insurance.pdf

Insurance -insurance is a contract called a policy made with an insurance company where, in return for a fee called a premium, the insurance company (the insurer), will compensate the insured for any loss or damage suffered -the higher the risk of loss occurrence, the higher the premium the insu...

Insurance -insurance is a contract called a policy made with an insurance company where, in return for a fee called a premium, the insurance company (the insurer), will compensate the insured for any loss or damage suffered -the higher the risk of loss occurrence, the higher the premium the insurer will charge 20 -individuals and companies will engage in risk management to reduce/eliminate risks -insurer = the insurance company -insured = the person being insured -policy = the insurance contract -premium = the payment for insurance, the higher the risk the higher the premium -loading = an extra charge on the premium due to a greater risk eg a heavy smoker receives a loading on their health insurance premium due to higher negative health risks -actuary = a statistician who determines the size of the premium calculating the degree of risk involved -assessor = independent party who investigates the damage and loss that has occurred, determines the cost of compensation, and compiles all documentation, evidence and information relating to the insurance claim -proposal form = completed by the person applying for insurance cover, all material facts must be disclosed truthfully, and utmost good faith must be show, helps the insurance company to calculate the premium based on all the potential risks in relation to the insurance policy -cover note = temporary document issued by the insurance company as proof of existence of an insurance contract until the full policy contract is ready -renewal notice = sent out at the end of the insurance period to remind the customer of when the next premium is due, customer may renew existing insurance policy or change providers or stop insuring item (motor insurance is mandatory) -days of grace = extra days after the renewal date allowed by insurance companies to pay the renewal premium even though the premium period has ended (not applicable to motor insurance) -exemption/exclusion clause = outlines the items/risks of which the person is not insured under, and of which the company will not pay out compensation if the person suffers a loss or damage as a result of a risk occurring eg many health insurers will not cover loss or damage as a result of engaging in dangerous sports like mountain biking or bungee jumping Risk Management -a planned approach to the handling of risk that the individual or business is exposed to -it involves various steps towards reducing and eliminating risks 21 Risk Management Planned Approach 1. Identification (identifying all possible risks for the business/individual eg risk of fire, risk of personal injury loss) 2. Measuring (measuring the probability of the risk occurring eg very unlikely company buildings on high ground will face the risk pf being flooded) 3. Protection Cost (calculate the cost of protecting against the loss if the risk occurs) 4. Risk Reduction (engaging in risk reduction to minimise and eliminate all possible risks eg taking out insurance against the possible loss as a result of risk occurrence) Risk Reduction Methods -insurance (transfer the risk to an insurance company for a premium payment where the company will offset the cost and damage of losses suffered as a result of risk occurrence) -safe procedures (ensure that the manner of doing something is strictly laid out and adhered to eg secure procedures for managing cash) -health and safety (training of personnel in health and safety, provision of safety equipment, protective clothing and training in same, appoint Health and Safety representatives in the work force, report safety issues, have regular safety inspections, investment in new, replacement, upgraded equipment) -security systems (install security systems eg alarms, fire doors, CCTV, security guards) Factors Affecting Insurance Premium Cost 1. Risk (the higher the risk the higher the premium, this is usually based in the insurance company experience of the cost of claims made for similar risk exposure units) 2. Value (the value of the item being insured will impact the premium cost; higher item value suggests higher premium) 3. Loading (may be added to premiums due to higher risks because of certain material facts) 4. No Claims Bonus (discount offered on premiums to customers who have made no claims in previous years) 22 5. Profit Targets (insurance company profit targets will affect the cost of premiums; higher profit targets may cause higher premiums) 6. Government Levies (government levies are extra charges implied on something, if a levy is applied to a certain insurance type, this levy will be passed onto the customer’s premium eg in 2018 the government introduced a 2% levy on motor insurance premiums for 7 years) 7. Number of Claims (if an item has a lot of previous claims relating to it then the premium will be higher eg due to the high rate of motor insurance claims in recent years and increased court awarded payouts, insurance companies are charging higher motor insurance premiums to offset the cost of compensation) Insurance Process 1. Contact Insurance Company 2. Fill Out Proposal Form (utmost good faith with all material facts disclosed) 3. Insurance Company Assessment (assessment of risk and valuing of items to calculate the premium) 4. Policy Issue (insurance company will issue the policy (contract of insurance) to the customer) 5. Policy Acceptance 6. Cover Note (temporary proof of existing insurance cover issued until full policy is ready) Insurance v Assurance -insurance is protection against the risk of a loss that you hope will not happen eg fire -assurance is the protection against the loss that you know will happen eg life assurance policies for future death -life assurance Life Assurance Policy Types -whole life policies = only paid out when the insured passes away 23 -endowment policies = paid out when the insured person reaches a certain age or paid out on death (whichever occurs first), endowment is a combination of a personal savings scheme and risk protection -term policies = pay out if the insured person dies during a specific period of time eg 20 years, no compensation lump sum is paid out if the insured does not die in that time period eg mortgage protection insurance is a form of term life assurance Principles of Insurance -insurable interest -utmost good faith -indemnity (subrogation and contribution) Insurable Interest -householder or business must have a financial interest in the item being insured -you can only insure something that you own -you must benefit from the existence of the item you are insuring and suffer from its loss -eg you can ensure your own house, car, life, wife, husband, business partner but you cannot insure you neighbour's house, car etc as if anything happened to them, you would not lose any money Utmost Good Faith -also known as Uberrimae Fidei in Latin -when applying for insurance a person must give truthful information and disclose all material facts -person must disclose any information (even if not asked) which they may think may affect the acceptance/refusal of insurance cover and the cost of the premium -material fact = information that will help the insurance company to estimate the risk involved, decide whether to insure the risk and calculate the premium for insurance eg existing heart problem, previous drunk driving conviction, thatched roof on house -the greater the risk the higher the premium charged 24 -if utmost good faith is not shown and any material fact is omitted, then the insurance contract can be declared void, terminated, and compensation need not be paid (Unit 1 Notes page 15) Indemnity -one cannot make a profit from insurance -you must be placed in the exact same financial position as you were in prior to the loss occurring -if you underinsure an item that suffered a loss, the company will use the average clause method to determine the amount of compensation to pay out -eg if you crash your two year old car you will only get compensated equivalent to the value of the car at two years’ old, not the value of the car on purchase -subrogation and contribution are principles of indemnity Subrogation -principle of indemnity that relates to the insurance company after having paid compensation -having paid compensation, the insurer (insurance company) has the right to claim and take legal action against a third party responsible for the damage to try to offset the compensation payout cost -eg if an electrician wires a house incorrectly and the house subsequently goes on fire due to an electrical fault, the insurance company having paid compensation to the house owner, can sue the electrician for negligence -having paid compensation, the insurer (insurance company) also has the right to claim ownership of any remaining goods for which compensation for replacements have been paid -eg if an insurance company compensates a person for the loss of jewellery and the jewellery is then later found, the insurance company, having paid compensation, can claim ownership of the jewellery when found Contribution -principle of indemnity 25 -aims to prevent people from making a profit on insurance through insuring the same item against the same risk with several different insurance companies in the hope of claiming compensation from each insurer -if the same item is insured against the same risk occurrence by a number of companies, the insurance companies will share the cost of the loss due to the risk occurring -insurers will share the cost of the loss through paying out compensation in proportion to the amount of the total risk that each company covered -a simple compensation payout formula reveals the payouts per insurance company -eg Happy Ltd insures its premises with two different insurance companies as follows; insures €100,000 with company A and insures €300,000 company B, if a storm causes damage worth €80,000 to the premises then the insurance companies will compensate in proportion to the individual amounts insured as that Happy Ltd cannot receive more than €80,000 in compensation to not break the rule of indemnity and earn a profit on insurance -the compensation was proportionally shared and paid out so Happy Ltd received €20,000 and €60,000 to recoup their total loss of €80,000 Average Clause -not a principle of insurance but applies as a result of the principle of indemnity -you cannot make a profit from insurance, and you will be compensated to a maximum of the proportion of the item you insured 26 -partial loss occurs when you underinsure an item -someone may intentionally underinsure (eg to reduce the cost of the premium) or unintentionally underinsure (eg the item has increased in value since it was insured, and insurance company has not been made aware) an item -if you only insure an item for a fraction of its actual current replacement market value, you only get the same fraction compensation payout -a simple average clause formula reveals the compensation payout by the insurance company -eg you insure your house for €250,000 when it is currently valued at €500,000, if €50,000 worth of damage is caused the insurance company will apply the average clause formula to calculate the compensation payable Types of Business Insurance 1. Public Liability Insurance (cover for the business which protects the business against claims by members of the public for injury or loss resulting from an accident on the business premises) 2. Employer’s Liability Insurance (cover for the business which protects the business against claims by employees for injury or loss resulting from an accident on the premises) 3. Fidelity Guarantee Insurance (cover for the business which protects the business against financial losses, as a result of theft or fraud by an employee) 4. Theft Insurance (cover for the business against stock and money stolen) 5. Fire Insurance (cover for the business against stock and premises being destroyed by fire) 6. Consequential Loss Insurance (covers the firm for loss of profits while a business is closed due to unforeseen circumstances such as a fire or flood) 7. Products Liability Insurance (covers the business if a customer makes a claim against it as a result of a loss or injury from using the business's products) 27 8. Cash In Transit Insurance (covers the business’ money being moved to or from the bank) 9. Goods In Transit Insurance (covers the business against stock lost, damaged or stolen while being transported, very important for foreign trade. 10. Motor Insurance (covers the business in the event of the firm's vehicles being damaged in an accident or by any third-party injuries, all vehicles and delivery trucks owned by a business must be insured as it is compulsory by law) 11. 3rd Party Motor Insurance (basic motor insurance plus covers the insured for damage they caused to third party vehicles, other people or property, personal injury or death as a result of the insured’s fault) 12. 3rd Party Fire and Theft Motor Insurance (basis 3rd party insurance plus covers any losses to the insured’s vehicle as a result of fire or theft) 13. Comprehensive Insurance (basic 3rd party fire and theft cover plus covers any accidental damage that happens your own vehicle) 14. Key Person Insurance (a business-specific life insurance that can compensate a company for the financial loss and other consequences of the death of an important member of current staff) 15. Plate Glass Insurance (protects a business against damage or breakage to large glass panels eg shop windows) Types of Household Insurance 1. Buildings and Contents Insurance (protects the home if it is damaged in a storm, goes on fir or if the contents of the house are damaged the insurance company will pay compensation) 2. Life Assurance (protects the people who are financially dependent on the insured person eg the husband/wife/civil partner and children, the insurance company pays compensation to family members if the insured dies, three different types are whole life, endowment and term life assurance) 3. Health Insurance (pays the private medical bills of family members if they beco.me ill. 4. Mortgage Protection Policy (form of term life assurance policy, insurance company pays the amount outstanding on the loan to the financial institution on the death of the mortgage holder whilst mortgage is still open, this insurance is often now required by mortgage lenders as a form of security) 28 5. Permanent Health Insurance (pays a percentage of your salary if you must give up work due to accident or illness) 6. Motor Insurance (3rd party, 3rd party fire and theft, comprehensive) Similarities Between Business and Household Insurance -both identify risk -both engage in risk management -both take out insurance cover -both fill out insurance forms, proposal forms, claim forms -principles of insurance apply to both -both must keep insurance policy and documents safe -both are legally obliged to have motor insurance Differences Between Business and Household Insurance -businesses take out a wide range of insurance cover compared to households eg households do not need goods in transit insurance -business risk is much greater and on a much greater scale with propensity for much greater losses thus have higher premiums than households -businesses can treat insurance premiums as a tax-deductible expense to reduce their end of year tax liability whilst households cannot Insurance Importance 1. Business Survival (business insurance protects a business from closing due to a catastrophic loss such as fire or flood, when a company carries insurance against these types of losses, closure and loss are only temporary instead of permanent eg if a customer slips and falls while on your business premises or your product has a defect that injures a customer and you do not have insurance, this could spell the end of your business) 2. Exporting is Safer (goods transported over long distances can be insured against damage or theft with goods in transit insurance) 3. Saves Money (insurance cover in place saves money in the long run as paying regular premiums may be less expensive than having no insurance if something goes wrong) 29 4. Safety (as part of overall risk management, firms will generally improve safety standards in order to reduce premiums) 5. Cash Flow (insurance can help a business meet its cash flow requirements, financial burden of paying out large sums of money for an unexpected accident is eliminated) 6. Legal Requirement (motor insurance is required by law, no days of grace allowable) 7. Raising Finance (mortgage protection insurance is often now required by mortgage lenders as a form of security) 8. Tax Deductible (insurance premiums are a tax-deductible expense for businesses and reduce their yearly overall tax liability)