risk of debtors (customers
who buy goods on credit) not paying the amounts
due or paying very late
Event Insurance To cover against injuries, damages to property or
cancelation expenses related to an event. E.g.
wedding
Goods in Transit Insurance To cover against the loss, theft or damage of
goods while in transit.
Type Description

Cyber and Digital Risks Insurance
Marine
To protect company from cyber attacks on company
data
To cover damage to ships, cargo, persons, etc
Hull insurance damage to vessel
Cargo insurance damage to cargo
Freight insurance compensation in case the shipper
forfeits transport payment to ship owner
Shipowners’ Liability events such as collision, injury to
persons, pollution, et.

Business Interruption Insurance To cover lost income as a result of a disaster. Income

lost may be as a result of the business closing or due to
rebuilding efforts required

Key Personnel Insurance Provides compensation to a business if key member of

staff dies or is severely incapacitated

Types of Non-Insurance Policies used by

Businesses cont’d
Does insurance promote trade?
◦ Insurance helps to narrow down the number of risks. It encourages businesses
to trade knowing that at least some of the risks involved are taken care of,
even if there is some cost to the business.
◦ Insurance promotes business confidence; entrepreneurs are reassured that
they can claim compensation should unforeseen and costly event occur. This
saves them from having to set aside funds against such an occurrence, thus
increasing the funds available to operate and expand the business. Insurance
also encourages them to take the reasonable operational risks involved in
successful business activity.
The Role of Insurance
◦ Insurance companies encourage industry by taking on many of the risks of firms.
◦ companies allow us to enjoy an improved standard of living because they allow us to get a
wider range of goods and services.
◦ Traders feel more secure sending goods across many miles from one country to another
because they know they would be compensated for losses sustained in shipment.
◦ Insurance companies provide a source of capital since they are institutional investors.
◦ Insurance provides coverage against personal risks which individuals would not be able
to manage.
INSURANCE TERMS
◦ Claim - A special form to be filled out by those seeking compensation for loss.
◦ Contingency/Event – The thing which is being insured against.
◦ Insured – A person seeking insurance for himself or his property.
◦ Insurer – The insurance company which underwrites/finances the risk.
◦ The risk – The thing (eg. house), or person (man, woman, child) being insured.
◦ Policy – A document that sets out the terms and conditions of the insurance company and the insured.
◦ Premium – The minimum amount a policyholder may pay for insurance coverage.
◦ Proposal – A questionnaire/form that is filled out by persons seeking insurance.
(Contract between insurer and insured)
o Sum Insured – The maximum amount that the insurance company will pay on the policy.