Introduction to insurance unit3
- 1. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED Module 7: Introduction to Insurance
- 2. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED LEARNING OBJECTIVES This course aims at helping you the student to, • Gain a broader understanding of risk and insurance as a means to manage it. • Appreciate the role of insurance to our economy and how it operates • Have a balanced, systems – oriented view of how the insurance industry players work together to protect and meet the needs of consumers.
- 3. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED LEARNING OUTCOMES After completion of this study you should be able to: • Describe the role insurance plays in our economy • Explain how insurance is used to manage or diversify risk • Understand the fundamental principles of insurance • Recognize the various categories of insurance and the underwriting procedure • Define the key insurance terms • Explain the roles of the insurance players in the industry • Explain how insurance claims are administered
- 4. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED What is Insurance? Risk Management and Responding to Risk The Purpose of insurance How does Insurance work? Players in the Insurance Industry Insurance Underwriting and Categories of Insurance Fundamental Principles of Insurance Some commonly used Insurance terminologies Settlement of Insurance Claims
- 5. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED The Purpose of Insurance Insurance provides several benefits to individuals, governments and the society at large. These benefits can be classified as either economic or social; 1. Peace of Mind 2. Savings 3. Investment of Funds 4. Preservation of source of Income
- 6. THE UGANDA INSTITUTE OF BANKING & FINANCIAL SERVICES UIBFS ISO 9001:2008 CERTIFIED How does Insurance work? Insurance works by pooling risk or creation of a common pool. The insurance Company gathers together people who want insurance protection and sets itself up to operate a pool. It takes contributions in the form of premiums from many people exposed to the same risks and pays a few who incur losses. Insurers use past experience to determine the losses that may occur in a year. These losses are expected to be generally in line with their prediction for the year.
Editor's Notes
- #6: Peace of Mind; when individuals, businesses and other entities know that insurance exists to meet financial consequences of their insurable risks; they will invest larger amounts of money than those they could have invested in the absence of insurance. Savings; Premiums paid for life assurance constitute income saved now for future consumption. An individual who saves one’s current income for the future’s well being of his family generally ensures their future security and prosperity. Investment of Funds; – Insurance companies use premiums collected to purchase treasury bills and other government securities. Insurers also lend to individuals, the government, and other companies leading to economic development in the country. Preservation of source of Income – Since insurers provide funds to be used in the reconstruction of damaged property e.g Owino fire, people are able to continue with their employment and contribute to the national economy. Invisible Earnings in form of COMESA yellow cards, Goods in transit, travel insurance, etc, insurance purchased across borders, improves income for the nation. Thus insurance companies improve on the balance of trade and add to the wealth of the country. Reduction and Control of Losses; Insurers provide loss control measures, improve and reduce effects of the loss by making use of loss assessors and loss adjusters. Protection; Life assurance policies offer protection to the lives of the insured. A person with a life policy is assured that in the event that he/she dies, the dependants shall be paid a lump sum to alleviate the financial consequences of the death. Job Creation and Retention; Insurers invest the premiums paid, which in turn create jobs for the unemployed population.
- #7: The pool mechanism is based on the fact that the unfortunate few will be compensated by the fortunate many. Not all insured individuals will suffer losses at once or at all, so this allows insurance companies to operate profitably and at the same time pay for claims that may arise. The law of large numbers can be illustrated with the simple act of tossing a coin. If a coin is tossed very many times, then the chance of getting a tail or a head will almost be equal (50%). The law of large numbers would have operated to give a result which conforms to the probability. In operating a common pool, insurers rely on the law of large numbers which states that the actual number of events occurring will tend towards the expected number where there is a large number of similar exposures.