Define insurance. Differentiate between compulsory and non-compulsory insurance Why would businesses need insurance Difference between insurance and assurance principles of insurance Concepts in insurance Grade 12 subject content

1.  
Term 3 Topic 2

2.  Uncertainty and risk is part of business.
 A business can protect itself from financial losses by
purchasing insurance.
 Main concepts to discuss:
 Define Insurance:
o Insurance contract is a contract between insurer and the insured.
o Insurer undertakes to compensate the insured for losses
suffered as a result of a specified risk
o Insured will pay a monthly premium to insurer.
o The purpose of insurance is to indemnify the insured against risk

3.  Non compulsory:
o Short term insurance – Insurance of goods for example multi-
peril policies, asset policies, personal property policies.
o Long term insurance – Life insurance for example retirement
annuities, pension funds.
 Compulsory:
o Unemployment insurance fund.
o Road accident fund.
o Workmen’s compensation (Compensation for occupational
injuries and Diseases Act – COIDA).

4.  To protect against key employees dying or being
permanently disabled.
 Buy-and-sell insurance that co-owners take out on each
others lives to enable them to buy a deceased or co-
owner’s share of the business.
 Theft and fire cover if large amounts of stock are kept.
 Product liability insurance against losses due to damage
or injury caused by failure of a product.
 Employer’s liability insurance against losses due to
employee injury or employees becoming ill through the
fault of the employer.

5.  To enable them to retire comfortably.
 Cover themselves against claims by people who
sustain injuries in vehicle accidents.
 Cover their debts in the event of death.
 Provide income for their dependants in the event of
death.
 Protects themselves against losses due to fire,
theft, burglary, motor accidents and storm
damages.
 To protect themselves against losses due to
unemployment.
 To protect themselves against losses due to illness
(medical aid)

6.  Insurance helps to reduce
the risk / losses by shifting
the risk to the insurer.
 Insurance provides
protection to business
against future losses.
 Helps to keep high
reinstatement costs under
control.

7. Insurance
 Covers for an event that might happen.
 Losses due to fire, theft, burglary.
 Only pays out if the insured claim.
Assurance
 Cover for an event that will happen.
 Example: retirement or death.
 Will always result in payment

8. Indemnification
 Based on the possibility of loss due to risks that might occur
such as fire or theft.
 The object of indemnification is to place the insured after the
loss in the same position that he was in immediately before
the loss.
 The insured must not be placed in a better or worse position.
 Neither the insurer not the insured may profit from insurance.
Security
 Based on the possibility of loss due to events that will occur
such as death and retirement.
 The object of security is to provide security in the form of
money to the deceased’s dependants.
 Example – life insurance.

9.  Insurer:
o A company which provides cover against insurable risk.
 Insured:
o Person/business that needs insurance coverage and pay a
monthly premium.
 Clause:
o A stipulation / paragraph in the insurance contract.

10.  Subrogation:
o This means “to stand in the place of”.
o Should John drive negligently and cause an accident damaging Peter’s car,
Peter will claim damages from his own insurer. His insurance company will
then rectify the damage to his car and claim the money back from John (who
caused the accident). The insurance company is therefore claiming on behalf
of or in place of Peter. This is called subrogation. Peter can not claim directly
form John and from his insurance company.
 Average clause:
o Average refers to under- or over insurance.
o Under insurance means that property is not insured for its full market value.
o If good/buildings are not insured for their full value, the full amount of the loss
will not be paid out.
o The following calculation will be used to determine the amount that is to be
paid out:
o Insured value x damages / replacement value
o Over-insurance means that property is insured for more that its market value.
o In this case the insurer can choose to reinstate the insured for the losses
suffered.

11.  Reinstatement:
o The insurer can replace the damaged or stolen goods instead of
paying the amount to the insurer.
 Cession of insurance policy:
o The rights a person has in a policy may be transferred to another
person by means of a written agreement.
o Only life policies may be ceded.
 Excess:
o Short term insurance companies expect the insured to pay a certain
amount when a claim is lodged.
o The amount differs – the excess when a claim is lodged to replace a
front window of a vehicle will be less than when the vehicle is
stolen.
o Excess depends on the risk that the insurer have – the bigger the
risk, the larger the excess.

12.  Iron safe clause:
o This clause specifies that the insured must keep a complete set of
books in a fireproof safe at night to enable the insurer to have evidence
of the amount of stock on the premises.
 Market / replacement value:
o Replacement value refers to the price of the asset at that moment in
time.
 Book value:
o Book value is the purchase price less depreciation.
 Surrender:
o Applies to life assurance and means to terminate a policy.
o A cash amount is paid to the policyholder, no further premiums are paid
and no further cover is provided.
 Fully paid up:
o Applies to life assurance.
o Payments of premiums are stopped but the policy is not terminated.
o No cash is paid to the policyholder. Coverage is maintained but the
extent of the cover is reduced.

13. 1. What is the purpose of
insurance?
2. Explain the difference
between insurance and
assurance.
3. Why would individuals
need insurance?
4. Discuss the principles of
insurance.

14.  Good faith:
o The insured must disclose everything that may affect the extent
of the risk.
o All questions asked by the insurer must be answered honestly.
o If not, the policy may be declared void.
o Both parties must disclose all material facts.
o Proposal forms are drafted carefully to cover all possible
questions.
 Insurable interest:
o The insured must be able to prove that he derives a financial
benefit from the existence of the object which is being insured
and that the insured stands to loose financially if goods are
destroyed or by the death of a person.
o An employer has insurable interest in the life of an employee.
o A debt creates insurable interest between a debtor and creditor.
o Marriage spouses have an insurable interest in one another’s

15.  Insurance on life of a human being.
 Includes life policies, endowment policies and disability
policies.
 Allows a person to make provision for their dependants
when the person dies or becomes permanently disabled.
 A life insurance policy pays out a lump sum after death
to provide for dependants and to settle debts.
 The principle of security applies.

16.  Six different types of life insurance policies:
o Sinking fund – Pays out a sum of money on a fixed future date in
return for a premium.
o Health policy – Provides benefits to the insured upon an event
relating to the health or mind of a person.
o Life policy – Provides benefits after, and exclusively as a result of
a life event (death).
o Assistance policy – policy benefits do not exceed R10 000.
o Fund policy – Provides benefits to finance the liabilities of a fund
o Disability policy – Provides benefits upon a disability event.

17.  Personal pension plan which aims to create wealth for
retirement.
 Crated for self-employed people who do not receive any
employer’s contributions towards a pension fund.
 RA (retirement annuities) contributions are tax deductible up
to a specified amount.
 Monthly, annual or lump sum contributions can be made to an
RA.
 A person may only access the money in the RA once the
person reaches retirement age, unless the person is disabled.
 1/3 of the value of the RA may be taken in cash, while 2/3 of
the RA must be contributed towards a monthly pension fund,
OR a person can contribute the full value of the RA towards a
monthly pension fund.
 You may not contribute to an RA past the age of 69.
 You can retire from an FA fund at any stage between the ages
of 55 and 69, whether you are still working or not

18.  Funds in a RA are protected from creditors.
 The income after retirement can be guaranteed for life.
 Lump-sum contributions can be made at any time.
 Retirement funds are taxed at a favourable rate.
 A change in employment will not affect retirement
provision

19.  Material goods that can be replaced can be insured.
 This type of insurance is non-compulsory and the business
and individuals choose to insure themselves against risks.
 The principle of indemnification applies.
 Insurable risks include:
 Fire:
o Indemnifies the insured against losses due to fire.
o It is the duty of the insured to notify the police and the insurer if a
fire occurred at the place of business.
o An Iron Safe Claus compels the insured to keep all financial and
stock records in a fire proof safe to enable the insured to provide
evidence of the amount of stock that was in the premises.
o The premium payable depends on the risk and probability of an
adverse event occurring and the value of the stock.
o The nature of the products or buildings, the availability of fire
sprinklers and the nature of adjoining buildings are factors that may
affect the risk.

20.  Personal property policies:
o Designed to protect the assets of individuals and families.
 Burglary:
o Indemnifies the insured against losses due to forced entry into
the business premises when the business is not open.
o Due to high crime rate in South Africa, this is essential insurance
to have for any business owner.
 Theft:
o Indemnifies the insured against losses due to all forms of theft,
such as shoplifting and theft by employees.
o Shoplifting means that money or goods were stolen from the
business during business hours.
o Usually, shoplifting is a risk that insurance companies do not
cover.

21.  Storm damage:
o Indemnifies the insured against losses due to storms, wind, rain and
hail.
 Money in transit:
o Business owners should insure their businesses against losses
occurring when cash is stolen while it was being transported from
the business to the bank.
o In South Africa 280 cash in transit heists happen on average per
year.
 Multi peril policies:
o A number of covers are being combined under one policy
document.
o These policies are designed to protect the assets and interest of the
insured business against loss or damage cause by fire, storms,
floods, earthquakes, sprinkler leakage, riots and strikes, theft and
malicious damage.

22. Compulsory insurance is
insurance that is enforceable by
law.

23.  To ensure workers against loss of earnings arising from
unemployment and to provide employees with financial
support during their efforts to find employment.
 Employers must pay UIF contributions of 2% of the value
of each worker’s pay per month – the employer and the
worker each contribute 1% towards the UIF.
 Types of benefits provided by UIF:
o Unemployment benefits
o Illness benefits
o Maternity benefits
o Adoption benefits
o Dependants benefits

24.  To provide cover for all drivers of motor vehicles against claims
by persons injured in vehicle accidents, or claims of
dependants of people killed in accidents.
 Cover is provided by means of a fuel levy.
 RAF only indemnifies the driver to compensate for losses
suffered due to bodily injuries or the death, not for damage to
the property.
 In the following cases the RAF will pay claims to injured parties
but has the right of recovery from the driver:
o Where the car has been stolen or where the person is driving the car
without the consent of the owner.
o Where the driver was under the influence of alcohol or any other
substance.
o Where the driver is not in possession of a valid driver’s license.
o Where the driver causes an accident owning to negligence.

25.  The Road Accident Fund Amendment Act came into
effect on 1/8/2008 and brought about some changes to
the way the RAF operates:
o Previously there was no limit on the amount that could be
claimed as loss of income. Now, a maximum of R160 000 per
year applies for loss of income or loss of support.
o Claimant can no longer sue the guilty party in the event of an
accident.
o Medical cost claims will be limited to the rates charged by public
health care authorities.
o Previously, passengers were limited to a maximum claim of R25
000. Now the claims of passengers ill be settled in full subject to
the maximum limits (R160 000 per year).

26.  Provide cover against disability owing to injuries,
occupational diseases or death sustained during the
normal course of work.
 Compensation is paid to workers or their next of kin.
 Only employers contribute towards the Workmen’s
Compensation Fund.
 The Act specifies the injuries and diseases that can be
claimed for