Insurance 1


- This is an undertaking or contract between an individual or business and an insurance an occurrence of risk(s) (i.e. against events whose
occurrences are unforeseen but causes financial losses or suffering to the affected parties.

Risks are also referred to as contingencies, hazards or perils and include:

- Fire outbreak

- Accidents

- Thefts

- Deaths

- Disabilities

- Risks are real and unforseen. Methods to eliminate such risks has achieved very little and thus has necessitated the need for insurance.

Importance of insurance

1. Continuity of business

Every business enterprise is exposed to a variety of risks e.g. fire, theft e.t.c.The occurrence of such risks often result in financial losses to the business.

Insurance provides adequate protection against such risks in that, if a trader suffers losses as a result of insured risk, she/he is compensated, thus he/she is able to continue with business operations.

2. Investment projects

Insurance enables investors to invest in profitable yet risky business projects
that would otherwise avoided.

Not all the money received as premiums (by the insurance companies) is used up for compensation to those who have been exposed to risk and suffered losses.

The rest of the money is invested in other businesses to earn profits.

3. Creation of employment

Insurance does provide employment opportunities to members of the public.

4. Government policy

The profits earned are a source of revenue for the government i.e. insurance companies are profit-making organizations which generate revenue to the government through payments of taxes.

5. Credit facilities

The insurance industry have also established credit or lending facilities which the business community uses by borrowing.

Loans are made available to the public for different investment projects in different sectors of the economy and also for personal requirements.

6. Development of infrastructures

The insurance industry plays a crucial role in the development of urban facilities in major towns.

Both residential and office buildings have been
developed by insurance firms.

The firms also participate in development projects in the areas where they operate.

They contribute to development of a region by constructing and infrastructural facilities.

7. Life policies can be used as security for loans from either the insurance company or other financial institutions.

8. Provision of life and general insurance policies encourages Kenyans to Plan ahead for their dependants thereby reducing the number of needy future students.

9. Loss prevention - The insurance companies encourage the insured not to cause accidents thus channeling the unclaimed resources into the

The Theory of Insurance

The insurance business relies on the law of large numbers in its operations.

According to this law, there should be a large group of people faced with similar risks and these risks spread over a certain given geographical area.

Every person in the group contributes at regular intervals, small amounts of money called premium into a “common pool”.

The pool is administered and controlled by the insurance company.

i) The fact that risks are geographically spread ensures that insurance does not have a concentration of risks in one particular area.

ii) The law of large numbers enables the insurance to accurately estimate the future probably losses and the number of people who are likely to apply for insurance.

This is done in order to determine the appropriate premiums to be paid by the person taking out insurance.

Pooling of risks

The insurance operation is based on the theory that just a few people out of a given lot may suffer a loss.

There is therefore a “pooling of risks” i.e the loss of the unfortunate few is spread over all the contributors of the group, each bearing a small portion of the total loss.

This is why the burden of loss is not felt by the individuals because it is “shared” by a large group.

Benefits of the “pooling of Risks” to insurance company

i) Pooling of risks enables an insurance company to create a common pool of funds from the regular premiums from different risks.

ii) It enables the insurance company to compensate those who suffer loss when the risks occur.

iii) The insurance company is able to spread risks over a large number of insured people.

iv)Surplus funds can be invested in for example, giving out loans or buying shares in real estates.

v) It enables the insurance company to meet its operating costs by using the pool funds.

vi)It enables the insurance company to calculate to be paid by each client.

vii) It enables the company to re-insure itself with another insurance company.

Terms used in Insurance


This is a written contract that transfers to an insurer the financial responsibility for losses arising from insured risk.


This is the specified amount of money paid at regular intervals by the insured to the insurer for coverage against losses arising from a particular risk.


These are perils or events against which an insurance cover is taken.

It is the calamity or problem a person or business faces and results into losses.

Note: The calculation of premiums depends upon the type of risk insured against.

The higher the probability of the risk occurring, the higher the premium.

The more the risks the business or person is exposed to the more the premiums payable.

Pure risk

This is a risk which results in a loss if it occurs and results in no gains if it
does not occur.

For example, if a car is involved in an accident, there will be a loss and if the accident does not occur there will be no gain or loss.

Speculative risk

This is a risk which when it occurs, may result in a loss or a profit.

For example, a person may buy shares at ksh.50 each, one year later the shares may be valued at ksh40 each meaning a loss of ksh.10.

Alternatively, their value might not have changed or might have increased to ksh.45 each.

Speculative risk lures people to venture into business in the first place.


This is the individual or the business that takes out the insurance cover and therefore becomes the policy holder.

The insured pays premiums to the insurance company to be compensated

should the risk insured against occur or cause loss.


This is the business company that undertakes to provide cover or protection to the people who suffer loss as a result of occurrence of risks.


These are people employed by an insurance company to complete expected losses and calculate the value of premiums.


This is a demand by the insured for payment from the insurer due to some loss arising from an insured risk.


This is a document that contains the terms and conditions of the contract between the insurer and the insured.

Its issued upon payment of the first

Information contained in a policy includes;

• Name, address and occupation

• Policy number of the insured

• Details of risks insured

• Value of property insured

• Premiums payable

• Other special conditions of the insurance, for example nominees

Actual value

This is the true value of the property insured

Sum insured

This is the value for which property is insured, as stated by the insured at the time of taking the policy.

Surrender value

This is the amount of money that is refunded to the insured by the insurer in case the former (i.e. the insured) terminates payment of the premiums before the insurance contract matures.

The policyholder is paid an amount less than
the total amount of the premium paid.

Grace period

This is term allowed between the date of signing the contract and the date of payment of the first premium.

During this period the insurance contract
remains valid. This period is usually a maximum of thirty (30) days.


This is a person wishing to take out an insurance cover (prospective insured) Cover note (Binder)
This is a document given by the insurance company to an insured on payment of the first premium while awaiting for the policy to be processed.

It is proof of evidence that the insurer has accepted to cover a proposed risk.


This is a fixed amount of money that an insurer agrees to pay the insured annually until the latter’s death.

It occurs when a person saves a lumpsum
amount of money with an insurer in return for a guaranteed payment which will continue until he/she dies.

Consequential loss

This is loss incurred by a business as a result of disruption of business in the event of the insured risk occurring.


This is the transfer of an insurance policy by an insured to another person.

Any claims arising from the transferred policy passes to the new policy holder called an assignee.


These are people named in a life assurance policy who are to be paid by the insurer in the event of the insured.


This is the act of designing one or more people who would be the beneficiaries in the event of death of the insured.

These people are called nominees.

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