INSURANCE

Insurance is the protection given against a risk that we are not sure would occur but which if it occurs
would cause a financial loss.

Nature & Insurance Pool

Insurance works on the principle of “pooling of risks” This means that the premiums of many people pay
for the loss of a few people. Every business or person is faced with risks, pays a small amount of annual
In this way a fund (collection of premium or pool) is created at the insurance company out of this pool,
compensation can be paid to those who suffer financial losses. Thus the premium of many compensates
the loss of a few.

Dividends to insurance company

shareholders (owners)

Premium paid Surplus funds

The insured public Investment in

Insurance Pool business activities
and businesses or (Premiums,
(policy holders) or lent out
Interest and
Profits)

Claims Interest
Paid out and profits

Running costs and expenses

(Salaries, rent, tax, stationery, transport etc.

Importance of insurance

1. Insurance enables the business to be compensated in case of financial loss that resulted from
the occurrence of a risk.
2. It provides businessmen with confidence to continue trading knowing they will be covered in
case they face a risk.
3. Insurance provides a saving plan and benefits the dependents of the assured in times of loss of
loved ones hence as they cannot remain suffering.
4. Insurance companies work as investors as they also lend money to businesses which generates
interest for the company to be used in different activities of the company.
5. Insurance helps individuals to overcome misfortunes like theft, damage of property as they get
compensated upon suffering a risk.
6. It is an invisible export and it brings income to the country as well as improves the balance of
payment position.

1
Business Risks:
A risk is an event that causes financial loss. It could be fire, accident, burglary theft, death etc. There are
two types of risks:

1. Insurable risks: are those whose likelihood to occur can be predicted with accuracy. The prediction on
occurrence can be easily calculated on the basis of past experiences and statistics. A fair premium can be
fixed. For e.g. the incidence of robbery in a given region can be calculated on the basis of past statistics.
It is therefore possible for insurance companies to fix a fair premium, which will cover most claims.

2. Non-insurable risks: are those which cannot be assessed due to lack of records as their likelihood of
occurring is not known, hence cannot be calculated on the basis of past experiences and statistics. A fair
premium cannot be fixed so; the insurance companies do not provide cover for such risk. For e.g. Risk of
losses due to low sales cannot be accepted by insurance companies as they cannot be calculated on the
basis of past statistics. The loss of profit due to bad or poor management.

The importance of statistics and other information on in calculating risks and premiums
Statistics and other information are required to enable the insurance company to estimate the number
of people to be insured against a particular risk. It is therefore possible for insurance companies to fix a
fair premium which will cover most claims and even earn profit.

THE PRINCIPLES OF INSURANCE:

2
The operations of insurance are governed by a set of principles failure to comply with the principles may
make the policy null and void, in which case the insurance company would not pay any claim. The main
principles are:

1. The principle of indemnity:

Indemnity means that the insured must be restored to the same position as before the risk occurred.
Indemnity does not allow the insured to make profit out of insurance by over insuring or under insuring
as it is limited to the sum insured. It does not apply to life and personal accident.

i. Over insurance occurs when the insured insures his property for an amount more than the actual
worth of the property. E.g. A man insures his property which is worth only P10, 000 for P12, 000. Even if
his property is totally destroyed, the maximum compensation given will be only P10, 000 and not 12,000
as insurance is a contract of indemnity.
ii. Under Insurance: is when the insured insures his property for an amount less than the actual worth of
the property. E.g. A man insures his property worth P10, 000 for P8000.00 if his properly is totally
destroyed, the maximum he could get is only P8000.00 and not P10, 000.

Indemnity works through three rules: namely, subrogation, contribution and average clause .
a. Subrogation: this means to take over the remains or scrap of the damaged property by the
insurance company so that the insured does not benefit from it as well. After paying the compensation
by buying Mr. Ben another car of similar value, model and the insurance company will subrogate the
scrap because Mr. Ben is not to make profit by selling the remains of the old car . This principle confers
the rights of an owner onto the insurer once the insurer makes payment of a claim.
Eg.2. if Mpho has insured his car against fire and in case of fire then Mpho gets compensated for the
loss by the insurance company. The damaged car remains can now be taken away by the insurer who
can sell it to the scrap yard for a price.

b. Contribution: Contribution applies when the same property is insured under two different companies.
In case of loss, each company would contribute half the value of the damaged or lost property to
prevent the insured from making profit out of insurance.
E.g. Mr. Ben insures his goods worth P1000 against fire with 2 insurance companies (P1000 with each
insurance company) In case of fire, Mr. Ben would receive a maximum of P1000, from both the
insurance companies jointly and P1000 from each insurance company because he cannot make profit
from insurance.

c. Average clause: A rule that prevents the insured from making a profit out of insurance by under
insuring their property. If the property is partly damaged, the company will only pay a fraction of the
repair costs since the property was partly insured and the insured will have to pay the balance.
E.g. if one insures a car worth P18, 000 for only 15000 and if it is later on partly damaged in an
accident such that it needs P6000 for repair, the insurance company would pay only P6000
Calculation: insured value x cost of repairs
Actual value
P15000 X P6000
P18000
= P5000 since the property was partly insured

3
2. Utmost good Faith; The principle compels both the insurer and the insured to be truthful or honest to
each other. The proposer must disclose fully all material facts known, in answering all questions in the
proposal form. Failure to disclose the whole truth will make the policy void and the insurance company
will refuse to pay compensation should a loss occur. The insurer must also show utmost good faith by
explaining in detail the nature of insurance contract and terms of the contract i.e. when the insured may
or may not be compensated.

Utmost good faith should be observed since the answers or information on the proposal form enables
the insurance company to:
- Assess the risk
- Decide whether to cover the risk or not
- Fix a fair premium
- Come up with an insurance contract which is fair to the insurer and the insured.

3. Insurable Interest:
It prevents the people from making profit out of insurance by insuring property that they do not own i.e.
property they have no direct interest and legal right to. The principle allows people to insure a property
for which they would personally suffer a financial loss if it is stolen or damaged.
Example: If you buy a car and later it is stolen, you will certainly suffer a financial loss [lost the money
you spent on the car]. This means you have insurable interest in your car, your sister or friend cannot
suffer any loss if the car is lost because she has no insurable interest in it.

4. Proximate Cause:
The insurance company will pay compensation if the loss suffered was caused by the risk that was
covered by the policy and the cause of the risk is within the precise terms of the policy.
E.g.1 If the goods stored in a warehouse are insured against fire and flood then the goods are lost or
damaged due to an earthquake, then no claim can be made.
E.g.2. If your house is insured against accidental fire then you deliberately decide to burn it down
yourself in order to get compensated, the insurance company will not pay any compensation because
you deliberately caused the fire, yet the house was insured against accidental fire.

CLASS EXERCISE
Q1. Mr. Jones insured a house worth P12000 with 3 insurance companies against the risk of fire.
Unfortunately the house caught fire and was totally destroyed.
a. How much would he be paid as compensation?
b. Calculate how much compensation would be paid by each insurer.
c. Give reasons why each insurer would not compensate him fully.

Q2. A house worth P12000 is insured for P10000. Later the house is partly damaged and the repairs
cost P9000.
a. Calculate how much compensation the insured would get from the insurer.
b. Give reasons to support your answer.

Q3. Mr. Pule rents a house in Gaborone. Explain why he can insure his property inside the house
against risks and not the house.

4
Q4. Mr. Pule insured his car against the risk of accident at P14000 and yet the actual value is P17000.
a. How much would Mr. Pule receive as compensation if the car is totally destroyed in an accident?

Q5 A business insured its machine against fire and the building was broken into and the machine was
stolen
a. What do you think the insurer would do and why?

Q6. Frank insured a house against risk of fire. The house caught fire one day and in the process of
putting off the fire the next house was partly damaged.
a. Who would be compensated by the insurance company and why?

The insurance Premium – it’s the monthly payment made by the insured to the insurer in return for an
insurance cover.

Factors that determine the amount of premium to be charged

1. The amount of risk involved; the greater the likelihood of the risk occurring, the larger will be the
premium. The amount also depends on individual circumstances. E.g. A 50 year old driver with a clean
30 years accident free license will be charged a lower premium compared to an 18 year old with one
year ‘s driving experience and has had 3 accidents.

2. The total number of people insuring against a certain risk: the more people come to insure against a
certain risk the lower the premium each of them will pay because the larger the number of people
contributing a small amount in premium leads to a large pool being created.

3. Claim free grouping: customers are grouped on how frequent they make claims; customers who do
not make a claim are rewarded by being put in a claim free group which entitles them for discount next
time they renew their policies.

4. Other factors depend on individual cases

e.g. –When insuring a car: they may consider age of the driver, type and cost of the car e.t.c.
- When insuring a house they may consider method of construction, contents location e.t.c
-When assuring life they may consider record of health, occupation, lifestyle e.t.c.

TYPES OF INSURANCE COVER

There are two types of insurance namely General Insurance and Life Assurance

1. GENERAL INSURANCE - it involves the following: Fire Insurance, Marine Insurance, Aviation Insurance
and Accident Insurance.

1. FIRE INSURANCE: It covers property against the risk of fire. The insurance company agrees to
compensate private individuals and businesses for damage to their buildings and contents caused by
accidental fire and not deliberate fire. The cover also caters for lightning and explosions are also covered
here and natural events like storms, floods and earthquakes.

5
The damage caused by water used to put off a fire on neighboring property is also covered by fire
insurance. For example, if fire had started in second floor of an apartment, and the water used to put it
off flows down to damage properties for people in the first floor, they would also be compensated.

2. ACCIDENT INSURANCE: It covers the risks of accidental damage to property and personal accident
and even burglary. There are two types of policies under this which are: Personal accident and Group
personal accident.

- Personal accident insurance: It covers the insured against partial or total disability arising from
accidental cause. E.g. Professional sports stars can take this insurance cover such that if they get injured
or get disabled while playing, and cannot play permanently or for a period of time, their income may be
compensated.

- Group personal accident: This policy provides a similar cover as in personal accident but only for
members of a particular group, e.g. a football team, dance troop or tourists.

3. LIABILITY INSURANCE: The branch of insurance provides cover against claims arising from the deaths
of or injuries to third parties as well as loss or damage to their property.
There are four policies under liability insurance which are:
- public liability insurance: The policy covers the business against claims made by members of the
general public who have suffered losses as a result of the fault of the business.
For example, a trader may put floor tiles, some of which are loose, on his or her shop floor and as a
customer gets in to buy goods she/he trips, fall and breaks a leg. The injured customers would claim
compensation from the trader.
-employer’s liability (workmen compensation): This policy covers the business against claims arising
from the deaths or injury of an employee while on duty. This policy is necessary because some
occupations are very dangerous and may cause injury or illness to employees. This policy is required by
law and all businesses must have liability insurance certificate displayed at the work place, preferably at
the reception.
- Fidelity bond: This insurance covers the business against losses resulting from the dishonesty of the
business own employees. The insurance company can compensate losses arising from employee theft
provided it can obtain satisfactory reference about the employee’s character.
- Professional indemnity insurance: It protects businesses that sell knowledge and skills against claims
sought by a client if they have made mistakes or are found to have been negligent in some or all of the
services that they provide them e.g. law firms, advertising agencies.

4. PROPERTY INSURANCE: It includes household insurance, which is divided into two types namely
content insurance and building insurance.

- Contents insurance: It covers all moveable items in the insured’s home, e.g. Furniture, carpets, sports
equipment, records, TV and videos, jewellery, etc. against losses resulting from theft, fire, flooding,
lightning accidental damage and the like. The insured gets compensated the money equal to the value of
the goods at the time the risk occurred considering wear and tear. i.e. they will give you enough money
to replace exactly what you have lost.
E.g. If your five year old LG flat screen TV gets stolen from your house, you will be paid enough money
to buy another five year old LG flat screen TV not a brand new one. However one can take a policy
that is called ‘new to old’ contents policy which offers a new replacement for lost items.

6
- Building insurance: This insurance covers you against any risk occurring to your house For example,
fire, explosion, damage by vehicles or aircraft, flood, Lightening and subsidence. It may also cover claims
for personal accidents and liability, especially if the building collapses and injures a person.

5. CASH IN TRANSIT: -it covers the loss of money from the business’s premises as well as when it is
being taken to the bank due to armed robbery or theft. The term money does not only refer to bank
notes and coins but it also includes cheques, postal orders, credit cards, vouchers e.t.c.

6. MOTOR INSURANCE
This covers the risks of fire, theft, accidental damage to the vehicle as well as loss to third parties who
happen to be traveling in the car or knocked down by the car of their belongings damaged in a car
accident. It has three main policies:

-Third party policy: It covers the death or bodily injury caused to third parties (passengers or other road
users) as well as damage to their properties. The policy is compulsory and a minimum legal requirement
for anyone buying a car.
-Third party fire and theft policy: It covers the insured against a risk of fire and theft, damage to the
vehicle and loss of properties in the vehicle as well as injury to or death of the insured. The premium is
higher than that in third party insurance.
- Comprehensive Policy: This is the most secure policy which covers third party, fire and theft, damage
to the vehicle and loss of properties in the vehicles as well as injury to or death of the insured.

7. MARINE INSURANCE
This is the insurance of mainly ships and their cargoes against perils at sea. These perils include fire,
theft, piracy, jettison, capture, and seizure, detention by government, bad weather, foundering and
collision. There are four types of marine insurance which are:

- Hull insurance: This form of marine insurance is useful in the event of loss of ship due to fire, accident
and sinking of the ship on the sea. It can be a time policy lasting twelve months or two years, or a
voyage policy lasting from port of departure to port of arrival.

- Cargo insurance: it covers goods which are being transported by a ship against loss or damage at sea.
The insurance may be covered on a particular trip or voyage. E.g. from London to Durban, or it may be
open to travel anywhere.

- Freight insurance: It covers the transport charges by the shipping company for carrying the goods. It is
usually paid in advance but the shipping company is entitled to it only if the cargo is safely delivered. If
the goods are not delivered for some reason, maybe because it was lost at sea, the shipping company
may face a claim not only for compensation for the goods lost but also for the refund of the freight
charges (if it was prepaid).

- Ship owner’s liability Insurance: It covers the ship owner against claims from third parties like
injury/death of passengers travelling in the, damage to loss of their property and damage to port
facilities or other ships.

7
8. BUSINESS INTERRUPTION/ LOSS OF PROFIT DUE TO FIRE / CONSEQUENCIAL LOSS
It covers the business against loss of profit due to fire which may lead to the business being temporarily
closed or forced to restrict production waiting for repairs to be completed. It also extends to cover risk
such as breakdown of machinery, accidental damage by vehicles/aircraft, power failure e.t.c

9. GOODS IN TRANSIT: It covers goods transported against risk of theft or damage by fire, water or
careless handling that may occur during transit.

2. LIFE ASSURANCE
The insurance of people’s life so that when they die their dependants may have some money to sustain
their needs. Principle of indemnity does not apply to life assurance because a dead person cannot be
brought back to life.

Types of Life Assurance Cover

1. Whole life policy – This is a policy under which a person assures his life for a certain sum of
money which will be paid to his dependants upon death. The assured decides the amount of
money they wants to assure their life for, and pays a certain amount of premium their entire
working life until they retire or dies.

2. Terms policy: This is a policy which covers a person for only a fixed period of time say 20 years.
If the assured dies within the period of cover, the money is paid to their dependents but if they
live up to the end of the policy nothing is paid to the assured. The premiums here are cheaper
than in whole life policy because the insurer does not have to pay the insured anything if they
live up to the end of the period covered.

3. Life endowment policy: - Under this policy the assured is covered for a specific period of time
e.g. 20 years, if the person dies before the maturity date, the money is paid to him/her
personally. There are two types of this policy:
4. i) With profits policy assurance: the policy pays the assured the sum assured plus a bonus or
profits.
ii) Without profits: pays the assured a lump sum upon expiry of the cover.

5. Annuity Assurance: This policy provides regular payments to the assured from a fixed future
date until the person dies. A person may arrange for such payment to begin at his/her
retirement time. It is suitable policy for self employed people who have no pension plan.

6. Group Policy – this policy mainly provides funeral expenses to members of a group. E.g.
Employees of a company.

7. Family Income Policy – under this policy if the policy holder dies, his dependants will be paid an
agreed sum at regular intervals for a specific period of time. This helps the spouse to continue
providing for kids until they can fend for themselves.

8. Educational policy: taken out by people for their children’s education in future. The policy pays
out educational expenses.

8
 INSURANCE BROKERS AND AGENTS

1. Insurance Agents: Agents who work on behalf of the insurance company. They never handle
premiums but are paid directly to the insurance company. They are paid commission based on the
number of clients they have found. They deal with life policies only.

2. Insurance brokers: these are also agents but mostly companies whose work is to link those seeking
insurance cover and the insurance company. They are paid a commission based on the amount of
collected from the insured (usually 15%)

3. Underwriters: Underwriters are people who accept insurance risks (i.e.) they insure by themselves.
This means that they receive insurance premiums from their clients in exchange for the insurance cover
and if the risk occurs they pay out compensation from their own pockets. However if no risk occurs they
enjoy the premiums collected.

INSURANCE DOCUMENTS

1. The proposal form: It is an application form supplied by the insurance company where the proposer
fills it, answering all the questions asked in good faith. Its purpose is to collect the information from the
proposer which would assist the insurance company to make an assessment of the risk and calculate a
fair premium to be paid.

2. Cover note: This is a document that proves that the two parties have entered into an agreement. It is
issued on the same day the contract is signed and acts as a temporary policy document.

3. Insurance policy: The insurance policy is the final document that is issued by the insurance company.
It clearly states the terms and conditions under which the contract has been entered into as well as the
obligations of both parties.

4. Claim form: It is a form used for making claims when the risk has occurred. It is filled by the claimant
giving all the details of the risk and amount of loss suffered.

5. Police Report: A document from the police that a claimant must get which explain the cause of the
accident and point whose fault it was and the actions taken to try and reduce the loss. It accompanies
the claim form. The police carry out a thorough investigation to determine the circumstances and cause
of the accident.

PROCEDURE OF BUYING INSURANCE

To insure one’s property:
1. The proposer must approach the insurance company directly or can go through an insurance broker.
2. The proposer would be given a proposal form to full in, where he has to give full, accurate and
detailed information about the risk being insured against.
3. The insurance broker then investigates, assesses the risk being covered and calculates the premium to
be charged.
4. Upon payment of premium the proposer is now insured, who is then given a cover note.
5. The full policy would be issued within a month or so.
6. At the end of period of cover, the insurance company issues a renewal notice to remind the insured to
pay a further premium.

9
PROCEDURE INVOLVED IN MAKING CLAIMS.
If the risk insured against occurs, the insured shall at his own expense
1. Inform the police of the event or loss of property
2. Notify the insurance company as soon as possible
3. Complete a claim form giving full details of the loss suffered.
4. The insurance company will arrange to inspect the damage to assess and determine the extent of loss
suffered, and compare it with the sum claimed. This is done by qualified assessors.
5. An agreement of loss is signed by the client.
6. The insurance company then settles the claims by paying out a monetary compensation to the
insured.

BOTSWANA EXPORT CREDIT INSURANCE: (BECI)

This insurance covers exporters who sell goods to foreign buyers on credit against the risk of not being
paid by their foreign customers BECI thus enables exporters to sell on credit to foreign buyers knowing
that they would be compensated in case their foreign customers fail to pay.

REASONS WHY FOREIGN CUSTOMER MAY FAIL TO PAY

i. Lack of foreign exchange or insolvency

ii. Due to political problems such as civil wars or the foreign government has prevented
the buyer from paying.

BECI in Botswana is offered by Export Credit Insurance and Guarantee Company, Botswana (PTY) Limited
or (BECI) for short. It is a 100% wholly owned subsidiary of Botswana Development Corporation (BDC)
formed to underwrite export credits and develop non-traditional exports. BECI’s new function includes
the protection of exporting businesses and private businesses selling locally against the risk of loss due
to non payment by their customers.

ADVANTAGES OF BECI
It diversifies the export market of the country, Export credit insurance enables exporter to take on more
business and reach new market by offering competitive credit terms without having to worry about
being paid.
1. BECI can help exporters to obtain information on their prospective foreign buyers.
2. The insurance can provide useful security for exporters to obtain export finance from their
banks.

Reinsurance: Reinsurance is the spreading of risk to other insurance company. E.g. If an insurance
company accepts a risk which is considers to be far too big for it to cover alone, it can reinsure it with
another company, in which case the premium collected would be partly passed on to the other
company. If the risk occurs the two insurance companies would share it according to the percentage of
cover granted by each.

10