2) The principles of insurance

• The principles of insurance

  Indemnification/ Indemnity

  • Usually applies to short term insurance, as insured is compensated for specified loss.
  • Protects insured against specified event that may occur.
  • Insured must be placed in same position as before occurrence of loss. Insured may not profit from insurance.
• The principles of insurance

  Security/ Certainty

  • Applies to long-term insurance where insurer undertakes to pay out an agreed upon amount in event of loss of life.
  • Aims to provide financial security to insured at retirement/ dependents of deceased.
• The principles of insurance

  Utmost good faith

  • Insured has to be honest in supplying details when entering insurance contract.
  • Insurer and insured must disclose all relevant facts.
  • Details supplied when claiming should be accurate.
• The principles of insurance

  Insurable interest

  • Insured must prove he/ she will suffer financial loss if insured object is damaged.
  • Insurable interest must be expressed in financial terms.
• Advantages/ Importance of insurance for businesses and insurable risks

  • Protects businesses against dishonest employees.
  • Protects businesses against losses due to death of debtor.
  • Transfers risk from insured to an insurer.
• Insurable versus non-insurable risk

  Insurable risks

  • Risks insured by insurance companies.
  • Insurance companies decide likelihood of an event and decide if they want to ensure risk.

  Example of insurable risks include:

  • Theft
  • Fire
  • Burglary
• Insurable versus non-insurable risk

  Non-insurable risks

  • Risks not insured by insurance companies as insurance cost to high.
  • Insurance company cannot calculate profitability of risk and therefore they cannot work out premium that business must pay.

  Examples of non-insurable risks include:

  • Losses incurred as a result of war
  • Fluctuations in fashion and trends
  • Losses incurred as a result of illegal marketing activities
• Difference between compulsory and non-compulsory insurance

  Compulsory insurance

  • Businesses are compelled by law to insure certain types of risks.
  • Types of risks are regulated by the state.

  Examples

  • Unemployment Insurance Fund (UIF)
  • Road Accident Fund (RAF)
  • Compensation for Occupational Injuries and Diseases Act (COIDA)
• Difference between compulsory and non-compulsory insurance

  Non-compulsory insurance

  • Businesses voluntary insure certain types of risk.
  • The state does not regulate these types of risk.

  Examples

  • Short-term insurance
  • Long-term insurance