1. Continuity of business
   Every business enterprise is exposed to a variety of risks e.g. fire, theft e.t.c.The occurrence of such risks often result in financial losses to the business. Insurance provides adequate protection against such risks in that, if a trader suffers losses as a result of insured risk, she/he is compensated, thus he/she is able to continue with business operations.
2. Investment projects
   Insurance enables investors to invest in profitable yet risky business projects that would otherwise avoided. Not all the money received as premiums (by the insurance companies) is used up for compensation to those who have been exposed to risk and suffered losses. The rest of the money is invested in other businesses to earn profits.
3. Creation of employment
   Insurance does provide employment opportunities to members of the public.
4. Government policy
   The profits earned are a source of revenue for the government i.e. insurance companies are profit-making organizations which generate revenue to the government through payments of taxes
5. Credit facilities
   The insurance industry have also established credit or lending facilities which the business community uses by borrowing. Loans are made available to the public for different investment projects in different sectors of the economy and also for personal requirements.
6. Development of infrastructures
   WThe insurance industry plays a crucial role in the development of urban facilities in major towns. Both residential and office buildings have been developed by insurance firms. The firms also participate in development projects in the areas where they operate. They contribute to development of a region by constructing and infrastructural facilities
7. Loss prevention
   The insurance companies encourage the insured not to cause accidents thus channeling the unclaimed resources into the economy.
8. Life policies can be used as security for loans from either the insurance company or other financial institutions.
9. Provision of life and general insurance policies encourages Kenyans to plan ahead for their dependants thereby reducing the number of needy future students.

The insurance business relies on the law of large numbers in its operations. According to this law, there should be a large group of people faced with similar risks and these risks spread over a certain given geographical area.

Every person in the group contributes at regular intervals, small amounts of money called premium into a “common pool”. The pool is administered and controlled by the insurance company.

The fact that risks are geographically spread ensures that insurance does not have a concentration of risks in one particular area.

The law of large numbers enables the insurance to accurately estimate the future probably losses and the number of people who are likely to apply for insurance. This is done in order to determine the appropriate premiums to be paid by the person taking out insurance.

The insurance operation is based on the theory that just a few people out of a given lot may suffer a loss.
There is therefore a “pooling of risks” i.e the loss of the unfortunate few is spread over all the contributors of the group, each bearing a small portion of the total loss.
This is why the burden of loss is not felt by the individuals because it is “shared” by a large group.

• Pooling of risks enables an insurance company to create a common pool of funds from the regular premiums from different risks.
• It enables the insurance company to compensate those who suffer loss when the risks occur.
• The insurance company is able to spread risks over a large number of insured people.
• Surplus funds can be invested in for example, giving out loans or buying shares in real estates.
• It enables the insurance company to meet its operating costs by using the pool funds.
• It enables the insurance company to calculate to be paid by each client.
• It enables the company to re-insure itself with another insurance company.

1. Insurance
   This is a written contract that transfers to an insurer the financial responsibility for losses arising from insured risk.
2. Premium
   This is the specified amount of money paid at regular intervals by the insured to the insurer for coverage against losses arising from a particular risk.
3. Risk
   These are perils or events against which an insurance cover is taken. It is the calamity or problem a person or business faces and results into losses.
   NOTE: The calculation of premiums depends upon the type of risk insured against. The higher the probability of the risk occurring, the higher the premium. The more the risks the business or person is exposed to the more the premiums payable.
4. Pure risk
   This is a risk which results in a loss if it occurs and results in no gains if it does not occur. For example, if a car is involved in an accident, there will be a loss and if the accident does not occur there will be no gain or loss
5. Speculative risk
   This is a risk which when it occurs, may result in a loss or a profit. For example, a person may buy shares at ksh.50 each, one year later the shares may be valued at ksh40 each meaning a loss of ksh.10 Alternatively, their value might not have changed or might have increased to ksh.45 each. Speculative risk lures people to venture into business in the first place.
6. Insured
   This is the individual or the business that takes out the insurance cover and therefore becomes the policy holder The insured pays premiums to the insurance company to be compensated should the risk insured against occur or cause loss.
7. Insurer
   This is the business company that undertakes to provide cover or protection to the people who suffer loss as a result of occurrence of risks
8. Actuaries
   These are people employed by an insurance company to complete expected losses and calculate the value of premiums.
9. Claim
   This is a demand by the insured for payment from the insurer due to some loss arising from an insured risk.
10. Policy
    This is a document that contains the terms and conditions of the contract between the insurer and the insured. Its issued upon payment of the first premium. A policy contains the follwing information;
• Name, address and occupation
• Policy number of the insured
• Details of risks insured
• Value of property insured
• Premiums payable
• Other special conditions of the insurance, for example nominees
11. Actual value
    This is the true value of the property insured.
12. Sum insured
    This is the value for which property is insured, as stated by the insured at the time of taking the policy.
13. Surrender value
    This is the amount of money that is refunded to the insured by the insurer in case the former(i.e. the insured) terminates payment of the premiums before the insurance contract matures. The policyholder is paid an amount less than the total amount of the premium paid.
14. Grace period
    This is term allowed between the date of signing the contract and the date of payment of the first premium. During this period the insurance contract remains valid. This period is usually a maximum of thirty (30) days.
15. Proposer
    This is a person wishing to take out an insurance cover (prospective insured)
16. Cover note (Binder)
    This is a document given by the insurance company to an insured on payment of the first premium while awaiting for the policy to be processed. It is proof of evidence that the insurer has accepted to cover a proposed risk.
17. Annuity
    This is a fixed amount of money that an insurer agrees to pay the insured annually until the latter’s death. It occurs when a person saves a lumpsum amount of money with an insurer in return for a guaranteed payment which will continue until he/she dies.
18. Consequential loss
    This is loss incurred by a business as a result of disruption of business in the event of the insured risk occurring.
19. Assignment
    This is the transfer of an insurance policy by an insured to another person. Any claims arising from the transferred policy passes to the new policy holder called an assignee.
20. Beneficiaries
    These are people named in a life assurance policy who are to be paid by the insurer in the event of the insured.
21. Nomination
    This is the act of designing one or more people who would be the beneficiaries in the event of death of the insured. These people are called nominees
22. Average clause
    This clause is usually included in policies to discourage under-insurance. The clause provides that the insured can only recover such proportions of the loss as the value of the policy bears on the property insured. It is usually included in marine or fire insurance policies
23. Double insurance
    This is taking of insurance policies with more than one company in respect to the same subject matter and the risk. It is significant because if one of the insurers is insolvent at the time the claim arises the insured can enforce his/her claim against the solvent insurer or if both insurers are solvent then they share compensation.
24. Co-insurance
    This is an undertaking by more than one insurance company to provide insurance cover for the same risk for an insured. Co-insurance help spread risks to several insurers, each insurer covering only a certain proportion of the total value. The insurance company with the largest share is called the “leader” and acts on behalf of all the participating insurance companies.
25. Re-insurance
    'Re-insurance' means insuring again. This is a situation where an insurance company insures itself with a bigger insurance company called re-insurer for all or part of the risks insured with it by members of the public. Re-insurance indirectly insure an individual’s risks. The following are factors that may make it necessary for an insurance company to Re-insure
• Value of property-When the value of property is great, such as ship, the risk is too high to be borne by a single insurer.
• High risk of loss-When chances of loss through the insured risks are high, it becomes necessary to re-insure.
• Number of risks covered-When the insurance company has insured many different risks, it would be too costly to compensate many claims at once, hence the need for re-insurance.
• Need to spread the risk-When the insurance company wishes to share liability in the event of a major loss occurring.
• Government policy-The government may make a legal requirement for an insurance company to re-insure.
26. Under-insurance
    This occurs when the sum insured as contained in the policy is less than the actual value of the property e.g. A property of shs.500, 000 can be offered for insurance as having a value of shs.400, 000
27. Over-insurance
    This is a situation where the sum insured is more than the correct value of property e.g. a person insures property of shs.300,000 for shs.600,000. If total loss occurs, he is compensated the correct value of the property i.e. that which he has lost
28. Agents
    These are people who sell insurance policies on behalf of the insurance company. They are paid on commission that is dependent upon the total value of policies sold
29. Insurance Brokers
    These are professional middlemen in the insurance process. They connect the people wishing to take insurance with the insurers. They act on behalf of many different insurance firms, unlike agents

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Here are some more interesting notes on insurance

• Principles and Classes of Insurance
• General Insurance (Fire, Accident & Marine Insurance)

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Other Form 2 Business Notes