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INSURANCE
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CHAPTER THREE
INSURANCE
01/25/2025
Meaning of insurance
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There is no single definition of insurance.
Insurance may be defined indifferent ways by the
different scholars
Insurance may defined in
economic sense
Legal view point
Business view point
Social view point
Mathematical view point
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What is insurance
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Insurance : is pooling of accidental losses by
transfer such risks to insurers, who agree to
indemnify insured for such losses, to provide
other financial benefits on their occurrence.
In business sense: is a plan by which large
number of people associate themselves and
transfer risks of individuals to the shoulders of
all members of the policy
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Insurance terminology
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A insurance :is an arrangement between an individuals
“consumers” and insurers “insurance company” to
protect individuals against risk
A policy: is a contract between the insurer and
individuals specifying terms insurance arrangement
A policyholder: is a consumer who purchases policy
A premium: is a fee paid to insurer to be covered under
specific term
Deductible: is amount paid out of pocket by
policyholder for initial portion of a loss before
insurance coverage begins
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Basic characteristics of insurance
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there are four characteristics of
an insurance plan/ arrangement
Pooling of losses
Payment of accidental losses
Risk transfer
Indemnification
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1. Principal of loss pooling
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Pooling of losses: is the spreading of
losses incurred by the few over the entire
group, so that in the process, average
loss is substituted for actual loss
The sharing of losses by the entire group
future losses are predicted based on law
of large number
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2. payment of accidental losses
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Insurance pays for losses that are accidental,
unexpected , and occurs as a result of chance
Insurance policies do not cover international losses
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3. indemnification
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Indemnification: means that the insured
is restored to his or her approximate
financial position prior to the occurrence
of the loss
4. Risk transfer
Risk transfer: means that a pure risk is
transferred from the insured to the insurer,
who typically is in a stronger financial
position to pay the loss than the insured
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1. Risks can be classified into
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1. Insurable risks
2. Uninsurable risks
Insurable risks
The following are generally
insurable risk.
Pure risks.
Non-catastrophic losses
Risk with low probability of
occurence
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Uninsurable risks
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The following are main uninsurable
risks
Speculative risks such as market risks
Fundamental risks such as war,
earthquake, economic losses
Wear and tear of goods , example.
Depreciation
Risks that are against public policy
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Fundamentals of insurable risk
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1. A large number of independent units should be
exposed to the same risks
2. It must be possible to calculate / measure the
chance of loss in monetary terms
[Link] loss should be definite , in time, place,
cause and amount; otherwise claim adjustment
will be difficult
4. The loss should be accidental from the view
point of the insured as distinguished from the
expected loss
5. The possible loss must not be catastrophic
6. The potential loss must be large
7. The
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Benefits of insurance
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insurance has several advantage or value to the social
well-being and economic development of the nation.
Some of the advantages are mentioned below.
a) Risk transfer/ indemnification.
b) Reduction of uncertainty
c) Encourage saving
d) Help business continue without interruption operation.
e) Provide funds for investment
f) Keeps families
g) Stimulate international trade and commerce
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Types of insurance
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These classifications are based on the perils
insured against and can be grouped into two
classes.
1. Private insurance
2. Social insurance
Private insurance.
Private insurance: consists of mainly voluntary
insurance programs offered by the private
insurers to provide compensation to individuals
and business owners when an insured loss
occurs. This insurance is offered by both private
and government insurance offices.
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Social insurance
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Social insurance: is compulsory insurance, often operated by the
government, whose benefits are determined by the law and which
attempts to achieve social adequacy.
The major groups within private insurance
Life insurance.
Health insurance.
General insurance like property and liability
insurance
Social (government) insurance, which includes
Social security
Welfare
Unemployment
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Life insurance
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Life insurance: covers a variety of products,
including policies that provide payment upon
death, continuous disability or trauma. The
underwriting of life insurance relies on the
collection and the use of health information
to assess an applicant’s risk of mortality and
morbidity
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class discussion
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1. Assess the unique
characteristics of life insurance
2. Mention and explain types of
life insurance
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General insurance
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this type of insurance is offered by fire and
general insurance companies and provides
protection against loss or damage to property
These insurance can be classified by the types
and losses arising from legal liability
of policies sold. The major categories are
Fire insurance .
Marine insurance
Aviation insurance
Motor vehicle insurance
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Cont.….
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Liability insurance.
Equipment breakdown insurance.
Robbery and theft insurance
Workers compensation insurance
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End of chapter
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