Explain each of the following insurance concepts (a) non indemnity insurance (b) Group insurance (c) Re-insurance (d) Under insurance (e) Consequential loss...

Answer Details

Explanation of the insurance concepts

(a) Non-indemnity insurance

This is a form of insurance in which the insurer does not merely restore the insured to his former financial position but pays an agreed fixed sum on the happening of the insured event. Because human life and limb cannot be valued in money, the principle of indemnity does not apply. Examples are life assurance and personal accident insurance, where a stated sum assured is paid.

(b) Group insurance

This is a single (master) policy taken to cover a number of persons who share a common feature, for example all the employees of one company or members of one association. It gives the members cover, often life or accident cover, at a lower premium than each would pay individually.

(c) Re-insurance

This is the practice whereby an insurer who has accepted a very large risk transfers part of that risk to another insurance company (the re-insurer). It enables the original insurer to spread the risk so that it is not ruined by a single heavy claim.

(d) Under-insurance

This occurs when the value at which property is insured is less than its true (actual) value. On the average principle, the insured then bears part of any loss himself, recovering only the proportion that the sum insured bears to the true value. For example, goods worth \(N100{,}000\) insured for \(N60{,}000\) will attract only 60% of any loss.

(e) Consequential loss insurance

Also called loss-of-profits or business-interruption insurance, this covers the loss of profit and continuing expenses (such as rent and salaries) that a business suffers as a result of an interruption of trade following an insured event like a fire, rather than the direct physical damage itself.