Concept of insurance

Definition

Insurance is the system of pooling risk whereby a large number of people contribute to a common pool or fund from which they are paid or compensated if certain specified events or losses occur to them.

Pooling of risk — Everyone who is exposed to a risk should pay a small amount, and all such collections should go to a pool. If a person suffers a loss, they should be paid compensation out of the pool.

Terms used in insurance

1. Insurer — Is the party which grants insurance, i.e., insurance companies. In Tanzania, the insurance companies may be National Insurance Company (NIC), Zanzibar Insurance Corporation (ZIC), etc.

2. Insured — Is the person who takes insurance. Is a person or business firm who takes out an insurance and is promised by the insurance company to be compensated after an event of a loss has occurred.

3. Premium — Is the payment made for an insurance policy under or usually on a regular basis, e.g., monthly or annually. Is the sum paid by an insured to the insurer in order to insure the property.

4. Proposal form — This is the printed form on which the insured makes a written application for the issue of a policy. Normally, before issuing a policy, an insurance company (insurer) will require information about what is to be insured.

5. Actuaries — These are highly qualified mathematicians who are employed by the insurance companies for calculating premium and losses occurred.

6. Risk — This is the event against which insurance is taken out, or the uncertainties which may occur and give an unfavourable effect to the business.

7. Cover note — This is a document acting as evidence of agreement to cover any loss that may happen between the time the insurer accepts the proposal and the insurer issues the policy to the proposer. It is valid for a period of 30 days only after a policy has been issued.

8. Policy — Is the document which sets out precisely the insurance cover provided (i.e., is an insurance contract).

9. Surrender value — Is the amount paid to a person who wants to discontinue with the insurance contract.

10. Insurance broker — This is the intermediate engaged solely in the services between the insurer and insured. A person who is going to explain to other people about the work of insurance company.

11. Assurance contract — Applies to those contracts of insurance which guarantee (promise) the payment of insurance of events which must happen, e.g., death or retirement, etc.

12. Double insurance — This is an insurance whereby more than one policy is taken to cover the same risk, but the insured cannot be recovered more than the insured value of the property from his insurers.

13. Re-insurance — It is a procedure under which an insurance company enters into a contract with another insurance company with the assumption that the insurer solely cannot compensate wholly insured property due to high value.

Advantages of re-insurance

1. It enables a wider distribution of risks.
2. The insurer can contract to indemnify more risks.
3. It stabilises incomes and loss over a long period of time.
4. It makes possible for insurer to undertake to indemnify even risks involving very large amount of money.