1. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Module 7: Introduction to Insurance
2. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
LEARNING OBJECTIVES
This course aims at helping you the student to,
• Gain a broader understanding of risk and insurance as a
means to manage it.
• Appreciate the role of insurance to our economy and
how it operates
• Have a balanced, systems – oriented view of how the
insurance industry players work together to protect and
meet the needs of consumers.
3. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
LEARNING OUTCOMES
After completion of this study you should be able to:
• Describe the role insurance plays in our economy
• Explain how insurance is used to manage or diversify risk
• Understand the fundamental principles of insurance
• Recognize the various categories of insurance and the
underwriting procedure
• Define the key insurance terms
• Explain the roles of the insurance players in the industry
• Explain how insurance claims are administered
4. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
What is Insurance?
Risk Management and Responding to Risk
The Purpose of insurance
How does Insurance work?
Players in the Insurance Industry
Insurance Underwriting and Categories of Insurance
Fundamental Principles of Insurance
Some commonly used Insurance terminologies
Settlement of Insurance Claims
5. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Fundamentals of Insurance
Utmost Good Faith
Refers to the full and truthful disclosure, by the insured, of all
relevant material facts about the risk being proposed for
insurance. Material facts are facts that would influence the
mind of a prudent underwriter to accept or reject a risk.
Material facts may include; types of material used in
construction in fire insurance, use of the car in motor
insurance, type of stock in burglary insurance, state of health
of the proposer in health insurance.
6. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Fundamentals of Insurance
Indemnity
Refers to placing the insured in the same monetary position he was
in just before the loss occurred. The insured’s position is restored,
i.e. the insured is not supposed to benefit from insurance; he/she
is simply reinstated.
This is only applicable to property and liability insurance but not life
and personal accident policies. These are benefit policies because
they contain agreements to pay a specified sum of money when
the loss occurs. The methods of providing indemnity include; cash,
repairs, replacement ad reinstatement.
7. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Fundamentals of Insurance
Subrogation refers to the right of the insurance company
to recover the insured’s loss which was the subject of
the relevant claim paid under the policy up to the
amount of that paid claim
Contribution is the right of an insurer to call on other
insurers similarly, but not necessarily equally, liable to
the same insured to share the loss of an indemnity
payment. It also applies to indemnity policies only. This
principle normally applies to large risks
8. THE UGANDA INSTITUTE
OF BANKING &
FINANCIAL SERVICES
UIBFS
ISO 9001:2008 CERTIFIED
Fundamentals of Insurance
Insurable Interest – An insurance contract is legally binding
only if the insured has an interest in the subject matter of
insurance, hence, there must be a legal relationship between
the person buying insurance and the asset being insured.
Proximate Cause - the loss must be directly attributed to an
insured peril/risk and must be accidental or not intentional.
In other words, if the insured risk is fire, the insurance
company will not pay for a loss caused by theft. If customer
X insures his car against accident only, and it gets burnt or is
stolen, then the insurer is not liable.
Editor's Notes
Insurance law is largely derived from the general law of contract. Because of this, insurance contracts must contain elements or principles that are applicable and required for all legally binding contracts. There are six basic principles that govern the way insurance operates;
Insurance law is largely derived from the general law of contract. Because of this, insurance contracts must contain elements or principles that are applicable and required for all legally binding contracts. There are six basic principles that govern the way insurance operates.
For indemnity above, For instance, if the value of a customer’s vehicle is 10,000,000/=, then the insurer can only pay claims up to 10,000,000/= and not more. The insured is not supposed to benefit- they are simply reinstated.
Subrogation works hand in hand with indemnity, i.e. it is corollary to the principle of indemnity and prevents the insured to recover from parties, (the insurer and the third party who has caused the loss). An example of subrogation may include; a case where one car knocks another, naturally the owner of the damaged car would demand for compensation or repairs by the owner of the car that caused the damage. However, if the car is insured, then the insurer may pay the claim. In this case the insured should not demand for compensation from both parties but should give such rights to the insurer.
In reality however, subrogation rights are rarely practiced.
An example on contribution is for instance, KCCA may decide to spread their risks to NIC, UAP and Chartis Insurance companies in proportions 40%, 30% and 30% proportionately. Claims settlement should be done in the same proportion. Contribution can be applied in two ways; where there is Co-insurance (two insurance companies at the same level sharing a big risk) and Re-insurance (where the insurance companies insures the risk with a bigger company normally referred to as a Reinsurance Company), such as Swiss Re, Africa Re, etc
The person buying the insurance who has an insurable interest stands to benefit from the preservation of the asset and will suffer from its loss. For instance, a husband or wife can insure an asset they both own e.g. a car, house etc, and a person with powers of attorney can insure the asset over which he has powers because he is affected by the loss or damage to the asset. Other relationships where insurable interest applies include; ownership, agent, bailee and part or joint ownership.
