Principles of insurance provide guidance to the insurance firms at the time they are entering into a contract with the person taking the cover. It is therefore important that a prospective insured (person wishing to take insurance policy) has basic knowledge of these principles as stated in the insurance law. The principles include;

1. Insurable Interest
   

   This principle states that an insurance claim cannot be valid unless the insured person can prove that he has directly suffered a financial loss and not just because the insured risk has occurred.

Going by this principle one cannot insure his parents or friends or other people’s property since he/she has no insurable interest in them. If such properties are damaged or completely destroyed, he/she will not suffer any financial loss.

In life insurance (life assurance) it is assumed that a person has unlimited interest in his/her own life. Similarly it is assumed that one has insurable in the life of spouse and children e.g. a wife may insure the life of her husband, a father the life of his child because there is sufficient insurable interest.

2. Indemnity
   The essence of this principle is that the insurer will only pay the “replacement value” of the property when the insured suffers loss as a result of an insured risk.
   
   This principle thus puts the insured back to the financial position he enjoyed immediately before the loss occurred.
   
   It is therefore not possible, then, for anybody to gain from a misfortune by getting compensation exceeding the actual financial loss suffered as this will make him gain from a misfortune.
   
   This principle does not apply in life assurance since it is not possible to value one’s life or a part of the body in terms of money. Instead, the insurance policy states the amount of money the insured can claim in the event of death.
3. Utmost good faith (uberrima fides)
   In this principle the person taking out a policy is supposed to disclose the required relevant material facts concerning the property or life to be insured with all honesty. Failure to comply to this may render the contract null and void hence no compensation.
   
   Examples;A person suffering from a terminal illness should reveal this information to the insurer, one should not under-insure or over-insure his/her property.
4. Subrogation
   This principle compliments the principle of indemnity. It does so by ensuring that a person does not benefit from the occurrence of loss.
   According to this principle, whatever remains of the property insured after the insured has been compensated according to the terms of the policy, becomes the property of the insure.
   
   Note: This principle cannot be applicable to life assurance since there is nothing to subrogate.
5. Proximate cause
   This principle states that for the insured to be compensated there must be a very close relationship between the loss suffered and risk insured i.e. the loss must arise directly from the risk insured or be connected to the risk insured.

Insurance covers are mainly classified into two;

• Property (non-life) general insurance
• Life assurance

The term assurance is used in respect of life contracts. It is used to mean that life contracts are not contracts of indemnity as life cannot be indemnified i.e. put back to the same financial position he was in before the occurrence of loss.(life has no money value, no amount of money can give back a lost or injured life).

Life insurance (assurance) is entered by the two parties in utmost good faith and the premiums payable in such life contracts depend on:

• Age: The higher the age the higher the premiums as the age factor increase the chances of occurrence of death.
• Health condition: A person with poor health i.e. sickly person pays higher premiums as opposed to one in good health.
• Exposure to health risks: The nature of a person’s occupation can make him susceptible to health problems and death.

Whole Life Assurance
In whole life assurance, the assured pays regular premiums until he/she dies. The sum assured is payable to the beneficiaries upon the death of the assured.

Whole life assurance covers disabilities due to illness or accidents i.e. if the insured is disabled during the life of the policy due to illness or accidents, the insurer will pay him/her for the income lost.

Endowment policy/insurance
This is whereby the insured pays regular premiums over a specified period of time. The sum assured is payable either at the expiry of the period (maturity of policy) or on death of the insured, whichever comes first.

The insured, at expiry of policy is given the total sum assured to use for activities of his own choice.(ordinary endowment policy). Where the insured dies before maturity of contract, the beneficiaries are given these amounts

The assured person may be paid a certain percentage of the sum assured at intervals until the expiry of the policy according to the terms of contract. Such an arrangement is known as Anticipated Endownment policy.

Advantages of Endowment policies

• They are a form of saving by the insured, for future investments.
• Premiums are payable over a specified period of time which can be determined to suit his/her needs e.g. retirement time.
• Where the assured lives and time policy matures, he receives the value of sum assured.
• Policy can be used as security for loans from financial institutions.

Differences Between a whole life policy and an Endowment policy

Term insurance
The insured here covers his life against death for a given time period e.g. 1yr, 5yrs e.t.c.
If the policyholder dies within this period, his/her dependants are compensated.
If the insured does not die within this specified period, there is no compensation. However, a renewal can be taken.

Education plan/policies
This policy is normally taken by parents for their children’s future educational needs. The policy gives details of when the payments are due.

Statutory schemes
The Government offers some types of insurance schemes which are aimed at improving/providing welfare to the members of the scheme such as medical services and retirement benefits. A member and the employer contribute, at regular intervals, certain amounts of money towards the scheme. Examples include NHIF, NSSF, and Widows and children pension scheme.

• It is a cover for life until death or for a specified period of time.
• It may be a saving plan.
• It is normally a long term contract and does not require an annual renewal.
• It has a surrender value.
• It has a maturity date when the assured is paid the sum assured bonuses and interests.
• A life assurance policy can be assigned to beneficiaries.
• The policy can be any amount depending on the assureds’ financial ability to pay premiums.
• The policy can be used as security for a loan.

---

Here are some more interesting notes on insurance

• Insurance: Introduction - Form 2 Business Studies
• General Insurance (Fire, Accident & Marine Insurance)

---

Other Form 2 Business Notes