WAEC SSCE - Insurance - 2016 (Case Study and Essay)

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(a) Endowment policy

An endowment policy is a life assurance contract under which the insurer agrees to pay the sum assured either on the survival of the life assured to the end of a fixed term (maturity) or on his earlier death within the term, whichever occurs first. It therefore combines protection with saving, guaranteeing a payout to the policyholder if he lives or to his dependants if he dies.

(b) Differences

(i) Third party versus comprehensive motor insurance: Third party cover pays only for injury to other persons and damage to their property caused by the insured's vehicle; it gives nothing for the insured's own car. Comprehensive cover includes the third party protection and, in addition, indemnifies the insured for accidental damage, fire and theft affecting his own vehicle.

(ii) Death benefit versus maturity benefit: A death benefit is the sum paid to the named beneficiary if the life assured dies during the term of the policy. A maturity benefit is the sum paid to the policyholder himself if he survives to the end of the policy term.

(iii) Contracts of life versus non-life insurance: A life insurance contract is not a contract of indemnity; it pays a fixed agreed sum on death or maturity, because human life cannot be valued in money, and the risk (death) is certain to occur. A non-life (general) insurance contract, such as fire or motor, is a contract of indemnity; it pays only the actual loss suffered, the risk may or may not occur, and it is usually renewable yearly.

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(a) Principle involved and why

The principle involved is subrogation. It arises because after Integrity Insurance Plc indemnified Mr. Peter Chukwu by paying N180,000, it then wrote to Adequate Insurance Company Limited (the insurer of the party at fault, Mr. Bayo Samuel) to recover the amount it had paid out. Stepping into the insured's shoes to recover the loss from the third party who caused the accident is the essence of subrogation.

(b) Explanation of the principle

Subrogation is the right of an insurer, having fully indemnified the insured, to take over the insured's legal rights and remedies against any third party responsible for the loss. Its purpose is to support the principle of indemnity by ensuring the insured does not profit twice, once from the insurer and again from the wrongdoer. Any sum recovered belongs to the insurer up to the amount it paid, and any excess is returned to the insured.

(c) Who should take delivery of the damaged parts

The insurer, Integrity Insurance Plc, should take delivery of the damaged bumper and rear lights. Under the principle of salvage, which flows from indemnity and subrogation, once the insurer has paid the full cost of repairs the damaged parts (the salvage) belong to it. Mr. Peter Chukwu is not entitled to keep and sell them, because doing so would let him make a profit out of his loss.

(d) Two covers available under his policy (comprehensive)

1. Own damage cover: Indemnifies Mr. Chukwu for accidental or collision damage to his own Peugeot 406, meeting the cost of repairing the rear bumper, lights and booth up to the insured value.
2. Third party liability cover: Protects him against legal liability for death or bodily injury to other persons and damage to their property caused by his vehicle.

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(a) Discharge voucher

A discharge voucher is a document, signed by the insured (claimant), acknowledging receipt of the settlement amount from the insurer in full and final settlement of a claim. By signing it the insured accepts the agreed sum and discharges the insurer from any further liability in respect of that particular loss.

(b)(i) Three duties of the insured in insurance claims

1. To give prompt notice of the loss or event to the insurer within the time stated in the policy.
2. To take reasonable steps to minimise or mitigate the loss and to protect the property from further damage.
3. To provide full and truthful particulars of the loss, complete the claim form and produce documentary proof (receipts, estimates, police report) in support of the claim.

(b)(ii) Three duties of the underwriter in insurance claims

1. To acknowledge the claim promptly and issue the claim form and any guidance needed by the insured.
2. To investigate and verify the claim, appointing loss adjusters or assessors where necessary to establish the cause and amount of loss.
3. To settle valid claims promptly and fairly in accordance with the policy terms, or to repudiate invalid claims giving clear reasons.

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(a) Three marine perils

1. Perils of the sea, such as storms, heavy weather, rough seas and sinking.
2. Collision of the ship with another vessel or with a fixed object.
3. Stranding or running aground of the vessel.
4. Fire and explosion on board the ship.
5. Jettison (deliberate throwing of cargo overboard to lighten the ship in danger).
6. Piracy, theft and barratry of the master or crew.

(b) Three types of cover available under marine insurance

1. Hull insurance: This covers loss of or damage to the ship or vessel itself, including its machinery and equipment, against marine perils such as sinking, collision and stranding.
2. Cargo insurance: This covers loss of or damage to the goods or merchandise carried on board the vessel during the voyage, protecting the owner of the cargo from perils such as water damage, jettison and theft.
3. Freight insurance: This covers the loss of freight, that is the money payable to the shipowner for carrying the cargo, which the shipowner would lose if the cargo or ship is lost before the freight is earned.

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(a) Meaning of risk in insurance

In insurance, risk refers to the uncertainty of loss, that is the possibility that an unfavourable or adverse event may happen and cause a financial loss. It may also refer to the peril insured against, the property or person exposed to loss, or the chance that the event insured against will occur. Insurance exists to transfer this uncertainty of loss from the individual to the insurer in return for a premium.

(b) Five features of insurance contracts

1. Utmost good faith (uberrimae fidei): Both parties, especially the proposer, must disclose fully and truthfully all material facts affecting the risk.
2. Insurable interest: The insured must have a legal or financial interest in the subject matter, so that he stands to lose if it is damaged or destroyed.
3. Indemnity: The insurer undertakes to restore the insured to the financial position he occupied just before the loss, no more and no less (except for life and personal accident).
4. Offer and acceptance (consensus): Like every valid contract, there must be a definite offer by one party (usually the proposal) and unqualified acceptance by the other, supported by consideration (the premium).
5. Proximate cause: The insurer is liable only for a loss brought about by the nearest, most effective cause that is insured under the policy, not a remote cause.

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Meaning of the terms as used in insurance business:

1. Surrender value: This is the cash sum that a life assurance company pays to a policyholder who chooses to terminate (surrender) his policy before it matures. It represents the accumulated value of premiums paid, less the insurer's charges and expenses, and is available only on policies that have run long enough to acquire a value.
2. Days of grace: This is the extra period, usually fifteen or thirty days, allowed by the insurer after the premium due date within which the policyholder may still pay the renewal premium without the policy lapsing. Cover continues during this period.
3. Ex-gratia payment: This is a payment made by the insurer to the insured out of goodwill, and not because the insurer is legally liable under the policy. The insurer pays as a favour, without admitting liability, often to preserve goodwill.
4. Endorsement: This is a written amendment or clause attached to a policy to alter its original terms, for example to add or remove an item, change the sum insured or correct the details of the insured. It becomes part of the contract.
5. Disclosure: This is the duty, under the principle of utmost good faith, of the proposer to reveal to the insurer all material facts that would influence the insurer's decision to accept the risk or fix the premium, whether asked for or not.

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(a) Difference between whole life and endowment assurance

Under a whole life policy the insurer pays the sum assured only on the death of the life assured, whenever that occurs; premiums may be payable throughout life or up to a stated age, and the policyholder himself never collects the sum during his lifetime. Under an endowment policy the sum assured is paid either on the death of the life assured within the term or on his survival to the end of a fixed term, whichever happens first; it therefore matures and pays the policyholder if he lives, combining protection with saving. Whole life gives cheaper, pure protection, while endowment is dearer because of its savings element.

(b) Five uses of life assurance

1. It provides financial security for the dependants of the assured on his death.
2. It is a means of saving for the future and for retirement.
3. The policy can be used as collateral security to obtain a loan.
4. It helps in meeting future obligations such as children's education or estate duty.
5. It provides funds for business continuity, for example key-man cover or partnership protection.

(c) Two benefits covered under life assurance

1. Death benefit: The sum assured paid to the named beneficiaries when the life assured dies during the currency of the policy, giving financial support to the family.
2. Maturity (survival) benefit: The sum, sometimes with bonuses, paid to the policyholder himself on surviving to the end of the policy term, which he can use for retirement or other needs.