27/02/2023

COMMERCE – GRADE 12 (NOTES)

MBEWE D.
GRANDVIEW ACADEMY 2023

INSURANCE
Insurance is an aid to trade that protects individuals and
organisations such as traders against financial losses that
may be caused by risks such as fire, theft, accident, etc.
Insurance also defined as the legally binding guarantee
given by the insurer to -compensate/indemnify/restore or
cover the insured for any financial loss which may be
suffered as a result of the occupancy of a specified event
which may or not occur (probabilities). In return for this
guarantee the insured makes a periodic payment called
premium to the Insurer.
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SOME WORKING DEFINITIONS

Insurer:
This is the party (insurance Company) which under take/ giving the
cover or Insurance
Insured:
This is the party (person) seeking for insurance or guarantee of
compensation.
Insurance Premium:
This is the amount of money that an individual or business pays for
insurance cover
 The premiums are paid into a central fund (pool) for the
claims of the unfortunate few (ones).
 The profit on the Insurance Company is based on the
statistical probability that only a small percentage of the
insured person will ever have to make claims.

 Therefore, the premium of many pays the claims of the

unfortunate few who have suffered financial loss as a
result of an insurable risk leaving the excess as a profit for
the insurer for the services he provides.
 The larger the number of people contributing to an
Insurance pool for a particular risks the less likelihood of
that group suffering a large percentage of loss than the
average for all the people open to the risk.
 This is known as law of average. This is because there is
less chance of loss to the Insurance company.
 When the number insuring a particular risks with it, is large,
the amount or premium likely to be charged is lower.
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Purpose/Functions of Insurance
 To pool the risks of many insured persons and spread the
financial losses of the unfortunate few over the fortunate
few over the fortunate many.
 It reduces the risk of financial loss by giving indemnity i.e.
giving security to the insured.
 It reduces, fear by increasing funds, which might otherwise
have to be set aside in case of a calamity.
 It allows businessmen and businesswomen to enter into
large-scale contract, which might otherwise be avoided
for fear of loss.
 It is also on invisible export and means of saving for some
people (in the case of an endowment policy)

Why it is important for the business people to insure their items?

 If a loss occurs, the business person will receive compensation if he
does not insure his business he may end up going out of business
 It gives people the confidence to continue conducting businesses
because if they suffer, the insurance company will compensate
them
 Claims against business people may be too large
 Business people are required by law to take public liability
insurance, for example, employer’s liability insurance.

Pooling of Risks
 Pooling of risks is the basis of insurance which enables the fortunate
ones to help the unfortunate ones.
 A policy holder pays a premium into the pool from which
compensation is paid to those who claim.
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 The funds in a pool must be sufficient to cover

compensation, administration cases and leave some
profits for the insurance company.
 There is likely to be a separate pool for each risk.
 If there are many who wish to insure against a particular
risk, more premium is contributed, but if there are few
calamities, the premium is low.
 For the principle of pooling of risks to work, the insured
persons must not suffer losses all at the same time. If they
all suffer the loss at once, they can be no enough funds in
the insurance pool to pay everyone.

PRINCIPLES OF INSURANCE
These are the basic ‘rules’ of insurance which are applied to ensure that
the policy is effective and it is not prone (open) to abuse:
a) Utmost good faith
Both the insured and insurer must reveal every relevant and material
facts relating to the policy being undertaken.
The insured must fill in the proposal form by telling the truth without
leaving out any material facts relating to the contact.
This enables insurance company to assess the risk and decide whether
or not to accept it and then determine the amount of premium
The insurance company must also act in the utmost good faith by
settling material facts relating to the contract.
The contract may be declared null and void if utmost good faith is not
followed by both parties (breach or utmost good faith) renders the
contract well and avoid.
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b) Indemnity
 This principle states that the policy holder must be
restored/compensated to his or her former financial position without
making profits out of a loss.
 She is not allowed to make profit out or a loss as she may cause the
risk to occur.
 Indemnity does not apply to life assurance and is limited to the sum
insured or the market value of the object, therefore the insured must
not over insure or under insure.
In order not to violate this principle there are two rules under principle of
indemnity. These are;
(i) Contribution
Applies if the policy holder insured with more than one insurance
company.
In this case, insurance companies contribute proportional amounts
to make up for the loss.

ii) Subrogation
Applies if the insured is fully compensated/Indemnified for
the loss E.g. in the case of a vehicle stolen or damaged, the
damaged (scrap vehicle) or recovered property belongs to
the insurance company.
The principle of average under indemnity means that if the
insured does not increase the amount of the cover when
the value of the insured object increases, he will not receive
the full compensation in the event of the claim, instead he
will receive part of the compensation based on the average
cause or the ratio of the amount to cover the market value
of the object
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c) Insurable Interest
 It states that only the person who stands to lose financially if the
risk insured against has the legal right to insure the property or life
 That is, the person must own the property if s/he has to insure it.
 It prevents people who are not owners of the item from insuring
the property
 If people were allowed to insure items or lives which do not
belong to them,
 they might be tempted to deliberately cause the loss in order to
claim compensation
 And thus making profit out of the loss
 This will defeat the principle of indemnity because
 The insured was not in the position to lose financially hence s/he
could not be indemnified

d) Proximate cause
 This doctrine entails that the insurance company can only
compensate a person who has suffered a loss if the risk
insured against is the immediate cause of the loss.
 There is no compensation payable if the loss caused by
the risk is not insured against
 For instance, if Mr Milanzi assures his life against death by
motor accident and as he is travelling from Isoka to Kitwe,
he dies of a heart attack no compensation would be
paid,
 This is because, the immediate cause of his death is a risk
which he did not insure his life against.
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Taking out an Insurance Policy

The person seeking insurance cover approaches the insurance broker
S/he obtains and completes the proposal form which an application for
insurance
It gives details of the risk to be covered against and details of the
applicant.
The proposal form must be filled in utmost good faith.
The proposal form is important to the insured because; It enables the
insurance company assess the risk and decide whether or not to accept
the risks and fix/set premium and finally issue the insurance policy, setting
the terms of the contract (it forms the basis of the contract).
An insurance policy is a paper written as evidence between the
insurance company and the person insured.
Where the important information relating to the object being insured is
not disclosed on the proposal form, the contract may be declared null
and void

Procedure involved in making a claim

Inform the police immediately the loss occurs/happens
Notify the insurance company of the loss as soon as it
happens(possible)
Notify the insurance company if the object was insured with the other
insurance company
Complete the claim form giving full details of the loss suffered
Insurance company employees (assessors) inspects the damage
They assess and determine the amount of financial loss suffered In
order to arrive at a fair and reasonable amount of compensation, the
client signs an agreement of loss form to bind him to accept the
amount of compensation arrived at.
The insurance company then settles the claim by paying money Or by
paying in kind, eg, buying the same object of the same model and
value
The remains of the object are subrogated to the insurance company
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An Insurance Policy
It is a document which sets out
• terms and conditions of an insurance
Covering the precise risk
• Period of cover
• Exceptions such as life assurance like suicide
• And the amount of premium to be paid

Insurable and non-insurable risks

A risk is any event that results in a financial loss. Risks are categorised in
two. Insurable and non-insurable risks.
Insurable risk
These are risks that the insurance company accept to cover because;
 they have occurred before
 It is possible to calculate premium
 It has passed records
 It is easy to assess the occurrence of the misfortune e.g. fire,
accident.
Non insurable risk
These are risks which the insurance company refuse to cover because;
 They have no passed records
 It is difficult to calculate premium
 It is difficult to assess the misfortune occurrence
 It has not occurred.eg mismanagement of a business
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Types of insurance covers

Because there are many risks facing individuals and businesses,
many different insurance policies have been designed to offer
various insurance cover. These are:
Life Assurance
The term assurance refers to certainties,
The term insurance refers to probabilities,
That is, risks that may or may not happen such as fire, theft,
accident and flood..
The principle of indemnity, does not apply to life assurance
Because when a person dies, no amount of monetary
compensation will restore him/her to life.
Assurance is looked at as a form of serving plan rather than
insurance.

 It is true we all know that we are going to die but we are

not sure when we will die.
 Life assurance is a good way of ensuring that surviving
members of the family are taken care of
 if we die young we are likely to leave a widow and young
children with no money to look after them. This is where
life assurance will be helpful.
 Life policies are normally sold by insurance agents who are
different from brokers.
 Insurance agents act on behalf of a company. They never
handle premiums.
 The premiums are paid directly to the insurance company
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Life assurance policy covers the following:

(a) Whole life policy
 This is a policy under which a person assures his/her life for a
certain sum of money which will be paid to his/her
dependants after his/her death.
 the person divides how much he wants to assure his life for
and the insurance company Calculates the amount of
premium to be paid monthly or yearly.
 The assured pays premium for his/her entire working life until
death.
 To fix premium, the Insurance Company will look at the age,
health records occupation as well as the duration and the
amount of cover required – if the assured dies, the money is
then paid to his/her dependants and beneficiaries.

(b) Term Policy

 This is a policy which covers a person for a fixed period of
time e.g. twenty years.
 The premium is cheaper as the insurance company does
not have to pay anything if the person lives up to the
period covered.
 It may act as a form of saving for some people.
 She/he can take the policy for the duration of the loan.
 It is good for someone buying a house through mortgage.
 If he/she dies before furnishing paying for the loan, the
procedures are used to pay off the loan.
 The main disadvantages of this policy is that no value at
the end of its full period.
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c) LIFE ENDOWMENT POLICY

 Under this policy the assured is covered for certain period of
time.
 The period may be from 5 years to 20 years.
 It provides compensation in money (sum assured) either at
maturity date or death of the assured person whichever
comes first.
 Endowment policy serves two useful purposes:
 Endowment policy with profit assures the assured person to
share profit made by the insurance company from the
premiums.
 Endowment Without Insurance does not assure the assured
person to share profits made by the insurance company
using the premiums contributed.

Fire Insurance
• Fire is a risk that has caused untold misery to mankind. The
major Insurance cover available are:

(a) Ordinary fire insurance

• This provides cover/insurance protection to a wide range of
property such as personal and business buildings, and their
content against damage caused by fire.
(b) Consequential Loss
 This is the loss of profit suffered as result of an insured risk, for
example; a trader may insure his/her retail shop against fire. If
later fire totally destroys the retail shop, then the trader has not
only lost the business buildings and contents but also the profit
she/he was making.
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• The loss of profit is a consequence of fire destroying

business building and the contents.
• Therefore, a consequential loss insurance provides
compensation for:
 Loss of normal business profits as a result of an insured
risk. E.g. fire
 Business expenses to be paid for when the business
buildings are not in use. i.e. expense that may continue
to be paid after the building are destroyed are salaries,
interest on loan etc.
 Renting or an alternative building.

Factors considered when fixing the premium for the

insurance
 The number of people wishing to insure so as to apply the
law of big numbers
 Type of cover required
 Age of the person or the object
 Purpose for which the object is used for
 Value of the object
 Number of people using the object
 Security gadgets fitted to the object
 Make of the object
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The size of the premium for pure insurance depends on the

likelihood of fire breaking out and the following are some of
the factors considered are.
 Materials used in the construction of the building i.e.
whether materials are bricks or wood or concrete and
whether roofing is a thatch or iron sheets or asbestos.
 Whether inflammable materials such as petrol, diesel,
paraffin etc. are stored in the house or not.
 Nature of the surroundings of the house i.e. whether there
is danger of fire breaking out from the neighboring houses
or not.
Whether additional fire protection facilities are available or
not e.g. fire brigade services provided by local government.

Accidental Insurance
This branch of insurance covers a wide range of Insurance policies
and includes the following:
(a) Motor Vehicle Insurance
 It is compulsory by law far motor vehicle owners to Insure against
loss or damage to third parties.
 In a contract of motor insurance, the two parties actually
connected with the Contract of Insurance are the insurer who is
known as the first party
 And the insured person who is called the second party.
 The third party is any member of the general public to whom
death or body injury may be caused E.g. passengers, pedestrians,
other motorists etc.
A variety of motor Insurance policy exists. The main ones include the
following:
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(i) Third Party Motor Insurance

 Third party motor insurance is the minimum motor insurance
 Any vehicle that moves on the road is required to have this
 Third party provides compensation only to third parties for death
or body injury caused to them or damage to their property.
 The insured’s own vehicle is not covered.
(ii) Third Party, Fire And Theft Motor Insurance
This type of insurance covers
 Third parties for death or body injuries caused to them and their
property.
 The insured’s own vehicle for accidental damage to the vehicle,
 Injury to the driver, loss of the vehicle by fire, theft or by instant
mob justice.

(iii) Full Comprehensive Insurance

Full comprehensive insurance covers a variety or risks that may
happen to the vehicle. It is therefore the best and at the same
time the most expensive type of motor insurance.

Factors considered when fixing the premium for motor insurance

The size of the premium payable on motor insurance depends
on many factors which include the following:
 Experience of the number of accidents the type of vehicle
being insured has been involved in based on statistics
insurance companies have in their possession.
 The number of people wishing to insure against the risk e.g,
road traffic accident, so as to apply the law of big numbers.
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 The type of motor insurance required whether it is third party or

comprehensive insurance etc. comprehensive insurance covers
many risks and therefore higher are charged.
 The age of the driver young people are charged higher premiums
because they drive fast, and therefore more likely to cause an
accident.
 The purpose for which the vehicle is used e.g. higher premiums are
charged on sports cars than on family cars which are not used for car
racing.
 The value of the vehicle – A new car stolen or damaged would
require more money to compensate than an old car. Therefore
higher premiums are paid on new cars than old ones.
 The number of people using the vehicle – the premiums are lower
when the motor insurance required is meant to cover one driver.
Higher premiums are charged where the vehicle is used by many
drivers.

 Occupation of the user - The size of premium for a teacher

driver, for example may be less than that of sales person
when he/she is always travelling across the country selling
goods. A teacher is found in class most of the day and is
therefore less likely to cause accidents. Female drivers are
usually better drivers than male drivers and so less
premiums for ladies than gentlemen.
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(b) Employer’s Liability Insurance

This class of accident insurance provides compensation of
employees for deaths, diseases etc. Suffered whilst at work or as a
result of the employer’s negligence. For example a shunter in
Zambia Railways may lose both legs in an accident while on duty. If
employer’s liability insurance was taken by Zambia Railways, then the
insurance company would compensate the injured employee
without employer’s liability, the employer might not be able to
continue if a substantial claim was made as all the money of the
company can just be used to pay compensation to the employee.
Public Liability
Public liability insurance covers business owners and manufacturers
against claims by members of the public for deaths, accidents etc.
caused to them due to business owner’s negligence.
Examples include:

i. A minibus owner may insure his/her minibus against the possibility of

accident happening to members of the public whilst travelling on
the bus.
ii. A manufacturer may insure against claims for death or injuries
resulting from the use his/her product e.g. a meat pie manufacturer
can insure against the possibility of poisoning to members of the
public after eating the meat pie.
The money that may be required in compensating injured members of
the public might amount to a billions of Kwacha. A business without a
public liability insurance may not be able to continue carrying out its
business activities if large claims for deaths or injuries is made on it by
members of the public. It is important therefore that a business takes up
a public liability insurance so that claims made by members of the
public for injury or deaths are not by insurance companies. This would
leave the operation of the business unaffected.
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(d) Fidelity Guarantee Insurance policy

This class of insurance provides cover to employees for money or
goods embezzled (stolen) by employees. Company employees
who handle large sums of money such as accountants take
Fidelity Guarantee insurance and pay premiums. The benefits of
the insurance guarantee policy are however, paid to the
employee when an employee is convicted in a court of law of
having had stolen goods or cash.

(e) Credit Insurance

Credit insurance provides cover to traders for losses resulting from
bad debts i.e. loss of money due to non-payment by customers
who obtained goods one sources on credit but later fail to pay
for them.

(f)Theft Insurance
This, class of insurance provides compensation to insured
persons whose goods are stolen from homes or businesses or
goods in transit.

(g) Air travel insurance

This class of insurance provides compensation to insured
person who suffer deaths or injuries caused by air accident.
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4. Marine Insurance
Marine Insurance Covers losses or damage to property and life
caused by sea risks. The main types of marine insurance are:

(a) Hull Insurance

This class of marine insurance covers losses caused to the body
of the ships, its machinery and fixtures. The sea risks that may
cause loss or damage to the ship or goods including bad
weather, collision with other ships, fire, sinking of a ship, bond
storage in the ship, theft, etc.
(b) Cargo Insurance
Cargo Insurance covers importers and Exporters for loss or
damage to goods being transported by sea transport to various
parts of the world.

(c) Ship Owners Liability Insurance

This class of insurance covers ship owners against claims that
may be made against them such as:
• Death or injuries caused to crew members and passengers.
• Loss or damage caused to other shop in a collision.
• Loss or damage caused to beaches etc.
(d) Freight Insurance
Freight is the sum of money paid to the ship owners whose ship
was hired for the transportation of goods.
At certain times, freight is not paid in advance until the goods
reach their final destination. Freight insurance therefore, covers
ship owners against the possibility of not being paid freight or hire
money by clients who do not pay transport charges in advance.
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(e) Sellers interest insurance

Where goods are sent to a buyer in a foreign country and
the buyer refuses to accept delivery of these goods possibly
because he/she is bankrupt, the seller’s interest insurance
would cover the goods while arrangement are being made
to sell them for the best price possible.
Compensation is paid to the seller if the goods are stolen or
damaged in anyway before they are sold.

MARINE POLICIES
Types of marine policies include;
(a) Voyage Policy
This type of marine policy is taken out for a particular journey
e.g. from Dar e slam to New York: USA: Cargo insurance is
usually taken on voyage policy rather than on a time policy.

(b) Time Policy

Time policy is marine insurance taken for a particular period
of time to cover the hired ship, for instance for a period of six
months.
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(c) Mixed policy

 Mixed policy requires that a sum of money agreed upon
between the person seeking insurance cover and the
insurer is deposited with underwriters so that each time a
ship makes a journey the premium is deducted from the
amount deposited with underwriters.
 Floating (Mixed) policies are appropriate where regular
shipments of goods are made.
 They save time and troubles of taking out separate
insurance policies for each trip made.

MARINE LOSS
Marine loss may be classified as:

(a) Particular average

Particular average refers to any form of loss or injury that may be
suffered whilst the ship or goods are in transit. The losses suffered may
be complete or partial loss but it should be as result of the risks insured
against.

The Insurance Broker

 He acts as a link between the insurance company (underwriter)
and the clients as the clients Cannot approach the underwriters
directly.
 He gives information on the policy for a number of insurance
companies.
 They are not employed by the Insurance Company but they are
independent professionals, who are on insurance business on their
own account.
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 They advise clients on the best insurance policy to the damage

(scrapped vehicles) or recovered property of the insurance
company.
 He may deal with the full amount of the policy recovered
 He may deal with claims and particular problems affecting the
client.
 They collect premium from their clients on behalf of the insurance
company.
 They arrange insurance cover and administration (papers) work or
clerical work for their clients.
 Brokers are paid commission by the insurance company for their
work.
 Their commission is known as brokerage.