Insurance 2

Double insurance

This is taking of insurance policies with more than one company in respect to the same subject matter and the risk.

It is significant because if one of the insurers is insolvent at the time the claim arises the insured can enforce his/her claim against the solvent insurer or if both insurers are solvent then they share compensation.

(Insolvency is a state where a business is not able to pay all its liabilities from its existing assets)

Co-insurance

This is an undertaking by more than one insurance company to provide insurance cover for the same risk for an insured.

This will usually occur for properties that have great value and face great risk exposures that an insurer cannot successfully make compensation for e.g. value of aeroplanes, ships e.t.c.

Co-insurance help spread risks to several insurers, each insurer covering only a certain proportion of the total value.

The insurance company with the largest
share is called the “leader” and acts on behalf of all the participating insurance companies’ e.g. in collecting premiums from the insured and carrying out documentation work, making claim after collecting each insurers premium
contribution e.t.c

Note: Co-insurance is different from double-insurance in that in co-insurance company approaches another insurance company to help in covering the insured property while in double-insurance; it’s the insured who decides to
approach different insurance companies to insure the same property against the same risk.

Re-insurance

‘Re-insurance’ means insuring again. This is a situation where an insurance company insures itself with a bigger insurance company called le-insurer for all or part of the risks insured with it by members of the public
Re-insurance indirectly insure an individuals risks.

Re-insurance helps to reduce the burden on an insurance company when the loss is too high for a
single insurer.

When such losses occurs, the claim is met by both the insurer and re-insurer(s) proportionately (according to agreed percentages)

Note:Re-insurance deal with the protection of insurance companies only, while insurance companies protect individuals and business organizations.


Factors that may make it necessary for an insurance company to Re insure

i. Value of property - When the value of property is great, such as ship, the risk is too high to be borne by a single insurer.

ii. High risk of loss - When chances of loss through the insured risks are high, it becomes necessary to re-insure.

iii. Number of risks covered - When the insurance company has insured many different risks, it would be too costly to compensate many claims at once, hence the need for re-insurance.

iv. Need to spread the risk - When the insurance company wishes to share liability in the event of a major loss occurring.

v. Government policy - The government may make a legal requirement for an insurance company to re-insure.

Under-insurance

This occurs when the sum insured as contained in the policy is less than the actual value of the property e.g.

A property of shs.500, 000 can be offered for insurance as having a value of shs.400, 000
Over-insurance.

This is a situation where the sum insured is more than the correct value of property e.g. a person insures property of shs.300,000 for shs.600,000.

If total loss occurs, he is compensated the correct value of the property i.e. that which he has lost.

Agents

These are people who sell insurance policies on behalf of the insurance company.

They are paid on commission that is dependent upon the total value of policies sold.

Insurance Brokers

These are professional middlemen in the insurance process.

They connect the people wishing to take insurance with the insurers.

They act on behalf of many different insurance firms, unlike agents.

Their activities include:

• Examination of insurance market trends

• Correspondence between the insured and his clients

• Advising the insured and would be policyholders on the best policies for their property e.t.c.


He receives a commission (reward) known as brokerage.

Principles of Insurance

Principles of insurance provide guidance to the insurance firms at the time they are entering into a contract with the person taking the cover.

These insurance principles include:

i. Help to determine whether a valid insurance contract exists between the two parties at the time claims are made.

ii. Provide checks and controls to ensure successful operations of insurance for the benefit of both the parties.

It is therefore important that a prospective insured (person wishing to take insurance policy) has basic knowledge of these principles as stated in the insurance law.

The insurance principles include;

i) Insurable Interest

This principle states that an insurance claim cannot be valid unless the insured person can prove that he has directly suffered a financial loss

and not just because the insured risk has occurred.

Going by this principle one cannot insure his parents or friends or other people’s property since he/she has no insurable interest in them.

If such properties are damaged or completely destroyed, he/she will not suffer any
financial loss.

For example, Mr.x has no insurable interest in the property of his neighbours.

He does not suffer any financial loss should they be destroyed.

This principle ensures that people are not deliberately destroying other people’s properties/life in order for them to receive compensation.

In life insurance (life assurance) it is assumed that a person has unlimited interest in his/her own life.

Similarly it is assumed that one has insurable in the life of spouse and children e.g. a wife may insure the life of her husband, a father the life of his child because there is sufficient insurable interest.

ii) Indemnity

The essence of this principle is that the insurer will only pay the “replacement value” of the property when the insured suffers loss as a result of an insured risk.

This principle thus puts the insured back to the financial position he enjoyed
immediately before the loss occurred.

It is therefore not possible, then, for anybody to gain from a misfortune by getting compensation exceeding the actual financial loss suffered as this will make him gain from a misfortune.

This principle does not apply in life assurance since it is not possible to value one’s life or a part of the body in terms of money.

Instead, the insurance policy states the amount of money the insured can claim in the event of death.

iii) Utmost good faith (uberrima fides)

In this principle the person taking out a policy is supposed to disclose the required relevant material facts concerning the property or life to be insured with all honesty.

Failure to comply to this may render the contract null and void hence no compensation.
e.g.

- A person suffering from a terminal illness should reveal this information to the insurer.

-One should not under-insure or over-insure his/her property.

iv) Subrogation

This principle compliments the principle of indemnity. It does so by ensuring that a person does not benefit from the occurrence of loss.

According to this principle, whatever remains of the property insured after the insured has been compensated according to the terms of the policy, becomes the property of the insure.

Example

Assuming that Daisy’s car is completely damaged in an accident and the insurance compensates for the full value of the loss, whatever remains of the old car (now scrap), belongs to the insurance company Scrap metal can be sold for some values and should Daisy take the amount she would end up getting more amount than the value of the car which will be against the principle of indemnity.

Note:This principle cannot be applicable to life assurance since there is nothing to subrogate.

v) Proximate cause

This principle states that for the insured to be compensated there must be a very close relationship between the loss suffered and risk insured i.e. the loss must arise directly from the risk insured or be connected to the risk insured.

Example

i) If a property is insured against fire then fire occurs and looters take advantage of the situation and steal some of the property, the insured will suffer loss from ‘theft’ which is a different risk from the one insured against,
so he/she will not be compensated.

However if the property burns down as a result of sparks from the fire-place, the proximate cause of the loss is sparks which are directly related to fire. So the insured is entitled for compensation.

Classes of Insurance

Insurance covers are mainly classified into two,

1. Property (non-life) general insurance

2. Life assurance

1. Life Assurance

The term assurance is used in respect of life contracts.

It is used to mean that life contracts are not contracts of indemnity as life cannot be indemnified i.e. put back to the same financial position he was in before the occurrence of
loss.

(life has no money value, no amount of money can give back a lost or injured life)
Life insurance (assurance) is entered by the two parties in utmost good faith
and the premiums payable in such life contracts depend on:

i) Age: The higher the age the higher the premiums as the age factor increase the chances of occurrence of death.

ii) Health condition: A person with poor health i.e. sickly person pays higher premiums as opposed to one in good health.

iii) Exposure to health risks: The nature of a person’s occupation can make him susceptible to health problems and death.