18.

Purposes and Principles of Insurance

What is Insurance?

• Insurance allows the insured (the people or business) to claim financial compensation from the
insurer (company providing the insurance cover) when su;ering from a financial loss.

Purposes of Insurance

1. Risk Reduction
- Sharing risks between many people through insurance premiums
2. Compensation
- Insurer provides money to the insured if a loss or damage occurs.
3. Financial Protection
- Protects individuals or businesses from large, unexpected costs.
4. Business Confidence
- Knowing losses will be covered makes the business run without fear and allows to take risks
5. Investment
-Insurance companies invest the premiums they collect; this helps growth in economy and
generates returns for insurance companies.

Insurance Principles

1. Indemnity
- Compensation against a possible loss or financial burden, insured should be compensated in
way they cannot make a profit.
2. Contribution
- an insurance principle that states, the insurer has the right to collect money from other
insurance companies, if the insured has taken out more than one insurance policy. Prevents the
insured from being better o;, as the compensation is shared between companies.
3. Subrogation
- once compensation has been paid to a claimant, any property recovered resulting from a loss
belongs to the insurer. Property can only be claimed if full compensation is paid to the insurer.
4. Insurable Interest
- prevents individuals from taking an insurance cover against a loss incurred by a third party.
5. Utmost Good Faith
- both parties in an insurance contract should be honest when giving the other information.
- From insurers POV: it is important that the terms and conditions relating to an insurance policy
clearly stated.
- Insured: Important that accurate information is given, must not withhold any important
information.
The Statistical Basis of Insurance

1. Pooling of Risks
- Insurance companies collect premiums from many insurance policyholders and combines
(pools the money). This allows costs of losses to be shared among everybody, so no individual will
have to face huge losses
2. Forecasting Losses
- Insurance companies use statistics and past data to estimate how often losses likely occur.
3. Fixing Premiums
- Based on chances of a loss and the value of the item insured, insurance companies calculate
premiums.
- Those with high risks pay higher premiums, and others with low risks pay lower premiums
4. Compensating for loss
- When loss occurs, the insurer pays the insured according to the policy terms, helping them
recover financially.

The Role of an Actuary

• Actuaries calculate the probability of loss and decide the rate of the premiums for the customer
that must pay.
• Insurer then can cover claims, generate a profit and cover operating costs.

The Role of an Assessor

• Inspect the loss or damage, verify the claim, and recommend the amount of compensation to be
paid.
 19 Insurance Business Risks

Premises

• Covers damage for business buildings from events such as fires, storms or vandalism.

Theft

• Covers loss of goods, stock, equipment or money from a burglary or theft.

Marine

• Covers goods and cargo being transported by sea. Protects against loss/damage in transit

Fire

• Covers damages specifically due to a fire, needed for factories, warehouses and o;ices

Consequential loss

• Covers profit loss for a business when they stop operating due to an insured event. (ex. Fire stops
production).

Employers’ liability

• Covers the business if an employee is injured or gets ill due to workplace conditions.

Public liability

• Covers the business if a member of the public is injured or their property is damaged at the
business premises.

Product Liability

• Covers the business if a faulty product causes injury or damage to a customer.

Fidelity guarantee

• Protects the business against the loss caused by dishonest employees, such as theft or fraud.

Credit insurance

• Protects the business if a costumer doesn’t pay the bill.

Plate glass

• Covers breakage of glass windows, often used for shopfront and o;ices.
 20 EUecting cover, renewals and claims in Insurance

EUecting Insurance Cover and Renewal

1. Quote
- A quote is an estimated cost(premium) the insurer gives to the customer before an insurance
policy is taken out. It’s not a contract – its price o;er.
2. The Main documents of Insurance
- Proposal Form
- A form filled out by the person seeking an insurance
- Costumer must give full truthful information (principle of utmost good faith)
- Insurer uses the information to assess the risks and decides the premiums
- Cover note
- A temporary insurance document given while the insurance policy is being prepared
- Provide short-term proof insurance(often valid for 14-30 days)
- Commonly used for motor insurance.
- Policy
- Final legal contract of insurance.
- Includes:
- What Is covered
- What is not covered
- the premiums
- Conditions of claims and compensation.
3. Renewal
- Insurance Covers usually last for one year.
- Should be renewed by paying the premium.
- Premium will change based on history of claims, Changes in risk and new conditions

The Purpose of Endorsement

- A written amendment to the insurance policy when changing terms, details without issuing a new policy

The Reasons for the Inclusion of Policy Clauses

- Clarify what is covered and what is not covered, to not create misunderstanding

1. The Insured
- Clauses may relate to a person’s behavior (damages from war, 180 days since the event)
2. The Property
- Clauses may specify how the property should be protected.
- putting smoke detectors, fire escape. Will not cover electrical faults, or accidental damage
unless additional cover is requested.
3. Life Assurance and the Cover Required
- Misstatement of Age: If the insured gave the wrong age, benefit paid will be adjusted to correct
amounts
- Suicide Clause: No payment is paid if suicide is committed, prevents abuse.
 - War clause: No payment is given if death is caused from war
- Aviation Clause: No payment for high-risk aviation accidents.

The Main Roles in Insurance

1. Insurance and Broker agents
- Advise costumers and help arrange insurance policies on behalf of the insurer.

2. Underwrites and Syndicates

- Underwriters assess and evaluate the risks and fix premiums, syndicates share large or unusual
risks

EUecting Claims
- Steps to make a claim.

1. Immediately notify the insurer

2. Complete and Submit a claim form
3. A claims assessor checks the damage or loss.
4. If valid, insurer calculates the compensation and makes payment

21 Consumer Protection Legislation

What is meant by Consumer Protection?

• Consumers want high quality goods for a fair and cheap price, and they want information that is
real.
• Without government regulations, firms may exploit consumers by using anti-competitive or
restrictive trade practices.
- Increasing prices to higher levels than in the competitive market.
- Fixing prices
- Restricting consumer choice by market sharing

Reasons for having Consumer Legislation

Consumers need protection from businesses for a number of reasons

- Businesses are larger and more powerful

- Business have expert knowledge of products which consumers don’t have.
- Some firms are only interested in making as much profit as possible. If they get away with it
they may exploit consumers.

Legislation prevents firms from

- Making false claims about the performance of their products

- Selling goods not suitable for eating and drinking
- Selling goods not fit for purposes
Making a Complaint

• Important that consumers complaint if they are unhappy with their purchase.
• If not made, business will not know the problem, and it will never be solved.
• Complaints help businesses to improve on their products.
• Consumer gets compensation for their disappointment.
• A complaint Is more likely successful if:
- It is made right after the purchase
- Consumers are aware of their rights under any warranty
- If it is directed at a senior manager or a owner.
- Consumers know what to achieve
- A letter is written, or the complainant returns to the store
- A deadline is set to solve the problem.
• Complaint is unsuccessful if goods are being returned if the customer doesn’t like them.
• If they have been used or damaged since purchase
• However in most cases, business might o;er refunds or cover note to maintain good will.

Dealing with Faulty Goods

Action taken by Buyers

- Return goods to seller

- Return goods to manufacturer
- Make a claim for damages under any warranty or guarantee provided by the seller
- Take legal action if seller doesn’t provide compensation.
- Make insurance claim for the loss resulting from damage or injury

Action taken by Sellers

- O;er a replacement
- O;er a refund
- Direct consumers to the manufacturer
- Provide a cover note
- Organize a product recall
 22 Trade Protection

What is Protectionism?

An approach used by governments to protect domestic products

Reasons include:

1. Prevent Dumping
- Dumping is when foreign firms sells larger quantity of cheap products to wipe out competition
2. Protecting Employment
- If cheap imports take over, domestic firms may close.
3. Protecting Infant Industries
- New industries are new and weak compared to global firms.
4. To Gain tariU revenue
- Government earns money from taxes on imports
5. Preventing the entry of harmful or undesirable goods
- Some imports maybe unsafe, illegal or culturally inappropriate
6. Reduce current account deficits
- If country does more imports than exports, money will flow out
7. Retaliation
- If one country puts restrictions on imports, the other will do the same.

TariUs

• Tax on important goods, become more expensive than local products, encourages consumers to
buy domestic products.

Import Quotas

• A physical limit on the quantity of imports allowed into a country, ensures domestic firms keep a
share of the market.

Administrative Barriers

• Rules and Regulations that make it di;icult for exporters to enter the foreign market.

Subsidies

• A financial support provided by governments to domestic firms, then decreases production costs,
and gives cheaper products and more competitive than imports.

Impact of TariUs, Quotas and Trade Restrictions

Short term Impact: Domestic products benefit as imports become more expensive, employment
increases, government may earn revenue

Long term Impact: Domestic firms may become ine;icient as they are protected, economy becomes
less innovative, other countries may reduce trade slowing economic growth.
Retaliation: When one country puts restrictions, other country will respond the same way, causing trade
wars, where both countries impose increasing barriers. Result is export falls.

20 Exchange Rates and Bad Debt

Check in textbook, it is enough.