Chapter nine : Insurance as part of risk management
Short-term vs long-term insurance :
1.Short-term insurance: IN CASE something happens (fire, theft, floods). The insured is indemnified – put back in the same
financial position.
2.Long-term (life) insurance: something will SURELY happen (retirement, death). Gives security to the insured or dependants.
By paying a monthly premium, the insured passes the risk on to the insurer.
KEY TERMS :
1. Premium: the monthly amount paid to the insurer.
2. Insured: the person or business taking out the policy. Insurer: the insurance company.
3. Excess: the Rand amount or % of each claim the insured pays himself.
4. Under-insurance: the asset is insured for less than its value.
A) Non-insurable risks
1) War and political risks – SASRIA (1979) covers political unrest and terrorism if specified
2) Bad debts – insurance exists but is unaffordable
3) Price changes between ordering and delivery of goods
4) Trading stock going out of fashion
5) Technology changes – machines becoming outdated
6) Unlawful action – eg. a traffic fine
7) Areas at risk from climate change (eg. Santam 2010 – parts of Langebaan, Vaal Dam)
B) General insurance concepts
1) Indemnity (short-term)
a. Insured is put back in the same financial position as before the loss
b. No profit from a claim
2) Security (long-term)
, a. Financial security at retirement, or for dependants on death or disability
3) Average clause
a. Applies when an asset is under-insured – insured carries part of the risk
b. Formula: amount insured ÷ market value × damage
c. Eg. value R10 000, insured R6 000 (60%), damage R2 000 → pays R1 200
4) Over-insurance: insured for more than the value – only the actual value is paid
5) Excess: higher excess = lower premium
6) Proximate cause
a. The immediate, real cause of the loss determines whether it is covered
b. Eg. car stolen at a police station while reporting a house theft – a different incident, so household insurance doesn’t
cover the car
7) Subrogation
a. After paying out, the insurer claims from the guilty party
b. The insured can’t claim twice
8) Cession
a. An endowment policy is signed over to a creditor as security for a loan
9) Group life: lower premiums because many employees take the same cover (bulk discount)
C) Requirements of a valid insurance contract
1) Absolute (utmost) good faith
a. Disclose all relevant information honestly
b. Otherwise the policy is void – premiums lost, no compensation
2) Insurable interest
a. The insured must suffer a financial loss if the event happens
b. Examples:
i. Own assets and own life
ii. Spouse
iii. Business partners (co-partners)
iv. Creditor in the life of a debtor
3) Contractual capacity
a. Legal age (18) and sound mind
Short-term vs long-term insurance :
1.Short-term insurance: IN CASE something happens (fire, theft, floods). The insured is indemnified – put back in the same
financial position.
2.Long-term (life) insurance: something will SURELY happen (retirement, death). Gives security to the insured or dependants.
By paying a monthly premium, the insured passes the risk on to the insurer.
KEY TERMS :
1. Premium: the monthly amount paid to the insurer.
2. Insured: the person or business taking out the policy. Insurer: the insurance company.
3. Excess: the Rand amount or % of each claim the insured pays himself.
4. Under-insurance: the asset is insured for less than its value.
A) Non-insurable risks
1) War and political risks – SASRIA (1979) covers political unrest and terrorism if specified
2) Bad debts – insurance exists but is unaffordable
3) Price changes between ordering and delivery of goods
4) Trading stock going out of fashion
5) Technology changes – machines becoming outdated
6) Unlawful action – eg. a traffic fine
7) Areas at risk from climate change (eg. Santam 2010 – parts of Langebaan, Vaal Dam)
B) General insurance concepts
1) Indemnity (short-term)
a. Insured is put back in the same financial position as before the loss
b. No profit from a claim
2) Security (long-term)
, a. Financial security at retirement, or for dependants on death or disability
3) Average clause
a. Applies when an asset is under-insured – insured carries part of the risk
b. Formula: amount insured ÷ market value × damage
c. Eg. value R10 000, insured R6 000 (60%), damage R2 000 → pays R1 200
4) Over-insurance: insured for more than the value – only the actual value is paid
5) Excess: higher excess = lower premium
6) Proximate cause
a. The immediate, real cause of the loss determines whether it is covered
b. Eg. car stolen at a police station while reporting a house theft – a different incident, so household insurance doesn’t
cover the car
7) Subrogation
a. After paying out, the insurer claims from the guilty party
b. The insured can’t claim twice
8) Cession
a. An endowment policy is signed over to a creditor as security for a loan
9) Group life: lower premiums because many employees take the same cover (bulk discount)
C) Requirements of a valid insurance contract
1) Absolute (utmost) good faith
a. Disclose all relevant information honestly
b. Otherwise the policy is void – premiums lost, no compensation
2) Insurable interest
a. The insured must suffer a financial loss if the event happens
b. Examples:
i. Own assets and own life
ii. Spouse
iii. Business partners (co-partners)
iv. Creditor in the life of a debtor
3) Contractual capacity
a. Legal age (18) and sound mind
