Introduction to insurance unit6

THE UGANDA INSTITUTE

OF BANKING &

FINANCIAL SERVICES

UIBFS

ISO 9001:2008 CERTIFIED

Module 7: Introduction to Insurance


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LEARNING OBJECTIVES This course aims at helping you the student to,

• Gain a broader understanding of risk and insurance as a means to manage it.

• Appreciate the role of insurance to our economy and how it operates

• Have a balanced, systems – oriented view of how the insurance industry players work together to protect and meet the needs of consumers.


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LEARNING OUTCOMESAfter completion of this study you should be able to:

• Describe the role insurance plays in our economy

• Explain how insurance is used to manage or diversify risk

• Understand the fundamental principles of insurance

• Recognize the various categories of insurance and the underwriting procedure

• Define the key insurance terms

• Explain the roles of the insurance players in the industry

• Explain how insurance claims are administered


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What is Insurance?

Risk Management and Responding to Risk

The Purpose of insurance

How does Insurance work?

Players in the Insurance Industry

Insurance Underwriting and Categories of Insurance

Fundamental Principles of Insurance

Some commonly used Insurance terminologies

Settlement of Insurance Claims


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Underwriting and categories of InsuranceInsurance Underwriting

An insurer will require a proposal to be prepared which answersboth general and specific questions about the proposer. Whenthe proposal has been completed, the underwriter goesthrough it to determine whether the risk is acceptable or not.

This process is called underwriting.

The underwriting process begins after the proposal form hasbeen completed and presented to the underwriter. Theunderwriter will consider both the moral and physical hazard.

The physical hazard relates to the physical characteristics of thesubject matter of insurance while the moral hazard relates tothe attitude of the proposer.


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General Questions

• Name of the proposer

• Address of the proposer

• Occupation of the proposer

• Details of past claims

• Other insurance of thesame risk

• Period of insurance

• Description of the risk orsubject of insurance

Specific Questions (fire)

• What construction materialwas used in the building

• Use of the building and theprocesses which take placethere

• Whether fire extinguishingappliances have been installed

• The distance from the nearestfire brigade

• Surrounding fire risks


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Categories of Insurance1. Non Life Insurance / General InsuranceBasically, it is insurance for assets and liabilities e.g. vehicles,

buildings, computers. Also referred to as indemnity policies,they are short – term policies, usually up to one year and arerenewable.

COMMON CLASSES INCLUDE:a. Fire and Special PerilsThis policy provides indemnity for loss of and/or damage to

buildings, Plant and machinery, Stock in trade, etc. Resultingfrom Fire, Lightening, Explosion of Gas or Boilers used fordomestic purposes, Earthquake, Subsistence and landslip,Impact by moving objects, Aircraft damage, Riots, Strikesand Malicious damage, Water damage by burst pipes orapparatus.


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b. Business Interruption

This policy provides protection against loss of profits followingdamage at the insured locations by fire and/or any of theSpecial Perils.

c. Burglary

The burglary policy provides protection against loss of movableitems by theft accompanied by violent entry into and/orexist from the premises.

d. All Risks

This policy provides protection for your various portablevaluable items e.g. Mobile phones, Telephone systems, Faxmachines, Switchboard, Fans, Office, Fittings and Equipmentetc.


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e. Electronic Equipment Insurance (Computers)Noting the operational hazards to which electronic equipment is exposed, we

recommend this cover for your computers, Air conditioning Plant andaccessories to provide indemnity for losses resulting from:

1.Physical Breakdown, actual breaking, distortion whilst in use or at Rest;2. Accidental damage i.e. any other sudden and unforeseen loss including fire

and Lightning, theft, earthquake, malicious damage, riots, strikes and civilcommotions.

This cover would additionally provide:1. Indemnity for damage to other data carrying media e.g. diskettes, tapes

and cables resulting from any of the above perils.2. Reimbursement of additional expenses incurred to reproduce lost data and

records following damage to the insured equipment by any of the aboveperils.


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f. Workers’ Compensation/Employer’s Liability

It is a statutory obligation for every employer to take out insurance for compensationto his employers for death and/or permanent incapacity from accident sustainedwhilst at work.

g. Group Personal Accident

Whereas the workmen’s compensation cover provides protection for your legalliability to compensate employees for injuries resulting from accidents at work, theGroup Personal Accident cover is a benefit policy for your employees on a 24 hoursbasis.

h. Public Liability

Public Liability To provide protection against your legal liability to compensate thirdparties for injuries and/or damage to their property resulting form accident s orevents at any premises owned, occupied, hired or leased for your operationsanywhere in the country.


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i. Fidelity Guarantee

Provides protection against loss of cash and/or stock by fraudulent means (involvingstaff)

j. Money/Cash In Transit

This cover would be required for indemnity against “All Risks” of physical loss and/ordamage to money whilst in transit to and from the premises and whilst in thepremises during and after working hours.

k. Motor Comprehensive

Comprehensive cover to provide indemnity for:

• All Material Damage: i.e. the risk of accidental loss, fire and theft, includingdamage caused by fold, hurricane storm and tempest, earthquake, riots, strikesand civil commotions and malicious damage.

• Windscreen Extension: i.e. Reimbursement of costs incurred to replace or repairwindscreen following damage or loss other than involving total loss of the vehicle.


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Third Party Liability: i.e. compensation to third parties for bodily injury or death caused by the use of your motor vehicles as required by statute.

Medical Expenses to Insured/Driver: Up to a limit of Ushs.300,000/= per person per incident.

Towing/Wreckage Removal: Up to a limit of Ushs.300,000/=.

Classes of vehicles to be insured:

A: Private: To cover Saloon wagons and small vehicles used for official, social, domestic and pleasure purposes.

B: Commercial: To cover Pick-Ups, Trucks, Lorries, Vans and Minibuses used for your operations.

C: Motor Cycle: Motor Cycles used for official, business, social and domestic purposes.


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l. Domestic Package

This proposal is for a comprehensive insurance cover for residential buildings owned by yourselves and/or hired for your executive and household contents therein against loss of and/or damage resulting from fire, lightning, earthquake, subterranean fire, flood, storm, hurricane, impact with moving objects, aircraft damage, riots, strikes and malicious damage, landslip, water damage etc.

This package also extends to cover:

i. Liability for injury to third parties and damage to their property.

ii. Liability to compensate domestic servants.

iii. Loss of Gold equipment, Golfer’s liability and Breakage of clubs.

iv. Personal Accident to occupiers.

v. Loss of rent or costs of alternative accommodation.

vi. Pedal cycle and other equipment for domestic use.


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m. Marine

This cover is recommended for business whose operations involve regularimportation of Raw materials, packaging materials, spares, etc and/orexportation of finished products. The indemnity provided under thispolicy is for “All Risks” of physical loss and/or damage to the goods whilstin transit form one country to another.

n. Insurance Bonds or Financial Guarantees

Bonds are also referred to as Financial Guarantees. The purpose of an insurance bond is to compensate the third party in respect of loss suffered as a result of a failure of the insured to perform a task described in the insurance contract.


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Peculiar features of insurance bonds:-1. A bond once issued, is non-cancellable before its expiry

date.

2. All bonds issued to contractors for government projects are demand bonds and are worded in such a way that they can be invoked by the holder of the bond without any reason and explanation.

3. The Insurer is obliged to pay upon demand notwithstanding any dispute or protest by the contractor or insurer or any third party.


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Types of bondsa. Bid or Tender Bonds:

These are guarantees required in connection with the submission of tendersfor contract jobs with Public Authorities or Private Principals whererelevant. The bond value is usually a fixed amount determined by thePrincipal. The main objective of this bond is to guarantee that thecontractor who is awarded the contract will accept the Contract accordingto the terms that was submitted by him to the principal. If he is unable tomaintain his quotation, the Bond will be liquidated and the principal willrequest the surety to pay for the damages sustained up to the amount ofthe bond.


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b. Performance bondsPerformance bonds are surety bonds issued by an insurance

company (surety) or a bank to guarantee satisfactorycompletion of a project by a contractor.

c. Advance payment bonds (mainly for governmentcontracts)

This is required when a contractor applies for an advancepayment from the Principal to help in the funding of thepreliminary costs and mobilization works of the contract.The bond value ranges from 15% to 25% of the total contractvalue.

d. Immigration or Security BondsThese bonds are issued to non – citizens, whose conduct

insurers guarantee. Should one fail to be of good conduct, aninsurance company undertakes to pay the cost ofdeportation or the consequences of their bad conduct.


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e. Court BondsThese are used when a court has the responsibility of administering

the affairs of persons unable to do so for themselves for somereasons, that is, mental incapacity. The court appoints a receiver toadminister the affairs of the estate or the person. The court will askthe receiver to provide a bond that will take care ofmaladministration that might take place.

f. Customs or Importation BondsThese ensure that dutiable goods on which no duty has been paid do

not find their way into the Ugandan market. Should the goods findtheir way into the market, the insurer will meet the duty theinsured has not paid.

g. Warehouse BondsWarehouse bonds guarantee payment of duty when goods leave a

warehouse.


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Categories of Insurance

2. Life AssuranceLife Insurance or Assurance products are also referred to as benefit policies.

They are normally long – term policies i.e. over five years. Life assurance policies can be grouped into Individual life and Group life.

Individual Life Policies include; Endowment plans, Personal Insurance Plan and Dividend plus Plan. Group life assurance policies include:

a. Group Life and Income Replacement BenefitThis is a tailor-made Life insurance product that covers death, disability,

critical illness, including income replacement and retirement funds for employer groups and retirement funds aiming to meet the risk management needs.

b. Group Life Assurance BenefitThis is a death in service benefit taken out by the employer on behalf of its

employees. The benefit is paid out to the beneficiaries in the event of the member’s death.


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c. Income Replacement BenefitThis is a benefit taken out as a rider on either Deposit Administration

Plan or Group Life to cater for one’s financial status in the eventhe/she is absent from work as a result of critical illness throughaccident or natural illness for more than six months and may sufferfrom financial hardship as a result. Income Replacement Insurance issometimes known as Permanent Health Insurance (PHI) or IncomeProtection.

It's called permanent because the insurer may not cancel the policy nomatter how often you claim for benefit, although policies usuallyexpire when the policyholder reaches 60 or 65.

• To enable us quote, the following will be required;• A detailed list of eligible members• Gender • Dates of birth• Monthly salaries


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d. Deposit Administration Pension PlanThis is similar to NSSF, whereby the employer contributes 10%

and the employee 5% of the gross salary. These contributionsare normally made on a monthly basis. The benefits are paidout with interest at retirement or when the employee resignsfrom the job or in the event of death.


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Micro insuranceThis is a mechanism used to protect low income earners

against risk (accident, illness, death in the family, natural disasters, etc.) in exchange for insurance premium payments tailored to their needs, income and level of risk.

Micro Insurance policies may include; Credit Life or Loan Protection Insurance, Group or Community Funeral Insurance and Weather Index Insurance


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1. Credit Life or Loan Protection Insurance Proposition.

• The loan protection Insurance protects the Banks,Microfinance Institutions and SACCOs againstunexpected loss following the death, total permanentdisability, and catastrophic loss of business property(stock) due to identified perils like fire among others.

• The product also offers a funeral benefit to the client inthe event of accidental death of a pre-identified spouseand children.


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CATEGORY SCOPE OF COVER BENEFIT (AMOUNT)

A Client Death (Both Natural and Accidental) Outstanding loan amount

and interest due.

B Total Permanent Disability (due to illness or bodily

injury)

Outstanding loan amount

and Interest

C Catastrophic loss of physical property/stock

detailed in the proposal (Fire/earthquake,

explosion, storm, flood). Single property loss is also

covered (valid documentation required).

Outstanding loan amount

and interest

D Funeral Benefit - Death (Accidental) of borrower Specified Amount

E Funeral Benefit - Death ( Accidental only) of a Pre-

identified Spouse

Specified Amount

F Funeral Benefit - Death (Accidental) of a pre-

identified Child (Maximum of 4 children)

Specified Amount

Group insurance benefits- Example


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2. Group/Community Funeral InsuranceCoverage/beneficiaries: Group member, one pre-identified spouse and up to two children. The spouse and children are identified by putting their full names on the policy form. Names cannot be changed once they are written on the form.

The policy is active only after payment of premium and expires a year from the date of commencement.

Benefit/Pay outs are made in cases of; Death of Group member, Death of pre-identified spouse and Death of pre-identified child.


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Group/Community Funeral Insurance claims:

All claims under this insurance shall be lodged withthe Company by submitting at least three of thefollowing supporting documents:

• Certified Letter from Local Council & Institutional letterfrom the Microfinance Institution or branch

• Death Certificate or a certified copy of the same.

• Police Report for accidental deaths

• Letter from local pastor/imam

• Letter from Group Chairman


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Weather Index Insurance• Weather index insurance contracts are policies linked to the

fluctuation of a weather variable. The weather variable ismeasured and indexed according to the specific objective of theinsurance policy.

• Insurance payouts are based only on the performance of theweather index and not on actual damage incurred or actual lossessuffered on the ground.

• This kind of insurance is most suitable for farmers’ groups orassociations; however, premium rating is based on the amount ofloans taken from the bank or financial institution. Payouts in theevent of loss are made to the financial institution which disbursedthe loans.

• Examples of weather variables used in index insurance are Rainfall, Temperature, Wind speed, Soil moisture, Growing degrees days, and Sea surface temperature

Introduction to insurance unit6

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Transcript of Introduction to insurance unit6