INSTITUTE OF FINANCE MANAGEMENT

BIRM I
IRU_07101
GENERAL INSURANCE

Prepared by
Kisyombe, Stuart G
 Sub- enabling outcomes:
• At the end of this module, you are expected to understand the following;

 Describe the origin of insurance business in international context.

 Apply the fundamental principles of insurance in undertaking business activities.
 Describe the fundamental products and associated services in selling insurance.
 Describe the Islamic principles in developing insurance products.
 Apply basic underwriting techniques in developing insurance policy.
 Describe the Tanzania Insurance market.

KISYOMBE, S
 Readings:
• Required readings;
 Chartered Insurance Institute (2019) Insurance Legal and Regulatory
 Chartered Insurance Institute (2019) General Insurance
 Chartered Insurance Institute (2019) Motor Insurance Products
 Chartered Insurance Institute (2018) Insurance Underwriting process
 Chartered Insurance Institute (2019) Household Insurance Product
 Dofman, M.S (1997), Introduction to Risk Management and Insurance, Prentice Hall, Scott E
Harrington and Saudza G Gustauson (1993), Springer
 Hansel, D.S (1982) Elements of Insurance, Macdonald & Evans Series, London 5th Ed.
 Redja, G (1997) Principles of Risk Management and Insurance, 6th Ed. Addison-Wesley,
 Robert I Mehr and Emerson Commack (1990), Principles of Insurance

KISYOMBE, S
 Readings:
• Recommended readings;
 Vaughan, E.J Vaugha, T.M. Vaughan, T (1995) Essential of Insurance: A risk Management Perpective,
John Wiley,
 Crane F.G (1980), Insurance Principles and Practice, John Wiley and Sons,
 Vaughan, .J(1982), Fundamentals of Risk and Insurance,
 Greene, M.R and Trieschamann, J.S (1984) Risk and Insurance, South Western Publishing co,
 Reigal, Miller and Williams (1979), Insurance Principles and Practices,
 NIC (1983), Insurance in Tanzania NIC’s 20 Years, NIC
 FII (1986) Risk Managent FII Course NO. 86
ONLINE SOURCE
libgen.li
KISYOMBE, S
 LECTURE ONE - ORIGIN OF INSURANCE BUSINESS

CONTENTS

 Concept of Insurance
 Concept of Risk and Insurance Risk
 Benefit Functions and characteristics of Insurance
 Historical development of Insurance Business
- Internationally and in Tanzania

KISYOMBE, S
 Introduction

• Before understanding the concept of Insurance, let us explore what “risk” is;

Risk is a possibility of an unfortunate occurance, OR Dought concerning the occurance of a situation,

OR Unpredictability, OR The possibility of loss
Attitude - Each person’s attitude towards risk is different, we all respond to risk in a different way.
Some people are willing to carry certain risk themselves - risk takers/ risk seekers,
others lean more towards risk averse/ against the risk.

KISYOMBE, S
 Managing risk

• Where everyone is aware about Risk, there comes the need the manage the future uncertain
occurances.

Risk Management is a process that involves identification, Analysis and control of risk

Risk management is important because :

• It reduces the potential for loss by identification and managing hazards
• It gives shareholders a greater degree of confidence in a company’s ability to manage its risks.
• It provides disciplined approach to quantifying risks

KISYOMBE, S
 Managing risk continues...

The Risk Management Functions:

Risk Identification: Discovery of all threats to a company/individual that may already exist, and the
potential threats that may exist in the future. Not all risks are insurable but must be managed.

Risk Analysis: Risk managers examine the data to evaluate or analyse the risk. This enlights on how
the potential risks may materialize based on past experiences and patterns of events leading to losses.

Risk Control: This can be achieved through physical control measures such as Putting door locks,
Financial control such as transfering risk to insurance and Developing a good risk culture, such as
improving risk awareness to all the responsible members.

KISYOMBE, S
 Managing risk cont...

Risk Control: Depending on what they were designed for, internal controls usually categorised as
detective, corrective or preventive controls.

Detective controls are designed to detect errors or irregularities that may have occured. (find and
state any example)

Corrective controls are designed to correct errors or irregularities that have been detected. (find and
state any example)

Preventive controls are designed to keep errors or irregularities from occuring in the first place. (find
and state any example)

KISYOMBE, S
 Categories of Risk

Financial and Non-financial risks:

Financial risks are risks which are capable of financial measurement.

Example on financial risk:

Accidental damage to a motor car: The financial value of the risk is the cost of repairing or
replacement the car
Theft of a property: The financial value of the risk of theft of an item of jewellery is its current
market value.

While non-financial risks cannot be quantified. e.g choice of marriage partner or enjoyment of a
holiday
KISYOMBE, S
 Categories of Risk

Pure and Speculative risk:

Pure risks are those risks where there is the possibility of a loss but not of gain. The best we can
achieve is break-even situation.
Example:
The risk of fire: it could damage or destroy property or cause interruption to the running of the
business, both of which are measurable financially.
The risk of machinery breakdown: this could lead to actual damage or business interruption.

Speculative risk: Reflect situations where the outcome is making some kind of gain. Example
gambling, or investement in a stock market

KISYOMBE, S
 Categories of Risk

Fundamental risks: These are risks which occur in a vast scale that they are uninsurable.
Example of such risks include is earthquake in a region known to be prone to such risk, or femine,
economic recession or a general risk of war.

Fundamental risks are those risk that rise from social, economic, politial or natural causes and are
widespread in their effect. The problem with fundamental risk is the lack of willingness or capacity
on the part of insurers that causes such risk to be uninsurable.

Particular risks are localised or even personal in their cause and effect. sometimes the cause

KISYOMBE, S
 Categories of Risk

Example of particular risks include:

A factory fire: this would cause localised damage to the factory and possibly to its surrounding, but
would not affect the whole community.

A car collision: damage to the vehicles and any third party liability are localised events affecting
relatively few individuals.

Theft of a person possessions from home: an event that only affects an individual or family.

KISYOMBE, S
 Insurable risk

It is important to understand that not every risk is insurable. For a risk to be insurable in addition to
being financial, pure and generally a particular risk the following features must also apply.

The event insured against must be fortuitous or unforseen.

There must be insurable interest

Insuring the risk must not be against the public policy.

KISYOMBE, S
 Insurable risk

A fortuitous event: happening of event must be unexpected or accidental and not inevitable, it shoud
not be a deliberate act on the part of the insured.

Insurable interest: is the legally recognised financial relationship between the insured and the object
or liability that is being insured. For example, you can insure against the theft of your own car because
you may suffer financial loss if it is stolen.

Public interest : Contracts including insurance agreements must not be against public policy or go
against what society considers to be the right or moral thing to do. Insurers should not cover risks that
are against public policy.

Homogeneous exposures : this means a sufficient number of exposures to similar risks. The historical
pattern and trends will enable insurer to forecast the expected extent of future losses. The law of large
number is applicable.

KISYOMBE, S
 Insurable risk Vs Uninsurable risk

Insurable risks Uninsurable risks

Financial Non- financial

Pure Speculative
Particular Fundamental
Fortuitous event Deliberate act
Insurable interest No insurable interest
Not against the public policy Against the public policy interest
Homogeneous exposured one- offs ( generally

KISYOMBE, S
 Component of Risk
Component of risk include Uncertainty, level of risk and peril and Hazard.

 Uncertainty: Implies dought about the future

- If we know what is going to happen, there is no element of risk involved.
 Level of risk: Greater likelihood of somethings happening than other.
- Risk is assessed in terms of frequecy (how often it will happen)
and severity (how serious it will be if does happen)
 High and low frequency.

KISYOMBE, S
 High vs Low Frequency/ Severity
I. Low frequency and Low severity - Retention/ afford lossing

II. High frequency and Low severity - Loss prevention techniques/ Retention

III. Low frequency and High severity - Insurance

IV. High frequency and High severity - Avoidance/ securitization.

Note : Retentions, loss preventions, insurance and securitization may be refered to as proposed risk
mitigation action/ Procedure.

KISYOMBE, S
 Peril and Hazard
A peril can be defined as that which gives rise to a loss.

Example : Lighting - When it occurs can result into damage

- Fire, when it becomes hostile can cause losses.

A hazard can be defined as that which influences the operation or effects of peril.
Conditions that increases probability of peril to take effect.
Example: High value sports car, papers/ woods near fire.

Hazard can be physical : age of proposer for insurance, construction materials

Moral hazard : Carelessness, Dishonesty and Social attitudes.

KISYOMBE, S
 Recap

• At, this point you must be able to explain the following;

 Describe the concept of risk

 Explain the risk management function
 Describe the various categories of risk
 Explain the type of risk which can be insured and types of risk which cannot
 Component of risk
 Explain the relationship between frequency and severity
 Explain the differences between peril and hazard as they relate to insurance

KISYOMBE, S
 Concept of Insurance
As a contract : Is an agreement whereby one party, the insurer, undertake, for a premium or/and
assesment, to make payment for another party, the policyholder or third party, if an event of agreed
risk occurs.

Other definition:

“A social devise for the transfer of risks of individual entities to an insurer, who agrees for a
consideration called premium, to assume to specified extent loss suffered by insured.” Dr. W A.
Dinsdale.

“Insurance is a devise for the transfer of an insurer of certain risks of economic loss that would
otherwise be borne by the insured” Prof. Allan L. Mayerson

KISYOMBE, S
 Characteristics of Insurance

 Pooling of losses/ Sharing of risk - Law of large number, funds by many to compensate and/or
indemnify losses by the few.

 Payment of Fortunitous losses - Insurance compensate/indemnify accidental losses.

 Risk tranfer mechanism - Risk is transfered in exchange of premium.

 Indeminification - Return to the same financial position experienced before the occurance of loss

 Contract agreement - A contract, consideration of premium in exchange for a promise.

 You may also refer to insurance risks

KISYOMBE, S
 Functions Insurance
 Certainty - It provide certainty of payment at the uncertainty of losses.

 Protection - It protect the probable chances of loss.

 Risk sharing mechanism - Risk is shared among the rest facing the same kind of risk

 Prevention of loss - Insurance prevent losses through the risk improvement efforts.

 Capital - Provides capital to the society, investment capacity is build.

 Efficiency - Through assurance, peace of mind and more reliable.

 Economic progress - Compensation and indemnification, and economical approach in dealing with
risk.
KISYOMBE, S
 Benefits of Insurance
For a corporate:
 It releases capital within companies that can be used in the business.
 Enterprises are encouraged to start and expand
 Employess are kept at work
 Losses are reduced in size and number
 The nation benefits from the invstment made by insurers
At individual level
 Peace of mind
 Financial stability
 Independency
 Security and assurance
TASK 3 - Explain the benefits of insurance at a society level

KISYOMBE, S
LECTURE TWO - FUNDAMENTAL PRINCIPLES OF INSURANCE

CONTENTS

 Insurable interest
 Utmost good faith
 Indemnity - corollaries Subrogation and Cotribution
 Proximate cause

KISYOMBE, S
 Principles of Insurance - Insurable interest
1/ Insurabe Interest: Is the legal right to insure arising out of a financial relationship recognised at law,
between the insured and the subject matter of insurance.

OR

The legal right to insure arising out of financial relationship recognised under the law between the
insured and the subject matter of insurance.

• Insurance agreement/ contract must have an insurable interest. Without it would be a mere wager.
• The concept is the basis of the doctrine of insurance and was cleared in the case of Castellain VS
Priston in 1883

KISYOMBE, S
 Principles of Insurance - Insurable interest
Key take aways : subject matter, legal relationship, financial value.

Essential components of Insurable interest

• There must be a property, right, interest, life, limb,or potential liability capable of being insured.
• Any these must be the subject matter of insurance
• The insured must stand in a formal or legal relationship with the subject matter of insurance.
Whereby he benefits from its safety, well being or freedom from liability and would be adversely
affected by its loss, damage and existance of liability.
• The relationship between the insured and the subject matter must be recognised by law

KISYOMBE, S
 Principles of Insurance - Insurable interest
Creation of insurable interest: These are refered to as the ways on which the insurable interest arises or
is restricted.

By common law - Ownership of a property, a car, building

By contract - Example, a lease deed, tenant becomes responsible for the maintenance

By statute - Act of a perliament may create an insurable interest by granting some benefits or imposing a
duty.

KISYOMBE, S
 Application of Insurable interest

For property insurance, insurable interest rises out of ownership.

Other situations & financial interest which gives a person who is not the owner, insurable interest in the
property and situation as listed below:

• Morgagee and Mortgagers

• Bailee - Trustee
• Part ownership - Agent
• Liability - Husband and wife
• Creditor

KISYOMBE, S
Application of Insurable interest

For Liability insurnace, under common law a person has insurable interest to the extent of any
potential legal liability that they may incur to pay damage awarded by a court and other costs.

Insurable interest included not only loss and damage but also potential liability.

Example : A person may be liable for injuring someone else through the careless use of an umbrella.
This incident may give rise to a potential award by a court plus a claimant’s legal costs.

The potential liability and costs are capable of being insured.

KISYOMBE, S
 Principles of Insurance - Insurable interest
When should the insurable interest exist:

1. Life Assurance - It exists at the time of inception of insurance and not required at the time of claim

2. In marine Insurance - It must exist at the time of loss/claim and not required at the time of inception

3. In property and other insurance - It must exist at the inception and as well as time of loss/ claim

KISYOMBE, S
 Principles of Insurance - Utmost good Faith
Originates for latin word “Uberrimae Fidei” meaning utmost good faith

Utmost good faith is a positive duty to voluntarily disclose, accurately and fully, all facts material to the
risk being proposed, whether requested or not.

This means that the parties to a contract must volunteer material information in all negotiations before
the contract comes into effect.

The principle applies equally to both the proposer and the insurer throughout the contract negotiation.

However, it applies rather differently to each part.

KISYOMBE, S
 Utmost good Faith - Duty of Disclosure

The proposer - Has the duty to disclose all material facts about the risk to the insurer.

The nature of the subject matter of the insurance contract and the circumstances surrounding it are facts
known mainly by the insured.

The insurer on otherhand must be entirely open with the proposer in other ways.

The insurer cannot introduce new non-standard terms into the contract that were not discussed during
negotiations, neither can the insurer withhold the fact that discounts are available for certain measures
that can improve risk

KISYOMBE, S
 Utmost good Faith - Duty of Disclosure
Insurer’s duty of disclosure

The insurer also has a duty of disclosure to the insured. In order to fulfill this duty, the insurer must
also behave with utmost good faith, by for example:

• Notifying an insured of a possible entitlement to a premium discount resulting from a good previous
insurance history.

• Only taking on risks which the insurer is registered to accept (avoid unenforceable contracts) and

• Ensuring that statements made are true: misleading an insured about policy cover is a breach of
utmost good faith

KISYOMBE, S
 Utmost good Faith - Material Facts

According to the Marine Insurance Act, 1906

Material facts : Every circumstance is material which would influence the judgment of a prudent
insurer/underwriter in fixing the premium or determining whether to accept the risk or not.
Or
Material fact is every circumstance or information, which would influence the judgement of a prudent
insurer in assessing the risk.
Or
Those circumstances which influence the insurer decision to accept or refuse the risk or which effect the
fixing of the premium or the terms and conditions of the contract must be disclosed.

KISYOMBE, S
 Utmost good Faith - Material Facts

It is important that the insured makes full and complete disclosure of the material facts relating to the
contract if they wish to ensure so that, in the event of a loss covered by the policy terms of the policy,
their claim is paid.

The underwriter/needs to be aware of all the facts surrounding the risk so as to price accordingly.
Otherwise the assumption may be upon his standard/ experience approach.

KISYOMBE, S
 Utmost good Faith - Duty of Fair presentation
What is Fair Presentation?

A fair presentation of the risk is defined as one;

• Which makes disclosure of every material circumstance which the insured knows or ourght to
know, or disclosure which gives insurers sufficience information to put a prudent insurer on notice
that it needs to make further enquiries for the purpose of revealing those material circumstances.

• Which make the disclosure in a manner which would be reasonably clear and accessible to a prudent
insurer; and

• In which every material representation as to a matter of fact is substantially correct and every material
representation as to a matter of expectation or belief is made in good faith

KISYOMBE, S
 Utmost good Faith - Material Facts in non-life proposals

In general, material facts relate to either physical hazard or moral hazard.

Physical hazard:
Fire insurance - Construction of the building, nature of use, heating and electrical system.
Motor insurance - age and type of car, age of driver, previous accidents
Theft insurance - nature of stock, its value and nature of security precautions

Moral hazard:
Insurance history- Previous refusal to insure by other insurers, previous claim history if any indication of
suspected fraud or exaggeration.

Personal history- Criminal convictions, a lack of good management of business excessive or willful
carelessness.
KISYOMBE, S
 Material Facts which must be disclosed

a. Facts, which show that a risk represents a greater exposure than would be expected from its nature
e.g., the fact that a part of the building is being used for storage of inflammable materials. This
means any special or unsual facts relevant to the risk.

b. External factors that make the risk greater than normal e.g. the building is located next to a
warehouse storing explosive material.

c. Facts, which would make the amount of loss greater than that normally expected e.g. there is no
segregation of hazardous goods from non-hazardous goods in the storage facility. any particular
concerns which lead the insured to request insurance to cover the risk

KISYOMBE, S
 Material Facts which must be disclosed

a. Facts, which show that a risk represents a greater exposure than would be expected from its nature
e.g., the fact that a part of the building is being used for storage of inflammable materials. This
means any special or unsual facts relevant to the risk.

b. External factors that make the risk greater than normal e.g. the building is located next to a
warehouse storing explosive material.

c. Facts, which would make the amount of loss greater than that normally expected e.g. there is no
segregation of hazardous goods from non-hazardous goods in the storage facility. any particular
concerns which lead the insured to request insurance to cover the risk

KISYOMBE, S
 Material Facts that DO NOT need be disclosed
a. Facts of Law: Everyone is deemed to know the law. Overloading of goods carrying vehicles is legally
banned. The transporter cannot take excuse that he was not aware of this provision.

b. Facts which lessen the Risk: The existence of a good fire fighting system in the building.

c. Facts of common Knowledge: The insurer is expected to know the areas of strife and areas susceptible
to riots and of the process followed in a particular trade or Industry.

d. Facts which could be reasonably discovered: For e.g. the previous history of claims which the Insurer is
supposed to have in his record.

KISYOMBE, S
 Material Facts that DO NOT need be disclosed
e. Facts which the insurers representative fails to notice: In burglary and fire Insurance it is often the
practice of Insurance companies to depute surveyors to inspect the premises and in case the surveyor
fails to notice hazardous features and provided the details are not withheld by the Insured or concealed
by him them the Insured cannot be
f. penalized
g. Facts covered by policy condition: Warranties applied to Insurance polices i.e. there is a warranty that a
watchman be deployed during night hours then this circumstance need not be disclosed.
h. Facts where the insurer has waived its right to the information: where the proposed did not answer the
question in the proposal form, or inserted a dash and if insurer did not follow-up for more information it
is considered to have waived right to that information
i. Facts outside the scope of specific questions: if the insurer ask for records of the party three years, it
means the years over the requested scope falls outside the scope of specific questions and no need to be
disclosed

KISYOMBE, S
 Duty of Disclosure cont..
 The duty of disclosure remains in force through out the entire negotiation stage and till the contract is
finalized.
 Once the contract is finalized than the contract is subject to ordinary simple good faith.
 However when an alteration is to be made in an existing contract then this duty of full disclosure
recovers in respect of the proposed alteration.
 The duty of disclosure also revives at the time of renewal of contract since legally renewal is regarded as
a fresh contract.

For example: a landlord at the time of proposal has disclosed that the building is rented out and is being
used as an office. If during the continuation of the policy the tenants vacate the building and the landlord
subsequently rents it out to a person using it as a godown then he is required to disclose this fact to the
Insurer as this is a change in material facts and effects the risks.

KISYOMBE, S
 Consequences of Non-discosure...

• The general rule is that if the insured is in breach of the duty of discosure, the insurer may avoid the
contract intirely, ab initio. from the begining.

• In other words, the claim will not be paid. the insurer set the whole contract aside.

• If the non-discosure is fraudulent ( often refered to as concealment), the insurer may keep the
premium and sue for damages. But he cannot refuse to payment of a particular claim, but leave the
policy in force for the future.

• The insurer has the right to ignore the breach, but in this case must pay the claim and leave the policy
in force.

KISYOMBE, S
 Consequences of Non-discosure...

The legal rule is that non disclosure arises and gives grounds for avoidance by the second party to the
contract (the insurer) where a fact is;

• within the knowledge of the first party (the insured);

• not known to the second party

• calculated, if disclosured, to induce the second party to enter the contract at terms they consider to be
better, or not to enter the contract at all

KISYOMBE, S
 Breach of utmost goodfaith...
Breaches of Utmost Good Faith occur in either of 2 ways.
1/ Misrepresentation:

Innocent: This occurs when a person states a fact in the belief or expectation that it is right but it turns
out to be wrong. While taking out a Marine Insurance Policy the owner states that the ship will leave on a
specific date but in fact the ship leaves on a different date.

Intentional: Deliberate misrepresentation arises when the proposer intentionally distorts the known
information to defraud the insurer. The selfish objective is somehow to enter the contract or to get a
reduction in the premium e.g., If an applicant for motor Insurance stated that no one under 18 would
drive the vehicle when in fact his 17 years old son drives frequently. Such a misrepresentation would be
material as it would effect the decision of the insurer.

KISYOMBE, S
 Breach of utmost goodfaith...
2/ Non-Disclosure

Innocent: This arises when a person is not aware of the facts or when even though being aware of fact
does not appreciate its significance e.g. A proposer at the time of effecting the contract has undetected
cancer therefore does not disclose it or

A proposer had suffered from Rheumatic fever in his childhood but he does not disclose this not knowing
that people who have this are susceptible to heart diseases at a later age.

KISYOMBE, S
 Breach of utmost goodfaith...
2/ Non-Disclosure

Deliberate: This is done with a deliberate intention to defraud the insurer entering into a contract, which
he would not have done had he been aware of that fact.

A proposer for fire Insurance hides the fact knowingly by not disclosing that he has an outhouse next to
his building, which is used as a store for highly inflammable material.

KISYOMBE, S
 Remedies avaible for insurers...
An insurer has a remedy for breach of duty of fair presentation only if the insurer shows that, but for the
breach of duty;
• It would not have entered into the contract of insurance at all; or
• it would have done so only on different terms.

A deliberate or reckless breach mean that the insured knew that it was in breach of duty of fair
presentation or did not care if it was in breach of that duty

KISYOMBE, S
 Options available incase of breach involves...
The options available are on case-to-case basis
like: -
a. The contract becomes void from the very beginning if deliberate misrepresentation or non-disclosure
is resorted to with the intention of misleading the insurer to enter into a contract.
b. To consider the contract void, the bereaved party, must notify the offending party that breach has
been noticed and as per the conditions of the contract he is no longer governed with the terms of the
contract agreed upon in covering the risk. In case the breach is discovered at the time of claim he
will refuse to honour his promise and will not pay the claim. This again occurs when there has been
a deliberate breach.
c. When the breach is innocent but it is material to the fact then the insurer may impose a penalty in the
form of additional Premium.
d. Where the breach is found to be innocent and is not

KISYOMBE, S