INSURANCE – CH 9
1. INTRODUCTION
INSURANCE & ASSURANCE AS RISK MANAGEMENT TOOLS FOR INDIVIDUALS
AND BUSINESSES:
Insurance = IN case something happens.
o May/may not take place, in order to manage risk IN case, the insured wants to be
Indemnified (placed in same position as before accident).
AS sure as we’re living, we will retire after work/or death.
o Can manage risk of loved ones being without income if we die/risk of being unable to
maintain decent SOL after retirement = Assurance.
Taking out in/assurance = insured pays monthly premium to transfer risk to insurer.
INSURABLE & NON-INSURABLE RISKS
Some risks = uninsurable/too expensive to insure = unaffordable to ensure against.
War & associated risks
o Insurance companies regard it as a risk government should manage.
Bad debt
o Is insurance available for bad debt = almost affordable.
Business risks (price fluctuations due to time intervals.)
o Not covered by traditional insurance policy.
o Business may decide to hedge against such risks.
Trading inventory becoming obsolete/outdated due to fashion changes
Technology changes/improvements made to machinery & production processes.
o Cannot take out insurance against machines becoming outdated.
o Leasing is an option to prevent this.
Committing an illegal act (penalty imposed for traffic offence)
Climate changes
o Some insurers consider risk of natural disasters too high.
o Some areas have becoming too high of a risk to insure.
2. GENERAL CONCEPTS RELATING TO INSURANCE:
INDEMNIFICATION
Provides insured with peace of mind of knowing that should insured asset be
damaged/destroyed, insured will be adequately compensated for any loss.
Will be put in same financial position as before the loss took place.
Insured won’t suffer loss/make a profit out of insurance.
Short-term INsurance.
SECURITY
Long-term assurance
Aim = provide financial security to insured when they retire or in event of disability or death
– financial security to dependants if death.
The Group Life Cover policy – employees belong to at work = provides security to the
family (Life Assurance) when the person dies.
o Premiums lower than normal life assurance policies, because many employees take out
the same cover = “bulk discount”
AVERAGE CLAUSE
, Applies when asset not insured for correct value
o If under-insured, insured paying below sufficient premium to cover the full risk. If monthly
premium too low = full value of the loss not indemnified.
R10,000 asset insured for R6,000 (60%). If damaged, 60% of damage will
be paid out.
o Over-insured – insured for more than current value. Monthly payments higher than
necessary.
If loss is suffered, only value of asset will be paid out
Principle of indemnification – insured is not allowed to make a profit from
insurance.
Vehicles often over-insured because car value diminishes yearly, people
should adjust policies to insure for lower value.
EXCESS
Rand amount or % of the loss/claim specified by the policy that is the responsibility of
the insured to pay.
Amount on each claim not covered by the policy.
Excess can be low, then monthly premiums will be higher, and vice versa.
PROXIMATE CAUSE
When claiming for loss, insurer will ensure loss suffered was a result of an event that was
insured (proximate cause of the loss) and not secondary event.
E.g. If someone has household insurance and is burgled, insurance will pay for loss. If they do not
have car insurance and the car is stolen, cannot claim – separate incident that caused second
loss suffered.
SUBROGATION
Relates to principle of indemnity – person put in same financial position when insurance
pays out – without profit.
Every loss may only be claimed once – no profit
Cannot claim from insurance and guilty party, the right to claim from guilty party is signed
over to the insurance company paying out to cover loss.
CESSION OR TO CEDE (SIGN OVER) THE POLICY
An endowment policy builds up cash worth over time (monthly when premium is paid).
Should the need arise by insured for the money, policy may be signed over to the creditor as
collateral in order to get the loan.
1. INTRODUCTION
INSURANCE & ASSURANCE AS RISK MANAGEMENT TOOLS FOR INDIVIDUALS
AND BUSINESSES:
Insurance = IN case something happens.
o May/may not take place, in order to manage risk IN case, the insured wants to be
Indemnified (placed in same position as before accident).
AS sure as we’re living, we will retire after work/or death.
o Can manage risk of loved ones being without income if we die/risk of being unable to
maintain decent SOL after retirement = Assurance.
Taking out in/assurance = insured pays monthly premium to transfer risk to insurer.
INSURABLE & NON-INSURABLE RISKS
Some risks = uninsurable/too expensive to insure = unaffordable to ensure against.
War & associated risks
o Insurance companies regard it as a risk government should manage.
Bad debt
o Is insurance available for bad debt = almost affordable.
Business risks (price fluctuations due to time intervals.)
o Not covered by traditional insurance policy.
o Business may decide to hedge against such risks.
Trading inventory becoming obsolete/outdated due to fashion changes
Technology changes/improvements made to machinery & production processes.
o Cannot take out insurance against machines becoming outdated.
o Leasing is an option to prevent this.
Committing an illegal act (penalty imposed for traffic offence)
Climate changes
o Some insurers consider risk of natural disasters too high.
o Some areas have becoming too high of a risk to insure.
2. GENERAL CONCEPTS RELATING TO INSURANCE:
INDEMNIFICATION
Provides insured with peace of mind of knowing that should insured asset be
damaged/destroyed, insured will be adequately compensated for any loss.
Will be put in same financial position as before the loss took place.
Insured won’t suffer loss/make a profit out of insurance.
Short-term INsurance.
SECURITY
Long-term assurance
Aim = provide financial security to insured when they retire or in event of disability or death
– financial security to dependants if death.
The Group Life Cover policy – employees belong to at work = provides security to the
family (Life Assurance) when the person dies.
o Premiums lower than normal life assurance policies, because many employees take out
the same cover = “bulk discount”
AVERAGE CLAUSE
, Applies when asset not insured for correct value
o If under-insured, insured paying below sufficient premium to cover the full risk. If monthly
premium too low = full value of the loss not indemnified.
R10,000 asset insured for R6,000 (60%). If damaged, 60% of damage will
be paid out.
o Over-insured – insured for more than current value. Monthly payments higher than
necessary.
If loss is suffered, only value of asset will be paid out
Principle of indemnification – insured is not allowed to make a profit from
insurance.
Vehicles often over-insured because car value diminishes yearly, people
should adjust policies to insure for lower value.
EXCESS
Rand amount or % of the loss/claim specified by the policy that is the responsibility of
the insured to pay.
Amount on each claim not covered by the policy.
Excess can be low, then monthly premiums will be higher, and vice versa.
PROXIMATE CAUSE
When claiming for loss, insurer will ensure loss suffered was a result of an event that was
insured (proximate cause of the loss) and not secondary event.
E.g. If someone has household insurance and is burgled, insurance will pay for loss. If they do not
have car insurance and the car is stolen, cannot claim – separate incident that caused second
loss suffered.
SUBROGATION
Relates to principle of indemnity – person put in same financial position when insurance
pays out – without profit.
Every loss may only be claimed once – no profit
Cannot claim from insurance and guilty party, the right to claim from guilty party is signed
over to the insurance company paying out to cover loss.
CESSION OR TO CEDE (SIGN OVER) THE POLICY
An endowment policy builds up cash worth over time (monthly when premium is paid).
Should the need arise by insured for the money, policy may be signed over to the creditor as
collateral in order to get the loan.
