INSURANCE
UNIT 1
Business Risks
Business faces different risks.
Some risks can cause serious damage or harm,
resulting in business collapse.
loss or damage to the properties, vehicles and stocks due to
Examples fires, thefts, burglaries, flood
Injuries or loss of lives due to accidents
Sued by customers or employees due to business negligence
Negligence – failure to use care in doing
Purpose of
Insurance
Protect businesses against FINANCIAL
losses due to
- some eventualities or
- unforeseen circumstances
But not for losses due to bad business
decisions.
Insurable risks
• Risks that can be mathematically
calculated by statisticians and
actuaries to convert into premium
Insurable vs • Insurers will cover this risk if premium
non- is high enough to cover possible
claims
insurable Non-insurable risks
risks • Risks that insurer have no records
how to calculate
• Eg: wars, trade risks, change in
fashion trend, poor management
resulting in business losses
Common terms
Insured person who buys the insurance policy
Insurer/underwriter insurance company
Beneficiary person named in the insurance policy to receive payment in the
event of risk or death
Policy agreement signed between the insured and the insurer stating the
indemnity and compensation to be paid should the insured risk
occurs
Cover the limit payable by the insurer
Premium fee paid by insured to insurer to cover the insured against possible
losses due to the insured risk
Insurance
Premium
• Must be higher than expected claims for
insurer not to suffer a loss
• Calculated by actuaries who evaluate the
financial impact of risks
• Collected into a fund pool
• A portion to provide for any possible claims
for losses
• The rest are invested to provide income for
the insurer
Basic principles of insurance
1. Insurable • Insured must incur a loss if the insured risk event happens
interest
• Insured must disclose all known facts relevant to the
2. Utmost good insurance in the application to allow the computation of
premium and compensation. Intent to hide facts may
faith result in the policy being void and no compensation being
paid
• Applies to all insurance contracts except life & personal
accident insurance
3. Indemnity • To compensate a person and restore him to the state he
was in immediately before the insured risk happens.
• Key cause of the loss
4. Proximate • Claim may be denied if cause is outside the scope of the
cause policy
Indemnity Example
A new delivery van costs $50,000 was
insured for $50,000.
After 5 months, the van was wrecked in an
accident.
Insurer will compensate insured up to
$50,000 to replace with another van.
However since the van has been used, Insured should not make a
insured will get only the current market profit out of the insurance
value of the used van, maybe $47,000 to
policy!
indemnify the loss.