CHAPTER 9
INSURANCE AS PART OF RISK MANAGEMENT
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INTRODUCTION
Short-term and long-term (Life Insurance)
• Short-term Insurance is IN case something happens. Could or may not happen,
insured wants to become INdemnified (placed in the same financial position as
was the case before the incident).
• Long-term insurance people will retire and need some sort of income.
Non-insurable risk
Non-insurable risks include the following:
• War is not insurable
• Bad dept is regarded as non-insurable
• Unlawful action
• Business risks – price changes due to the time laps between the time goods were
ordered and were delivered.
• Trading stock – become out of date due to fashion changes.
• Technology changes – regular improvements in machines and production
process.
• Climate changes
CONCEPTS REGARDING INSURANCE
Indemnity
Indemnity gives insured peace of mind to know if ensured experiences a lot of damages
or is destroyed, the insured will be sufficiently compensated for any losses. Refers to
short-term insurance.
Security
Security is applicable when reference is made to long-term insurance. Gives financial
security to insured at retirement or to the insured’s dependents when he/she dies or
becomes disabled.
Average clause
The principle of the Awery-clause is applied when the asset is not insured for the
correct value.
• Under-insured the insured had not paid continuously a premium that is sufficient
to cover the full risk.
• Over-insurance the asset is insured against more than its present value. Insured
will pay a higher premium than necessary.
, Excess
The Rand amount or % of the loss/claim as stipulated by the policy that determines
what the insured needs to pay. The excess could be lower but the monthly payments
will be higher.
Proximate cause
If a person claims from an insurance company for a loss suffered, the company will
ensure that the loss was due to the cause that was insured and not a secondary event
that is not insured.
Subrogation
If insured claimed from the insurance company for an incident that has happened, they
cannot claim from the guilty party who caused the loss as well.
Cession
An endowment policy builds up a cash worth over time.
REQUIREMENTS OF A VALID INSURANCE CONTRACT
Absolute good faith
Also known as utmost honesty and requires the insured to disclose all relevant
information that may affect the risk. Not honest the risk will not be covered and the
policy will be declared null and void.
Insurable interest
A person who has insurable interest it can be proven that he/she will sustain a financial
loss if a certain event takes place. Example of insurable interest:
• A person has insurable interest in his own assets.
• A person has insurable interest in his/her own health or life.
• A married person has insurable interest in the life of the spouse.
• Business partners have insurable interest in the lives of co-partners.
• A creditor has insurable interest in the life of his debtor.
Contractual capacity
The person entering into the insurance contract is of legal age and sound mind. South
Africa – 18 years of age.
INSURANCE AS PART OF RISK MANAGEMENT
__________________________________________________
INTRODUCTION
Short-term and long-term (Life Insurance)
• Short-term Insurance is IN case something happens. Could or may not happen,
insured wants to become INdemnified (placed in the same financial position as
was the case before the incident).
• Long-term insurance people will retire and need some sort of income.
Non-insurable risk
Non-insurable risks include the following:
• War is not insurable
• Bad dept is regarded as non-insurable
• Unlawful action
• Business risks – price changes due to the time laps between the time goods were
ordered and were delivered.
• Trading stock – become out of date due to fashion changes.
• Technology changes – regular improvements in machines and production
process.
• Climate changes
CONCEPTS REGARDING INSURANCE
Indemnity
Indemnity gives insured peace of mind to know if ensured experiences a lot of damages
or is destroyed, the insured will be sufficiently compensated for any losses. Refers to
short-term insurance.
Security
Security is applicable when reference is made to long-term insurance. Gives financial
security to insured at retirement or to the insured’s dependents when he/she dies or
becomes disabled.
Average clause
The principle of the Awery-clause is applied when the asset is not insured for the
correct value.
• Under-insured the insured had not paid continuously a premium that is sufficient
to cover the full risk.
• Over-insurance the asset is insured against more than its present value. Insured
will pay a higher premium than necessary.
, Excess
The Rand amount or % of the loss/claim as stipulated by the policy that determines
what the insured needs to pay. The excess could be lower but the monthly payments
will be higher.
Proximate cause
If a person claims from an insurance company for a loss suffered, the company will
ensure that the loss was due to the cause that was insured and not a secondary event
that is not insured.
Subrogation
If insured claimed from the insurance company for an incident that has happened, they
cannot claim from the guilty party who caused the loss as well.
Cession
An endowment policy builds up a cash worth over time.
REQUIREMENTS OF A VALID INSURANCE CONTRACT
Absolute good faith
Also known as utmost honesty and requires the insured to disclose all relevant
information that may affect the risk. Not honest the risk will not be covered and the
policy will be declared null and void.
Insurable interest
A person who has insurable interest it can be proven that he/she will sustain a financial
loss if a certain event takes place. Example of insurable interest:
• A person has insurable interest in his own assets.
• A person has insurable interest in his/her own health or life.
• A married person has insurable interest in the life of the spouse.
• Business partners have insurable interest in the lives of co-partners.
• A creditor has insurable interest in the life of his debtor.
Contractual capacity
The person entering into the insurance contract is of legal age and sound mind. South
Africa – 18 years of age.
