ASSURANCE AND INSURANCE Lesson

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Learning Outcomes and Assessment Standards

Learning Outcome 2: Business Ventures The learner is able to identify and research viable business opportunities and to explore these and related issues through the creation of achievable business ventures. We know this when the learner is able to: Investigate a range of available business investment opportunities, distinguish between assurance and insurance (both compulsory and non-compulsory), and discuss the viability and relevance of these to both individuals and business.

Overview
In this lesson you will investigate:

Assurance and insurance (compulsory and non-compulsory) Risks in insurance (insurable and non-insurable) Principles of insurance Important terms in insurance.

Prior knowledge
In Grade 10 you described the relevance of contracts and their legal implications in different business contexts, and in Grade 11 you investigated avenues of acquiring businesses as well as their contractual implications.

Lesson part 1

DVD

Introduction
Everyone is faced with the challenge of risks. Insurance companies try to make a profit out of their ventures and to minimise risks. Whilst businesses and individuals can save money, they have to look at the huge benefit they can derive from insurance companies carrying their risk for them.

What is assurance?
This is a long-term life insurance whereby a person is being covered for something that will definitely occur. Assurance covers the life, health and well-being of a person. Life cover is paid in the event of death. On death the beneficiaries will be given a lump sum of money. Funeral cover is another product offered under an assurance policy to cover the funeral expenses of the deceased and give that person a decent funeral service. Health cover applies to serious illnesses like cancer, HIV/AIDS and major injuries. The assured can make use of a medical aid or can take out a hospital plan with an insurance company such as Liberty Life. Disability cover pays out in the case of a temporary or permanent disability. A retirement annuity is a long-term investment that aims to provide financial security to the assured on retirement. This is in addition to the pension benefits he or she receives due to employment. It is also known as the personal pension plan and it is an investment with an insurance company. It offers a tax benefit

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by lowering the tax payment. Some sole proprietors, partnerships and close corporations opt for this form of a long-term investment for their business pension fund.

What is insurance?
Insurance is defined as a contract between the insurer (insurance company e.g. Liberty Life), and the insured (policy buyer, i.e. individual or a business). The insurer undertakes to compensate the insured in the case of the occurrence of a specific event in return for receiving a premium.

Risks in insurance
Insurable risks (non-compulsory insurance)

Fire

This type of cover covers losses due to fire and as well as damage caused by the water used to extinguish the fire.

Theft

Burglary after hours is covered but shoplifting during business hours is not covered.

Storm damage

Storm cover includes losses suffered due to hail, floods, rain, wind and burst water pipes.

Money in transit

The risk involved in transporting money from one area to another is very high. Insurance covers these losses.

Fidelity insurance

Dishonesty by employees is often a problem employers need to face and insurance covers employees in the event of this type of loss.

Why is insurance important?

Insurance is indispensable for two reasons: 1. It protects individuals and businesses from various risks. 2. It may be ceded as security for loans.

Principles of insurance
Insurable interest The insured must be able to prove that they derived a real financial benefit from the continued existence of the object insured or stand to loose financially if it is destroyed. Utmost good faith Both parties (insurer and insured) must be absolutely honest and should disclose all material facts. Proposal forms are drafted very carefully to cover all possible questions and pitfalls.

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Indemnity This is a written agreement whereby the insurance company agrees to reimburse the insured in the event of any loss or damage suffered as a result of a specific event.

Important terms

Market value The value(price) of the item today Replacement value The cost of replacing the item at the market related value. Book value The cost minus depreciation. Over-insurance If a good is insured for more than what it is worth (market value). Under-insurance If a good is insured for less than what it is worth (market value). Average clause The clause that stipulates the result of under-insurance. Cession Transferring the rights in a policy to a second person. Subrogation The right to claim from a third person for damages which the insurer has already paid.

Reinsurance If the insurer is spreading the risks among other businesses. Excess The portion of the claim that the insured is responsible for. He/she needs to pay this portion him/herself.

Activity 1
Individual PAIRS
self assessment

Mmabuthe Building Contract is a small building company owned by two partners. The company is one year old and employs ten builders who earn R3, 000.00 each per month. The partners are starting to make a small profit and feel that they are now ready to look at some insurance for their business. They approach your firm of financial advisors to assist them in making a decision on what type of insurance to take out. They have about R20, 000.00 per month to spend on various types of insurance. 1. Explain to them the difference between assurance and insurance. 2. Compile a list of recommendations that Mmabuthe B. C. should consider. 3. Explain to them one main reason why insurance is necessary.

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Lesson part 2
Compulsory insurance
In order to ensure that all citizens enjoy minimum cover, the government has initiated a number of compulsory insurance schemes. These are: 1. The Road Accident Fund (RAF)  If a person buy fuel he/she contributes to this fund. The main purpose of the road accident fund is to provide insurance to all the vehicles driven on public roads. The RAF needs to compensate for injuries or death caused by a negligent driver and its needs to protect drivers against claims.  A person driving under the influence of alcohol or without a legal drivers license will not be able to claim from the RAF 2. Unemployment Insurance Fund (UIF)  All workers are legally bound to contribute to the UIF. The purpose of the UIF is to compensate people that were previously employed and contributed to the fund and are now unable to find a job due to relevant reasons. 3. Workmens Compensation Fund  Sometimes workers are injured on the job. This fund covers workers that are now because of this, unable to work. All employers have to make compulsory contributions to the fund. An injured employee will receive a certain amount based on the following:

DVD

Salary of the worker Seriousness of the injury and extent of the disability after the injury

Non-insurable risks These risks include:

Time that lapses Refers to the time lost between making an order and delivery. Different prices at different places Prices paid for, for example, grapes in Cape Town is far less than prices paid in Gauteng, because of transportation fees for the transport of the grapes to Gauteng. Change in fashions Clothing stock that remains from last year cannot be insured to recover costs. Bad debt Bad debtors can only be written off and handed over to a credit bureau for recovery, and are not insurable. Improvement in technology Technological improvement advances daily, which means that insurance companies are not able to cope with such a rapid change. These risks are therefore non-insurable.

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Activity 2
PAIRS
self assessment

Referring to the graph below, answer the following questions: (a) Identify TWO examples of compulsory insurance. (b)  With reference to the employers financial contributions, which one is considered to be the largest and in which quarter, and which one is the smallest? (c) Men also qualify for a maternity fund. True/false? 90 80 70 60 50 40 30 20 10 0 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr unemployment pension fund workmen's compensation

Conclusion
Businesses and individuals buy insurance to protect themselves from unexpected events that may occur. It must be remembered that this is not a profit-making venture, but aims to ease to hardships that might happen in future. In this lesson you learnt about:

Differences between assurance and insurance Risks in insurance Principles of insurance Important terms in insurance.

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