Investment Insurance
Meaning of Insurance
Insurance is a contract between the insured (person/business requiring cover) and the insurer
(insurance company) where the insurer bears the financial risk for a specified loss or
damage.
The insured pays a premium for this cover.
The insurer undertakes to indemnify the insured in the event of a specified loss/damage.
Non-Compulsory Insurance
Insurance where the insured has the option to insure against certain risks.
The decision to insure is voluntary and not influenced by the government.
It transfers the risk of something happening onto the insurance company.
Examples of risks covered: theft, damaged cars, damaged buildings, injuries on premises.
Divided into:
Short-term insurance (e.g., fire, theft).
Long-term insurance (e.g., retirement/death).
Insurance Concepts
Over-insurance: Insuring an item for more than its actual market value. The payout will not
exceed the market value of the loss, and the insurer may choose reinstatement.
Under-insurance: Insuring an item for less than its actual market value. The insurer usually
applies the average clause to calculate the compensation.
Average Clause: A stipulation by the insurer applicable when property/goods are under-
insured. The insurer pays for losses in proportion to the insured value. The insured is liable
for the uncovered portion of the risk.
Formula for calculating the average clause:
Example:
A business has equipment with a market value of R500,000. They insure it for R300,000. A fire
causes R200,000 in damages.
Reinstatement: The insurer may replace lost/damaged property instead of reimbursing the
insured, particularly when over-insurance exists. The aim is to put the insured in a similar
financial position as before the loss. The reinstatement value will not be higher than the market
value of the loss.
Excess: A portion of the insurance claim that the insured pays. It protects the insurer against
fraudulent claims and keeps premiums lower. Higher excess amounts lead to lower premiums.
Over-Insurance vs. Under-Insurance
Over-Insurance:
Insured insures assets for more than market value.
Insurer can choose to reinstate the insured.
Compensation will not be more than the market value.
The insurer will replace/repair the damages/loss incurred by the insured.
Under-Insurance:
Insured insures assets for less than market value.
Insurer implements the average clause.
The insured will be compensated partly/proportionally for damages/losses.
The insurer will pay the insured cash for damages or losses incurred.
Insurance vs. Assurance
Insurance:
Based on the principle of indemnity.
Transfers the cost of potential loss to the insurer at a premium.
Covers a specified event that may occur.
Applicable to short-term insurance (e.g., property, theft, fire).
Assurance:
Based on the principle of security/certainty.
Insurer pays an agreed sum after a certain period or upon death.
The specified event is a certainty (death), but the time is uncertain.
Applicable to long-term insurance (e.g., life insurance, endowment policy, retirement
annuities).
Note: Both insurance and assurance are types of non-compulsory insurance.
Short-Term vs. Long-Term Insurance
Short-Term Insurance:
Property insurance
Money in transit
Theft
Burglary
Fire
Long-Term Insurance:
Endowment policy
Life insurance
Retirement annuity/Pension fund/Provident fund
Disability policy
Trauma insurance
Funeral insurance
Health insurance/Medical aid
Principles of Insurance
Indemnification/Indemnity: Applies to short-term insurance. The insured is compensated for
proven loss. Aims to place the insured in the same position as before the loss, and the
insured may not profit from insurance.
Security/Certainty: Applies to long-term insurance. A predetermined amount is paid out upon
reaching a certain age or injury. Aims to provide financial security.
Utmost Good Faith: Both insurer and insured must be honest and disclose all relevant facts.
Information supplied when claiming should be accurate.
Insurable Interest: The insured must prove they will suffer a financial loss if the insured object
is damaged/lost. The insurable interest must be expressed in financial terms.
Advantages of Insurance for Businesses
Transfers risk to the insurance company.
Protects against dishonest employees.
Protects against losses due to debtor death.
Protects against theft/loss of stock and damages from natural disasters.
Protects from claims made by the public.
Protects against loss of earnings (e.g., strikes).
Compensates for insurable losses (e.g., fire).
Protects business assets (vehicles, equipment, buildings).
Life insurance on partners can prevent capital loss.
Proceeds from insurance policies can compensate for the loss of key personnel.
Reduces/covers replacement costs for damaged machinery/equipment.
Insurable vs. Non-Insurable Risks
Insurable Risks: Risks that insurance companies will insure. The company assesses the
likelihood of the event.
Non-Insurable Risks: Risks that insurance companies will not insure, usually because the
cost/risk is too high.
Examples
Insurable Risks:
Theft
Fidelity insurance
Money in transit
Burglary
Fire
Natural disaster/Storms/Wind/Rain/Hail
Damage to/Loss of assets/vehicles/ equipment/buildings/premises
Injuries on premises
Non-Insurable Risks:
Nuclear weapons/war
Changes in fashion
Improvement/changes in technology
Irrecoverable debts
Financial loss due to bad management
Possible failure of a business
Shoplifting during business hours
Loss of income if stock is not received in time/Time that elapses between the ordering
and delivery of goods.
Compulsory Insurance
Insurance that individuals/businesses are legally required to take out.
Aims to safeguard the welfare of everyone concerned.
Regulated by the Government.
Payment is a levy/contribution to a common fund.
Types of Compulsory Insurance
Unemployment Insurance Fund (UIF)
Road Accident Fund (RAF)/Road Accident Benefit Scheme (RABS)
Compensation Fund/Compensation for Occupational Injuries and Diseases (COIDA)
Unemployment Insurance Fund (UIF)
Assists employees with financial aid if they become unemployed.
Provides financial assistance to dependents of deceased employees.
Employers and employees contribute (1% each) of the employee's salary.
Unemployed employees must register with the Department of Labour.
Unemployed workers may not claim if they resign or are dismissed.
UIF Benefits
Unemployment Benefits: For employees who become unemployed/retrenched.
Illness/Disability Benefits: For employees unable to work for more than 14 days without a
salary.
Maternity Benefits: For pregnant employees for up to 4 consecutive months.
Adoption Benefits: For employees who adopt a child younger than two years.
Dependants' Benefits: For dependants if the breadwinner dies.
Road Accident Fund (RAF)/Road Accident Benefit
Scheme (RABS)
Insures road users against the negligence of other road users.
Provides compulsory cover for all road users in South Africa.
Funded by a levy on fuel sales.
Compensates for medical costs, loss of income, pain and suffering, disability, and funeral
costs.
RABS aims to provide a reasonable, equitable, affordable, and sustainable benefit scheme.
RABS aims to simplify/speed up the claims process.
Compensation Fund/Compensation for Occupational
Injuries and Diseases (COIDA)
Covers occupational diseases and workplace injuries.
Compensates employees for injuries and diseases incurred at work.
Compensation is determined by the degree of disablement.
Employers are obliged to register and report accidents and diseases.
Covers employers for legal claims from workers.
Dependents receive financial support in the event of death.
Compulsory vs. Non-Compulsory Insurance
Compulsory Insurance:
Required by Law.
Regulated by Government.
Payment is a levy/contribution.
Examples: UIF, RAF, COIDA.
Non-Compulsory Insurance:
Voluntary.
Insured enters a legal insurance contract.
Monthly/Annual payments/premiums.
Examples: Short-term (theft, fire) and Long-term (life insurance).