Insurance

Commerce SSS2 Third Term

WEEK  1

Insurance

Performance Objectives

The student should be able to:

    1. Define insurance.

    2. Trace history of insurance in Nigeria.

    3. List and explain the basic principles.

Content

Definition of Insurance

Insurance can be defined as a method of protecting a person, a business or some other form of an organization against financial loss resulting from damage to the theft of personal and business assets(general insurance) and against injury and death (accident and life insurance).

Insurance can also be defined as a legal contract in which one party undertakes to indemnify another party against damage, loss or liability, resulting from the occurrence of uncontrollable events. It is one of the aids to trade that relieves businesses of some risk of being in business and releases capital in case of emergency. There are man-made risks and natural risks. Some risks are insurable while others are not insurable. Insurance works on the principle of pooling risks. The premium (contributions) of many clients is pooled together and the losses of few clients are compensated from the pool.

The Difference between Insurance and Assurance

At one time ‘insurance’ and ‘assurance’ had the different meaning but today this difference is less important but the word ‘assurance’ is still often used in relation to life policies. Insurance is used in terms of risk that might or might not happen, while assurance is concerned with events that are inevitable.

The History of Insurance

Insurance started formally in Nigeria in 1921 but before then, there existed in many communities within Nigeria some form of organised social aid insurance schemes like extended family systems, age-grade group and cultural affiliations. These groups collectively pooled fund together from members and gave to the members who were in need especially those who lost a family member or property. These social clubs still exist today. However, in 1921, insurance started in Nigeria as a formal business when a branch of the Royal Exchange Assurance Company Limited was opened. In 1949, three other British owned insurance companies started operation in Nigeria. At independence, the number of operating insurance companies in Nigeria increased to 25. They became 88 by 1984. In 2005, the government decided to consolidate the insurance industry by imposing recapitalization on the insurance company operating in Nigeria. Prior to the recapitalization plan, Nigeria had 105 insurance companies but after the recapitalization in 2007, the number dropped to 71. The first major step of Nigeria in regulating the activities of insurance business was after the report of J.C. Obando Commission of 1961. The report brought about the establishment of the Department of Insurance in the Federal Ministry of Trade but later transferred to the Ministry of Finance. The report also led to the enactment of the Insurance Act of 1961, which came into effect on May 4th 1967. In 1968, the Insurance Company Regulations were put in place to facilitate the implementation of Act No 58 of 1961. The first all-embracing law for the regulation and supervision of insurance in Nigeria was the Insurance Decree No 59 of 1976. Decree No 58 of 1991 improved on the provision of Decree No58 of 1979 and No 40 of 1988. In 1992, the Insurance Special Supervision Fund Decree No 62 was enacted, establishing a body known as National Insurance Supervisory Board, bringing out insurance supervision from core civil service supervision. The name of the Insurance Supervisory Board was changed to National Insurance Commission when Decree No 1 and 2 of 1997 was enacted.

Basic Principles of Insurance

The principles of insurance refer to the necessary conditions that be fulfilled in insurance. These include;

1. Principle of Insurable Interest: The principle of insurable interest implies that the insured must have an insurable interest in the subject matter of insurance. Insurable interest, therefore, means that only one person will suffer financial loss by the damage of the insured object. Put in another way, one can only insure what he owns and not what another person owns. The presence of the insurable interest is a legal requirement for the insurance contract to be valid.

2. Principle of Indemnity: This is the insurance principle by which a policy-holder is compensated for the loss incurred. The amount of compensations is limited to the amount assured or the actual losses, whichever is less. The compensation must not be less or more than the actual damage or what the insurance policy covers. An insurance contract is not undertaken for the purpose of profit-making but to get compensated in case of any damage or loss.

3. Principle of Uberrimae Fidei (Utmost good faith): Uberrimae Fidei means utmost good faith, which implies that both the insurer and the insured must disclose all material facts whether asked or not concerning the insurance contract. The law requires the insured to disclose all important material facts about the object of insurance to enable the insurance company to determine the premium for the contract. The insurance company is also required by law to provide the facts of the risk to be covered. Non-disclosure of the material fact will render the contract null and void at the option of the aggrieved party. This principle applies to all insurance contracts.

4. Subrogation: To subrogate means ‘to take the place of’. When an insurance company pays out compensation on a claim, the money they payout takes the place of the article damaged, for instance, a car insured had an accident and damaged beyond repair, it becomes the property of the insurance company as soon the compensation is paid. The car could be sold as scrap and the scrap value retained.

5. Principle of Proximate Cause: Proximate cause means there must be a close connection between risk insured and the loss actually suffered. When an insurance policy covers a particular risk, it is quite possible that damage may be incurred which is not directly related to the terms of the policy. Proximate cause helps to determine whether the insurance company is liable or not. An insurance company will not be liable if the cause of damage was not insured against.

6. Principle of the Contribution: This principle states that where a person has ensured a certain risk with two or more insurance companies, he cannot claim compensation in full from each of the insurance companies. This means that the insured cannot receive a contribution from both insurance companies with the aim of making a profit. Once the insured has been settled by one insurance company he is not entitled to receive any contribution from other insurance companies.