Principles of Business
Insurance and Assurance – Handout #13
Insurance differs from assurance in that insurance covers risks that may occur e.g. theft, fire,
accident etc., while assurance covers events that will occur such as death.
The parties to the insurance contract are the insurer (the company offering protection) and the
insured (the person seeking protection). Payments are made by the insured for this service. The
price charged for insurance is called a premium. The contract is known as the policy.
Insurance Principles
The purpose of insurance is to compensate persons insured who suffer a loss. It is based on the
principle of indemnity, that is, to restore the insured to his or her original position before
suffering the loss. Therefore, insurance should neither make the insured worse off or better off
than before the loss was incurred. For example, if Mr. Green suffered damages valuing $500,000
subsequent to a fire at his home, he will be compensated exactly $500,000 to repair his house.
Principles of Insurance
1. Indemnity - restoring the insured to his original position.
2. Insurable interest - the insured must have a vested interest in what is being insured. For
example, someone is not allowed to insure his neighbour’s house.
3. Utmost Good Faith -the insured must be truthful concerning the information pertaining to
the policy contract.
4. Proximate Cause - The damage caused must be close or proximate to the event insured
against.
5. Contribution - this principle prevents persons insuring identical risks with several
companies to make profits if they suffer a loss. For example, an individual may insure
his car with three insurance companies hoping to be compensated by all three. He will not
succeed as the insurance companies will each only pay a portion of the claim.
6. Average Clause – This clause sets a limit to the size of the compensation, which depends
on the proportion of the true value of the asset paid up by the insured. For example, a
homeowner insures his home for $100,000 which is half the true value of $200,000. His
house was partially destroyed by fire on the insurance company for $50,000 worth of
damage. The insurance company only paid him $25,000 as he was only insured for 50%
of the true value of the house presently.
7. Subrogation - this is an extension of the principle of indemnity, that is, the insured should
be reinstated to his exact position before the loss. For example, if a vehicle is totally
wrecked and the insurance company pays the insured the value of the car, the wrecked
vehicle will be claimed by insurance company.
How does insurance Work?
How are insurance companies able to pay its clients large sums of money to compensate them for
loss? They operate on the basis of risk pooling. Premiums from large numbers of persons with
the same risks are pooled and only those who suffer loss are compensated. The insurance
company can predict the percentage of losses based on past data. The premiums charged are
based on the number of losses predicted plus the cost to operate the business and profits to be
realized. For example, a particular insurance company may insure one thousand persons for risk
against car theft. Only two percent of those insured may suffer loss and therefore the insurance
company can afford to assist those persons.
Types of Insurance Policies
1. Life Assurance
(a) Whole Life Assurance
Payment will be made upon the death of the insured. The beneficiaries of the insured will be
paid.
(b) Endowed Assurance
Payments are made at the end of specific periods. The Endowment policies may be paid at
the end of twenty or thirty years or at the age of retirement. If death occurs before the end of
the endowment period insured, then the beneficiaries of the insured will be paid.
2.Term and Business Insurance
(a) Fire Insurance
Covers loss or damages to assets by fire.
(b) Burglary Insurance
Covers loss due to goods stolen and damages to property caused by theft.
(c) Bad Debts Insurance
Covers debts that cannot be collected
(d) Plats Glass Insurance
Covers the replacement of shop windows as well as any injury to staff and customers that
may be caused by its breakage.
(e) Fidelity Guarantee Insurance
This protects a firm against loss due to the misappropriation of funds by employee,
customers or other persons.
(f) Employers’ Liability Insurance and Public Liability
Covers injury incurred by staff or visitors on a business location due to the negligence of the
firm, e.g., customers slipping on a wet floor.
(g) Motor Insurance
Third party – Only third parties e.g. passengers are covered. The driver and car is not
covered.
Comprehensive – Covers loss due to damages to the driver and third parties.
(h) Marine Insurance
This policy covers loss due to damages of ships and cargo at sea.
Importance of Insurance to Businesses
Entrepreneurs invest a wealth of resources into the start-up and continuous operation of a
business. If the entrepreneur suffers any form of loss such as fire or burglary etc. the business
may take a long time to recover. Insurance is therefore very important to the business
community. The principle of indemnity ensures that an entrepreneur receives enough
compensation to continue the business with minimum effects.
Quiz
Question 1
Differentiate between ‘insurer’ and ‘insured’.
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Question 2
What is premium?
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Question 3
What is a policy?
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Question 4
Give ONE reason why you would encourage someone to take out an insurance policy?
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Question 5
Explain the purpose of insurance and identify four fundamental principles.
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Question 6
Differentiate between Insurance and assurance and give four types of Insurance.
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Question 7
Show how the three types of insurance are beneficial to businesses.
Bad debts insurance
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Plats glass insurance
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Employers’ Liability
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