Chapter 5

MAJOR CLASSES OF INSURANCE

CONTRACTS

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 Classification of Insurance
• On the basis of risk (type of coverage).
 Personal
 Property
• From the business point of view
 Life insurance
 Non- life insurance

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 Personal coverage are those directly related to
the individual. Such as
Some peril may interrupt the income that is earned
by an individual.
 There are four such perils:
Death
Poor health/Sickness
Unemployment
Old age

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 Property coverage is directed against perils
that may destroy property. it includes:
 Fire
Theft
Marine
Liability
Causality
Surety insurance etc

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 LIFE INSURANCE & HEALTH
INSURACE
• Life insurance is a social and economic
device by which a group of persons may
cooperate to make better the loss resulting
from the premature death or living too long
of members of the group.
• The insuring organization collect
contributions from each member, invest
this contribution, grants both their safety
and a minimum interest return and
distribute benefits to the estates of the
members who die.

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 LIFE INSURANCE(cont…)
• Life insurance is a protection against two contingencies
concerning life: dying soon(premature death)or living
too long (the risk of old age).
• The first contingency is physical death due to which
dependents may suffer financial ruin.
• The second contingency is financial or economic death.
This happens when the individual gets older and become
unable to work and generate income.
• Life insurers are generally engaged in the provision of
both protection and saving.
• The protection given by the insurer is death benefits or
other financial benefits in the case of survival.
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 UNIQUE CHARACTERISTICS OF LIFE
INSURANCE
• The benefits are determined in
advance.
• The event insured is eventually
certain.
• There is no possibility of partial loss
in life insurance
• Life insurance is not a contract of
indemnity
• Insurable interest must be met at the
inception of the policy.
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 BASIC TYPES OF LIFE INSURANCE
1.Term life Insurance
•Provides compensation to the beneficiary if the insured dies
within the stated period.
•If the insured survives beyond the specified time, the policy
will expire and there will be no payment.
•It gives temporary protection and there is no saving
element involved.
•The cost of this policy is relatively low because it is a form
of temporary life insurance.
•Term insurance policies are always without profit because
benefits are payable following the death of the insured.
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 Term life Insurance(cont…)
Insurance coverage terminates at the end of the
period unless it provides an option for conversion
into other insurance schemes.
•There are different forms of insurance available to
the potential purchaser. These include:
– Straight term insurance
– Renewable term insurance
– Convertible term insurance

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 A) Straight term insurance
• It is a term insurance written for a specified
number of years and terminates
automatically at the end of the designed
period.
• Example: for under 15 year term policy of
birr 30,000, the insured collect 30,000 at any
time during the policy period.

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 B) Renewable term policy
• Renewed upon expiration.
• The premium charges are adjusted to reflect the
standard premium at the attained age.
• Higher premiums are required at each renewal
time.
• This policy is important for those whose health is
deteriorating from time to time and will be
uninsurable at an advanced age.

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 C) Convertible term policy
• Gives the policyholder the option to convert his to the
other types (whole life or endowment insurance) during
the term of the policy.
• No new evidence of insurability is required upon
conversion.
• If conversion is not made, the policy lapses at the end of
the term.
• When the insured makes the conversation the premium
increases.
• In initial policy issue case, premiums will be calculated
retroactively and the insured is required to make up the
difference including interest in lump sum payment.
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 2. Whole Life Insurance
• The sum assured is payable on the death of the
life assured whenever it occurs.
• Premiums are payable either throughout the life
of the assured or can cease at a certain age, often
80 or 85.
• This policy provides protection to the dependents
of the insured upon the event of his/her death.
• Allows for the accumulation of savings over the
life of the insured.

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 Whole Life Insurance(cont…)
• In essence, the policy encourages saving.
• The insured can apply for loan after the
policy acquires positive cash value.
• Depending upon the manner of premium
payments, whole life insurance contracts
are classified as:
– straight life
– limited pay and
– single pay policies.

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 a) Straight Whole Life Insurance
• Under this policy, premiums are to be paid
at regular interval until the death of the
insured or until the achievement of a
specified age limit.
• Such policy gives permanent protection at
the lower cost.

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 b) Limited Pay Whole Life Insurance
• Premiums are paid for a definite period of time which is
determined in advance. That is for 10, 15, 20, 25, and 30,
years or up to age 85.
• After the expiration of the specified time, the policy is
said to be paid-up, which means that no more premiums.
• This policy is desirable when one intends to stop
payment of premiums after reaching a given age level,
but wants to continue with the insurance protection till
the end of his life.
• Since premiums are to be paid for a limited period, they
are usually higher than those under the straight life
policy.
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 c) Single Payment Whole Life Insurance
• Here, premium payment is made in one
lump sum at the time of purchase of the
whole life insurance.
• In most cases, insurance buyers do not
prefer this type of arrangement (mode of
payment).

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 3) Endowment Insurance
i. Pure Endowment
•Pure endowment policy is the direct opposite
of term insurance.
•The sum assured is payable if the life assured
survives the endowment period.

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 Differences between Term Insurance and Pure Endowment
Term insurance Pure endowment
• Benefit is payable if • The sum assured can
the life assured die be collected if the
within the term of the policy holder survives.
policy. • Designed for the
• Designed for the benefit of the policy
benefit of dependents holder (element of
or others (element of investment)
protection).

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 ii. Ordinary Endowment
• This policy provides payment if the insured live to the
end of endowment period, or upon the death at the time
during the term of the policy.
• The sum assured is payable in the event of death within a
specified period of, say 15, 20, 25 or 30 years, or if the
life assured survives until the end of this period.
• It is a combination of pure endowment and term insurance
for which the net premium under ordinary endowment is
the sum of the net premium under term insurance and
under pure endowment issued at the same age for the
same period of time.

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 HEALTH INSURANCE
• Health insurance is defined as insurance
against loss by sickness or accidental
bodily injury.
• The loss may be loss of wage caused by
sickness or accidental bodily injury or it
may be expenses of doctor bills, hospital
bills, medicine and so forth.

There are two separate types of health insurance:

1. Disability income insurance: this insurance provides regular
and periodic payment for those policy holders who lose their
ability to work and generate income due to sickness or bodily
injury.
2. Medical expense insurance: this policy pays the cost of
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medical cares resulted from sickness or bodily injury.
 LIFE INSURANCE PREMIUM
DETERMINATION
• Insurance premium is the price of an insurance
protection.
• The types of premiums available in life insurance are
two types.
1. Net premium: The determination of net premium
considers only the mortality rate and rate of interest.
It ignores operating costs charged by the insurer.
• N.B. Net premium provides the insurer only with the
amount of money required to pay death claims.
• The net premium to be paid could be single or level
premium.
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LIFE INSURANCE PREMIUM DET(cont…)

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 LIFE INSURANCE PREMIUM DET(cont…)
2. Gross Premium: operating costs are added to the net
premium, which is called loading.
•Loading is the act of adding costs of running business to
the net premium costs including operating expenses,
commissions, advertisement expenses, etc.
•It provides the insurer with the amount of money required
to cover death claim and cost of running the insurance
business.

Gross Premium = Net Premium (NP) + Loading

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 A) PREMIUM COMPUTATION FOR TERM LIFE INSURANCE
Term Life NSP Computation
•The following information are required to
determine the Net Single Premium (NSP) of term
insurance
 Age and sex of the insured (policy holder)
 Mortality rate
 Interest rate
 Period or term of the insurance policy
 Sum assured or face value of the policy

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 PREMIUM COMPUTATION(cont…)
• Example 1: Ethiopia Insurance Company issues one year
term insurance to 100,000 males of age 30 for a death
benefit (sum assured) of Br. 10,000 each. Assume that the
premium is to be collected at the beginning when the
policy is issued and death benefits are to be paid at the
end of the year. Also assume that interest rate is 10%,
each of the insured person is assumed to bring the same
level of risk to the underwriting class. The mortality table
is given by the Central Statistics Office (CSO) is shown
below for males of age 30 and above
Age 30 31 32 33 34

Mortality rate/thousand 1.73 1.78 1.82 1.89 1.95

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 PREMIUM COMPUTATION(cont…)

Using the table given above calculate Net Single Premium

(NSP) to be paid by the insured.
•Solution
•Given: Age=30, Sex = male
•Interest rate = 10 %
•Period or term of the insurance policy= 1 year
•Sum assured = 10,000 birr
•NSP = Pv of expected death claim/(No. Of insured(policy
holders))
1. Find the probability of death to know death per year.
•Probability of death at age 30 = 1.73/1,000 = 0.00173
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 PREMIUM COMPUTATION(cont…)
2. Find expected number of insured dying at age 30
= No. of insured living at age 30 X prob of death at age 30
=100,000 X 0.00173 = 173 insured
3. Find expected amount of death claim
= No. of insured dying at age 30 X death benefit
= 173 x 10,000 = 1,730,000 birr
4. The PV of expected death claim at 10 % interest rate =
expected amount of death claim ×1/(1+i)^t
= 1,730,000 ×0.9091 = 1, 572,743 birr
5. Apply the NSP formula, NSP = Pv of expected death
claim/(No.of insured)
•NSP =1,572,743/100,000 = 15.72743 birr= 15.73 Br
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 PREMIUM COMPUTATION(cont…)
• Example 2: Make the previous example a three year term
insurance and by using the mortality rate given in
example one, calculate the NSP to be paid by the insured.

• Solution : Age=30, Sex = male, r=10 %

• Period or term of the insurance policy= 3 years
• Sum assured = 10,000
• Age 30 31 32 33
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• Mortality rate/thousand 1.73 1.78 1.82 1.89
1.95

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 PREMIUM COMPUTATION(cont…)
• Step 1: estimation of expected number of insured dying at each age

Year Age Probability of death No. of insured living No. of insured dying
(1) (2) (3) (4) (5) = 3 × 4

1 30 1.73/1,000 = 0.00173 100,000 173

2 31 1.78/1,000 = 0.00178 99,827 178

3 32 1.82/1,000 = 0.00182 99,649 182

• Step 2: estimation of expected death claim

Yea Age No. of insured Death claim (sum Expected death claim
r (2) dying (3) assured) (4) (5) = 3 × 4
(1)
1 30 173 10,000 1,730,000
2 31 178 10,000 1,780,000 30
 PREMIUM COMPUTATION(cont…)
• Step 3: estimation of present value (PV) of death claim
st 1 nd 1 rd 1
PV of death claim for1 year, , 2 year , 3 year
(1.1)1 (1.1)2 (1.1)3
Yea Age Expected death PV Factor PV of expected
r(1) (2) claim (3 ) (4) Death claim =3* 4
1 30 1,730,000 birr 0.9091 1,572,743 birr
2 31 1,780,000 0.8264 1,470,992
3 32 1,820,000 0.7513 1,367,366
PV of expected death claim for 3 years = 4,411,101 birr
Step 4: apply the NSP formula
NSP = (Pv of expected death claim)/(No.of insured)
NSP =4,411,101/100,000 = 44.11 birr.
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 Term Life Insurance Net Level Premium (NLP)
determination
• Instead of paying once, equal size of payment annually,
semiannually, quarterly or monthly made.
• In NLP determination three points considered
I. Not all the policyholders will pay the annual level
premiums (Since some of them are expected to die before
the end of the term).
II. The insurer will collect a limited amount of money to
invest at the very beginning of the policy.
III. The total annual level premiums paid under the level
scheme will be greater than the single net premium.

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 Net Level Premium determination(cont…)
• Example 3: NIC issues a three year term insurance to
100,000 males of age 30 for a death benefit of 10,000 birr
each. Assume that premiums are to be collected
throughout the term of the policy on an installment base
and death benefits are to be paid at the end of the year.
The interest rate is 10% and each insured person is
assumed to bring the same level of risk to the underwriting
class. By using the mortality rate table given in example 1,
calculate the NLP to be paid by the policy holder.
Solution 1.; find the PV of birr 1
• 2. Find the PV of birr (1) premium per insured.
• 3. calculate NLP, NLP = NSP/(Pv of birr 1 premium/insured
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 Net Level Premium determination(cont…)
1. Determine PV of Birr (1) level Premium Payment

2. PV of Birr (1)Level Premium Payment per Insured

= 273,103 /100,000 =2.731
3. NLP = NSP/(Pv of birr(1)level premium/insured)
NLP = (44.11)/(2.731) =16.15 birr
•This is the level premium to be paid in order to have equal
accumulation of birr 44.11 as in the case of NSP (16.15 x 3= 48.45
birr).
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2. Permanent Health Insurance
 This type of cover has been devised to overcome
the limitation of the personal accident and
sickness policies.
 It provides benefits for those who are disabled for
longer periods or who, due to accident or illness;
have to change to a lower paid occupation.
 It may also be called long term disability
insurance.

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 Cover cannot continue beyond age 65.
 The maximum benefit payable is usually 66 per
cent or 75 per cent of earnings, less any other
disability benefits payable.
3. Motor Insurance
• The minimum requirement by law is to provide
insurance in respect of legal liability to pay
damages arising out of injury caused to any person.
• Third party only: provides cover in respect of
liability incurred through death or injury to a third
party, or damage to third party property.
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 Third party, fire and theft: provides cover as
above and in addition includes cover for damage
to the vehicle from fire or theft.
 Comprehensive: provides cover as above and in
addition including cover for accidental loss of,
or damage to, the vehicle itself. This is the most
common form of policy.
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 Private car insurance applies to private cars
used for social and domestic purposes.
 Commercial vehicle policies: Vehicles used for
commercial purposes (including lorries, taxis,
vans, hire cars, and police cars) are not insured
under private car policies.

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4. Marine and Transport Insurance
a. Marine Cargo
 Marine policies relate to three areas of risk: the
hull, cargo and freight:
 The sum paid for transporting goods, or for the
hire of a ship.
 Cargo ( warehouse to warehouse)
 Against 'perils of the sea'

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b. Marine liabilities
 Liability for collisions at sea under a marine policy.

5. Aviation insurance
 Most policies are issued on an 'all risks' basis.
 Usually a comprehensive policy is issued covering
the aircraft itself (the hull), the liabilities to
passengers and the liabilities to others.

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6. Fire Insurance
 Cover for buildings, machinery and plant, and stock.
 The basic intention of the fire policy is to provide
compensation to the insured person in the event of
there being damage to the property insured.
 The standard fire policy covers damage to property caused by
fire, lightning or explosion,
 The insurance companies, the insurers, have to know which
perils they are insuring against. 42
7. Theft insurance
• Provide compensation to the insured in the event
of loss of the property insured by theft.

8. Fidelity Guarantee Insurance

 Fidelity guarantee insurance indemnifies an
employer for any loss suffered at the hands of
dishonest employees.

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 It provides guarantee against loss through the
dishonesty or incapacity of individuals who
are trusted with money or other property and
who violate this trust.
 Cashiers and other, who handle money, and
other persons employed in positions of trust,
are required by the employers provide
security in the form of fidelity guarantee
policy.

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 The policy indemnifies the employer against
losses from the dishonesty of his employees.
 A requirement that the insured should:
 Inform the insurer of such fraudulent act
immediately upon discovery.
 Either obtain admission of fraud or take
appropriate legal action to establish fraud, and
 Cooperate with the insurer to bring the defaulter
before the court of law.

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9. Comprehensive Insurances
 The combination of separate policies.

 It is also sometimes called a 'package' policy

 This form of insurance represents a widening in

the scope of cover.

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10. Worker’s Compensation/Employer’s Liability
Insurance
 Covers loss of income, medical, and rehabilitation
expenses that result from work related-accidents and
occupations disease.
 If an employee is killed or injured at work as a result
of an accident arising from defective premises or
equipment that a court may award damages against
the employer.
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• Any employer is liable for an employee who
suffers accidental bodily injury or disease while
working for him.
• The insurance which provide protection for
injuring to employees while at work, and as a
result make the employer liable for the loss, is
called worker’s compensation insurance.
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11. Public Liability Insurance

 The policy provides compensation for legal

liability for death, injury, or disease to people
other than employees (which should be covered
by employer’s liability policy).
 Public liability insurance provides what is
popularly termed “third party cover”.
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 Under public liability insurance, policies are
available to cover liabilities attaching to:
 Private individuals: The so called “personal
liability” policy is available to protect private
persons from claims arising due to injury to other
party.
 Product Liability: Liability arising out of defects
of goods produced or sold.
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• Professional men such as doctors, dentists,
solicitors, and bankers may take out policies to
protect themselves from claims arising out of
negligence or mistake committed in the exercise
of their professional duties.

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END OF CHAPTER 5

THANK YOU!!!

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 CHAPTER 6

REINSURANCE

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 REINSURANCE DEFINED
• Re-insurance is a process of shifting part or all of the insurance
originally written by one insurer to another insurer.
• Ceding company/ principal insurer: The insurer that
originally writes the business and shifts it to the other insurer.
• Re-insurer: The insurer that accepts the insurance ceded by the
ceding company.
• Net retention/ retention limit: The amount of insurance
retained by the ceding company.
• Cession: The amount of insurance ceded to the reinsurer.
• Retrocession: Reinsurers may obtain reinsurance from another
reinsurer.
• Retrocedingis the reinsurance co. that purchases reinsurance &
retrocessionair is the one that sells reinsurance.
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 TYPES OF REINSURANCE
1. Facultative reinsurance
•Facultative reinsurance is an optional case by case
method used when the principal insurer receives an
application that exceeds its net retention.
•It is necessary if the principal insurer receives an
application that requires a face value/amount that
exceeds the maximum retention of the insurance
company.
•The main advantage of facultative reinsurance is its
flexibility.
•The major pitfall is that there is uncertainty and delay.
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 2. Treaty reinsurance
• The ceding company and the reinsurer have agreed to cede and
accept insurance business respectively.
• All business that fall within the scope/range of their agreement will
be automatically reinsured according to the terms of the treaty.
• The advantage of treaty reinsurance to the primary reinsurer is that
it is automatic; it avoids uncertainty and delay involved in
facultative reinsurance.
• The major disadvantage to the reinsurer is that it could be
unprofitable since the reinsurer have no knowledge about the
individual applicant and rely on the underwriting judgment of the
primary insurer and the primary insurer may accept and cede
unprofitable insurance to the reinsurer.

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 Types of treaty reinsurance arrangement
Quota share treaty
• Under this treaty the ceding company and the
reinsurer agreed to share premiums and
losses on some proportion expressed in terms
of percentage.
• In this arrangement the ceding company’s
retention limit is expressed in terms of
percentage not in terms of birr amount.

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  Surplus share treaty
• Under this treaty the reinsurer agrees to accept
insurance in excess of the ceding company’s retention
limit up to some maximum amount.
• The retention limit is referred to as a line and is stated
as a birr amount.
• For example, assume that apex fire has a retention
limit of birr 200,000(called a line) for a single policy,
and that four lines, or birr 800,000 are ceded to
general reinsurance. Assume that a birr 500,000
property insurance policy is issued and a loss of birr
5000 occurred.
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 Surplus share treaty(cont…)
• The contribution summarized as follows:
Apex fire birr 200,000(one line)

general reinsurance 800,000(four line)

Total underwriting capacity birr 1,000,000
• For birr 500,000 policies
Apex fire birr 200,000(2/5)

general reinsurance 300,000(3/5)

• For birr 5,000 losses
Apex fire birr 2,000(2/5)

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general reinsurance 3,000(3/5)
  Excess of loss treaty
• Designed largely for catastrophic protection. Losses in
excess of retention limit are paid by the reinsurer up to
some maximum limit. The excess of loss treaty covers;
1. A single exposure
2. A single occurrence, such as a catastrophic loss from a
windstorm, or
3. Excess losses when the primary insurer’s cumulative
losses exceed a certain amount during some stated time
period, such as a year.
• Example; assume that the reinsurer agrees to pay for all
losses in excess of birr 50,000 up to a further birr
200,000.
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 Excess of loss treaty(cont…)
• The way in which various losses are divided is
shown below:
Loss direct insurer excess treaty
Birr 10,000 birr 10,000 nil
50,000 50,000 nil
100,000 50,000 50,000
300,000 100,000 200,000

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 Reinsurance pool

• It is an organization of insurers that underwrites

insurance on a joint basis.
• Reinsurance pools have been formed because a
single insurer alone may not have the financial
capacity to write large amounts of insurance, but
the insurers as a group can combine their
financial resources to obtain the necessary
capacity.

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 REASONS OR ADVANTAGES OF
REINSURANCE
• Increase underwriting capacity
• Stability of profit
• Reduce unearned premium reserve
• Provide protection against catastrophic loss
• Other reasons like retiring from insurance
business and obtaining underwriting advice &
assistance from the reinsurer

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End of the course!!!

THANK YOU!!!

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