TOPIC 6: INSURANCE

CONTENTS

 Introduction
 Pooling of risks
 An insurance contract
 Importance of insurance
 Terms used in insurance
 Principles of insurance
 Classes of insurance
 Re-insurance
 Co-insurance
 Procedure of obtaining an insurance
 Procedure of making an insurance claim
 Insurance and gambling

INTRODUCTION

Insurance is a contract between an individual or an organisation and the insurance company

where the insurance company undertakes to protect the individual or the organisation against loss
arising from the occurrence of the risks insured against.

The individual or the organisation taking the insurance cover is known as the insured whereas
the company giving the insurance cover is known as the insurer.

The insured must make regular payments to the insurer to effect insurance. These regular
payments are known as premiums.

The insurance uses the number of people insured a particular risk and its past experience as the
basis for determine the amount of premiums to be charged.

Examples of insurance companies in Kenya include:

 Blue shield insurance company

 Amaco insurance company
 Britam insurance company etc.

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How insurance works

Insurance companies operate on the law of large numbers where:

a) Many people are insured against the same risk

b) Each person contributes a small amount of money (premium) to cover the risk
c) The amount of money contributed by all persons is collected together into a pool
d) Any person who suffers a loss from the insured risk is compensated from the money
collected in a pool

POOLING OF RISKS

Refers to the practising of grouping together all the people insured against the same risk by
the insurance company.

The pooling of risks spreads the risk over a large number of people, hence reducing the
burden on each of them.

Benefits of pooling of risks to the insurance company

a) It enables the insurance company to create a common pool of funds out of the premiums
paid
b) It enables the insurance company to compensate those who suffer loss when the risks
insured against occur
c) It enables the insurance to spread the risks over a large numbers of insured thereby
reducing the burden on each of them
d) Surplus funds from the pool can be invested in the economy by the insurance company
e) The insurance company can use funds from the common pool to its operational costs
f) It enables the insurance company to calculate the insurance company to be paid by each
insured
g) It enables the insurance to determine whether to re-insure itself with another insurance
company or not

Characteristics of an insurable risk

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 a) There must be a large number of people exposed to the similar risk
b) The possibility of calculating premiums must exist
c) Occurrence of the loss should be accidental or uncertain
d) The insured must suffer a financial loss

e) The insured risk must not be catastrophic

INSURANCE CONTRACT

A contract is a legally binding agreement between two or more parties.

An insurance contract is therefore a legally binding agreement between the insurer and the
insured where each of them agrees to undertake certain specified obligations.

An insurance contract must meet the following conditions in order to be legally binding

a) It must be for a legal purpose i.e. one cannot insure illegal activities or items such as
bhang.
b) The parties must have the legal capacity to contract i.e. they must be mature (above 18
years), sane and not bankrupt.
c) The terms and conditions of the contract must be acceptable to both the insured and the
insurer.
d) There must be a payment and a consideration. The payment is the premiums paid by the
insured whereas the consideration is the insurance cover given by the insurer.

IMPORTANCE OF INSURANCE

a) Creates employment

Insurance creates employment opportunities either directly or indirectly. It creates employment

opportunities directly through the employment of people in insurance companies. On the other
hand, it creates employment opportunities indirectly by enabling business to continue operating
which in return employ people.

b) Creates confidence in investors

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Insurance creates confidence in investors thereby encouraging them to venture in risky but
profitable businesses.

c) Earns revenue to the government

The government earns from insurance companies by taxing the profits they make and the salaries
paid to their employees.

d) Ensures continuity of businesses

Insurance enables businesses to continue operating throughout by compensating them whenever

the risks insured against occurs

e) Spreads risks

Through pooling of risks, insurance spreads risks in that each of the insured contributes a small
amount of money into a common pool out of which those who suffer losses are compensated. As
such they spread the burden (loss) to all the insured.

f) Encourages savings

The amount of money contributed as premiums may act as savings especially in life assurance
polices

g) Invests in the economy

Insurance companies may invest their surplus funds in the economy e.g. by buying shares in
order to earn more incomes.

TERMS USED IN INSURANCE

Some of the commonly used terms in insurance are discussed below:

a) The insurer

This is the insurance company that undertakes to provide the insurance cover

b) The insured

This is the individual or an organisation who takes insurance cover

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 c) Insurance

This is a written contract between the insured and the insurer where the insurer undertakes to
protect the insured against loss arising from the occurrence of the risk insured against.

d) Premium

This is the specified amount of money which is paid by the insured to the insurer at regular
intervals in return for the insurance cover.

e) Risk

These are perils or events against which an insurance cover is taken. They include fire, theft,
accident etc.

There are four types of risks:

 Pure risk
 Speculative risk
 Insurable risks
 Uninsurable risks

i. Pure risk

This is a risk which results in a loss it occurs and results in no gains if it doesn’t occur e.g.
accident.

ii. Speculative risk

This is a risk which results in a loss or a gain when it occurs e.g. risks involved in the stock
exchange.

iii. Insurable risks

These are events or risks which an insurance firm will accept to insure. Examples include fire,
accidents, theft etc. Their features include the following:

 Their probability of occurrence of the risk may be predicted

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  Financial loss arising from their occurrence may be determined accurately
 The number of people who are likely to suffer loss from their occurrence within a given
period of time can be predicted.
 The risk must not be under the control of the insured
 The risk must be pure and not speculative
 The risk must not be unlawful
 A large number of people must be exposed to the same risk
 The risk must unlikely to affect all the insured at once
 The loss must be significant enough to warrant insurance
 The insured must have insurable interest in the subject matter
 The value of the insured should be easily determined
iv. Uninsurable risks

These are risks or events which an insurance firm would not be willing to insure e.g. death. Their
features include the following:

 Their probability of occurrence may not be accurately predicted

 The resulting financial loss may be too enormous to compensate
 The number of people likely to suffer the loss is not accurately predictable
f) Actuaries

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

g) Claim

This is a demand for compensation from the insurance company by the insured for loss arising
from the occurrence of the insured risk

h) Policy

This is a document that contains the terms and conditions of the insurance contract

i) Actual value

This is the true value of the property insured

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 j) Sum insured/sum assured

This is the financial value of the subject matter insured as stated by the insured at the time of
taking the insurance cover.

k) Surrender value

This is the amount of money that is refunded to the insured by the insurance company in case the
insured terminates payment of premiums before the insurance contracts matures. The amount
compensated is usually less than the total amount of premiums already paid.

l) Grace period

This is the time allowed between the date of signing the insurance contract and the date of
payment of the first premium. The grace period is usually a maximum of 30 days

m) Proposer

This is the person who is wishing to take out an insurance cover. He/she is the prospective
insured.

n) Cover-note (binder)

This is a document that is given to the insured by the insurer on payment of the first premium
while awaiting processing of the policy.

The cover-note acts as an evidence that the insurer has accepted to cover the proposed risk.

p) Annuity

This is the amount of money that the insurance company agrees to pay the insured annually until
the insured’s death.

Annuity is paid when the insured saves a large amount of money with the insurance company
and agrees with the insurance company that on maturity of the insurance contract, he/she be paid
a specific amount of money annually until his/her death.

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 q) Consequential loss

This is loss that is suffered by the insured as a result of the disruption of business caused by the
occurrence of the risk insured against

r) Assignment

This is the transfer of an insurance policy by an insured to another person. The new policy holder
is known as the assignee. The assignee takes over all the claims arising from the transferred
policy

s) Beneficiaries

These are people named in life assurance policy by the insured who are to be paid by the
insurance company in the event that the insured dies.

t) Nomination

This is the act of designating (identifying) beneficiaries. The designated people are known as
nominees

u) Average clause

This is a clause that is included in the policy to discourage under-insurance (insurance property
at a lower value than its actual value).

The clause provides that the insured can only recover the proportion of the loss as the value of
the policy bears on the property insured.

The formulae used to calculate the amount of compensation when the property is under-insured
is:

Compensation = (value of the policy × loss) ÷ value of property

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Example: Musa insured a car valued at Ksh 500,000 against an accident for Ksh 400,000. An
accident occurred and the car was damaged. The loss suffered was estimated at Ksh 200,000.
Calculate the amount of compensation Musa will receive from the insurance company.

Compensation = (400,000 × 200,000) ÷ 500000 = Ksh 160,000

v) Double insurance

This refers to where the insured takes insurance policies with more than one insurance
companies in respect of the same risk and subject matter. E.g. insuring a house against the risk of
fire with two insurance companies.

In this case, the insurance companies will share the compensation proportionate to the value of
the subject matter insured with them.

w) Self-insurance

This is where an individual or an organisation insures oneself/itself by saving and accumulating

funds to meet losses that may occur from certain risks rather than insurance the risks with the
insurance company

x) Proposal form

This is a form that is filled by the prospective insured seeking to get an insurance cover from the
insurance company.

PRINCIPLES OF INSURANCE

These are the guidelines which govern the relationship between the insured and the insurer.

These principles are discussed below:

a) The principle of utmost good faith (uberrimae fidei)

According to this principle, the person taking out insurance cover should disclose all the material
facts relating to the person or the property being insured.

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This disclosure is done at the time of entering into the contract. Any changes during the contract
period must be communicated to the insurance company.

All relevant material fact must be disclosed by the insured whether he is asked to or not.

The aim of this principle therefore is to ensure that the insured discloses all the relevant material
facts when taking the insurance policy.

Disclosure of all relevant material facts enables the insurance company to:

a) Decide whether to offer insurance cover or not

b) Determine the amount of premiums to be paid

If the insured fails to give all the material facts honestly and truthfully, the insurance company
has the right to refuse to compensate the insure when the risk insure against occurs

b) Principle of insurable interest

According to this principle, one should only insure property whose damage (loss) as a result of
the occurrence of the risk insured against will result in a financial loss to him/herself.

According to this principle therefore one can only insure his/her own property or any other
property in which he/she has interest.

Where the subject matter (property) to be insured is owned by more than one person, each person
can insure only to the extent of his/her interest in the subject matter.

The aim of the principle is to discourage people from insuring other people’s property.

c) Principle of proximate cause

According to this principle, for the insured to be compensated, there must be a very close
relationship between cause of the loss and the risk insured against i.e. the loss must arise directly
from or be closely connected to the risk insured. For example is a person insures his vehicle
accident and it is stolen, he/she cannot be compensated

The aim of this principle is to ensure that compensation is made for losses arising from risks
insured against only

d) Principle of indemnity

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To indemnify means to put one in the financial position he/she was in just before the loss
occurred.

According to this principle therefore, the insured should be compensated only to the extent of the
actual financial loss suffered.

The aim of this principle is to ensure that the insured does not benefit from the misfortune.

For example, if a vehicle is insured for Ksh 500,000 against theft, the insurance will only
compensate up to a maximum of Ksh 500,000 in the event that the vehicle is stolen

NOTE: the principle of indemnity does not apply to life assurance policies as it is not possible to
restore life

e) Principle of subrogation

To subrogate means to step in the place of or to find a substitute for.

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 insurance
company.

For example, if a vehicle which is insured for Ksh 300,000 is totally damaged and the owner
fully compensated, any scrap metal left behind after compensation becomes the property of the
insurer.

The aim of this principle is to ensure that the insured does not benefit from the misfortune in
accordance with the principle of indemnity.

f) Principle of contribution

This principle operates in a situation where the insured has taken policies with more than one
insurance companies covering the same risk (double insurance).

According to this principle, in the event of a loss, all the insurance companies would contribute
proportionately in order to indemnify the insured.

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The total amount received from all the insurers should be equal to the loss suffered in
compliance with the principle of indemnity.

The aim of this principle is to ensure that the insured does not benefit from the misfortune in
accordance with the principle of indemnity.

CLASSES OF INSURANCE

There are two broad categories of insurance, namely:

a) Life assurance
b) Property insurance

a) LIFE ASSURANCE

This is a form of insurance cover that is taken to cover personal life. It covers the risk of death or
incapacitation.

Death as a risk is inevitable hence the word “assurance” is used.

Life assurance is not a contract of indemnity.

The value of the insurance policy is determined by the ability of the insured tom pay premiums.

Types of life assurance policies

The common types of life assurance policies include the following:

a) Term insurance policy

b) Whole life assurance policy
c) Endowment insurance policy
d) Annuities
e) Statutory scheme
f) Miscellaneous life assurance policies
a) Term insurance policy

This is a form of life assurance that provides protection within a specified period of time
whereby if the policy holder dies within this period, compensation is offered to beneficiaries.

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However if the assured does not die within the specified period, no compensation is offered

Term assurance covers short periods of time e.g. 1 year, 5 years 10 years etc.

Term assurance is purely for protection. It is not a savings plan.

b) Whole life assurance policy

This is a type of insurance policy in which the assured pays premiums until he/she dies.

Upon death of the assured, his/her beneficiaries are paid the sum assured as indicated in the
policy.

Whole life assurance also covers disabilities due to illness or accidents in that if the assured is
disabled during the period when the policy is in form, the insurer will compensate him/her for
the income lost.

Premiums can be paid over an agreed period of time or in a single payment.

c) Endowment insurance policy

This is a type of life assurance policy where the assured pays premiums regularly for a specified
period of time. Sum assured is paid at maturity of the policy.

If however the assured dies before the policy matures, he/her beneficiaries are paid the sum
assured.

Endowment insurance can be terminated by the assured before maturity, in this case the assured
is paid the surrender value

Advantages of endowment insurance policy

a) It is a savings plan since the assured can be paid the sum assured
b) Provides financial security to the beneficiaries in case of early death of the assured
c) It provides financial security to the assured at retirement
d) It can be terminated before maturity by the assured
e) It is a form of investment since it earns interest in most cases
f) The assured enjoys a special tax relief
g) It can be used as a collateral security to acquire a loan

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Differences between a whole life policy and endowment policy

Whole life Endowment

Compensation is paid after the death of the Compensation is paid after the expiry of an
assured agreed upon period
Premiums are paid throughout the life of the Premiums are paid for an agreed period of
assured time
Benefits go the beneficiaries Benefits may go to the assured if he/she is
still alive at the maturity of the policy
Aimed at providing financial security to the Aimed at providing financial security to the
dependants assured and the dependants

d) Annuities

This is a type of life assurance policy where the assured (annuitant) pays a certain sum of money
to the insurance company in return for an annual payment of a specified amount of money from
the insurance company for a specific period of time or until his/her death.

e) Statutory schemes

These are insurance schemes which are offered by the government to provide welfare to the
members of the scheme. Such welfare may be in the form of medical services or retirement
benefits.

They are mostly offered to people who are employed.

A member and the employer both contribute certain amounts of money to the scheme at regular
intervals.

Examples of statutory schemes in Kenya include:

 National social security fund (NSSF)

 National hospital insurance fund (NHIF)

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 f) Miscellaneous life assurance policies

Under this category of life assurance,

a) One can insure anybody whose life he/she has an interest e.g. a wife, a child or a husband
b) Group life policies can be taken to cover a group of people e.g. an employee can take a
group policy over his/her employees

Characteristics of life assurance policy

a) It may cover life until death or for a specific period of time

b) It deals exclusively with life
c) It is usually a long term contract which does not require annual renewal
d) Its value depends on the ability of the assured to pay premiums
e) It may be used as a security when acquiring loans
f) It can be assigned to beneficiaries
g) It has surrender value
h) It has a maturity date
i) It may be a savings plan

Circumstances under which life assurance policies may be terminated

a) When the assured fails to pay premiums as agreed

b) When the assured terminates the policy before maturity
c) When the assured dies
d) When the policy matures
b) GENERAL (PROPERTY OR NON-LIFE) INSURANCE

This is a class of insurance that covers property against various risks which may result to loss or
damage.

It is a contract of indemnity which requires annual renewal.

Examples of risks insured under property insurance include; fire, accident and marine. Each of
these is discussed below:

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 1) FIRE INSURANCE

This is a type of insurance that covers loss or damage of property caused by fire. Property
covered under fire insurance include; stock, machines, equipment and building.

For the insured to be compensated under fire insurance, the following conditions must be met:

a) Fire must be accidental

b) Fire must be the immediate cause of the loss and not the incidental loss
c) The loss must be caused by the actual fire.

Types of fire insurance policies

There are three types of fire insurance policies;

a) Consequential loss (profit interruption) policy

b) Sprinkler leakage policy
c) Fire and related perils (material damage) policy

a) Consequential loss( profit interruption) policy

This is a type of fire insurance policy which is aimed at indemnifying the insured due to loss of
profit as a resulting of the interruption of business activities as a result of fire.

b) Sprinkler leakage policy

This is a type of fire insurance policy which provides cover against loss or damage caused to
goods or premises by accidental leakages from fire fighting sprinklers.

Fire fighting sprinklers are devices which are installed in buildings to provide automatic
mechanisms for fighting fire outbreaks

c) Fire and related perils( material damage) policy

This is a type of fire insurance policy which covers buildings and their contents. Such buildings
may include; shops, warehouses, offices and factories

2) ACCIDENT INSURANCE

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This is a type of insurance which covers all type of risks which occur by accident.

Types of accident insurance policies

There are two types of accident policies;

a) Motor policies
b) General accident policies
a) Motor policies

These are policies which are aimed at covering vehicles from losses arising from accidents.

Motor policies requires annual renewal.

Policies offered under motor policies include:

 Third party insurance

 Third party fire and theft
 Comprehensive policy
a) Third party insurance

This is a policy that covers losses caused by the vehicle to other people, other vehicles and to
property as a result of the accident.

The policy does not cover the vehicle and the owner.

In Kenya, this policy is mandatory for all vehicles.

NOTE:

 First party: refers to the driver and the vehicle

 Second party: refers to the passengers and goods carried in the vehicle
 Third party: refers to road users and property outside the vehicles
b) Third party fire and theft

This is a policy where compensation is offered to third parties as well as the vehicle itself in case
of loss or damage caused by fire or theft.

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 c) Comprehensive policy

This is a policy which covers damage or loss caused by the vehicle to first, second and third
parties as a result of an accident.

It also covers loss of the insured vehicle through fire and theft.

b) General accident policies

This is a form of insurance which provides cover for a wide range of risks. These risks are
discussed below:

a) Personal accident cover

This is a policy that covers partial or total physical disability caused to a person due to injury or
loss of income as a result of an accident.

The policy offers the following:

 A lumpsum in case the insured loses part of body

 Regular payments in case of partial or total disability
 Payment to beneficiaries in case the insured dies in an accident
 Meeting the medical bill in case the insured is hospitalised
b) Workmen’s compensation cover (employer’s accident liability cover)

This is a policy that covers employees who may suffer injuries while on official duty.

c) Cash or goods in transit cover

This is a policy that provides cover for loss of cash or goods while being transported.

d) Theft and burglary cover

This is a policy that provides cover for losses arising from the activities of robbers and thieves.
For example if robbers break into business premises and take away goods, the insurer will
compensate the insured for loss of goods and damage to business premises.

e) Bad debt cover

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This is a policy that covers the business against losses arising from failure of debtors to pay their
debts.

f) Public liability cover

This is a policy that covers losses, injuries or damages caused accidentally by a business or its
employees to the members of the public. For example if a building collapses injuring passers-by
in the process, the insurer will compensate the people who were injured.

g) Fidelity guarantee policy

This is a policy that covers the owner of the business against losses arising from activities of
his/her dishonest employees.

h) Consequential loss policy

This is a policy that provide cover against loss of profits resulting from interruptions in business
causing the business to close down temporarily.

3) MARINE INSURANCE

This is a type of insurance that provide cover for the ship, other water vessels and cargo against
sea perils that may lead to financial loss. Examples of sea perils include storms, fire and sinking.

Policies available under marine insurance include the following:

a) Marine hull policy

This is a policy that covers the ship against loss or damage as a result of risks at sea. These risks
include; storm, fire, collision and capsizing.

b) Marine cargo policy

This a policy that covers cargo against loss or damage while being transported by ship

c) Part policy

This is a policy that covers a specific peril when the ship is being loaded, off-loaded or serviced

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 d) Voyage policy

This is a policy that covers the ship or cargo on a particular journey. The insurer may not
compensate if the destination is changed unless such change was necessary to save the ship,
cargo or human life.

e) Floating policy

This is a policy where several shippers pay a lumpsum to cover their ships while in transit. As
ships make shipments, the amount of insurance for a particular shipment is deducted from the
lumpsum. The policy collapses when the sum insured equals the total value of all the shipments.

f) Time policy

This is a policy that covers losses arising within a specified period of time.

g) Mixed policy

This a policy that covers ships against losses while on a specified voyage and specified time.

h) Fleet policy

This is a policy which covers a fleet of ships against losses under one policy. This is possible
where there are many ships belonging to one organisation

i) Composite policy

This is a policy that provides cover to one specific ship which is insured by several insurance
companies. This is necessary where the sum insured is too large for one insurance company to
cover.

j) Construction (builders) policy

This is a policy which covers the risks that a ship is exposed to while it is either being
constructed, tested or delivered.

k) Freight policy

This is a policy that covers the ship owner against losses arising from failure by the hirer of the
ship to pay freight charges

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 l) Third party liability

This is a policy that covers claims that may arise from loss caused to other people and property
by the ship.

m) Port policy

This is a policy that covers the ship against sea perils when it is at the port

Marine losses

Losses encountered in insurance can be classified into two;

a) Total loss
b) Partial losses
a) Total loss

Refers to total damage to the ship or on the cargo or on both.

Total loss may be classified into two:

 Constructive total loss: this occurs when the insured is extensively damaged and as a
result it is abandoned because the cost of salvaging it would be more than the wreckage.
 Actual total loss: this occurs when there is total damage to the ship, on the cargo or both.
b) Partial loss

Refers to where the ship or the cargo is partly damaged. It is also known as average.

Partial loss may be classified into two:

 Particular average: this is an accidental loss or damage on either the ship or the cargo.
 General average: this is loss that occurs when actions taken to save the ship and the
cargo result in a loss

Characteristics of general insurance

a) The policy cannot be assigned to somebody else

b) The amount of premiums depends on the value of the property and the degree of the risk.
c) It is a contract of indemnity
d) It is usually a short term contract which requires periodic (annual) renewal

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 e) It requires the insured to have insurable interest in the property being insured
f) It has no surrender value

Differences between property (general) insurance and life assurance

Property (general) insurance Life assurance

The policy cannot be assigned to a The policy can be assigned to a beneficiary
beneficiary
The amount of premiums depends on the The amount of premiums depends on the
value of the property and the degree of the sum assured and the ability of the assured to
risk pay
Deals exclusively with property Deals exclusively with life
It is usually a short term contract which It is a long term contract which does not
requires annual renewal require annual renewal
Has no surrender value It has surrender value
It is not a savings plan It is a savings plan
It is a contract of indemnity It is not a contract of indemnity
Causes of over or under insurance may arise There is no under or over insurance
Nominees are not named Nominees are named

Factors influencing the amount of premiums to be paid

a) Health of the insured

The amount of premiums will he higher when health of the insured is poor compared to when
he/she is healthy

b) Frequency of occurrence of insured risk

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The amount of premiums will be higher when the probability of occurrence of the insured risk is
higher than when the probability is low

c) Extent of previous losses

The amount of premiums will be higher if the extent of damage caused by the insured risk
previously was high compared to when the extent of damage was low

d) Value of property insured

The higher the value of the property, the higher the amount of premiums and vice versa

e) Occupation of the insured

An insured person with a well-paying job will pay higher premiums compared to the one with a
poor paying job.

f) Age of the insure or property

Older people will pay higher premiums than higher people than younger people. On the other
hand, the insured will pay low premiums for older properties compared to newer properties.

g) Period to be covered by the policy

A longer period attracts lesser premiums than a longer period

h) Residence of the insured

Insured who reside in urban areas tend to pay higher premiums than the ones residing in rural
areas. This is because those residing in urban are assumed to be financially stable than those
residing in the rural areas

RE-INSURANCE

Re-insurance means to insure again. Re-insurance therefore refers to where insurance companies
insure themselves with other insurance companies known as re-insurers.

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Insurance companies usually re-insure themselves when the value of the property insured with
them is high or when the chances of the risk occurring are very high.

In the event of the risk insured against occurring, the re-insurer helps the insurance company to
compensate.

In Kenya, all insurance companies are required by law to re-insure themselves with the Kenya
re-insurance company.

Circumstances (reasons) that necessitate re-insurance

a) When the value of the property insured is high

b) When chances of the risk insured against occurring are high
c) When the loss from the damage caused by the occurrence of the risk is projected to be
high
d) When the insurance company has insured many different risks
e) When there is need to spread the risk
f) When the government requires all insurance companies to re-insure themselves
g) When the insurance company wishes to share liability in case of a major loss

Features of a re-insurance company (e.g. Kenya re-insurance company)

a) It commands large financial resources

b) Re-insurance companies are empowered by law to insure other insure other insurance
companies
c) Government has a stake in the re-insurance company
d) Re-insurance company only deals with corporate insurance clients
e) It guarantees compensation

CO-INSURANCE

Refers to where the insurance company insures the same property for the same risk with other
insurance companies.

Co-insurance is necessary when the value of the property is high to be covered by one insurance
company.

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Each insurance company will provide cover for only a portion of the value of the property
insured.

The insurance company that accepts to insure the property or the one the highest proportion is
known as the leader while the others are called co-insurers.

In the event of the risk occurring, the leader will ascertain the loss and apportion it to each of the
co-insurers in accordance to the value of the property covered by each of them for compensation
purposes.

DOUBLE INSURANCE

Refers to where the owner of the property (insured) insures the same property for the same risk
with two or more insurance companies.

The property may be insured with each insurance company for the full value or each firm taking
a share of the value.

In the event the risk insured against occurs, each insurance company only a share of the loss
suffered based on the proportion of the value insured.

UNDER-INSURANCE

This is where the sum insured is less than the actual value of the subject matter insured. In the
event of the actual loss, the insured will be compensated the lesser of the sum insured or the
actual loss suffered

OVER-INSURANCE

This is where the sum insured is higher than the actual value of the subject matter insured. In the
event of the actual loss, the insured is compensated the less of the actual loss or the actual value
of the subject matter.

PROCEDURE OF OBTAINING AN INSURANCE POLICY

The process of obtaining an insurance policy involves five key stages which are outlined below:

a) Filling a proposal form

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A person intending to take an insurance policy will first fill a proposal form which will be
obtained from the insurance company he intends enter into contracts with.

The applicant is expected to fill the form with the highest level of honesty by disclosing all the
relevant facts in compliance with the principle of indemnity.

Information given in the proposal form is used by the insurance company to calculate the amount
of premiums to be paid by the insured.

b) Determining the premiums to be paid

On receiving the proposal form, the insurance company uses the facts stated in the form to
decide whether to accept to cover the risk. If the insurance company accepts to cover the risk, it
will calculate the amount of premiums to be paid based on the information provided in the
proposal form.

Where necessary, arrangements may be made to inspect the subject to be insured

c) Payment of the first premium

After the insurance company has accepted to cover the risk and the premiums calculated, the
insured pays the first premium.

d) Issue of the cover note (binder)

Upon paying the first premium, the insured is issued with a cover note by the insurer. The
purpose of the cover note is to serve as evidence that a contract has been entered into between
the insured and the insurer.

The cover note is valid for a period of 30 days after which the policy is issued.

e) Issuing of the policy

The policy is the actual document of contract between the insured and the insurer. It contains the
terms and conditions of the insurance contract.

The policy is issued within 30 days to replace the cover note.

PROCEDURE OF MAKING AN INSURANCE CLAIM

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This is the process followed by the insured when claiming compensation from the insurer. This
process involves five key stages which are discussed below:

a) Notifying the insurer

The insured should inform the insurer immediately the risk insured occurs.

b) Filling a claim form

After being notified of the occurrence of the risk, the insurer issues a claim form to the insured.
The insured will then fill the form by giving all the details relating to the occurrence of the risk.
The fully filled claim form is retained by the insurer.

c) Investigation of the claim

On receiving the claim form, the insurer undertakes to investigate the cause of the occurrence of
the risk so as to ascertain whether the cause of the loss has any direct connection with the risk
covered.

d) Preparation of the assessment report

Once the insurance company establishes that the claim is valid, it prepares a report concerning
the extent of the loss suffered. This report is prepared by experts known as assessors

e) Payment of the claim

Upon receiving the assessment report, the insurer makes arrangements to pay insured. This
payment concludes the contract between the insured and the insurer.

INSURANCE AND GAMBLING

Gambling refers to the activity or practice of playing a game of chance for money or other
stakes. In most cases insurance is erroneously taken to be the same as gambling in that small
amounts are contributed by many people into a common fund which later benefits a few people.

Insurance however differs with gambling in the following ways:

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 Insurance Gambling
The person taking the policy should have A gambler doesn’t need insurance interest
insurable interest
The aim of insurance is to indemnify the The aim of gambling is to improve the
insured financial position of the gambler
The insured is required to pay regular Gambling money is paid at once
premiums to the insurer for the insurance
cover to be in force.
Insurance involves pure risks Gambling involves speculative risks
The event of loss may not occur The event of bet must happen to determine
the winner and the loser

Reasons for terminating an insurance contract

a) When the insured has not acted with utmost good faith and is discovered by the insurer
b) When the risk insured has occurred and compensation has been paid
c) When the insurance contract matures
d) When the insured decides to terminate the contract
e) When the court of law orders termination of the contract thus rendering it null and void
f) When the insurance company is wound up
g) When the insured ceases to have insurable interest on the property e.g. in case the
property is sold

TRENDS IN INSURANCE

a) Introduction of education policies

b) Introduction of funeral and benevolent funds
c) Introduction of medical insurance

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