CARA'S TIPS
Commerce · Lesson 7

Principles, types, procedure, compulsory insurance and NAICOM

JAMBWAECNECO

What the syllabus asks

JAMB: 6 Aids to trade (d) Insurance: types, principles, terms (insurable and non-insurable risks), importance, procedure for taking a policy and making a claim, compulsory insurances

WAEC: Insurance (meaning, importance and types; principles: utmost good faith, insurable interest, indemnity, subrogation, contribution, proximate cause; insurance and assurance; life assurance policies; fire, marine, motor, accident and other policies; procedure; terms: proposal form, cover note, policy, premium, average clause, excess; reinsurance; insurance institutions and intermediaries; NAICOM)

NECO: Insurance (meaning, importance and types; principles: utmost good faith, insurable interest, indemnity, subrogation, contribution, proximate cause; insurance and assurance; life assurance policies; fire, marine, motor, accident and other policies; procedure; terms: proposal form, cover note, policy, premium, average clause, excess; reinsurance; insurance institutions and intermediaries; NAICOM)

What you will learn

Key points

Start here: Meaning of insurance and how it works

Every business faces risk: a fire may destroy a warehouse in Onitsha, a truck carrying goods to Kano may crash, a cashier may steal, or a breadwinner may die. Insurance is a contract by which one party (the insurer) agrees, in return for a payment called a premium, to compensate another party (the insured) for loss arising from a specified risk.

Pooling of risk

Insurance works on the principle that the losses of the few are shared by the many. Insurers collect premiums from a large number of people exposed to the same risk into a common fund (pool), from which those who actually suffer loss are compensated. The law of large numbers lets insurers predict fairly accurately how many losses will occur in a large group, even though they cannot know who will suffer.

Worked example 7.1 (illustrative, Figure 1)

1,000 shop owners each face the same fire risk. Experience shows about 5 shops burn each year, each loss averaging ₦2,000,000. (a) What is the total expected loss? (b) What premium per owner covers it? (c) If expenses and profit add 25%, what is the premium?

  1. (a) 5 × 2,000,000 = ₦10,000,000.
  2. (b) 10,000,000 ÷ 1,000 = ₦10,000 each.
  3. (c) 10,000 × 1.25 = ₦12,500.

Each owner exchanges a small certain cost (premium) for protection against a large uncertain loss.

Parties and terms

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Practice questions

1. The amount paid regularly by the insured to the insurer is the
  1. premium
  2. claim
  3. sum assured
  4. excess
Show answer

A: premium
The sum assured is the amount covered; the claim is the request after a loss.

2. Insurable interest means the insured
  1. must be rich
  2. owns shares in the insurer
  3. has paid premiums for ten years
  4. would suffer financial loss if the insured item were lost or damaged
Show answer

D: would suffer financial loss if the insured item were lost or damaged
Without it the contract is void.

3. Utmost good faith (uberrimae fidei) requires
  1. a medical test for all policies
  2. a broker’s signature
  3. full disclosure of all material facts
  4. payment in cash
Show answer

C: full disclosure of all material facts
Non-disclosure can void the policy.

4. Subrogation means that after paying a claim, the insurer
  1. pays double
  2. takes over the insured’s rights against a third party
  3. refunds premiums
  4. cancels the policy
Show answer

B: takes over the insured’s rights against a third party
It follows from indemnity.

5. Contribution applies when
  1. the same risk is insured with more than one insurer
  2. the insured has no interest
  3. a claim is fraudulent
  4. the premium is late
Show answer

A: the same risk is insured with more than one insurer
Insurers share the loss.

Key words

Insurance
A contract in which the insurer agrees, for a premium, to compensate the insured for a specified loss.
Assurance
Cover against an event that is certain to happen, such as death; used for life policies.
Insurer (underwriter)
The person or company that accepts the risk in return for a premium.
Insured (assured)
The person whose risk is covered.
Premium
The payment made by the insured to the insurer for cover.
Proposal form
The application form for insurance on which the proposer discloses facts about the risk.
Cover note
A temporary document giving cover until the policy is issued.
Policy
The formal document containing the terms of the insurance contract.
Sum insured
The maximum amount the insurer will pay under the policy.
Utmost good faith
The duty on both parties to disclose all material facts truthfully.
Insurable interest
A financial interest in the subject matter, such that the insured will suffer loss if it is damaged.
Indemnity
Restoring the insured to the financial position he was in just before the loss, no better and no worse.
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