INSURANCE

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1.Meaning of insurance

Insurance refers to cover for a possible event that may cause a specified loss/ damage.

An agreement whereby the insurer undertakes to indemnify the insured in the event of a specified loss/damage.

The insured has to pay a premium for specified losses/damages covered.

A contract between a person/business/insured requiring insurance cover and the insurance company/insurer bearing the financial risk.

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2.The meaning of non-compulsory insurance

Non-compulsory insurance is voluntary/the insured has a choice whether to enter into an insurance contract.

It is not required by law, but it can provide protection for businesses and individuals.

It is taken out in order to transfer the risk of something happening to the insurance company.

These risks include theft, damaged cars, damaged buildings/ premises/injuries on-premises, etc.

Non-compulsory can be divided into:

Short-term insurance e.g. fire, theft, etc.

Long-term insurance e.g. retirement/death etc.

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3.Meaning of insurance concepts

1 Over insurance

Over insurance is when the item is insured for more than the actual market value.

Businesses will not receive a pay-out larger than the value of the loss at market value.

This means that the extra money paid for the premiums will not be paid out to the insurer if there is a claim for a loss.

2 Under-insurance

Occurs when property or assets are insured for their full market value.

The property/asset is insured for less than the current/actual value of the property/assets

If a business is insured for an amount that is under the actual market value of goods or service, the insured/business will only be paid out for the amount that the goods/assets are insured for.

The insurer usually applies the average clause to calculate the amount of money that must be compensated to the insured if the goods/assets are underinsured.

3 Average clause

A stipulation set by the insurer is applicable when property/goods are underinsured/insured for less than its market value.

The insurer will pay for insured loss/damages in proportion to the insured value.

This means that the insured is responsible for a part of the risk that is not insured.

NOTE: The average clause applies when goods/assets are underinsured.

The formula for calculating the average clause

The insured amount is divided by the market value of the insured item and multiplied by the total value/amount of the damages/loss.

Insurance companies apply the following formula to determine the amount to be paid out to the insured:

FORMULA: (Amount insured ÷ Market value) x damages

Amount insured x Amount of damages/loss

Value of insured item

4 Reinstatement

It is a stipulation whereby the insurer may replace lost/damaged property/goods instead of reimbursing the insured.

This stipulation is applicable when property/goods are overinsured.

The reinstatement value will not be higher than the market value of the loss.

Insured is returned to almost the same financial position as before the loss occurred.

NOTE: 1 Reinstatement applies when goods/assets are over-insured.

2 There is no formula for calculating over insurance. Therefore you will not be asked to calculate over insurance.

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4. Differences between over and under-insurance

OVER-INSURANCE

Property/Assets that are insured for more than their value.

The insurer can choose to reinstate the insured.

Businesses will not receive a pay-out larger than the value of the loss at market value

UNDER-INSURANCE

Property/Assets that are not insured for their full market value.

The insurer will implement the average clause to determine the amount that will be paid.

Businesses will only be paid out for the amount that the goods/assets are insured for.

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5 Differences between insurance and assurance

INSURANCE

Based on the principle of indemnity

The insured transfers the cost of the potential loss to the insurer at a premium

It covers a specified event that may occur

Applicable to short term insurance

Examples

Property insurance/money in

transit/theft/burglary/fire

ASSURANCE

Based on the principle of security/certainty

The insurer undertakes to pay an agreed sum of money after a certain period has expired/on the death of the insured person, whichever occurred first

The specified event is a certainty, but the time of the event is uncertain

Applicable to long term insurance

Examples

Life insurance/endowment policies/retirement annuities

NOTE: Both insurance and assurance form part of non-compulsory insurance

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6 Examples of short term and long term insurance

SHORT TERM INSURANCE

Property insurance

Money in transit

Theft

Burglary

Fire

LONG TERM INSURANCE

Endowment policy

Life cover policy/Life insurance

Retirement annuity/Pension fund/Provident fund

Disability policy

Trauma insurance

Funeral insurance

Health insurance/Medical aid

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7 Principles of insurance

1 Indemnification/Indemnity

Usually applies to short-term insurance, as the insured is compensated for specified/proven harm/loss.

The insurer agrees to compensate the insured for damages/losses specified in the insurance contract, in return for premiums paid by the insured to the insurer.

Protects the insured against the specified event that may occur.

Pay-outs from insurance companies/insurers will only be made; if there is proof that the specified event took place/if the insured can prove the amount of the loss/ damage.

The amount of indemnification/compensation is limited to the amount of provable loss/damage, even if the amount in the policy/insurance contract is higher.

The insured must be placed in the same position as before the occurrence of the loss/damage/The insured may not profit from insurance.

2 Security/Certainty

Applies to long-term insurance where the insurer undertakes to pay out an agreed-upon amount in the event of loss of life.

A predetermined amount will be paid out when the insured reaches a pre-determined age/or gets injured due to a predetermined event.

Aims to provide financial security to the insured at retirement/the dependents of the deceased.

3 Utmost good faith

Insured has to be honest in supplying details when entering into an insurance contract.

Both parties/insurer and insured must disclose all relevant facts.

Insured must disclose everything that may affect the extent of the risk.

Details/Information supplied when claiming should be accurate/true.

4 Insurable interest

Insured must prove that he/she will suffer a financial loss if the insured object is damaged/lost/ceases to exist.

Insurable interest must be expressed in financial terms.

Insured must have a legal relationship with the insured object in the contract.

NOTE: The principles of insurance form the basis of an insurance contract between the insurer and the insured.

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7 Advantages/Importance of insurance for businesses

Transfers the risk from the business/insured to an insurance company/insurer.

Transfer of risk is subject to the terms and conditions of the insurance contract.

Protects businesses against dishonest employees.

Protects businesses against losses due to the death of a debtor.

Protects the business against theft/loss of stock and/or damages caused by natural disasters such as floods, storm damage, etc.

Protects businesses from claims made by members of the public for damages that the business is responsible for.

Businesses will be compensated for insurable losses, e.g. destruction of property through fire.

Businesses assets, e.g. vehicles/equipment/buildings need to be insured against damage and/or theft.

Businesses are protected against the loss of earnings, e.g. strikes by employees which result in losses worth millions.

Life insurance can be taken on the life of partners in a partnership to prevent unexpected loss of capital.

Should the services of key personnel be lost due to accidents/death, the proceeds of an insurance policy can be paid out to the business/beneficiaries.

Replacement costs for damaged machinery/equipment are very high, therefore insurance can reduce/cover such costs.

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8 Meaning of insurable and non-insurable risks

Meaning of insurable risks

These risks are insured by insurance companies.

Insurance companies decide on the likelihood of an event and then decide if they want to ensure the risk

Meaning of non-insurable risks

These risks are not insured by insurance companies as insurance cost/risks are too high/remains the responsibility of the business.

The insurance company cannot calculate the profitability of the risk and therefore they cannot work out a premium that the business must pay.

Examples of insurable and non-insurable risks

INSURABLE RISKS

Examples

Theft

Fidelity insurance

Burglary

Money in transit

Fire

Natural disaster/Storms/Wind/Rain/Hail

Damage to/Loss of assets/vehicles/ equipment/buildings/premises

Injuries on-premises

NON-INSURABLE RISKS

Examples

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.

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9 Compulsory insurance

Meaning of compulsory insurance

Compulsory insurance is insurance that is required by law before /businesses/individuals may engage in certain activities.

Compulsory insurance is intended to safeguard the welfare of everyone concerned.

It is regulated by Government and does not require insurance contracts/brokers.

Payment is in the form of a levy/contribution paid into a common fund from which benefits may be claimed under certain conditions

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

NOTE: Do not confuse the examples of compulsory insurance with the examples of long term insurance.

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9.1 Unemployment Insurance Fund (UIF)

The UIF provides benefits to workers who have been working and become unemployed for various reasons.

Employees contribute 1% of their basic wage to UIF.

Businesses contribute 1% of basic wages towards UIF, therefore reducing the expense of providing UIF benefits themselves.

The contribution of businesses towards UIF increases the amount paid out to employees that become unemployed.

All employees who work at least 24 hours per month are required to be registered for UIF/contribute to the UIF.

It is an affordable contribution that makes it possible for businesses to appoint substitute workers in some instances.

The business cannot be held responsible for unemployment cover as the UIF pays out to contributors directly/dependants of deceased contributors.

Businesses are compelled to register their employees with the fund and to pay contributions to the fund.

NOTE: You will be not be awarded marks writing “workman’s compensation fund” instead of UIF.

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9.2 Benefits of UIF

Unemployment benefits

Employees, who become unemployed/retrenched due to restructuring/an expired contract, may claim within six months after becoming unemployed.

Unemployed employees may only claim, if they contributed to UIF.

Unemployed employees enjoy these benefits until the allocated funds are exhausted.

If a worker voluntarily terminates his/her contract, he/she may not claim.

No tax is payable on unemployment benefits.

Illness benefits/ Sickness/ Disability

Employees may receive these benefits if they are unable to work for more than 14 days without receiving a salary/part of the salary.

Employees may not claim these benefits if they refuse medical treatment.

Maternity benefits

Pregnant employees receive these benefits for up to 4 consecutive months.

If an employee had a miscarriage, she can claim for up to six weeks/42 days.

Adoption benefits

Employees may receive these benefits if they adopt a child younger than two years.

Employees who take unpaid leave/may receive part of their salary while caring for the child at home.

Only one parent/partner may claim.

Dependants' benefits

Dependants may apply for these benefits if the breadwinner, who has contributed to UIF dies.

The spouse of the deceased may claim, whether he/she is employed or not.

NOTE: Do not confuse the benefits of UIF with types of leaves

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9.3 Road Accident Fund (RAF)/Road Accident Benefit Scheme (RABS)

RAF/RABS insures road users against the negligence of other road users.

The RAF/RABS provides compulsory cover for all road users in South Africa, which includes South African businesses.

Drivers of business vehicles are indemnified against claims by persons injured in vehicle accidents.

RAF/RABS is funded by a levy on the sale of fuel/diesel/petrol.

The amount that can be claimed for loss of income is limited by legislation.

The next of kin of workers/ breadwinners who are injured/killed in road accidents may claim directly from RAF/RABS.

Injured parties and negligent drivers are both covered by RAF/RABS.

The injured party will be compensated, irrespective of whether the negligent driver is rich/poor/insured/uninsured.

RABS aims to provide a benefits scheme that is reasonable/equitable/affordable/ sustainable, etc.

RABS aims to simplify/speed up the claims process as victims of road accidents no longer have to prove who caused the accident.

RABS enables road accident victims speedy access to medical care as delays due to the investigation into accidents has been minimized.

NOTE: You will be awarded a mark if you write the word “third party” instead of RAF.

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9.4 Compensation Fund/Compensation for Occupational Injuries and Diseases/COIDA

The fund covers occupational diseases and workplace injuries.

Compensates employees for injuries and diseases incurred at work.

Compensation paid is determined by the degree of disablement.

The contribution payable is reviewed every few years according to the risk associated with that type of work.

All employers are obliged to register with the compensation fund so that employees may be compensated for accidents and diseases sustained in the workplace.

The fund covers employers for any legal claim that workers may bring against them.

Employers are required to report all accidents within 7 days and occupational diseases within 14 days to the Compensation Commissioner.

Employers are responsible for contributing towards the fund and may not claim money back from employees/deduct contributions from wages.

In the event of the death of an employee as a result of a work-related accident/ disease, his/her dependant(s) will receive financial support.

Employees do not have to contribute to this fund.

Employees receive medical assistance provided there is no other party/medical fund involved.

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10 Differences between compulsory and non-compulsory insurance

Compulsory insurance

Required by Law/there are legal obligations for it to be taken out and paid for.

It is regulated by Government and does not require insurance contracts/brokers

Payment is in the form of a levy/contribution paid into a common fund from which benefits may be claimed under certain conditions.

Examples

UIF, RAF, and Compensation Fund/COIDA

Non-compulsory insurance

Is voluntary/the insured has a choice whether to enter into an insurance contract.

Insured will enter into a legal insurance contract with the insurer, who may be represented by an insurance broker.

Monthly/Annual payments/premiums that must be paid in order to enjoy cover for a nominated risk.

Examples

Short term insurance/Multi-peril insurance (theft, fire, etc.) Long term insurance/Life insurance