Types of Insurance, it’s meaning and importance
Insurance as an aid to trade may be defined as a provision which a wise trader makes against the occurrence of some future loss. Insurance is a pool of risks.
Every year a number of risks tend to impede the progress of commerce. Risks involving fire, burglary, marine, accidents, the fidelity of workers and untimely deaths occur yearly.
These risks strike unannounced. No one trader is sure on whose head the hard knocks of misfortune will fall next. In order to escape these losses, every wise trader enters into an agreement with an insurance company to cover or indemnify him against any loss insured against.
Types of insurance
The following are some various types of insurance commonly taken:
1. Motor vehicle insurance
This insurance is a protection against loss, damage or accident that may befall a motor vehicle owner. There are 2 types of motor vehicle insurance,
I. Comprehensive insurance
In this type of insurance, the vehicle owner is protected against theft, damage by fire and accidents generally.
Precisely, it means the motor vehicle owner will be indemnified against any legal or justifiable loss by the insurance company. The premium paid on comprehensive insurance is very high.
ii. Third Party Insurance
As the name implies, it is a protection against a “third party” in respect of injuries or damage done by the motor vehicle concerned. In Nigeria, motor vehicle insurance of at least”third party” is compulsory for every motor vehicle owner.
The basic difference between a comprehensive and third party motor vehicle insurance can better be explained with the following example:
Mr Ade insured his motor car on third party policy. On his way to the office Mr. Ade’s car was involved in an accident with miss Okoro’s car. Both cars are seriously damaged. We assume that Mr.Ade was guilty and his insurance company accepts responsibility for the accident.
The insurance company will repair miss Okoro’s car. Mr. Ade will have to repair his own car.
It must be stressed that if Mr. Ade has insured his car under comprehensive insurance policy, his insurance company would repair both cars. The premium payable on third party Insurance is much lower than that payable on comprehensive insurance.
For example the premium payable on a car valued $2,400 insured under third party Insurance may be $10, while the premium for the same car under comprehensive insurance may be as much as $160.
2. Fidelity guarantee
This deals with the integrity or honesty of employees appointed to a positive of trust in the company, so that by the nature of their work they are in a position to defraud the company.
The insurance is a form of guarantee against the recovery of losses arising from the insured employees’ dishonesty. School Bursars, store-keepers, cashiers, field sales men are commonly insured under this head of insurance.
The insurance company must be satisfied about details in the proposal form before accepting the risk.
3. Fire insurance
This covers risks associated with fire. In determining the premium to charge, the insurance company will take into consideration the following:
a. The structure of the building – for example a thatched house will attract a higher premium than one roofed with corrugated iron sheets.
b. Whether there are inflammable materials like petrol etc, in the house.
Average – A fire insurance policy is usually taken with a clause known as “without average” or “with average”.
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i. Without average clause
Once this clause is inserted in the policy, the insured will claim, in the event of a loss, the estimated amount of the loss. This if a building worth $800 is insured for only $600 and the loss sustained through fire is $400, the insurance company will pay $400 to the insured.
ii. With average clause
If the policy is with average clause, the insurance company will base their payment on the actual worth of the building or goods, the amount for which it was insured as well as the total loss sustained.
Thus if a building or goods is worth $800 but was insured for $600 and the loss sustained is $400, the insurance company will pay only $300, worked thus
Amount insured X Actual Loss
Actual Value of Goods
Amount insured = $600
Actual Loss = $400
Actual Value = $800
i.e $600 X $400
________ = $300
The insurance company will pay $300 and not $400 because the property was under-insured. If the actual Value of the property had been insured, the premium would have been higher.
This is breaking and entering a dwelling house or shop by night. A wise trader may decide to take a Burglary policy. If his shop or premises is broken into by day or night and his wares are stolen the insurance company will indemnify him.
For the purpose of insurance burglary includes house breaking. The two terms have different meanings in law.
This covers losses arising from sea perils as a result of transporting goods by sea. Marine insurance is compulsory in foreign trade if goods are to be carried by ship.
6. Accident insurance
This type of insurance is commonly taken by motor vehicle owners, travellers, touring officers, sales-men and people who work on industrial machines. It covers personal injuries sustained as a result of accidents generally.
7. Life assurance
This is effected as a protection against loss caused by death. Life assurance policy may be
a. Whole life assurance
b. Endowment assurance
i. Whole life
Under Whole life assurance, the sum assured can only be claimed after death of the assured. Thus if Mr. X takes a whole life policy for $2000, the money will not become due until he is dead. It is a provision made for his beneficiaries, like children, wife and relations.
ii. Endowment assurance
In this type of assurance, the assured takes a policy for a definite period. It may be 10 years or 20 years. For example, Mr. B may assure his life for $2000 spread over 20 years from the date the policy was taken.
If Mr. B lived up to 20 years, the policy would have matured in his life time. In this case Mr.B would collect the sum of $2000 from the insurance company. On the other hand Mr. B may die six months after taking the policy. The insurance company would pay his next of kin $2000.
Both whole life policy and endowment policy may be with or without profits. If the policy is with profits, the assured is given a share of the profits made by the insurance company. A with profits policy attracts a higher premium. If the assurance is without profits the assured gets only the total amount assured against when the policy becomes due.
Perhaps it will be clear here if we distinguish between the words “insurance” and “assurance”. Insurance deals with probabilities, that is, events which may happen. For example, if I insure my house against fire, my house may or may not be destroyed by fire.
Assurance deals with probabilities, that is, events which must happen-such as death. For instance, if I assure my life with an Insurance company, it is certain that I will die, but what I am not certain of is when and how I will die.
Insurance as a pool of risks.
Insurance is regarded as a pool of risks because the insured pool their resources together in order to indemnify any one victim amongst them. In other words, it is a principle of the fortunate helping the unfortunate.
Let us take as an example a situation quite familiar to all of us. We assume that there are thirty Students each with a copy of a book. We also assume that the cost of the book is $1.
In In the past many students have at one time or the other lost their pens, caps, badges, text books and so on. No one knows now which Student is likely to lose his Commerce text book of each student.
The teacher collects from the Students as premium a sum of $10 each. One of the Students Miss Betney lost her text book. The teacher paid her $1.
One may ask from where does the teacher get the money to pay miss Betney? The answer is that the teacher was merely acting as an agent of the 30 Students in indemnifying miss Betney.
It is from the $10 contributed by each of the 30 Students that Miss Betney was paid. That is why insurance is often referred to as a pool of risks or a principle whereby the fortunate helps the unfortunate.