COMMERCE LESSON NOTES (GRADE 12 PINK)

TOPIC: INSURANCE

Insurance is an Aid to trade or a commercial service which protects traders

against financial losses caused by risks such as fire theft, accidents e.t.c

Functions/ purpose/importance of insurance

 To cover good or assets in advance against financial loss

 To cover employers against injury/death while t work
 It covers risks such as fire, accident, floods
 Indemnify/ compensate traders in case of financial loss through third
party claims such as (Public liability, Employers liability, Loss of raw
materials, equipment, property)

State/list risks that a trader firms, company may insure against

 Fire
 Theft/burglary
 Public liability
 Accident
 Employers liability
 Product liability
 Fidelity guarantee

Importance of taking out an insurance cover by traders/business

people

 If a loss occurs he/she will receive compensation /be indemnified if any

financial loss is suffered.
 Insurance enables the business person to arrange to be compensated
or indemnified in case of a loss resulting from the occurrence of a risk.
To compensate simply means to replace whatever you have lost.
 It provides business people with the confidence to continue trading,
knowing that if any loss is suffered the insurance company will be
there for them.
 Insurance is an invisible export that brings income to the country and
helps to improve the country's balance of payment position.
 It provides companies with the opportunity to pool up risks and for a
fairly low monthly or annual premium, reduces the risk of financial loss.
 It helps individuals to overcome misfortunes like the theft or damage
of a property by fire, flood or accident and also reduces the suffering
 and loss of earnings caused by disablement due to accidents and so
on.

The Term “Pooling Of Risks”

 It is when people who stand a chance of facing common risks pay into
common fund an amount known as premium, from which the
disadvantaged (unfortunate people) are paid from.
 A pooling of risks is a board that consists of individuals who are likely
to suffer the same financial loss if any misfortune occurs.
 For example: individuals who own motor vehicles are likely to
suffer a misfortune of burning down of fire.
 Individuals who own houses are likely to face a misfortune of fire.
 Individuals who own businesses are likely to face misfortune of
theft.
 Insurance functions on the concept of pooling of risks or sharing
risks. Because “a loss lighted easily by many, than upon a few”.
 Pooling of risks means people or businesses that are likely to be
faced with a similar risk pay a small amount of money annual or
monthly payment to the insurance company in return for insurance
covers.
 The annual or monthly payments made in return for insurance cover
are called Premiums.
 These premiums make the insurance company to form what is called a
common fund (collection of premium or a pool).
 The insured is made to pay a small amount of premium to the insurer
for the insured property, e.g. property worth K10, 000 might be insured
for a premium of K300
This is because there are many who wish to insure against the same
risk, many premiums are contributed but there are proportionately
fewer claims
Hence it enables the fortunately people to help the unfortunately ones.
 How the insurance company uses the money from the pool
 To pay compensation to those who suffer losses
 To meet the running expenses such as salaries, rent bills for the
company.
 To pay dividend to company shareholders
 Surplus funds are invested in property business and some lent
out to the government

Terms Used In Insurance

 Insurance cover
This refers to the acceptance by an insurance company to receive
payments from a person or party in return for protection against a
certain specified misfortune which, if they occurs can led to financial
loss.
 The insured
This is a person or party who takes up an insurance cover and is likely
to suffer financial loss or be held responsible for the loss suffered in
case a misfortune covered occurs.
 The insurer
This is a firm or company that accepts to provide insurance cover to
individual who are likely to suffer a financial loss.
 Premium
This is the amount of money payable by the insured to the insurer in
return for an insurance cover.
 Insurance policy
This is a written contract or agreement between the insurer and the
insured.
 Matter insured
This refers to the property being protected in an insurance cover.
 Sum insured
This is the value of the matter insured at the time the insurance cover
is taken.
 Loss
This term refers to the actual damage sustained against which an
insurance cover is taken upon.
 Actual total loss
This refers to complete damage or destruction of the matter insured.
Hence, the insured individual is the compensated for the total loss.
 Constructive total loss
This refers to a situation where the matter insured is destroyed to an
extent that though it is not completely damaged, but the cost
damaged matter is greater than the value of the cost of insured
matter.
 Partial loss
This implies the damaged matter and the cost to repair it is less than
the value of the matter insured.
 Insurance
This refers to the protection against risks or events which may happen.
Example: fire, accidents, theft etc.
  Assurance
This refers to the protection against events or risks that will definitely
occur and compensation will have to be paid at some time.
Example: death.
 Surrender value
This refers to an amount refunded to the insured in case the insurance
policy is terminated before the contract matures.
 Annuity
This is a fixed amount of money that an insurer agrees to pay the
insured annually until ones death.

BUSINESS RISKS

There are two types of business risks and these are:

a. Insurance risks
b. Non- insurable risks

Insurable Risks

 These are risks whose chances of occurring can be mathematically

calculated from carefully kept past records or statistics.
 Calculated risks is used as basis for premium to be charged fairly (fair
premium can be calculated from the past records
 Examples of insurable risks; fire, theft, accident, damage of
property

Non- Insurable Risks

 These are risks that cannot be assessed due to lack of past records.
 Their probability of occurring is not known
 Premium cannot be calculated with certainty
 Examples of non-insurable risks are; loss of profit due to bad
management, Change of fashion, Natural Calamity

PRINCIPLES OF INSURANCE

1. Insurable Interest
 It states that “only the person who stands to lose financially if risk
insured against occurs has the right to insure the property or life”
 The person must usually own the property he/she has to insure i.e.
you cannot insure your friends property
 It prevents people who are not owners of items from insuring it
  No person can insure an item that does not belong to him/her
 People cannot insure anything that does not suffer financial loss
because he/she might be tempted to cause a loss
2. Utmost Good Faith also called Uberrima Fides
 It states that both the insurance company and the person seeking
insurance cover must say the truth or act in good faith by telling the
true without leaving out any facts.
 Otherwise the contact will be void
 Applies when completing a proposal form so that the insurance
company has all the information required in:
Assessing the risk
 Deciding whether to accept the risk or not
 Able to fix a fair premium
3. Indemnity
 It states that the insurance company must restore the insured person
to his/her former financial position without allowing him/her to make a
profit out of a loss.
 With an exception of life assurance/person accident
 Insured should not over insure or under insure a property.
 Indemnity is divided into two principles which are: subrogation and
contribution
 Contribution – It states that, if an item is insured with more than
one insurance company, if the same item is destroyed by the risk
insured against. The insurance companies involved will contribute
proportionately toward the amount of compensation required
without allowing the insured person making profit out the loss.
 Subrogation - It states that once the insured is compensated in
full for the loss, the remains or recovered items becomes the
property of the insurance company.
 The insured must not allowed to make profit out of the loss by
receiving compensation money and keeping the wreak or
removed item
 The right of ownership of the remains item passes to the
insurance company immediately the insured is fully indemnified
to his /her financial position.
 Example 1: A computer is insured for K2, 000 it is damaged in
fire and the cost of repairing is valued at K1, 800. How many
must would be paid in compensations.
Solution
 K1, 800 would be paid in compensation, this is because
compensation money would be restricted to the market value of
the loss.

 Example 2: A school staff room valued at k30 000 it is insured

for k20 000. After getting damaged by fire, the cost of repairs to
the staff room as estimated at k18 000, how much did the school
revive in compensation for a burned staff room .give reason for
your answer
Solution

Amount Insured
Amount received ∈compensation= × Market Value
True Value

20 000
× 18 000
30 000
K12 0000
 The client must be compensated with K12 000 000
because The staff room was under insured,

THE GUIDING PRINCIPLE UNDER THE INSURANCE CLAIMS

a. Average Clause.
 States that the insured people his/her own insure for the amount not
covered by insurance company.
 Average clause prevent those who under insure from making profit
out lose
b. Proximate Cause
 It states that the insurance company would only compensate a
person who has suffered a loss if the risk insured against is the
immediately cause of the loss, he is compensation payable if the loss
is caused by a risk not insured against.
 Example ,if car is insured against theft is it damaged in
accident ,the car will not be replaced because ,it is damaged in an
accident not stolen as insured

STEPS TO BE TAKEN WHEN GETTING AN INSURANCE COVER

1. Approach an insurance broker for inquiries.

2. Obtain a proposal form.
3. Fill in details in utmost good faith, Otherwise the contract will void.
4. Insurance broker/company will assess the risk of the matter that the
insured wish to insure.
 5. The insurance broker/company will calculate the premium and deciding
whether to cover the risk or not.
6. Proposer (insurer) pays the first premium and cover note is insured
7. Cover note may be used to make a claim before a policy is issued.
8. Policy is issued after a period of time; it contains all terms and
condition of contract.
 INSURANCE BROKER
 These are middle men between the insuring company and the insurer.
 They assist the insuring person to obtain insurance by;
 By linking the company/person with the insurance company
 By advising the client and seek the best possible policy.
 By giving information to client on kind 0of insurance policies offered
by different insurance companies
 By approaching and getting quotation from esurience companies on
behalf of the client e.g. proposal form
 By collecting and forwarding premium/make claim on behalf of client
 They are paid by a commission called brokerage
 PROPOSAL FORM
 A proposal form is an application for insurance
 It gives details of the risk to be insured against
 It gives details of the applicant
 The proposer complete details in the proposal form in utmost good
faith
 Giving full; and accurate details about the property and the risk being
insured against
 The broker/company will use the details to assess the risk and Decide
whether to accept the risk or not.

PROCEDURE IN MAKING A CLAIM

1. Inform the police of the calamity accident immediately it happens

2. Notify the insurance company of calamity or accident as soon as
possible.
3. Inform the insurance company if the item was insured with other
company.
4. Complete or fill a claim form giving full details of loses suffered.
5. Insurance company seed assessors to inspect the damage and
determine amount of compensation.
6. The client signs an agreement of loss form.
7. To bind him to accept the amount of compensation arrived at.
 8. Insurance company settles the client by paying him/her or replacing
the item lost.
9. The remaining of the item is subrogated to the insurance company.

BRANCHES OF INSURANCE

1. LIFE ASSURANCE
 The term assurance refers to certainties i.e. risks that must happen
e.g. dearth The term insurance refers to probability i.e. risks that may
or may not happen e.g. fire theft, accident

TYPES OF LIFE ASSURANCE

a) WHOLE LIFE POLICY

 It is a policy which provides compensation (sum insured) only
upon death of the insured person.
 The insured person does not receive compensation money before
his/her death.
 The sum insured is given to his/her beneficially who may be
his/her wife/husband/children.
 Premium is paid for whole of his life.
 The money will be used to:
 Pay for funeral expenses of the insured person
 Pay the outstanding debts if any left by the insured person
 Other money will be used for upkeep of the beneficiaries
b) ENDOWMENT POLICY
 Is a policy taken for a specific period of time e.g. from 20 to
60years.
 It provides compensation money (i.e. insured money either at
maturity date or at death of the insured person whichever comes
first.
 It is essential because it provides:
 Compensation where assured person dies before maturity
 Saving money where the assured survives up to maturity date.
 It can be with profit or without profit (interest)

TERMINATION OF LIFE ASSURANCE POLICIES

Life assurance policy may come to an end in one of the following ways:

 Lapse of policy (if premium is not paid within the stated days)
 Death (if the assured person deaths)
 Surrender (if the assured decides to paying premium)
  Maturity (if the assured day reach and the assure is still alive)

TYPES OF INSURANCE COVER

These are classified into:

1) FIRE INSURANCE
This is the protection of both properties and lives. There are two main
types of fire insurance.
a) Ordinary Fire Insurance - It provides insurance protection to a
wide range of property such as personal and business
buildings ,warehouses and their content against damage caused by
fire
b) Consequential Loss Insurance - It is the loss of profit suffered as
a loss of profit as a result of an insured risk. It provides
compensation for:  Loss of normal business profit as a result of an
insured risk
 Business expenses
 Renting an alternative buildings
Extra or special perils – this covers a wide range of risks that
may or may not cause fire. They include fermentation, riots, civil
commotion, strikes etc.

FACTORS CONSIDERED WHEN FIXING PREMIUM FOR FIRE INSURANCE

 The particulars of an applicant

 The address and situation of the property to be insured
 Detailed information about the property
 If it is a house, state the value, materials used to build it, safety
measure provided
 Whether if the similar risk has occurred before
2) ACCIDENT INSURANC

The following are branches of insurance covers.

1. Employers Liability Insurance

 It provides compensation to employers for injury, death, diseases etc. as
a result of employer’s negligence. suffered whilst at work as a result of
the employers negligence
2.Public Liability Insurance
 It covers business owners and manufacturers against claims by
members of the general public for death and accident
 FIDELITY GUARANTEE INSURANCE POLICY

 Provides compensation to9 the employers for the money or good

embezzled by employers

MARINE INSURANCE - It covers losses or damage to property and life caused

by sea risk transport HULL INSURANCE - It covers ships and machine against
damage due to fire ,collusions and storm and - Against other ships - Policy
can either be for a particular journey known as voyage policy or a period of
time known as time policy - It is taken by ship owner FREIGHT INSURANCE -
Covers for the amount changed for transportation of the cargo or good - It is
refunded if good are un delivered - It is paid by shipping firms /suppliers - It
is also covers ship owner against the possibility of not being paid flight or
hire money by client who don’t pay transport chargers I advance CARGO
INSURANCE - Covers good b being carried by ship - Covers may be for a
single consignment or may be several consignment known as floating policy
- It is taken by cargo owners SHIP-OWNER ‘S LIABILITY INSURANCE a. Covers
ship owners against claims that may made on their for  Death or injury
caused to crew members/ passengers 63  Loss or damaged caused to other
ships in collision  Loss or damaged caused to beaches MOTOR INSURANCE
This covers a wide range of insurance and it include the following: MOTOR
VEHICLE INSURANCE i. It is compulsory y law for motor vehicles owners to
insure against loss or damage to third parties ii. The third party is any
member of the general public to whom death or bodily injury may be caused
e.g. passengers, other motorists etc TYPES OF MOTOR INSURANCE POLICIES
a. Third-party motor insurance i. This is a minimum motor insurance any
vehicle that moves on the road is required to have ii. It provides
compensation only to third parties for death or bodily injury caused to them
or damaged to their property iii. The insured own vehicle is not covered b.
Third party, fire and theft motor insurance i. This type of motor insurance
provides insurance cover to third parties for death or bodily injury caused to
them and their properties ii. The insured’s own vehicle for accidental damage
to the vehicle, injury to drivers, loss of vehicle y fire, theft, or by instant mob
justice c. Full comprehensive motor insurance i. This covers a variety of risks
that may happen to vehicle. ii. It is the best and the most expensive type of
motor insurance Factors to consider when fixing the premium for motor
insurance Number of accident for the type of vehicles being insured has
been involved in Number of people wishing to insure so as to apply the law
of big number Age of a driver Type of motor insurance required e.g.
comprehensive, third party etc Purpose for which the business is to be used
Number of vehicle using the vehicle Occupation of the vehicle user Security
gadgets fitted Make of the vehicle Value of the vehicle 64 EXAMINATIONS
QUESTION Question 1 Lwindi has just opened a new retail shop in Chipata,
but has not yet insured her premises (a) State why Lwindi must insure her
business premises [4] (b) (i) illustrate the difference between whole life
policy and endowment policy [[6] (ii) Explain clearly what factors need to be
considered when fixing premium for motor insurance [4] (c) Outline with
examples the main types of marine insurance [6] Question 2 Insurance seeks
to compensate those that suffer financial risk due to accidents, injuries,
thefts and fire. (a) How can a risk be considered to be an insurable risk [4]
(b) (i) why would advise a person to go through an insurance broker to
arrange for Insurance cover and not go direct to an insurance company [4]
(ii) Describe the two main types of fire insurance [6] (iii) Distinguish between
contribution and subrogation in relation to indemnity [6] Question 3 Parmalat
Zambia Limited is a producer of various fruit juices and owns a fleet of
vehicles used for delivery. (a) State four risks that this company can insure
against [4] (b) (i) Explain the factors that the insurance company considered
when fixing premium for fire insurance [5] (ii) Describe the procedure in
making an insurance claim [5] (c) Distinguish between insurance and non-
insurable risk [6] (d) Outline the procedure following when taking out
insurance cover [6] (e) The van was valued at KK30, 000. It was insured at
K20 000. After getting involved in an accident, the cost of repairs to the car
was estimated at K18 000. How much would be received in compensation?
Giver Reasons [6] Question 4 Insurance is a system of protection against all
kinds of insurance risks based on the principle of “Pooling of Risks” a)
Explain the term pooling of risks [6] b) Insurance requires indemnity. Explain
the term indemnity [4] c) List six insurance business risks that Mulungushi
Textiles Company insure [6] d) How might an insurance broker assist the
Mulungushi Textiles Company to obtain insurance [4] Question 5 Write brief
notes on the following a. An insurance policy b. Insurance Broker c. Utmost
good faith d. Non- insurable interest e. Insurable interest f. Indemnity
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