Chapter 13 - Insurance Flashcards
Business Ventures
· Define/Elaborate on the meaning of insurance
Is a contract between a person/business/insured requiring insurance cover and the insurance company/insurer bearing the financial risk.
Insurance is the cover against loss (property, business or physical) against the risk that businesses & individuals may have. Insurance protects against negative financial impacts
· Explain the meaning of non-compulsory insurance
In the case of non-compulsory insurance there is no legal obligation to take out this type of insurance it is your choice
Life insurance, Retirement annuities, Short-term insurance (i.e. car and household cover)
· Explain/Elaborate on the meaning of the following insurance concepts:
over-insurance
- Over insurance is when the item is insured for more than the actual market value.
- Businesses/Individuals 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.
· Explain/Elaborate on the meaning of the following insurance concepts:
under-insurance
Under-insurance occurs when property or assets are not insured for their full market value. It is insured for less than the current/actual value of the property/assets.
· Explain/Elaborate on the meaning of the following insurance concepts:
average clause
- The insurer will only pay the average between the actual value and the insured value. This means that the insured will have to carry a part of the risk that is not insured.
- This applies to goods/items that are underinsured.
· Explain/Elaborate on the meaning of the following insurance concepts:
reinstatement, using examples
- Insured is restored to almost the same financial position as before the loss occurred.
- The insurer rebuilt/replace the damaged property instead of paying out cash.
- Principle of re-instatement may be applied if the item was over-insured.
· Distinguish between insurance and assurance and give examples.
INSURANCE
ASSURANCE
- Based on the principle of indemnity.
Based on the principle of security/ certainty. - The insured transfers the cost of potential loss to the insurer at a premium.
- 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.
- It covers a specified event that may occur.
- Specified event is certain, but the time of the event is uncertain.
- Applicable to short term insurance.
- Applicable to long term insurance.
Example:
- Property insurance/money in transit/theft/burglary/fire, etc.
Example:
- Life insurance/endowment policies/ retirement annuities, etc.
Calculate under-insurance.
FORMULA: (Amount insured ÷ Market value) x damages
(Remember to write down the formula and show ALL of your calculations)
i.e
Paul owns a factory outside Port Elizabeth. His factory was damaged by a fire. The damage to the factory was estimated at R300 000. The factory is insured for R780 000 and the current market value is R1,2 million. Calculate the amount that Paul will receive from the insurance company.
Amount insured
Market value x damages
780 000
1200 000 x 300 000 = R195 000
Discuss/Explain the advantages/importance of insurance
Why businesses need insurance
Why individuals need insurance
- Protects businesses against severe losses and unexpected financial outlays
- Protects businesses against loss of business and operations in the event of fire and other natural disasters, damages or losses
- Ensures that all employees are guaranteed of pension support after their retirement
- Can be used as a form of saving and investment for businesses
- Ensure businesses of compensation if employees are injured or die while at work
- Product liability insurance against losses due to damage or injury caused by failure of a business’s product or a product that the business sells
- Allows individuals to retire comfortably
- Covers against claims from people injured in car accidents
- Cover their debt in the event of death
- Protects against the losses due to fire, theft, storms etc.
- Protects against to losses due to unemployment (UIF)
- Protects against losses due to illness (medical aid)
Outline/Mention/Give examples of insurable and non-insurable risks
INSURABLE RISKS
NON-INSURABLE RISKS
- Risks that cannot be shifted to insurance companies, businesses/individuals must carry such risks themselves.
- Insurance companies cannot work out a premium that the business must pay.
EXAMPLES OF INSURABLE RISKS
EXAMPLES OF NON-INSURABLE RISKS
Theft
Burglary
Fidelity insurance
Money in transit
Fire
Storms/Wind/Rain/Hail
Damage to/Loss of assets/vehicles/ equipment/buildings/premises
Injuries on premises
Nuclear weapons/war
Changes in fashion
Improvement 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 Wars
Give examples of short term insurance and long term insurance (non-compulsory insurance).
Short Term - Car insurance
Long Term - Life insurance
· Outline/Discuss/Explain the principles of insurance.
Security
- Applies to long-term insurance where the insurer/insurance company undertakes to pay out an agreed upon amount in the event of loss of life.
- A pre-determined amount will be paid out when the insured reaches a pre-determined age/or gets injured due to a predetermined event.
- Aim is to provide financial security to the insured at retirement/the dependants of the deceased.
Indemnification/Indemnity
- Usually applies to short term insurance, as the insured is compensated for specified harm/loss.
- 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.
- The insured must be placed in the same position as before the occurrence of the loss/damage./The insured may not profit from insurance.
Insurable interest
- Insured must prove that he/she will suffer a financial loss if the insured object is damaged/lost/ceases to exist.
- An insurable must be expressed in financial terms.
Utmost good faith
- Insured has to be honest in supplying details when entering into the insurance contract.
- Both parties must disclose all relevant facts.
- Details/Information supplied when claiming should be accurate/true.
· Explain the meaning of non-compulsory insurance.
- It is voluntary/the insured has a choice to enter or not, into an insurance contract.
- The insured will enter into a legal insurance contract with the insurer, who may be represented by an insurance broker.
- Monthly/Annual payments/premiums must be paid in order to enjoy cover for a nominated risk/insured event.
- Examples: Short term insurance/Multi-peril insurance (theft, fire, etc.)/Long term insurance/Life insurance
Discuss/Explain types of compulsory insurance
Unemployment Insurance Fund (UIF)
- The UIF provides benefits to workers who have been working and become unemployed for various reasons.
- Businesses contribute 1% of basic wages towards UIF, therefore reducing the expense of providing UIF benefits themselves.
- Employees contribute 1% of their basic wage to UIF.
- Businesses are compelled to register their employees with the fund and to pay contributions to the fund.
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 include South African businesses.
- RAF/RABS is funded by a levy on the sale of fuel/diesel/petrol.
- 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.
- RABS enables road accident victims speedy access to medical care as delays due to the investigation into accidents has been minimised.
NOTE: RABS replaced RAF
Compensation Fund/Compensation for Occupational Injuries and Diseases/COIDA
- Compensates employees for injuries and diseases that happen at work.
- The contribution payable is reviewed every few years according to the risk associated with that type of work.
- Compensates employees for injuries and diseases incurred at work.
- Compensation paid is determined by the degree of disablement.
- 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 towards this fund.
- Employees receive medical assistance provided there is no other party/medical fund involved.
- In event of the death of an employee as a result of a work related accident/disease, his/her dependant(s) will receive financial support.
Differentiate/Distinguish between compulsory and non-compulsory insurance and give examples
COMPULSORY INSURANCE
NON-COMPULSORY INSURANCE
- It is required by law/there are legal obligations for it to be taken out and paid for.
- It is voluntary/the insured has a choice to enter or not, into an insurance contract.
- It is regulated by Government and does not necessarily require insurance contracts/brokers.
- The insured will enter into a legal insurance contract with the insurer, who may be represented by an insurance broker.
- Payment is in the form of a levy/ contribution paid into a common fund from which benefits may be claimed under certain conditions.
- Monthly/Annual payments/premiums must be paid in order to enjoy cover for a nominated risk/insured event.
- Examples: UIF, RAF, COIDA
- Examples: Short term insurance/Multi-peril insurance (theft, fire, etc.)/Long term insurance/Life insurance
