Investment and

Insurance Part 2
Introduction
Insurance
■ Insurance is a contract of utmost good faith between an insurance
company (insurer) and an individual (insured) where the insurance
company promises to compensate the insured for any insured loss
which may occur.
■ The insured pays an insurance premium based on the value of the
asset and the associated risk.
■ INsurance is IN case something happens (e.g theft, fire, flood etc).
These events may or may not take place, but in order manage risk,
the insured wants to be indemnified (put in the same financial
position he/she was in before the incident).

Assurance
■ Assurance is cover for a risk that is certain e.g. death or retirement.
■ Helps to manage the risk of loved ones being without income if we
die, or the risk of being unable to maintain a decent standard of
living after retirement.
■ Types of assurance include: life assurance, term assurance,
endowment, retirement annuities, disability cover, trauma or dread
disease and funeral cover.
Types of Assurance
■ Life assurance
■ Term assurance – i.e. whilst paying a bond
■ Endowment
■ Retirement Annuity
■ Funeral cover
Non – Compulsory Insurance
INSURABLE RISK

Fire insurance: covers damage from a fire to stock, equipment and

buildings. Smoke and water damage are also covered by
this type of insurance.
◻ The premium charged depends on the value of the insured items and
the associated risk.
◻ Fire insurance will usually form part of other insurance policies.
◻ The insurance company must be informed immediately of a fire.
◻ Most insurance contracts include an ‘iron safe clause’ forcing the
insured to keep a full set of stock records in a fireproof safe. This
serves as proof of the value of the stock the business has on hand.
◻ The more flammable a product (thatch roof or inventory such as
wood, paper, gas etc) the higher the risk of fire and therefore the
higher premium.
◻ The nature of the surrounding buildings may have an impact on the
risk and premium., e.g a building next to a fire garage.
Vehicle insurance: two options available include
third party, fire and theft or fully
comprehensive.
■ Third party, fire and theft cover the insured’s vehicle
against theft or fire. The damage to other car during
an accident is paid by the insurance company.
■ Fully comprehensive covers all damage to the car
and the other vehicle will be repaired in the case of
an accident. Expensive sound systems, laptops and
other expensive items must be specified separately.
■ An excess is normally payable in the case of an
accident occurring.

All weather insurance, damage and theft

insurance: covers damage caused by
storms, hail, floods, lightning, earthquakes
and burst water pipes.
■ Usually covered by homeowners insurance.
■ Premium charged depends on the value and
Insurance of money in transit: insures money
in transit from the business to the bank.

Fidelity insurance: covers business against

losses incurred through dishonesty of
employees i.e. theft or fraud.

Liability insurance: covers a person who

becomes liable for losses caused by
negligence or defects to their property.

Crop insurance: taken out by farmers to cover

losses caused by loss or damage to crops
caused by drought, heat waves, floods, hail,
frost and fire. Additional insurance on
livestock may also be added.
Group life cover: businesses insure their
workers for loss of life. Should the worker
pass away, their family receives a
payment equal to the workers annual
salary multiplied by a factor. This type of
insurance is common for mineworkers.

Loss of income insurance: important for

entrepreneurs who stand to lose income
if they are unable to work, for example,
while repairs are being done.
 General Business Insurance /Commercial Insurance
❑Protects the business from losses caused by unforeseen
circumstances.
❑May include theft (shoplifting), burglary (forced entry),
public liability if a customer slips on a wet floor and sustains
an injury while in the shop (liability insurance) and damages
from fire.

Household Insurance
❑Includes all types of assets that form part of every
household that is at risk due to events such as burglary,
accidents or losses caused by fire, lightning, floods etc.
❑Assets include furniture, electrical items, clothing, toys,
sports equipment and gardening equipment.
Activity 1
■ Use Pick n Pay to assess the type of
insurance that will be needed for the
business.
■ Provide a list of possible insurance
policies needed. Justify the need for the
insurance policies you have listed.
■ For each type of insurance policies/types,
consider the business’ level of risk.
Motivate your answer.
NON INSURABLE RISKS
Some risks are uninsurable and some of them are
expensive to insure:
■ Inflationary factors: losses due to inflation are not
insurable.
■ Changes in fashion: if stock becomes outdated and
cannot be sold/ if trading inventory becomes obsolete.
■ Business risk: such as price fluctuations due to time
intervals between order of goods and time the goods
are received.
■ Improvements in machinery: production processes
and machinery are not covered by insurance.
■ Losses from bad debts: can be insured against, but
premiums are very high.
■ losses caused by war
■ Illegal activities are not insurable.
Compulsory Insurance
■ Unemployment insurance fund
◻ Covers employees for short-term loss of
income if a worker is retrenched, ill or on
maternity leave.
◻ Also provides relief to the dependents of a
deceased employee who contributed to the
fund.
◻ Contributions made by the employer and the
employee.
◻ Contribution is 2% of the employee’s gross
salary. 1% contributed by each party.
■ People excluded from UIF insurance:
◻ Employees who work less than 24 hours a
month.
◻ Employees who earn commission only.
■ Civil servants and foreigners are now
covered by UIF.
■ Employees on learnerships and domestic
workers are included (employer must
register with the Department of Labour).
■ Compensation for Occupational
Injuries and Diseases Act (COIDA)
◻ Employers take out compensation on behalf
of employees to protect employees against
loss of income caused by injury or death at
work.
◻ Protects employers against claims made by
employees.
◻ Compensates the employee or their family in
case they are unable to work or die.
◻ Does not apply to military staff or police,
because they have their own fund.
■ Road Accident Fund (RAF)
◻ Contribution made in the form of a levy on
fuel.
◻ Pay out innocent road accident drivers and
passengers (Covers all users of SA roads).
◻ Cover loss income from injuries caused by
road accidents.
◻ RAF will pay any person injured in a motor
vehicle accident (driver, passenger or
pedestrian).
◻ The family of a deceased victim may also
claim.
Activity 2
Discuss how the different compulsory
insurances would apply to a business such
as Woolworths.
Requirements for a Valid Insurance
Contract
■ Insurable interest – the person must be able to prove that they
stand to lose financially if the object they have insured is
destroyed or damaged.
■ Good faith/ absolute honesty – the insured must disclose all the
relevant information that may affect the risk.
■ Contractual capacity – legal age (18 years in South Africa) and
sound mind.
■ Intention to bind – must be serious about the contract.
■ Executable – reasonable conditions that can be complied with.
■ Obligation – both parties must be clear what is expected of them.
■ Legally binding – must be a legal purpose to the contract.
■ Communication of intent - must be specific and made clear to
both parties.
CONCEPTS RELATING TO
INSURANCE AND ASSURANCE
■ Risk – likelihood of an event occurring
■ Peril – potential cause of loss e.g. theft, fire, accidents
■ Hazard – something which increases the risk of a peril.
■ Indemnification – the insurer undertakes to indemnify the insured in the
event of a specified loss. The insured will be put in the same financial
position as before the event took place. The insured is not allowed to
make a profit from insurance.
■ Security – the main purpose of insurance is to provide financial security
for the insured and their family in the case of a loss. Applicable to
long-term assurance e.g the use of the Group Life Cover policy.
■ The average clause – this clause stipulates that if the property is not
insured for the full value (correct value), the full value of the loss will not
be paid out.
Under insurance – the property is not insured for the full value, thus
the insured has not been paying a premium which covers the risk. If
the policy specifies cover R10 000 and the real value of the article is
R50 000, the person is under insured and only 1/5 of the damage will be
indemnified.
Over insurance – goods are insured for more than their current value.
The insured pays a higher premium but is only indemnified for the
value of the goods.
■ Excess – the amount on each claim which is not covered by the policy.
The amount which has to paid by the insured first before the insurer pays
out. Low excess amount means that the monthly premiums will be higher
and vice versa.
■ Re-insurance – when an insurance company is unable to cover the full
risk of a large insurance policy, then another insurance company helps
cover this risk. An example is with the shipping industry.
■ Proximate clause – the insurer is only responsible for losses that are a
direct result of the event that was insured and not a secondary event. E.g
burglary reporting and stolen car at the police. Car can not be claimed
from household insurance.
■ Subrogation – based on the principal of indemnity, which means
potential loss is covered. No person may make a profit out of an
insurance claim. Every loss may only be claimed once.
■ Cession or assignment – rights that that the insured has in a policy may
be transferred to another party. The policy may be ceded as security for a
bank loan.
■ Surrender value – life insurance and investments build up value over
time. Should the policy holder wish to end the policy before its full term,
the insurance co. will determine the value of the policy, pay out and the
policy will cease to exist.
■ Paid-up value – the policy may be paid up instead of surrendering it.
ADVANTAGES OF INSURANCE
■ Insurance protects a business as well as individuals
against insurable risks e.g. fire or theft.
■ Life assurance provides security to families because
breadwinners can make provision for their dependants
in case of loss of income.
■ Life assurance policies can be ceded to a bank and
other financial institutions as security for a loan.
■ Life assurance policies protect creditors i.e. if a debtor
dies before a loan is paid up.
■ Assurance provides security by making provision for
the payment of medical and hospital expenses.
Disadvantages of Insurance

■ Refer to the textbook for disavantages.