EMT 301 Lecture 9

EMT 301
LECTURE 9
INSURANCE AND ENVIRONMENTAL
CONSIDERATION
Insurance
Insurance can be defined as the pooling of fortuitous
losses by transferring of such risks to insurers, who
agreed to indemnify insured for such losses, to
provide other pecuniary benefits on their occurrence,
or to render services connected with the risk.

DEFINITION OF TERMS
1. Insurer: This is an Insurance company that issues a particular insurance policy
to an insured. In case of a very large risk, several insurance companies may
combine to issue one policy.
2. Insured: This is an individual/ policyholder that undertake an insurance policy.
A party that has a right to compensation under an insurance contract if an
insured event occurs
3. Insurance policy: This is a contract of insurance, describing the term, coverage,
premiums and deductibles.

4. Insurance Premiums: An insurance premium is the money charged by
insurance companies for active coverage. The sum a person pays in premiums,
also referred to as the rate, is determined by several factors, including age,
health, and the area a person lives, for example, a 65-year-old male smoker will
have a higher premium than a 25-year-old male non-smoker. Insured pay these
rates annually or in smaller payments over the course of the year, and the
amount can change over time
Characteristics of Insurance
1. Pooling /sharing of losses: this is the heart of insurance. Pooling is the spreading of losses incurred by
the few over the entire groups, so that in the process, average loss is substituted for actual loss.
2. Payment of fortuitous losses: A fortuitous loss is the loss that is unforeseen and unexpected and occurs
as a result of chance. In order word, the loss must be accidental.
3. Risk transfer: It means a pure risk is transferred from the insured to the insurer, who typically is in a
stronger financial position to pay the loss than the insured. Pure risk that can be transfer to insurance
include, the risk of premature death, poor health disability, destruction and theft of property.
4. Indemnification: It means that the insured is restored to his/her formal financial position prior to the
occurrence of the loss.

REQUIREMENTS OF AN INSURABLE RISK
1. There must be a large number of exposure units: there should be a large group of roughly similar but
not necessary identical loss
2. The loss must be accidental and unintentional: That is, must be outside insured control.
3. The loss must be determined and measurable: there should be definite as to cause, time, place, and
amount, so as to be able to determine the loss cover.
4. The loss should not be catastrophic: that is, large proportion of exposure unit should not incur losses
at the same time.
5. The chance of loss must be calculable: the insurer must be able to calculate both the average
frequency and the average severity of future losses with some accuracy. Note: certain losses are
difficult to insure because the chance of loss cannot be accurately estimated, and potential of
catastrophic loss is present. E.g floods, war, earthquake and business loss.
6. The premium must be economically feasible: to have an economically feasible premium, the chance
of loss must be relatively low.

TYPES OF INSURANCE POLICY
There are two main types of insurance, namely
life assurance and general insurance which
covers different aspects in your life.
1. Life Assurance
2. General Insurance
LIFE ASSURANCE
Is an insurance coverage that pays out a certain
amount of money to the insured or their
specified beneficiaries upon a certain event such
as death of the individual who is insured. The
coverage period for life insurance is usually
more than a year. So this requires periodic
premium payments, either monthly, quarterly or
annually. The risks that are covered by life
insurance are: Premature Death, Illness.
Life Insurance policy sub divided
Life insurance policy can be divided into:
i) Whole life assurance: where payment can be
made upon the death of the insured. The
beneficiaries of the insured will be paid.
ii) Endowed/ term assurance: payment are
made at the end of specific periods. If death
occurs before the end of the endowment period
insured, then the beneficiaries of the insured
will be paid.
GENERAL INSURANCE
General insurance is basically an insurance policy
that protects you against losses and damages
other than those covered by life insurance. The
coverage period for most general insurance
policies and plans is usually one year, whereby
premiums are normally paid on a one-time basis.

This includes,
1. Fire Insurance, Burglary Insurance, Bad Debts Insurance (Covers debts that cannot be collected),
2. Fidelity Guarantee Insurance (This protects a firm against loss due to the misappropriation of funds by
employee, customers or other persons),
3. Employers’ Liability Insurance and Public Liability(Covers injury incurred by staff or visitors on a business
location due to the negligence of the firm, e.g., customers slipping on a wet floor),
4. Motor Insurance, Marine Insurance, Product Liability Insurance (it protects against financial loss as a
result of a defect product that causes injury or bodily harm. The amount of insurance you should
purchase depends on the products you sell or manufacture. A clothing store would have far less risk than
a small appliance store, for example),
5. Professional Liability Insurance (Business owners providing services should consider having professional
liability insurance (also known as errors and omissions insurance). This type of liability coverage protects
your business against malpractice, errors, and negligence in provision of services to your customers),
6. Commercial Property Insurance (Property insurance covers everything related to the loss and damage
of company property due to a wide-variety of events such as fire, smoke, wind and hail storms, civil
disobedience and vandalism).

PRINCIPLES OF INSURANCE
1. Insurable Interest: Insurable interest means that the person opting for insurance
must have pecuniary interest in the property he/she is going to get insured and will
suffer financial loss on the occurrence of the insured event. This is one of the
essential requirements of any insurance contract.
2. Principle of utmost Good faith (Uberrima Fides): Like in other contracts, the
insurance contract must be based on good faith and honesty. If the insurance
contract is obtained by way of fraud or misrepresentation it is void.
3. Material Facts Disclosure: In the Insurance contract, the insured is
required to disclose to the insurer all the material facts in respect of the proposed
insurance. This duty of disclosing the material facts not only applies to the material
facts which are known to him but also extends to material facts which he is
supposed to know. Thus, in case of Life Insurance the insured must disclose the true
age and details of the existing illnesses / diseases.
4. Principle of Indemnity: It states that the insurer agrees to pay no more than the
actual amount of loss.
5. Principle of subrogation: Its supports the principle of indemnity. It means
substitution of the insurer in place of the insured for the purpose of claiming
indemnity from a third person for a loss covered by insurance.
Importance of Insurance to Businesses
The benefits of insurance to entrepreneurs include:

1. Indemnification for loss: The principle of indemnity ensures
that an entrepreneur receives enough compensation to
continue the business with minimum effects.
2. Uncertainty is reduced which permits the firms to lengthen its
planning scope, worry and fear are reduced for managers and
employees, this would improve performance and productivity.
3. Sources of Investment funds: Insurance industry is an
important source of funds capital investments.
4. Loss prevention: They involved in numerous loss prevention
programme and employ variety of loss prevention personnel,
e.g. safety engineers and specialist in fire prevention.
5. Insurance premiums are income- tax deductible as a business
expenses

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EMT 301

Insurance can be defined as the pooling of fortuitous

losses by transferring of such risks to insurers, who

agreed to indemnify insured for such losses, to

provide other pecuniary benefits on their occurrence,

or to render services connected with the risk.

3. Insurance policy: This is a contract of insurance, describing the term, coverage,

premiums and deductibles.

as a result of chance. In order word, the loss must be accidental.

occurrence of the loss.

not necessary identical loss

amount, so as to be able to determine the loss cover.

at the same time.

of loss must be relatively low.

General insurance is basically an insurance policy

that protects you against losses and damages

other than those covered by life insurance. The

coverage period for most general insurance

policies and plans is usually one year, whereby

premiums are normally paid on a one-time basis.

employee, customers or other persons),

a small appliance store, for example),

disobedience and vandalism).

The benefits of insurance to entrepreneurs include:

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