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7 Insurance services

Learning Outcomes
1. Definition of the terms.
2. Explain types of insurances.
3. Describe Characteristics of insurable risks
4. Illustrate types of insurable risks.
5. Analyze risks that are not Insurable

Insurance services.
Insurance is a contract between an individual or business with an insurance company to help provide
financial protection and mitigate the risks associated with certain situations or events

Insurance is a contract between an individual or organization (known as the policy holder) and an
insurance company. In the contract, the insurer promises to pay the policy holder in the event the
specified risk occurs. The policy holder promises to pay a premium to the insurer to cover the risk.

Types of insurance

There are many types of insurance services, including:

Auto insurance

Helps pay for repairs to your vehicle or other people's property after an accident. It can also help if your
car is stolen, vandalized, or damaged by a natural disaster.

Life insurance

Provides financial protection for your survivors in the event of your death or disability.

Health insurance

Helps protect you from large medical bills in the event of an accident or illness.

Long-term disability insurance

Helps protect you from losing income unexpectedly.

Home insurance
Helps protect your home and its contents from damage or loss caused by natural or man-made events.

Travel insurance

Helps cover losses that may occur while traveling, such as flight delays, canceled trips, or lost luggage.

Endowment policy

Combines life insurance and savings. The policy holder receives a survival benefit if they survive the
policy term, and the beneficiary receives a death benefit if the policyholder dies during the policy term.

Unit-linked insurance plan

Combines life insurance and investment. Part of the premium goes towards life cover, and the rest is
invested in debt and equity funds.

Money-back policy

refers to the rules, guidelines, and procedures used by a bank in handling money-related activities such
as deposits, withdrawals, lending, savings, and customer transactions

An investment plan that pays out a predetermined percentage of the sum assured.

Long-term care insurance

Pays a set amount per day for long-term care in a variety of settings, such as nursing homes, assisted
living facilities, and private homes.

Workers' compensation

Helps protect workers from injury on the job.

Motor Vehicle Insurance

Protects vehicle owners against losses from accidents, theft, fire, or damage.

Property Insurance

Property insurance protects physical assets such as houses, buildings, offices, and equipment against
risks.

Covered risks may include:

Fire

Theft

Vandalism
Natural disasters

Examples:

Home insurance

Commercial property insurance

Fire Insurance

Fire insurance specifically protects property against loss or damage caused by fire.

Coverage may include:

Buildings

Furniture

Machinery

Goods in stores or warehouses

Marine Insurance

Marine insurance covers ships, cargo, goods, and transportation activities over water and sometimes
land transit. Protects traders and shipping companies from losses during transportation

Types:

Cargo insurance

Hull insurance

Freight insurance

Travel Insurance

Travel insurance provides protection against unexpected events during travel.

It may cover:

Medical emergencies

Lost luggage

Trip cancellation

Flight delays
Accidents

Liability Insurance

Liability insurance protects an individual or business from legal claims resulting from injury or damage
caused to others.

Examples:

Employer liability insurance

Public liability insurance

Professional liability insurance

Business Insurance

Business insurance protects businesses from operational risks and financial losses.

Coverage may include:

Employee compensation

Property damage

Theft

Business interruption

Liability claims

Education Insurance

Education insurance is designed to help parents save funds for children’s education.

Features:

Regular contributions are made.

Benefits are paid when the child reaches school or college age.

Agricultural Insurance

Agricultural insurance protects farmers against losses affecting farming activities.

Coverage includes:

Crop failure

Livestock diseases
Drought

Floods

Pest attacks

Disability Insurance

Disability insurance provides income support when a person becomes unable to work due to injury or
disability. Provides regular income replacement.

Types:

Short-term disability insurance

Long-term disability insurance

Insurable risks
An insurable risk is a financial risk that an insurance company will cover if it occurs. Insurable risks are
usually events that are beyond the insured's control, such as theft, fire, or natural disasters.

Characteristics of insurable risks

For a risk to be accepted by an insurance company, it must have certain characteristics. These
characteristics help insurers determine whether the risk can be covered fairly and profitably.

1. Predictable Risk

The risk must be capable of being predicted using past statistics and experience. Insurance companies
rely on historical data to estimate how often losses are likely to occur.

Predictability helps insurers calculate premiums accurately.

Example:

Motor accidents and illnesses are predictable because insurers have many years of statistical records
showing how often they occur.

2. Measurable Risk

The risk and possible loss must be clearly defined and measurable in monetary terms.

The insurer should be able to determine:

The value of the loss

The amount of compensation payable

3. Accidental Risk

The loss must occur by chance and should not be deliberate or intentional.

Insurance only covers unforeseen events.

Example:

A fire caused accidentally by an electrical fault can be insured.

A person intentionally burning their own business to claim compensation is insurance fraud.

4. Economically Feasible Risk

The premium charged must be affordable to the insured while still allowing the insurer to operate
profitably.

The cost of insurance should be reasonable compared to the possible loss.

If premiums are too expensive, people may not buy insurance.

Example:

Medical insurance premiums are usually set at levels that many people can afford monthly or yearly.

Insurance must benefit both parties:

The insured gets financial protection.

5. Not Catastrophic Risk

The loss should not affect a very large number of people at the same time.

Catastrophic events can cause massive claims that may bankrupt insurers.

Insurers prefer risks that affect individuals or small groups independently.

Example:

A single house fire is insurable because it affects one family only.

Less suitable risks:

Major earthquakes, wars, floods, or pandemics may affect thousands of people simultaneously.
Types of insurable risks
1. Personal Risks
These are risks that affect a person’s ability to earn income or maintain normal living conditions.
They mainly involve the individual’s health, life, or employment.
Examples:
Illness or injury
Death
Disability
Unemployment
Explanation:
If a person becomes sick or injured and cannot work, they may lose income. Insurance
companies provide protection through life insurance, health insurance, disability insurance, or
unemployment insurance.
2. Property Risks
These are risks that lead to loss, damage, or destruction of property owned by the insured
person.
Examples:
Fire damaging a house
Theft of a car
Flood destroying business premises
Vandalism
Explanation:
Property insurance compensates the owner for repair or replacement of damaged property. The
aim is to restore the insured person to their financial position before the loss occurred.
3. Liability Risks
These arise from social or business interactions where a person may be held legally responsible
for injury or damage caused to another person or their property.
Examples:
Causing a road accident
A customer slipping in a shop
A company selling defective products
Explanation:
Liability insurance helps pay legal costs, medical expenses, or compensation claims made
against the insured person.
Risks That Are Not Insurable
1. Speculative Risks
These are risks taken voluntarily with the hope of making a profit, but they may also result in
loss.
Examples:
Gambling
 Investing in highly risky businesses
Stock market speculation
Explanation:
Insurance companies do not ensure speculative risks because they involve deliberate choices
and the possibility of gain. Insurance is meant for pure risks, where only loss or no loss can
occur.
2. Systemic Risks
These are risks that affect a large part of the economy or many people at the same time.
Examples:
Economic recession
Inflation
Global financial crisis
Large-scale pandemics
Explanation:
Such risks are difficult for insurers to predict or spread because they affect many policyholders
simultaneously. This can lead to massive losses for insurance companies

Intentional Risks (Fraud or Deliberate Acts)

Risks that are caused intentionally by a person cannot be insured because insurance only covers
accidental losses.

Examples: Arson (deliberately setting property on fire), faking an accident.

Catastrophic Risks (Uncontrollable Large-scale Events)

These risks affect many people at once and are too large for insurance companies to cover easily.

Examples: War, nuclear disasters, some large-scale pandemics.

Financially Unpredictable Risks

Risks that are very difficult to measure in monetary terms or estimate future loss accurately.

Examples: Loss of market reputation, emotional distress.

Illegal Risks

Any risk arising from illegal activities cannot be insured.

Examples: Smuggling goods, illegal trading, theft committed by the insured.

Market and Business Fluctuation Risks (in some cases)

Changes in prices or demand that affect profits are generally not insurable because they are part of
normal business activity.
Examples: Loss of profit due to reduced sales, price changes