BUST 321-Risk Management and Insurance

COURSE OUTLINE
CHUKA UNIVERSITY
DEPARTMENT OF EDUCATION
BUST321: RISK MANAGEMENT AND INSURANCE
COURSE OUTLINE
LECTURER: Andrew T. Muguna
CELL PHONE NO: 0721407360
GENERAL OBJECTIVE
This course unit is aimed at enabling the student to understand the concept risk management and
insurance the basic pillars/principles of insurance upon which the contract of insurance operates
and its importance, various classes of Insurance and the Insurance market.
SPECIFIC OBJECTIVES
i. To evaluate the nature of risk and its manifestations
ii. To evaluate the nature and development of insurance
iii. To evaluate the various principles that govern the contract of insurance
iv. T establish the various players in the insurance industry
v. To examine why and how the insurance industry is regulated
vi. To differentiate various classes of insurance
COURSE CONTENT
1. Introduction
 Definition of Risk
 Overview of the nature of risk
 Economic significance of risk
2. Concept of Risk
 Relation of Risk to Insurance
 Types of Risks
 Risk, Peril, Loss &Hazard
 The Burden of Risk to Society
 Risk & Its management on Business
Assignment
3. Classification of Risks
 Various ways of classifying risks
CAT 1
4. Insurance: Concepts Legal Aspects & Principles
 Definition and significance of Insurance

 Requisites (Characteristics) of Insurability
 Origins & Development of Insurance
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 Legal Aspects and Principles of Insurance
 Subject matter of Insurance
5. Classes of Insurance
 Life and Health Insurance

 Property, Liability & Motor Insurances
 Insurance Underwriting and Claims Management
6. Insurance Market
 Agents
 Brokers
 Insurance Companies
 Reinsurance
7. Risk management strategies
8. Regulation of insurance Industry
 Functions of Insurance Regulatory Authority

 How IRA supervisors and regulates the insurance industry
 Reasons why the insurance industry is regulated and supervised
CAT 2
TEACHING METHODOLOGY
Teaching of this course will be conducted through formal lectures and class discussions,
presentations and assignments.
ASSESSMENT
Assignments & CATs 30%
Final Examination 70%
100%
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TABLE OF CONTENTS
Copyright........................................................................................................................................1
COURSE OVERVIEW.................................................................................................................2
COURSE OUTLINE.....................................................................................................................3
TABLE OF CONTENTS..............................................................................................................5
CHAPTER ONE- INTRODUCTION AND OVERVIEW OF RISK...........................................10
1.1 Introduction..........................................................................................................................10
1.2 Definition of Risk.................................................................................................................10
1.3 Characteristics of Risk-........................................................................................................11
1.4 Self – Test Questions...........................................................................................................11
1.5 Suggestion for Further Reading...........................................................................................12
CHAPTER TWO- THE CONCEPT OF RISK........................................................................12
2.1 Components of Risk/ Other Terms Related to Risk............................................................12
2.1.1 Uncertainty...................................................................................................................12
2.1.2 Measurement of Risk and the Heinrich Triangle.........................................................13
2.1.3 Peril and Hazard (Causes of Risks)..............................................................................14
2.2 The Burden of Risk/ Negative Aspects of risk....................................................................15
2.3 Utility of Risk/ Positive Aspects of Risk............................................................................15
2.4 Self-Test Questions..............................................................................................................16
2.4 Suggestion for Further Reading..........................................................................................16
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CHAPTER THREE- CLASSIFICATIONS OF RISK............................................................17
3.1 Classification of Risk...........................................................................................................17
3.1.1 Static and Dynamic Risks..............................................................................................17
3.1.2 Financial and Non-Financial Risks-.............................................................................18
3.1.3 Subjective and Objective Risks....................................................................................18
3.1.4 Personal and Business Risks........................................................................................18
3.1.5 Fundamental and Particular Risks.................................................................................18
3.1.6 Operational Risk and Strategic Risks...........................................................................19
3.1.7 Pure and Speculative Risks..........................................................................................19
3.2 Types of Risks.....................................................................................................................21
CHAPTER FOUR -INTRODUCTION TO RISK MANAGEMENT STRATEGIES..........24
4.1 Risk Management Strategies...............................................................................................24
4.1.1 Risk Control-.................................................................................................................24
4.1.2 Risk Financing...............................................................................................................25
4.1.3 Risk Transfer.................................................................................................................26
4.1.4 Risk Management Matrix for One Risk........................................................................27
4.1.4 Self-Test Questions.......................................................................................................27
CHAPTER FIVE: INTRODUCTION TO INSURANCE.......................................................28
5.1 Functional Definition of Insurance......................................................................................28
5.2 Contractual Definition of Insurance.....................................................................................28
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5.3 Nature of Insurance..............................................................................................................29
5.4 Historical Development of Insurance..................................................................................29
5.5 Unique Characteristics of an Insurance Contract.................................................................30
5.6 Requisite of Insurability (Characteristics of Insurable Risks).............................................31
5.7 Significance of Insurance.....................................................................................................32
5.7.1 Individual point of View...............................................................................................32
5.7.2 Business point of view..................................................................................................33
5.7.3 Social Point of View......................................................................................................34
5.8 Functions of Insurance.........................................................................................................34
5.8 Scope and Limitation of Insurance......................................................................................35
5.9 Insurance, Assurance and Wagering...................................................................................35
5.10 Self-Test Questions.........................................................................................................36
5.11 Suggestion for Further Reading........................................................................................36
CHAPTER SIX............................................................................................................................37
PRINCIPLES OF INSURANCE................................................................................................37
6.1 Principle of Insurable Interest..............................................................................................37
6.1.1 Essential Features of Insurable Interest.........................................................................37
6.1.2 Examples of People with Insurable Interest..................................................................38
6.1.3 When Insurable Interests Must Exist;...........................................................................39
6.2 Principle of Utmost Good Faith...........................................................................................39
6.2.1 Examples of Material Facts...........................................................................................39
6.3 Principle of Proximate Cause( Causa Proxima).................................................................41
6.3.1 Rules for the Application of Proximate Cause..............................................................42
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6.4 Principle of Indemnity.........................................................................................................43
6.4.1 Methods of Providing Indemnity..................................................................................43
6.4.2 Measurement of Indemnity...........................................................................................43
6.4.3 Factors Limiting the Payment of Indemnity..................................................................44
6.4.4 Extension in the Operations of Indemnity.....................................................................45
6.5 Principle of Subrogation......................................................................................................46
6.5.1 Extent of Subrogation Rights........................................................................................46
6.7 Principle of Contribution.....................................................................................................46
6.8 Principle of Mitigation of Losses.........................................................................................47
6.9 Principle of Risk Must Attach..............................................................................................47
6.11 Suggestion for Further Reading.........................................................................................49
CHAPTER SEVEN.....................................................................................................................49
CLASSES OF INSURANCE......................................................................................................49
7.1 Life Insurance......................................................................................................................50
7.2 Health Insurance..................................................................................................................51
7.3 Liability Insurance...............................................................................................................52
7.3.1 Employer‟s Liability( WIBA- Work Injury Benefits Act Insurance)...........................52
7.3.2Public Liability...............................................................................................................52
7.3.3 Products Liability..........................................................................................................53
7.3.4 Professional Indemnity Insurance.................................................................................53
7.3.5 Directors‟ and Officers‟ Liability.................................................................................53
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7.4 Property insurance................................................................................................................53
7.4.1 Fire Insurance –.............................................................................................................53
7.4.2Theft Insurance –............................................................................................................53
7.4.3 All Risks Insurance.......................................................................................................53
7.4.4 Goods in Transit............................................................................................................54
7.4.5 Contractors All Risks....................................................................................................54
7.4.6 Money Insurance...........................................................................................................54
7.4.7 Homeowners Policies....................................................................................................54
7.5 Transport Insurance..............................................................................................................55
7.5.1 Marine Policies..............................................................................................................55
7.5.1 Aviation Insurance........................................................................................................55
7.5.2 Motor Insurance............................................................................................................56
7.6 Pensions and Annuities........................................................................................................56
7.6.1 Pensions.........................................................................................................................56
7.6.2 Annuities.......................................................................................................................56
7.7 Self Test Questions..............................................................................................................58
CHAPTER EIGHT......................................................................................................................59
INSURANCE DOCUMENTATION..........................................................................................59
8.1 Proposal Forms....................................................................................................................60
8.1.1 Parts of a Proposal Form...............................................................................................60
8.1.2 Functions of a Proposal Form.......................................................................................61
8.2 Policy Document..................................................................................................................62
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8.3 A Certificate of Insurance....................................................................................................62
8.4 A Premium Receipt..............................................................................................................63
.......................................................................................................................................................63
CHAPTER NINE.........................................................................................................................63
INSURANCE UNDEWRITTING AND PRACTICE..............................................................63
9.1 Introduction..........................................................................................................................63
9.2 Defination of Underwriting..................................................................................................64
9.2.1 Sources of Underwriting Information...........................................................................64
9.2.2 Reosons for Underwritting............................................................................................64
9.2.3 Classification of Risks for Underwriting Purposes.......................................................64
9.3 Claims Handling..................................................................................................................65
9.3.1 Requirements before Making a Claim...........................................................................65
9.3.2Insureds Responsibilities Following a Loss...................................................................65
9.3.3 Claims Process..............................................................................................................66
9.4 Self Test Questions..............................................................................................................67
Suggestion for Further Reading.................................................................................................67
CHAPTER TEN: INSURANCE MARKET PLACE...............................................................67
10.1 Sellers of Insurance............................................................................................................68
10.1.1 Specialist Companies..................................................................................................68
10.1.2 Life and General Insurance Company........................................................................69
10.1.3 Composite....................................................................................................................69
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1.0.1.4 Proprietary Companies –............................................................................................69
10.1.5 State Owned Companies.............................................................................................69
10.1.6 Captive Companies......................................................................................................69
10.2 Reinsurance Companies.....................................................................................................69
10.3 Buyers of Insurance...........................................................................................................71
10.4 Intermediaries.....................................................................................................................71
10.4.1 Agent...........................................................................................................................71
10.4.2 Insurance Broker.........................................................................................................71
10.4.3 Bancassurance.............................................................................................................72
10.4.4 Insurance Aggregator..................................................................................................72
10.5 Self-Test Questions............................................................................................................72
10.6 Suggestion for Further Reading........................................................................................73
CHAPTER 11: REGULATION AND SUPERVISION OF INSURANCE INDUSTRY......73
11.1 Functions of IRA................................................................................................................74
11.2 Reasons Why IRA Supervises the Insurance Industry and Regulate It.............................74
11.4 Suggestion for Further Reading.........................................................................................75
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CHAPTER ONE- INTRODUCTION AND OVERVIEW OF RISK
LECTURE OBJECTIVES
At the end of this topic, the learner should be able to;
i) Define risk and enumerate its various meaning.
ii) Discuss the different types of risks that organizations face.
iii) Distinguish between Hazard and Perils.
iv) Classify the risks in its various forms.
1.1 Introduction
Every individual, organization or Country faces some level or degree of Risk. Economic
liberalization, globalization and technological revolution have exposed organizations, individuals
and countries to new and complex set of risks. Issues such as natural disasters, weather and
climate changes, food and feed safety, changing laws, supply chain disruptions, bioterrorism,
security, Aids epidemic, Credit crunch, Asian Tsunamis and a host of other risk exposures can
have devastating effects if not properly identified and addressed. These issues, combined with a
continuous challenge of driving business performance while dealing with uncertainty is forcing
individuals and institutions to embed risk management into their everyday processes and
activities.
1.2 Definition of Risk
In common business conversations the word risk is used to mean different things:
Risk –
a) Risk as a condition of the real world in which there is an exposure to adversity. More
specifically, Risk is a condition in which there is a possibility of an adverse deviation
from a desired outcome that is expected or hoped for.
b) Risk is the dispersion of the actual from expected results- In business, especially when
we undertake business decisions, we expect results, and sometimes these results are
different from our expectation. This dispersion can be measured in absolute terms using
percentages
c) Risk is the possibility of an unfortunate occurrence- Probabilities can be measured from
0-1 or 0% to 100%.We can therefore assign probability to certain events based on
expected occurrences
d) Risk is anything that has the possibility of causing unwanted change
e) Risk as cause e.g. fire as a risk, Personal injury as a risk etc.
f) Risk as likelihood e.g. the risk of something happening, leaving keys in a car results in
high risk etc.
g) Risk as the object – e.g. factory, plane, machine or ship might be referred to as the risk.
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h) Risk as verb – It is not only used as a noun but also as a verb e.g. risk of crossing the
road.
1.3 Characteristics of Risk-
 For us to say there is risk, the outcome must be in question. When risk is said to exist,
there must always be at least two possible outcomes and at least one of the possible
outcomes is undesirable. When the outcome is certain then there is no risk.
 Risk is in some form and to some degree in most human activities
 Risk changes with time
 Risk is usually (at least) partially unknown
 Risk is manageable in the sense that the application of some human action may change its
form and degree of effect
1.4 Self – Test Questions
Define risk. In your definition, state the relationship between risk and uncertainty.
i. Explain the characteristic of risk
ii. Explain the reasons why organizations are now concerned about risks more than ever
iii. Enumerate examples of risks facing our country Kenya
1.5 Suggestion for Further Reading
Dickson, G.C. (1997) Risk Management the Chartered Insurance Institute Vaughan, E. and
Vaughan, T. (2003) Fundamentals of Risk and Insurance 9th Edition, Wiley
Dorfman, M.S. (2005) Introduction to Risk Management and Insurance, 9th Edition, Prentice
Hall
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CHAPTER TWO- THE CONCEPT OF RISK
LECTURE OBJECTIVES
At the end of this topic, the learner should be able to;
i) Discus the components of risk
ii) Discuss the negative and positive aspects of risk in society
iii) Distinguish between Hazard and Perils.
iv) Classify the risks in its various forms.
2.1 Components of Risk/ Other Terms Related to Risk

There are three vital elements in a risk
- Uncertainty
- Measurement of risk
- Causes of risks
2.1.1 Uncertainty
- refers to a state of mind characterized by doubt, based on a lack of knowledge about what will
or will not happen in the future. It is the opposite of certainty, which is a conviction or certitude
about.
Example: A student says “I am certain I will get an A in this course,”. Here there is no
uncertainty.
If one says “I am uncertain what grade I am going to get in this course,” the statement reflects a
lack of knowledge about the outcome. Uncertainty, then, is simply a psychological reaction to
the absence of knowledge about the future. The existence of risk—a condition or combination of
circumstances in which there is a possibility of loss— creates uncertainty on the part of
individuals when that risk is recognized.
2.1.2 Measurement of Risk and the Heinrich Triangle

To make risk manageable, one has to measure the degree of risk.
The Heinrich triangle guides in risk measurement by considering the severity and frequency of
risks. The heinrich triangle was published by Herbert William Heinrich in 1931 in his book,
“Industrial Accident Prevention: A Scientific Approach,” .
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The Heinrich triangle was published as a result of empherical studies of incidents and
accidents in various industries. The Heinrich triangles found that occurrences without
serious impact/severity (Near Misses) were the majority in these industries. 300 out of
330 incidents were non-injury incidents.
Major incidents with fatal consequences( Severe impact) were very few( low
frequency) ,but once they happened the caused devastating impact in organisations.
Intermediate range between the two sectors were described as minor injuries.
- High frequency= Low severity- FOR EXAMPLE injuries in a football match occur
frequently but their impact is not severe.
- Moderate frequency= Moderate severity
Low frequency= High severity.-FOR EXAMPLE High severity incidents like Garissa
university attack, Plane crashes occur rarely, but once they do, their impact( severity) is
very high.
2.1.3 Peril and Hazard (Causes of Risks)

It is not uncommon for the terms peril and hazard to be used interchangeably with each other
and with risk. However, to be precise, it is important to distinguish these terms.
A peril is a cause of a loss/ It is the Prime ( main cause of Loss). For Example fire, or
windstorm, or hail, or theft. Each of these is the cause of the loss that occurs.
A hazard- is a condition that may create or increase the chance of a loss arising from a given
peril. It is possible for something to be both a peril and a hazard. For instance, sickness is a peril
causing economic loss, but it is also a hazard that increases the chance of loss from the peril of
premature death.
Hazards are normally classified into three categories:
• Physical hazards consist of those physical properties(Able to see) that increase the chance of
loss from the various perils. Examples of physical hazards that increase the possibility of loss
from the peril of fire are the type of construction, the location of the property, and the occupancy
of the building.
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• Moral hazard - These consist of human aspects that increase the probability of loss from a
given peril. For example dishonest tendencies, Drunkenness
NB: Moral hazard cannot be easily assessed/determined by insurers but physical hazards can be
assessed and determined . Therefore insurers deal with moral hazards by the application of
conditions, warranties or exclusions to the policy.( to be discussed later)
• Morale hazard- This is the increase in the hazards presented by a risk arising out of the
indifference of the person insured to loss because of the existence of insurance. People may
accelerate happening of losses because they will be paid by insurance.
For EXAMPLE
- When people have purchased insurance, they may have a more careless attitude toward
preventing losses or may have a different attitude toward the cost of restoring damage.
- Hospitals charge more to people having insurance
- Judges make larger awards when the loss is covered by insurance
In short, morale hazard acts to increase both the frequency and severity of losses when such
losses are covered by insurance.
2.2 The Burden of Risk/ Negative Aspects of risk
The following are the cost and burden of risk to a society;
1. Financial Loss- The greatest burden of risk is that some losses will actually occur e.g.
when floods destroy houses, wage earner dies, money stolen there are financial losses.
2. Opportunity cost- Risk also has additional detriment apart from causing loss. The
uncertainty as to whether loss will occur makes individuals establish risk minimization
measures such as taking insurance cover or accumulating funds to meet such losses
should they occur. These funds could have been invested elsewhere to generate additional
income
3. Risk deters economic Growth and capital accumulation- Existence of risk may also have
different effects on economic growth and capital accumulation which determines
economic progress. Investors incur risks of a new venture only if the returns from the
venture are high enough to compensate both static and dynamic risks. Such investors
therefore make the cost of borrowing capital expensive to new venture owners. The
venture owners must in turn charge higher prices to consumers; the economy will
therefore have the cost of living increased in order to bear the burden of risk.
4. Frustration and Mental Unrest- The uncertainty caused by risks produces feelings of
frustrations and unrest. This makes people unproductive because of mental disturbance.
5. Displacement of families and loss of property- This is particularly true with political
risks,they cause displacement of people and loss of property.
6. Damage of reputation
7. Pain and suffering
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8. Risks deprives society off services judged to be risky- Businessis are reluctant to engage
in projects that are otherwise strategically unattractive especially where losses appear to
be unmangeable
2.3 Utility of Risk/ Positive Aspects of Risk
We have throughout portrayed risk as having a negative effect e.g. great steps in medical fields
have been achieved at the personal risk of those researchers prepared to test drugs and treatment;
risk is also at the very heart of any free market economy i.e. it enables wealth to be created. Risk
taking aids investments and discoveries- For example some investments in the medical field
could not have been achieved without risk taking. Risk can be used for purpose of differentiation
between the rich and the poor
In summary therefore risk can be negative or positive and the challenge to us is to manage the
risk to which a business is exposed. This has led to the evolution of the discipline of risk
management
2.4 Self-Test Questions

1. Enumerate the various types of hazards that exist in the Kenyan business environment.
2. Differentiate between risk and uncertainty
3. Risk is the salt and sugar of life: Explain
4. Using the aid of a diagram explain the Heinrich triangle
5. Explain the negative aspects of risk
6. Explain the difference between Physical and Moral Hazards
7. With respect to each of the following, indicate whether you would classify the event
or condition as a peril or a hazard: an earthquake, sickness, worry, a careless act, an
economic depression.
Hall
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CHAPTER THREE- CLASSIFICATIONS OF RISK
LECTURE OBJECTIVES
i. Classify the risks in its various forms.

ii. Discus solutions to various risks facing society
iii. Identify various types of risks facing society
3.1 Classification of Risk
3.1.1 Static and Dynamic Risks
Dynamic risks are those resulting from changes in the economy. For EXAMPLE -Changes in the
price level, consumer tastes, income and output, and technology may cause financial loss to
members of the economy.
Generally dynamic risks are considered less predictable than static risks, since the former do not
occur with any precise degree of regularity.
Static risks involve those losses that would occur even if there were no changes in the economy.
If we could hold consumer tastes, output and income, and the level of technology constant, some
individuals would still suffer financial loss. These losses arise from causes other than the
changes in the economy, SUCH AS the perils of nature and the dishonesty of other individuals.
Static losses tend to occur with a degree of regularity over time and, as a result, are generally
predictable. Because they are predictable, static risks are more suited to treatment by insurance
than are dynamic risks.
3.1.2 Financial and Non-Financial Risks-
A financial risk is one where the outcome can be measured in monetary terms and where it is
possible to place some value on the outcome. Measurement in personal injury may be done by a
court when damages are awarded or negotiation among lawyers and insurers. There are cases
where measurement is not possible e.g. choice of a new car, selection from a restaurant menu,
selection of a career, choice of a marriage partner etc. all these are non-financial risks.
Generally in business we are concerned with financial risks.
3.1.3 Subjective and Objective Risks
A subjective risk refers to the psychological uncertainty which stems from individual’s mental
attitude or state of mind- For example two individuals who have the same exposure to theft risk,
but one individual may feel more uncertain about the risk and is more likely to insure his
property. This person has greater subjective risk
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Objective Risk- This refers to a state of nature / the actual number of losses in a given time
span.
NB: A situation may pose little or no objective risk for an individual yet instill in him a big
subjective risk.
3.1.4 Personal and Business Risks
Personal Risks- These relate to an individual, for instance to premature death, sickness, property
loss.
Business Risks- These are risks to business firms. They include destruction of business
premises, theft of stock, death of a key person e.t.c
3.1.5 Fundamental and Particular Risks
The distinction between fundamental and particular risks is based on the difference in the origin
and consequences of the losses.
Fundamental risks involve losses that are impersonal in origin and consequence. They arise
from causes outside the control of any one individual or even a group of individuals. In addition
the effect of fundamental risks is felt by large numbers of people.
They are group risks, caused for the most part by economic, social, and political phenomena,
although they may also result from physical occurrences. FOR EXAMPLE Unemployment, war,
inflation, earthquakes, and floods are all fundamental risks
They affect large segments or even all of the population.
Since fundamental risks are caused by conditions more or less beyond the control of the
individuals who suffer the losses and since they are not the fault of anyone in particular, it is held
that society rather than the individual has a responsibility to deal with them.
Particular risks involve losses that arise out of individual events and are felt by individuals
rather than by the entire group. They may be static or dynamic.
For example The burning of a house and the robbery of a bank are particular risks.
Generally particular risks are insurable while fundamental risks are not.
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3.1.6 Operational Risk and Strategic Risks
Is the prospect of loss resulting from inadequate or failed procedures, systems or policies?
Employee error. Systems failure. Fraud or other criminal activity. Any event that disrupts
business processes is an operational risk
Strategic Risk -A possible source of loss that might arise from the pursuit of an unsuccessful
business plan. For example, strategic risk might arise from making poor business decisions, from
the substandard execution of decisions, from inadequate resource allocation, or from a failure to
respond well to changes in the business environment.
3.1.7 Pure and Speculative Risks
Speculative risk describes a situation in which there is a possibility of loss, but also a possibility
of gain. Gambling For EXAMPLE (Investing in Sportpesa) and investing in shares are good
examples of a speculative risk.
Pure risk, is used to designate those situations that involve only the chance of loss or no loss. For
Example Theft, Fire, Terrorism are pure risks, they only result into a loss or a break even
situation
Normally only pure risks are insurable while speculative risks are not. Speculative risks are not
insurable since they are voluntarily accepted because of the possibility of gain.
Types of Pure Risk
1. Personal risks. These consist of the possibility of loss of income or assets as a result of the
loss of the ability to earn income. In general, earning power is subject to four perils:
(a) Premature death- This is the death of a breadwinner who leaves behind financial
responsibilities . Here we can buy a life insurance cover
(b) Dependent old age/ Retirement- This is the risk of being retired without sufficient savings to
support your retirement years( Here we Purchase Pension schemes, NSSF , Annuities)
(c) Sickness or disability( An individual with health problems may face potential loss of income
and increase in medical expenditures( Here we purchase Health insurance, Personal accident
insurance)
(d) Unemployment- Jobless individuals may have to live on their savings,if their savings get
depleted a bigger chrisis awaits- Here we buy Retrenchment or unemployment cover
2. Property risks. Anyone who owns property faces property risks simply because such
possessions can be destroyed ,lost or stolen. Property risks embrace two distinct types of loss:
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a) Direct Loss-: If a house is destroyed by fire, the owner loses the value of the house. This
is a direct loss
b) Indirect Or “Consequential” Loss.- in addition to losing the value of the building itself,
the property owner no longer has a place to live, and during the time required to rebuild
the house, it is likely that the owner will incur additional expenses living somewhere else.
This loss of use of the destroyed asset is an indirect, or “consequential,” loss.
Here we buy various Property insurances (To be discussed later).
3. Liability risks. These arise from the unintentional injury of other persons body reputation or
damage to their property through negligence or carelessness; Liability risks arise from either
intentional or unintentional torts, or invasion of the rights of others( e.g ) Somebody can be sued
for Defamation, Tresspass, Negligence etc. The risk of being taken to court as a result of torts is
a liability risk. Here we buy a various liability insurance covers (To be discussed later).
4. Risks arising from failure of others. When another person agrees to perform a service for
you, he or she undertakes an obligation that you hope will be met. When the person’s failure
to meet this obligation would result in your financial loss, risk exists. Examples of risks in
this category would include failure of a contractor to complete a construction project as
scheduled, or failure of debtors to make payments as expected. Here we buy Credit insurance,
Contractors all risks insurance (To be discussed later).
3.2 Types of Risks
There are various types of Risks which face individuals and businesses.They include;
1. Social risks-These are risks caused by people. In other words it is people who cause
some of the risks they or others face. Examples of socially caused risks include; Theft,
feudalism, accident etc.
2. Physical risks- Physical causes of loss are many. Some originate from natural
phenomena whereas others result from human error. Fire which is a major cause of death,
injury and damage to property is a physical cause that may result from natural
phenomena as lightning or human failure, such as defective writing.
3. Economic risks- Many of the risks that face a business firm or an individual are of
economic origin. As the general level of activity in the economy fluctuates from time to
time it creates uncertainty. These fluctuations are seen into depressions resulting in loss
of jobs and decline in property value.
4. Financial risks- These are risks of loss of income through investments or through
destruction of property examples would include loss of principal investments plus interest
due , as a result of the insolvency of the borrower or loss of profits due to the destruction
of business premises/ There are more specific financial risks that is, liquidity risks, credit
risks and currency risks.
5. Credit risks-This is a risks that an organization will suffer a sealed deterioration in
financial strength or be unable to pay amount in full when due. The risk is that a borrower
will default on any time of debt by failing to make payment which he is obligated to do.
This risk is primarily that of the lender and includes lost principle and interest and event
disruption of cash flow.
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The factors which influence credit risk include the type of business or industry, customer
profiles, economic conditions, political or social placing of a person.
6. Liquidity risks-This is the risk of running out of cash when it is needed to meet
obligation. If a company cannot pay its debt that they fall due and no one is prepared to
supply additional cash to the company then the company will fail even if it is
technically profitable. Liquidity is the ease with which an asset can be turned into cash.
Real estate for example is relatively illiquid compared to shares. The more liquid an asset
is the more uncertain an outcome will be.
7. Investments risks
Investments occur when an individual or organization buy something which they believe will
increase in value or provide a regular income or both. Investments can be anything from office
equipment, machinery, property, intellectual properties marketing rights, shares etc. Different
investments carry different degrees of risks in respect of their potential to appreciate or
depreciate in values and pay a return. The uncertainty involve therefore as a result of the
investment decision is referred to as investment risk.
8. Employee dishonesty risks-These are to do with fidelity or trustworthiness of a person.
As the owner of the business cannot do everything by himself he entrust his business with
people. Embezzlement of cash and other dishonest practice by dishonest employees can lead to
large financial loss to the business.
9. Public risks- A public risk is something that is (or likely to be) hazardous to human
health or could contribute to a disease or an infectious condition in humans.
Public risks can include designated pests(such as rats and mosquitoes)
10. Political risks-Political risk is a type of risk faced by investors, corporations and
government that political decisions, events or conditions will significantly affect the
profitability of a business actor or the expected value of a given economic sector.
11. Reputation risks-Reputation risk is a risk of loss resulting from damages of a firm’s
reputation, in lost revenue; increased operating capital, or regulatory costs or destruction
of shareholders value, consequent to an adverse or potentially criminal event even if the
company is not found guilty.
a) Explain how a business may respond to credit risks

b) Differentiate between the following terms and give two practical examples in each
i. Particular and Fundamental risks-
ii. Financial and non-financial risks
iii. Credit and Liquidity risks
c) Enumerate various types of pure risks facing Kenyans today
d) Risk may be sub classified in several ways. List the three principal ways in which risk
maybe categorized, and explain the distinguishing characteristics of each class.
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e) The distinction between “pure risk” and “speculative risk” is important because only pure
risks are normally insurable. Why is the distinction between “fundamental risk” and
“particular risk” important?
Hall
CHAPTER FOUR -INTRODUCTION TO RISK MANAGEMENT STRATEGIES
LECTURE OBJECTIVES
i. Discus solutions to various risks facing society

ii. Discus relationship between risk and insurance
iii. Discuss the three categories of risk management strategies used in the risk
environment.
iv. Discuss the main strategies applied in controlling risks in the organizations.
v. Discuss risk financing and risk transfer strategies that are mostly used in
organizations.
4.1 Risk Management Strategies
Generally there are several risk management strategies that can be employed to mitigate risk
exposures. The strategies can be broadly categorized into three;
- Risk control,
- Risk financing and
- Risk transfer.
4.1.1 Risk Control-

This is a strategy that focuses on minimizing the risk of loss to which an organization is exposed.
Techniques used are avoidance and risk reduction.
i)Risk avoidance – this occurs when decisions are made that prevent risks from coming into
existence in the first place, example an organization can avoid risks by deciding not to engage in
activities which it considers high risk e.g manufacture of explosives or poisonous substances.
Risk avoidance should only be used where exposure to risk is catastrophic and the risk cannot be
transferred or reduced. Risk avoidance is a negative approach for managing risks because the
advancement of personal and economic progress requires risk taking and if risk avoidance is
used extensively the organization is unlikely to achieve its primary objectives.
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ii)Risk reduction- Risk reduction consists of all techniques that are designed to reduce the
likelihood of loss or the potential severity (impact) of such losses should they occur.
Efforts to reduce the likelihood of loss are referred to as loss prevention, while efforts to reduce
the severity of loss are referred to as loss control.
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Consideration of risk reduction
i. Reduction of like hood of loss can be done through putting up signs such as no smoking sign
on a petrol station or installing protective devices around machinery to reduce the number of
injuries to employees. This will reduce frequency of loss or their probability.
ii. Reduction of severity of impact of loss. These can be done or demonstrated by installing
sprinkler or five extinguished or separation and dispersions of the company assets to different
location in an effort to salvage company assets in case of loss.
iii. Engineering approach to loss prevention. This approach focuses on removal of hazard. It
focuses on system analysis and mechanical unavoidable e.g air bugs can boost safety belts in
vehicles.
iv. Human behavior approach on loss prevention. This approach focuses on the elimination of
unsafe acts by the person. This approach is based on the fact that most accidents are as a result of
human failure e.g. alcohol and drug consumption fatigue among others.
v. Timing of risk reduction measures Such measures may be designed for prior to the loss event,
during the loss event and after the loss events.
Measures prior to loss include:
Training of personnel – measures before
 Measures during five; five:
 Fastening seat belts
Measures after the event may be:
 Rush victim to hospital
 Offer first aid
4.1.2 Risk Financing
These concentrate on availing the funds to meet the losses arising from risks that remain after the
application of risk control technique of measure. Risk financing include:
 Risk retention
 Risk acceptance
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RETENTION/ SELF INSURANCE
This is the most common method of dealing with risks whereby organization and individual face
unlimited number of risks most of which nothing can be done about.
Risk retention can either be conscious (intentional) or unconscious (unintentional). It can also be
voluntary or involuntary and even be funded or unfounded. When nothing can be done about the
particular exposure then the risk is retained. It is in last resort on risk management strategy
whereby the risk cannot be avoided, reduced or transferred. The self-assumption of risk consists
of waiting for the event to happen with no effort to any financial provision in advance for the
occurrence of risk. In some instances the individual subjected to the risk may provide some
amount in advance to cover for the anticipated financial consequences of the risk normally
referred to as self-insurance.
The major disadvantage of using insurance reserve is that:
(i) The amount set aside may be more or less at the time when the risk occurs.
(ii) A loss may occur before the fund is sufficient to meet the risk
(iii) There are chances that this fund may be mismanaged or may be misused by the firm
Self-assurance is normally possible where there is a large number of risks and more of them have
a large number of value. These objects are distributed such that the possibility of the risk
occurring to all of them at the same time is minimal. As a general rule, the risks that are retained
are those that need small losses.
4.1.3 Risk Transfer
Is the shifting of the risk burden from one party to another. This can be done through several
ways;
a) Through risk allocation, where there is sharing of the risk burden with other parties. This is
usually based on a business decision when a client realizes that the cost of doing a project is too
large and needs to spread the economic risk with another firm. Also, when a client lacks a
specific competency that is a requirement of the contract, e.g., design capability for a design-
build project. A typical example of using a risk allocation strategy is in the formation of a joint
venture.
b) Subcontracting whereby if an employee accepts work which they are not fully competent
without the assistance of others, they can subcontract the extra work. Extra work would involve
specialist work which that employee lacks the knowledge to handle; or which would involve
excessive amount of work beyond the capability of that employee.
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c) Through the use of contract indemnification provisions
d) Leasing and renting
e) Through purchase of INSURANCE. Whereby in consideration of a specific payment

(premium) by one party, the second party contracts to indemnity the first party against specified
loss that may or may not occur up to a certain limit
4.1.4 Risk Management Matrix for One Risk
NB: The choice as to which method will be chosen in managing risks will depend on the
frequency and severity of the risk and the cost and benefit. This is displayed in the matrix
below ,which is applicable when the organization faces one pure risk or a group of related risks
which can be treated using same risk management tech
4.1.4 Self-Test Questions
1 . Explain why the number of risks and the severity of losses increase over time.
2 Briefly explain five techniques used in management of risks
3 Global competition is a reality many businesses cannot ignore. In light of this, the
business leaders have a justification to develop plans and strategy to manage these
global as well as local risks. Discuss the benefit of such a move.
4 Discuss the main strategies applied in controlling risks in the organizations.
Hall
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CHAPTER FIVE: INTRODUCTION TO INSURANCE
LECTURE OBJECTIVES
By the end of this course, the student should be able
i. Document the historical development of insurance from the ancient times to its
present day developments.
ii. Explain how the insurance mechanism operates in an economic system like Kenya.
iii. Discuss the functions and benefits of insurance to a country like Kenya.
iv. Discus the legal aspects governing insurance contracts
As discussed in the previous topic insurance is simply one of the risk treatment options.
Insurance is referred to as the core risk management option as it can be used to manage losses
arises out of majority of the pure risks.
5.1 Functional Definition of Insurance
-Insurance is a risk treatment option which involves risk sharing.
- Insurance is a financial arrangement that redistributes the cost of unexpected losses- It involves
the transfer of potential losses to an insurance pool, the pool combines all the potential losses and
then transfers the cost of predicted losses back to those exposed.
- Insurance is a cooperative device to spread the loss caused by a particular risk over a number of
people who are exposed to it and who agree to insure themselves against the risk
5.2 Contractual Definition of Insurance
-Insurance is an agreement between insurer and insured whereby in return for payment of
premium the insurer undertakes to indemnify the insured upon the happening of a specified
event.
- A contract of insurance is known as an insurance policy.
- Insurance is a contractual arrangement whereby one party agrees to indemnify another party
for losses on a specified contingent event. It is a contract for financial protection against
specified losses.
5.3 Nature of Insurance
-The purpose of any insurance is to provide economic protection against the losses that may be
incurred due to chance events such as death, disability, Medical expenses, Home and automobile
damage.
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- Insurance is a cooperative device- All for one and one for all
- Insurance is a contract- Specifically insurance is a contract of good faith, mutual benefit and is
a future contract for compensating losses.
- Insurance involves sharing of risks among many people so that the insurer can compensate
losses at a nominal cost
- Insurance involves payment on contingency
-Insurance is not gambling
-insurance involves spread of risks among large numbers of insured persons Sharing losses, on
some equitable basis, by all members of the group
- Insurance is a social device- It does not work for people living in isolation.
5.4 Historical Development of Insurance
In this lecture we are going to learn how insurance business came to evolve with the Chinese
merchants as early as 3000BC, the transfer of risk via Great Code of Hammurabi, to the times of
Edward Lloyd coffee house.
As early as 3000BC Chinese merchants utilized the techniques of sharing risks. About 500 years
later, the famous Great Code of Hammurabi provided for the transfer of the risk of loss from
merchants to moneylenders. Under the provisions of the code, a trader whose goods were lost to
bandits was relieved off the debt to the moneylender who had loaned the money to buy the
goods. Babylonian moneylenders loaded their interest charges to compensate for this transfer of
risk. Loans were made to ship-owners and merchants engaged in trade, with the ship or cargo
pledged as collateral. The borrower was offered an option, for somewhat higher interest charge,
the lender agreed to cancel the loan if the ship or cargo was lost at sea. The additional interest on
such loans was called a ‘premium’ and the term is still used even today. The contracts were
referred to as ‘bottomry contracts’ in cases where the ship was pledged and ‘respondentia
contracts‟ when cargo was the security. Although these were insurance of sorts, the modern
insurance business did not begin until the commercial revolution in Europe following the
crusades.
Marine insurance the oldest of the modern branches of insurance was started in Italy during the
13th Century. This early marine insurance was issued by individuals rather than insurance
companies. A ship-owner or merchant prepared a sheet with information describing the ship, its
cargo, its destination among others. Those who agreed to accept a portion of the risk wrote their
names under the description of the risk and the terms of the agreement. This practice of ‘writing
under’ the agreement gave rise to the term ‘underwriter’.
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Ship-owners seeking insurance found the coffeehouses of London convenient meeting places.
One of the coffeehouses owned by Edward Lloyd, soon became the leading meeting place.
Lloyds is known to have been in existence early in 1688.
5.5 Unique Characteristics of an Insurance Contract
1. Insurance is a personal contract- The contract of insurance is between the named

insured and the insurer. Therefore no one else can claim other than the insured. When the
property is sold or transferred to another person the contract lapses immediately. The
insurer may return part of the premium if the contract term had not expired.
2. Insurance is a unilateral contract- Only one party to the contract is legally bound to do
anything. The promise of one party (the insurer) is given in exchange for the act of
another party (the insured). The insured pays the premium and the insurance carrier
promises to pay if a covered loss occurs
3. Aleatory – The performance of one or both parties is contingent on the occurrence of an
event that may never materialize. A homeowners’ insurance contract promises to pay if
there is damage by fire, for instance; the insurance carrier doesn’t have to do anything
unless the damage occurs.
4. Contract of Adhesion – Involves an unequal bargaining position. The insurance contract
is offered to the insured on an “as is,” “take it or leave it” basis. The insured cannot
negotiate the policy terms, they are written solely by the insurer. This insurance contract
feature is why coverage is interpreted in its broadest sense and exclusions are to be
narrowly applied. Any ambiguity is found in favor of the insured.
5. Conditional – Before the insurance contract is activated, certain conditions must be met.
There are two types of conditions: 1) conditions precedent; and 2) conditions subsequent.
A condition precedent is a condition that must be fulfilled to activate the contract. In an
insurance contract, the conditions precedent are the payment of the premium and a
covered loss. Conditions subsequent are acts or duties that must be adhered to in order to
receive the benefits of the policy. An example of conditions subsequent is the “Duties
after a Loss” section of the policy. To receive the benefits of the policy, the insured must
comply with the contractual requirements.
6. Insurance uses doctrine of Presumption of intent- It is usually assumed by court that
the person accepting the contract has read and understood the terms and conditions of the
contract and therefore is bound by those terms and conditions. However there may be
ambiguity in the wording of terms and conditions and in this respect the court will
interpreted the wordings against the part that created ambiguity.
7. Insurances as a contract of good faith (fiduciary contract)- Applicants for insurance
must make full disclosures for the risk to the insurance agent or company. The risk that
the insurer assumes must be equal to the risk that is being transferred to them by the
insured
5.6 Requisite of Insurability (Characteristics of Insurable Risks)
It is important to note that the world of businesses is not static and what may be uninsurable risk
today could very well be insurable tomorrow. A good example is recent moves to ensure political
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risks through the African Trade Insurance Agency (ATIA). However, the following would be the
requisites for insurability:-
1. Fortuitous – the happenings of the event must be entirely fortuitous to the insured. These rules
out inevitable events such as wear, tear and depreciation. Any damage inflicted on purpose by
the insured would be ruled out. However, purposeful events by other persons would be covered
provided they were fortuitous as far as the insured is concerned. In life assurance, although death
is certain, the timing of death is what is fortuitous and that is the concern of life assurance.
2. Financial Value – Insurance does not remove the risk but it endeavors to provide financial
protection against the consequences. Therefore, the losses must be capable of financial
measurement. In some cases the court will decide the level of compensation due to an injured
person while in property insurance it is possible to place a value on the loss or damage. In life
assurance, the level of financial compensation is agreed at the beginning of a contract.
3. There must be an element of uncertainty regarding the chances of occurrence of the risk and
also the time of occurrence.
4. The loss caused by the risk must be predictable and measurable with a fair degree of accuracy-
there must be a defined pattern of occurrence of the insured risk which is predictable
5. The loss must be capable of causing substantial damage or loss but should not be catastrophic-
All the units in the homogenous group should not suffer an adverse event simultaneously
6. Insurable Interest – Refer to principles of insurance to be discussed later
7. Apart from the insured having insurable interest the insured must have genuine interest in the
avoidance of the risk.
8. Homogenous Exposure – The law of large numbers entails that given a sufficient number of
exposure to similar risks, the insurance company can forecast the expected extent of their loss
and therefore move towards accuracy in setting premium levels. There might be a few cases
where heterogeneous exposures are insurable but on the whole insurers prefer homogenous
exposures in order to benefit from the law of large numbers.
9. Pure Risks – Insurance is primarily concerned with pure risks. Speculative risks are generally
not covered because it may act as a disincentive to effort e.g. insuring profit would mean no
effort to achieve desired results. But the pure risks consequences of speculative risks are
insurable e.g. risks of a new line of business selling or not – though in itself a speculative, the
risk of the factory being damaged by fire is pure and therefore insurable.
10) Particular risks – Fundamental risks are generally not insurable e.g. war, inflation etc.
However fundamental risks arising out of physical cause e.g. earthquakes may be insurable.
11) Public Policy – Contracts must no be contrary to what society would consider right and
moral e.g. contracts to kill a person, no insurance for criminal venture.
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5.7 Significance of Insurance
5.7.1 Individual point of View
1. Insurance provides security – insurance provides safety and security against the loss of a
particular event. For example Life insurance security against death and old sufferings.
2. Encourages habit of forced thrift – forms a habit of saving e.g. life insurance is difficult
to get out of it.
3. Insurance contributes to conservation of health – through various channels of
advertisement and publicity – it makes arrangements for periodical medical checkups to
policy.
4. Conservation of property /security to mortgage property – when the property is
mortgaged to insurer and adequate insurance is also given to the insurer which will avoid
the mortgaged property to be sold. The policy will be used to pay incase.
5. Insurance provides a peace of mind- it gives mental helps eliminate constant worries and
fears
6. It fosters economic independence – in case of death of the bread winner the family is on
the verge of destitution, but the timely paying by the insurance prevents this from
happening.
7. It provides social obligation e.g education of the children , marriage.
8. Tax exemption – it reduces the burden of tax on an individual.
9. It provides cover for legal liabilities- protects a person against third party liabilities
5.7.2 Business point of view
Modern business cannot survive without the aid of insurance. Marine trade is entirely based on
insurance- This is because, marine cargo cannot be discounted from the bankers unless they are
adequately insured. Peter Drucker - says that it is no exaggeration to say that without insurance,
an industrial economy cannot function at all.
1. Safety against risk – Goods worth millions is transported through different system which
insurance eliminates fear for industrialists and business people.
2. Basis of credit on business – a business person inn stocks in go downs can be able to get
loans from a bank with them as security. The bankers make sure that they are properly
insured.
3. Protection to key men – key men are not always available in the market place, the
training of key men takes long and in absence of key men , the organization is likely to
close down.
4. Insurance increases efficiency – it eliminates worries about what may or may not happen
hence business people can concentrate on things that increase efficiency.
5. Encourages loss prevention methods – this is done through advertisement and mass
media.
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6. Reduces costs of running a business – this is because there is no money set aside as a
contingent where there is insurance.
7. It promotes foreign trade – through things such as insurance of transportation in marine
insurance.
8. It protects employees – e.g. group insurance which protects workers within the workers
environment.
9. Encourages development of big industries partly because it provides protection for
investments and accumulated capital which is used to establish huge industries.
5.7.3 Social Point of View
1. Stability to families – insurance prevents families from experiencing the great hardships
caused by unexpected losses of property or premature death of the family income provider
2. Provides social obligation - Eg education of children.
3. Opportunities for employment - insurance agents, professionals etc.
4. Social welfare – policies like old age, pension schemes provides for later years.
5. Solution to social problems – insurance against disability or death.
5.8 Functions of Insurance
Classified into 2
(a) Primary functions–

1) It provides protection – it’s a form of guarantee and incase of loss occurrence it
makes good the loss.
2) It provides certainty - i.e certainty of p[ayment at the uncertainty of loss.
3) Risk sharing – it distributes risks among those people exposed to the risk.
(b) Secondary functions-
1) Prevention of loss - insurance joins hands with those institutions which are engaged in
preventing the losses – e.g financial assistance to fire brigade, educational institutions.
2) It provides capital - accumulated funds are invested in productive channel.
3) It improves efficiency – Eliminates worries and miseries of losses at death / destruction
of property.
4) It helps Economic progress – By protecting the society from huge losses of damage,
destruction and death.
5) Solution to social problems.
5.8 Scope and Limitation of Insurance
Insurance has spread over to every aspect of human life. However the scope of insurance is
limited by the following factors
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1) Absence of insurable interests – in absence of insurable interests insurance cannot exists
2) The scope is limited to financial losses.
3) Moral limitations – as a result of moral hazards that restrict the scope of insurance – it
arises out of concealment of material facts while effecting insurance.
4) Higher premium rates – this deprives the poor who are unable to pay the premiums.
5) All risks are not insurable eg risks of war, nuclear explosion, risks and strikes.
5.9 Insurance, Assurance and Wagering
In both insurance and wagering there is uncertainty and in both there is payment when the loss
occurs
Basis Insurance Wagering

1) Enforcement A contract of insurance is No legality and enforceability
legal and enforceable
2) Utmost good faith

Duty of observance of utmost
good faith No observance of utmost
good faith
3) Protection
Protection is provided
There is no protection
4) Scope
Limited compared to that of
wagering Wider scope because it is
5) Objective governed by law of the
journey.
Provide protection
It’s about win or lose
Insurance and Assurance

The 2 terms are used synonymously to mean the same.. The term assurance is used where the
event is bound to happening e.g. death whereas the term insurance is used where the event may
or may not happening e.g. burglary.
Basis Assurance Insurance
1) Use of word - -Used for life insurance contract -Used for other classes of
insurance
2) Risk – -Risk is bound to happen -Risk is uncertain i.e may or
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may not happen
3) Sum assured - -Sum assured is bound to be paid -Sum assured is paid if the
since death is a must insured event happen.
1. Explain the unique characteristics of an insurance contract

2. Explain the characteristics of an insurable risk
3. Describe the essential elements of a contract of insurance
4. Some Business people believe that it’s a waste to purchase insurance. Discus the
importance of Businesses purchasing various insurance covers
5. Explain any three differences between an insurance and a wager
6. Explain the law of Large numbers
7. Insurance has spread to almost every aspect of human life, explain factors that limit the
scope of insurance
Hall
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CHAPTER SIX
PRINCIPLES OF INSURANCE
Lecture objectives:
At the end of the lecture you should be able to:
i) Discuss the various special insurance contracts that are unique to insurance business.
ii) Discuss the principles of insurable interest and its application in the insurance business
operations.
iii) Explain the principle of utmost good faith and how this principle is applied.
iv) Highlight the main case laws that support the principle of proximate cause.
v) Provide a distinction between indemnity, subrogation and contribution principles as applied in

insurance business.
6.1 Principle of Insurable Interest
- An insurance contract is legally binding only if the insured has an interest in the subject matter
of the insurance ( Legal and Financial relationship with the subject matter of insurance) and this
interest is in fact insurable.
In most instances, an insurable interest exists only if the insured would suffer a financial loss in
the event of damage to,loss of or destruction of, the subject matter of the insurance. To be more
specific, an insurable interest involves a relationship between the person applying for the
insurance and the subject matter of the insurance, such as a dwelling or a person’s life, so that
there is a reasonable expectation of benefit or advantage to the applicant from the continuation of
the subject matter or an expectation of loss or detriment from its cessation.
6.1.1 Essential Features of Insurable Interest
a) There must be some property rights, interest, life, limbs or potential liability capable of being
insured.
b) Such property, rights, interest etc must be the subject matter of insurance.
c) The insured must stand in a relationship ( legal and financial relationship) with the subject
matter of insurance whereby he benefits from its safety and would be prejudiced by its damage
or loss.
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d) The relationship must be recognized at law e.g. Macaura V. Northern Assurance Company
(1925). Mr. Macaura affected a fire policy on an amount of cut timber on his estate. He later sold
the timber to a one-man company of which he was the only shareholder. A great deal of the
timber was destroyed in a fire and the insurers refused to pay the claim on the basis that Mr.
Macaura had no insurable interest in the assets of the company of which he was principal
shareholder. A company is a separate legal entity from its shareholders and the relationship
between timber and Mr. Macaura, whereby Macaura stood to lose by its destruction – had to be
one recognized or enforceable at law. In this case such a relationship did not exist as Macaura‟s
financial interest in the company as a shareholder was limited to value of his shares and he had
no insurable interest in any of the assets of the company.
6.1.2 Examples of People with Insurable Interest
1. An individual person- An individual person has unlimited insurable interest over his
own life.
2. Spouses- A wife and husband have unlimited insurable interest to the lifes of each other.
3. Real or Absolute owners of property-
4. A partner in business-Has insurable interest over the life of his co-partner up to the
amount of capital invested in the business
A Bailee- A Bailee is a person legally holding the goods of another either for payment or
gratuitously and is legally responsible for property under their care and hence have
insurable interest. E. g A T.V repairer has insurable interest over the property in his
possession so long as the property is lawful
5. An employer- Has insurable interest over the life of the employee and casualty
6. Executors / Administrators and trustees- Have insurable interest over the property in
their care
7. A creditor- A creditor has insurable interest in the life of his debtor.
8. Mortgagees and mortgagors have insurable interest; the purchaser as owner and seller
as creditor.
9. In Liability Insurance -A person has insurable interest to the extent of potential legal
liability he may incur by way of damages and other costs. A person‟s extent of interest in
liability insurance is without limit.
6.1.3 When Insurable Interests Must Exist;
1. In Marine Insurance, insurable interest need only exist at the time of any loss. This is because
of customs of maritime trading where cargo may change ownership while in transit and protects
merchants who may assume interest in cargo during a voyage.
2. In Life assurance – Insurable interest needs to exist when the policy is effected and not
necessarily at the time of claim.
3. For all other Insurances - Insurable interest must be present both at the time of affecting the
policy and when any claim is made.
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6.2 Principle of Utmost Good Faith
A contract of insurance is deemed to be one of the faith or trust and honesty. The parties to the
contract must be truthful and deal in all honesty when affecting an insurance contract. The duty
of full disclosure rests on the underwriters also and they must not withhold information from the
proposer which leads him into a less favorable contract e.g. not to accept an insurance which
they know is un-enforceable at law or they are not registered to underwrite.
Utmost good Faith is a positive duty to voluntarily disclose, accurately and fully all facts,
material to the risk being proposed, whether asked for or not. The principal of utmost good faith
states that the parties to an insurance contract must disclose all MATERIAL FACTS (These are
facts that would influence the judgment of a prudent underwriter either in fixing the premium or
determining whether to accept the risk or not.
6.2.1 Examples of Material Facts
- Full facts relating to the subject matter of insurance e.g. age, sex, occupation etc.
- Previous losses and claims
- Criminal records
- History of insurance E.G Cancellation of policies
- Directors disqualification
- Facts which show that the risk being proposed is greater because of individual, internal
factors than should be expected from its nature or class.
- External factors that make the risk greater than that normally expected- E.g. a house
located next to a cliff
- Facts that would make amount of loss greater than normally expected
- Previous declinature or adverse terms imposed on previous proposals by other insurers.
- Facts restricting subrogation rights due to the insured relieving third parties off liabilities
which they would otherwise have.
- vii) Existence of other non-indemnity policies like life and personal accident.
The underwriter on the hand should act in good faith by
 Not Changing policy terms
 Not Charge higher premiums
 Not Refuse to issue a policy
 Should not withhold information from the proposer which leads him into a less
favorable contract e.g. not to accept an insurance which they know is un-
enforceable at law or they are not registered to underwrite.
The following facts need NOT to be disclosed:-

i) Facts of law.
ii) Facts which the insurer is deemed to know.
iii) Facts which lessen the risk.
iv Facts about which the insurer has been put on enquiry
v) Facts which the insurers survey should have noted.
vi) Facts covered by policy conditions.
ix) Facts (convictions) which are „spent‟ under the rehabilitation of offenders Act 1974.
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Breach of utmost good faith can either be innocent or accidental and deliberate or fraudulent.
There are several remedies for breach of utmost good faith and include:-
i) Avoid the contract by either repudiating the contract abinitio or avoiding liability for an
individual clam.
ii) The damages if it is by concealment or fraudulent
iii) Waive these rights and allow the contract to carry on.
The aggrieved party must exercise the option within a reasonable time of discovery of the
breach. However, for some insurance that are compulsory like third party cover for motor
vehicles, the Road Traffic Act prohibits the insurer from avoiding liability on grounds of breach
of utmost good faith. But the insurer may claim the amount paid from the insured though this
situation is faced with practical differences.
6.3 Principle of Proximate Cause( Causa Proxima)
In insurance contracts, there are three main types of perils that need consideration:-
i) Insured Peril – these are perils that covered by the policy. They are the perils which the parties
intended that protection be given against. They are named in the policy.
ii) Excluded/Excepted Perils –These are a loss caused by perils not covered. These are the perils
that the insurer will specifically state that will not be covered by the policy. E.g earthquakes,
riots and strikes and nuclear explosions
iii) Uninsured Perils- These are the perils which were not in the contemplation of the parties
when creating an agreement. They are neither included nor excluded hence are not written in the
policy. These are the perils not covered by the policy.
It is because of the above that the principle of proximate cause is important. Every loss is the
effect of some cause. Sometimes there is a single cause of loss but frequently there is a chain of
causation or several causes may operate concurrently, and in these circumstances it may require
considerable thought to decide whether the loss is within the scope of the policy or not. The
doctrine covering such deliberations is proximate cause.
Proximate cause means the active, efficient cause that sets in motion a train of events which
brings about a result, without the intervention of any force started and working actively from a
new and independent source. It is not necessarily the first cause nor the last one but the
dominant, efficient or operative cause.
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6.3.1 Rules for the Application of Proximate Cause
i) The risk insured against must actually take place e.g. mere fear of insured peril is not loss by
that peril.
ii) Further damage to the subject matter due to attempts to minimize a loss already taking place is
covered.
iii) Intervention of a new act is without the doctrine e.g. if during a fire onlookers cause damage
to surrounding property then fire is not the cause of the loss.
iv) Last Straw Cases – where the original peril has meant that loss was more or less inevitable,
the original peril will be the proximate cause even though the last straw comes from another
source.
The following case law illustrates this:-
a) Gaskarth V Law Union (1972) – a fire left a wall standing but in a weakened condition.
Several days later, a gale caused the collapse of the wall onto another property. It was held that
fire was not the proximate cause but the gale. The crucial factor was the delay of several days
during which no steps were taken to shore up the weakened wall. The chain had been broken.
b) Roth V South Easthope Farmers Mutual (1918) – Lightening damaged a building and almost
immediately afterwards a storm blew it down. It was held that lightening was the proximate
cause. There was no time to take remedial action and the danger created by the fire was still
operating.
Leyland Shipping V Norwich Union (1916) – Last Straw Cases- A marine policy excluded war
risks. In time of war a ship was badly damaged. It managed to get to a port and repair work was
started but had to be stopped when a storm blew up. The harbor master ordered the ship out of
port in case she sank and blocked the harbor. Outside the harbor she met bad weather which
normally she would have survived, but in this case she sank. It was held the proximate cause of
loss was war risks, the ship was in danger of sinking from the moment it was damaged and as
repairs had not been completed that danger was always present.
6.4 Principle of Indemnity
Is the controlling principle in insurance law. It responds to the question “what is the person to
receive when the insured against event occurs? Indemnity is a mechanism by which insurers
provide financial compensation in an attempt to place the insured in a pecuniary position he was
in before the loss.
Indemnity is related to insurable interest as it is the insureds interest in the subject matter of
insurance that is in fact insured. In the event of a claim, the payment made to an insured cannot
therefore exceed the extent of his interest. In life assurance and personal accident insurance,
there is unlimited interest and thus indemnity is not possible.
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6.4.1 Methods of Providing Indemnity
i) Cash payment – It is the most common method of settlement where a cash payment
representing indemnity to the insured is made. In liability insurance the money is paid directly to
the third party rather than the insured.
ii) Repairs – It is commonly used in motor insurance where garages are authorized to carry out
repair work on damaged vehicles.
iii) Replacement - It is common in glass insurance where windows are replaced on behalf of
insurers by glazing firms. It is also used in motor vehicle insurance where a nearly new car is
destroyed and replaced by a similar model.
iv) Reinstatement – Used in property insurance where an insurer undertakes to restore or rebuild
a building damaged by fire.
6.4.2 Measurement of Indemnity
In property insurance the measure of indemnity in respect of loss of any property is determined
not by its cost but its value at the date of the loss and at the place of the loss. If the value of the
property has increased, the insured is entitled to this subject to the sum insured or average being
applied. For buildings it is the cost of repair or reconstruction less an allowance for betterment
which includes improvements or non-deductions of wear and tear. In liability insurance the
measure of indemnity is the amount of any court award or negotiated out of court settlement plus
costs and expenses thereon.
6.4.3 Factors Limiting the Payment of Indemnity
i) Sum Insured – The limit of an insurer’s liability is the sum insured. The insured cannot
receive more than the sum insured even where indemnity is a higher figure.
Usually the basis of settlement is the sum insured or the market value, whichever is less.
For example: If the sum insured is 300000 but a loss of 350000 occurs, then the insurer
will only compensate the 300000.
ii) Average clause – Where there is under-insurance the insurers are receiving a premium only
for a proportion of the entire value at risk and any settlement will take this into account using the
formula.
Liability of Insurer = Sum Insured x loss
Full value
When average operates to reduce the amount payable, the insured receives less than indemnity.
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Assume the following
Sum Insured= 300000
Market Value= 400000
Cost of Loss= 50000
The policy is subject to an average clause. Calculate the value of indemnity
iii) Excess – An excess is an amount of each and every claim which is not covered by the policy.
An excess is the proportion which the insured meets. Where excess applies to reduce the amount
paid, the insured receives less than indemnity.
For Example
An insured affects a policy on his vehicle whose sum insured is Ksh 300,000. This policy is
subject to an excess of 3% on the sum assured for each and every loss. During the policy period
the vehicle got involved in an accident and the cost of repairs were estimated to be ksh 50000
Calculate the amount of claim paid
Soln.
Excess= Sum insured * Excess
30000* 3%= 9000
50000- 9000= 41000
41000 is the amount claimed
Franchise – A franchise is a fixed amount which is to be paid by the insured in the event of a
claim. But once the amount of franchise is exceeded then insurers pay the whole of the loss.For
Example
An insured affects a policy on his vehicle whose sum insured is Ksh 300,000. This policy is
subject to a franchise of 10% on the sum assured for each and every loss. During the policy
period the vehicle got involved in an accident and the cost of repairs were estimated to be ksh
25000
Calculate the amount of claim paid
300000* 10%= 30000
Claim= 25000
Franchise> Claim
The insured meets the entire cost i.e 25000
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v) Limits – Many policies limit the amount to be paid for certain events. For example NHIF
Limit for Civil servants on dental and optical cover per family is 50,000. This means that even if
the family has dental or optical expenses exceeding the 50000 limit, they can only be
compensated up to 50000.
vi) Deductibles - Deductible is the name given to a very large excess particularly in commercial
insurance.
6.4.4 Extension in the Operations of Indemnity
There are cases where the insured may receive more than indemnity.
i) Reinstatement – An insured can request that his policy be subject to the reinstatement
memorandum where settlement is without deductions of wear, tear and depreciation. The sum
insured is normally high with consequent high premium.
ii) New for Old – Insurer agrees to pay for reinstatement of contents if destroyed within a
specified period without deduction of wear and tear.
iii) Agreed additional costs – Insurers may pay including additional costs like architects and
surveyors fees if agreed. This may mean receipt of more than indemnity.
6.5 Principle of Subrogation
Subrogation is the right of one person to stand in the place of another and avail himself all the
rights and remedies of that other, whether already enforced or not. In the case of Burnand V
Rodocanachi (1882) - It was held that the insurer having indemnified a person was entitled to
receive back from the insured anything he may receive from any other source. Subrogation only
applies where the contract is one of indemnity. Therefore life and personal accident contracts are
not subject to subrogation.
However, also an insurer is not entitled to recover more than he has paid out.
6.5.1 Extent of Subrogation Rights
i. An insurer is not entitled to recover more than be has paid out. Insurers must not
make profit by exercising subrogation rights.
ii. Where the insured retains part of the risks e.g. by an excess or application of average,
he is entitled to an amount equal to that share of the risk out of any money recovered.
Where the insurer makes ex-gratia payment to an insured then the insurer is not
entitled to subrogation rights. This is because ex-gratia payment is not indemnity and
subrogation rights arise only to support the concept of indemnity.
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Salvage: Salvage works closely in support of the principle of subrogation in that whenever, the
insured is fully compensated in a loss, the property that remains becomes a property of the
insurance company. Subrogation and Contribution are Corollaries of Indemnity.
6.7 Principle of Contribution
In a case where someone has a right to recover his loss from two or more insurers with whom he
has affected policies, the principle of indemnity prevents the insured from being more than fully
indemnified by each by way of contribution. Contribution ensures that the insurers will share the
loss as they have all received a premium for the risk. Contribution applies only to contracts of
indemnity. Contribution is the right of an insurer to call upon others similarly but not necessarily
equally liable to the sum insured to share the cost of an indemnity payment.
At common law contribution will only apply where the following are met:-
i) Two or more policies of indemnity exist.
ii) The policies cover the same or common interest
iii) The policies cover the same or common peril giving rise to loss.
iv) The policies cover the same or common subject matter
v) Each policy is liable for loss.
The formula used in contribution is
Contribution= Sum insured with individual offices

X Loss
Total sum insured under all policies
6.8 Principle of Mitigation of Losses
Insurance law requires that the insured has to behave normally as if the property was not insured.
The insured should try to mitigate and minimize the losses. The insurance company on the other
hand should compensate the insured for any losses as a result of trying to minimize the losses.
6.9 Principle of Risk Must Attach
For a contract of insurance the risk must attach, If the subject matter of insurance ceases to exist
(E. g goods are burnt) or the insured ship already arrived safely at the time the policy is effected,
the risk does not attach, and as a consequence, the premium paid can be recovered from the
insures because consideration for the premium has totally failed. Thus, where the risk is never
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run, the consideration fails and therefore the premium is returnable. If the insurers have never
been on the risk, they cannot be said to have earned the premium.

- Differentiate between material and immaterial facts in Insurance

- Discus the principle of Principle of insurable interest
- Explain the circumstances where an insured person may receive less than the value of
indemnity
- Johns car is damaged and the assessors have valued the cost of repairs at ksh 200,000.The car
was completely insured for Ksh 500,000,yet its market value at the time of the accident was
established to be Ksh 500,000,yet its market value at the time of the accident was established
to be Ksh 700,000.The policy is subject to average.
i. If the policy had an excess of 2.5% of the sum assured,what is the insurers net
liability?
ii. If the policy was subject to a franchise of 5% of the sum insured,what is the insurers
net liability
- XYZ Power and lightening company placed a fire policy with three companies because of
the high value of her property which was Ksh 6 billion. The lead underwriter A took 60% of
the share, while B and C were apportioned 30% and 10% respectively. The recommended rate
of premium was 1.75 per Mile. During the period of the policy, one of the fire stations was
destroyed by fire and the loss was estimated to be Ksh 1Million. XYZ Power and Lightning
approached company A for claims settlement because they were the lead underwriters, after
all this was a small claim.
i. Explain the principle that is displayed in this case
ii. Demonstrate how company A will handle the claim
iii. A commercial building has an actual value of Ksh 50 Million and the owner has insured it
for Ksh 30million and an 80% co-insurance clause is present. Calculate the amount that
the owner can receive from the insurer if a loss of Ksh 1 million occurs
[4 Marks]
Dickson, G.C. (1997) Risk Management the Chartered Insurance Institute
Vaughan, E. and Vaughan, T. (2003) Fundamentals of Risk and Insurance 9th Edition, Wiley
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Hall
CHAPTER SEVEN
CLASSES OF INSURANCE
Lecture objectives:
i) Distinguish between Life and Health insurance policies.
ii) Enumerate the various categorization of Life and Health class.
iii) Discuss the different liability insurance policies available in the market.
iv) Discuss the various property insurance policies sold in the Kenyan market.
v) Explain the difference between pensions and annuities.
Insurance offices are split into departments or sections, which deal with types of risks which
have affiliation with each other. Generally insurance companies are categorized into the
following offering the specified products or policies:
Life and Health
Liability Insurance
Property insurance
Transport insurance
Pensions and annuities
7.1 Life Insurance
This is a contract between the policy owner and the insurer, where the insurer agrees to pay a
sum of money upon the occurrence of the insured individual‟s or individual‟s death. It is the risk
pooling plan and economic device through which the risk of premature death is transferred from
the individual to a group In return the policy owner or policy payer agrees to pay a stipulated
amount called a premium at regular intervals or in lump sums (so-called “paid up” insurance).
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A life insurance contract is intended to meet the needs of survivors or beneficiaries, when the
investor dies. From the life insurance contract, the beneficiaries receive a sum of money that far
exceeds the value of the premiums the investor had paid. The beneficiaries, of course, receive
this benefit if the person insured dies during the contract period.
The contract of life insurance is different from other types of insurance in the following respects.
i) The event insurer against is an eventual certainty i.e nobody lives forever.
ii) It is not the possibility of death that is insured against; rather, it‟s the untimely death. The risk
is not whether the insured person is going to die but when.
The risk increases as the individual ages or grows older because chances of death are greater in
later years than in initial years.
iii) There is no possibility of partial loss in life as in the case of property and liability insurance.
Therefore, if a loss occurs under life assurance, the insurer will have to pay the face value of the
policy.
iv) Life assurance is not a contract of indemnity, that is, the position after the loss as before the
loss. This is because it is not possible to place a value on human life.
v) Life assurance does not violet the principle of contribution i.e counts of law have held that
every individual has unlimited interests in their own lives and individuals can assign insurable
interests to any one therefore, if the person taking insurance does so with many insurers all of
them will compensate the next of kin.
Ordinary life assurance, industrial life and group life would all fall under the wider caption of
life and health insurance. Under life and health, there are various types of (assurance) as follows:
a) Term Assurance – It provides for payment of the sum assured on death occurring within a
specified term. If the life assured survives to the end of the term, cover ceases and
nothing is payable by the life office.
b) Decreasing Term Assurance – It is designed to cover the outstanding balance of a debt. It

is common with mortgage institutions like HFCK and Saccos.
c) Convertible Term Assurance - This is synonymous with term assurance but has a clause
which allows the life assured to convert the policy into an endowment or whole life
contract at normal rates, without medical evidence.
d) Family Income benefits – The benefits on death within the term is paid out by
installments every month or quarter as opposed to lump sum.
e) Whole Life Assurance – The sum assured is payable on the death of the assured
whenever it occurs. Premiums are payable throughout life or till retirement but benefits
are payable on death whenever it occurs.
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f) Endowment Assurance – The sum assured is payable in the event of death within a
specified period but if the life assured survives up to the end of the period, the sum
assured will also be paid. For a given level of cover, it has the highest premium because
payment will be at a given date or before if the assured dies, the end of the period is
called the maturity date. The shorter the term of an endowment, the more expensive it
becomes.
g) Group Life Assurance – Employers sometimes arrange special terms for life assurance
for their employees, the sum assured is payable on death of an employee during his term
of service with the employer. The policy is issued to the employer as sponsor.
7.2 Health Insurance
Health insurance combines two risks, namely
i. Loss of income as a result of sickness or disability

ii. Incurring expenses as a result of sickness or illness
This policy covers expenses incurred by the insured as a result of sickness/illness or
accident .The expenses may include and are not limited to
 Hospital expenses
 Surgical expenses
 Regular medical expenses
 Major medical expenses
 Prescriptions
 On site accident expenses
 Evacuation/ Ambulance expenses
 Consultancy expenses
 Diagnostic expenses
The insurer will reimburse or pay for such expenses within a stated limit
7.3 Liability Insurance
This is a cover in case one is sued for unintentional injury of other person’s body reputation or
damage to their property through negligence or carelessness; Liability risks arise from either
intentional or unintentional torts, or invasion of the rights of others( e.g ) Somebody can be sued
for Defamation, Trespass, Nuisance, False imprisonment Negligence etc.
There are types of liability insurance namely:-
7.3.1 Employer’s Liability( WIBA- Work Injury Benefits Act Insurance)
- This arises where an employee is injured by the fault of the employer and the injured employee
can claim compensation or “damages” from the employer. In the past before introduction of this,
an industrial injury was very much a “particular” risk and not responsibility of the employer. The
principle was “volenti non fit injuria” i.e. the employee has concerted to run the risk of injury by
being employed. It was also extremely difficult for an ordinary employee to succeed in any
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claim. When an employer is held legally liable to pay damages to an injured employee he can
claim against his employer’s liability policy which will provide him with the amount paid out.
The cover would include lawyer’s and doctor’s fees. The policy is in respect of injury or death
and not applicable where the property of an employee is damaged. This insurance is compulsory
at law.
7.3.2Public Liability
Is designed to provide compensation for those who have to pay damages and legal costs for
injury or property damage in respect of members of the public.
7.3.3 Products Liability
Where a person is injured by a product he has purchased and can show that the seller or
manufacturer was to blame he can claim for damages.
7.3.4 Professional Indemnity Insurance
- This is liability to other parties arising out of professional negligence e.g. A lawyer may give
advice carelessly that results in a client losing money. Therefore, professional indemnity
insurance would be cover for various professional e.g. Lawyers, Accountants, Doctors, Brokers
etc.
7.3.5 Directors‟ and Officers‟ Liability
Shareholders, creditors, customers and employees can take action against directors as individual
for negligence in operating a company. This recent development has been aided by legislation to
make individuals accountable. The policy therefore will cover defense costs and compensation
for which a director may be liable to pay.
7.4 Property insurance
There are various covers for property depending with the cause or way in which it is damaged:
7.4.1 Fire Insurance –
The basic fire policy provides compensation to the insured person if the property is damaged as a
result of fire, lighting or explosions, where the explosion is brought about by gas or boilers not
used for any industrial purpose.
7.4.2Theft Insurance –
This covers theft which within the meaning of the policy is to include force and violence either
in breaking into or out of the premises of the insured.
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7.4.3 All Risks Insurance
Uncertainly of loss may not only be due to fire or theft, this led to the design of a wider cover
known as all risks. The term all risks is a misnomer as there are a number of risks that are
excluded but it is an improvement on the traditional scope of cover that was available on the
market. The policy can cover expensive items like jeweler, cameras etc. The objective of the
cover being to cover a whole range of accidental loss or damage.
7.4.4 Goods in Transit
It provides compensation, if goods are damaged or lost while in transit, this would cover modes
of transport like road, railway etc. The cover can be affected by the owner of the goods or the
carrier if he is responsible for them while in his custody.
7.4.5 Contractors All Risks
When new buildings or civil engineering projects are being constructed, a great deal of money is
invested before the work is finished. There is a risk that the building or bridge may sustain severe
damage – prolonging construction time and delaying eventual completion date. This may entail
the contractor to start building again or repair the damages. The extra cost cannot be added to the
eventual charge the contractor will make to the owner. The intention of the policy is to provide
compensation to the contractor for damage to construction works from a wide range of perils.
7.4.6 Money Insurance
The policy provides compensation to the insured in the event of money being stolen either from
the business, his home or while it is being carried to or from bank.
7.4.7 Homeowners Policies
-Most homeowner’s policies in Kenya include the following common coverage:
 Dwelling (coverage A) pays if your house is damaged or destroyed by a covered loss.

 Other structures(coverage B) pays if structures not attached to your house, such as
detached garages, storage sheds and fences are damaged or destroyed by a covered loss.
 Personal property (coverage C) pays if the items in your house (such as furniture,
clothing, and appliances) are damaged, stolen, or destroyed by a covered loss.
 Loss of Use (coverage D) pays your additional living expenses( costs over the normal
amount of housing , food, and other essential expenses ) if you must temporarily move
because damage to your house from a covered loss renders it uninhabitable.
 Personal liability (coverage E) pays to defend you in court against certain lawsuits and
provides coverage if you are found legally responsible for someone else injury or
property damage.
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 Medical payments to others (coverage F) pay the medical bills of people hurt on your
property. It might also pay for some injuries that happen away from your home, such as
your dog biting someone at the park.
7.5 Transport Insurance
The policies here cover marine, aviation and road risks.
7.5.1 Marine Policies
Marine Policies relate to three areas of risk i.e. hull, cargo and freight. Freight is the sum paid for
transporting goods or for hire of a ship. When goods are lost or destroyed by marine perils then
freight or part of it is lost – thus need for cover. The risks covered in a marine policy are
generally referred to as “perils of the sea” and includes fire, theft, collision etc.
i) The main types of marine policies are:-
a) Time Policy – Which is for a fixed period e.g. 12 months.
b) Voyage Policy – which is operative for the period of the voyage - for cargo it is from ware
house to warehouse.
c) Mixed Policy – Which covers the subject matter for the voyage and a period of time thereafter
e.g. while in port.
d) Building Risk Policy – It covers construction of marine vessels.
e) Floating Policy - It provides the policy holder with a large reserve of for cargo. A large initial
sum is granted and each time shipments are sent, the insured declares the value which is
deducted from the outstanding sum insured.
f) Small Craft – It covers the leisure use small boats. It is comprehensive in style covering
liability insurance.
7.5.1 Aviation Insurance
Most policies are issued on an “all risks basis”, subject to certain restrictions. In most cases a
comprehensive policy is issued covering the aircraft itself (the hull), the liabilities to passengers
and the liabilities to others.
7.5.2 Motor Insurance
Motor Insurance – The minimum requirement by law is to provide insurance in respect of a

legal liability to pay damages arising out of injury caused to any person. Motor Insurance polices
can either be:
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a) Third party only – It provides cover in respect of liability incurred through death or injury to
a third party or damage to the third party property. This is according to the Road Traffic Act.
b) Third party, fire and theft - It provides cover as above but in addition cover damage or loss
to the vehicle from fire or theft.
c) Comprehensive policy – It provides cover as above but in addition cover accidental loss or
damage to the vehicle itself.
7.6 Pensions and Annuities
7.6.1 Pensions
The prime objective is to ensure that pension is available on retirement. Most of the pension
schemes are arranged by employers for the benefit of their employees. In association with
pensions, policies are normally effected covering death in service for those employees who do
not live up to the retirement age. This is normally in the form of group life assurance. It is also
possible for individuals to purchase personal pension plans. The occupational pension plan may
be on:
(i) Final Salary or defined benefit basis or
(ii) Money purchase or defined contributions
7.6.2 Annuities
An annuity is a contract that provides periodic payments for specified time periods e.g. a number
of years of the life of an individual. The payment may begin at a stated date or may be contingent
(unknown date). A person whose life governs the duration of payment is called an annuitant.
Annuities are the reverse of life assurance contracts. Whereas life assurance is a method of
scientifically accumulating an estate of funds, annuities are devices for scientifically liquidating
that estate of funds. The basic function of life annuities is that of liquidating a principal sum
regardless of how it was accumulated. It is intended to provide protection against the risk of
outliving ones income from savings.
Types of Annuities
1) Deferred
This refers to an annuity where benefits are deferred until some future date / time. The particular
time when benefits are to begin may or may not be specified ahead of time.
2) Temporary
This type is rarely used, it pays benefits until the expiration of a specified period of years or until
the annuitant dies, whichever comes first.
3) Joint and Survivor
An annuity may be issued on more than one life. It provides that annuity payments will continue
as long as either annuitant is alive. The periodic payment may be constant during the entire
period or it may be arranged so that the amount of each payment is reduced upon the death of the
first annuitant. The size of the survivor’s benefit (payable when only one of the two persons is
still alive) is often stated as a % of the joint benefit (payable while both annuitants are living)
using the terminology joint and x % survivor annuity. Thus a joint and 100% survivor annuity
would pay the same benefits regardless of whether one or two annuitants were still alive. But a
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joint and 50 % survivor annuity will pay the survivor only one half of the joint benefit. Age is an
important factor as J & S annuities are more expensive at younger ages.
4) Fixed-Annuity that has a benefit expressed in terms of a stated dollar amount based on a
guaranteed rate of return.
Immediate – It starts to make the periodic payments immediately after purchase.
5) Certain – The periodic payments are made for a certain period irrespective of death.
6) Guaranteed - The annuity is made for a guaranteed period or until death whichever is later.
Major differences between life insurance and annuities;
i) While an annuity contract is intended to support the investor‟s future income requirements, the
life insurance meets the financial needs of the beneficiaries immediately after the occurrence of
an insured peril.
ii) While the annuity pays back the total value of the investment made plus the gains earned on
it, the life insurance investment returns an amount that may be multiple times larger than the
premiums paid.
iii) Life insurance is paid upon death or maturity and in lump sum while annuity is paid in
instalments.
iv) Life insurance has terms and conditions to be met while annuity matures at expiry of the
stated period.
v) Annuity can be deferred while life insurance is upon expiry of the stated period.
vi) In life insurance penalties are charged if funds are accessed before maturity while in annuity
no penalties are charged.
- Explain how aircraft insurance coverage resembles marine insurance coverage
- Explain the Work Injury Benefits Act insurance (WIBA)
vii)
- Life insurance
Explain are sold
the automobile but not
insurance purchased.
covers available in Kenya
- Write brief notes on the following forms of insurance
i. Annuities
ii. Money Insurance
7.7 Self Liability
iii. Insurance
Test Questions
iv. Property insurance
v. Endowment insurance
- Explain Various property insurance covers being offered in Kenya today
- Discuss the various insurance Coverages sold under home owners policy in Kenya
- Private insurance provides numerous coverage that can be used to meet specific loss situations. For each of the
following, identify and explain a private insurance coverage that would provide the desired protection.
i. Emily, age 28, is a single parent with two dependant children. She wants to be certain that funds are available for her
children’s education if she dies pre-maturely.
ii. Danielle, age 18, recently obtained her driver’s license. Her parents want to make sure they are protected if Danielle
negligently injures another motorist while driving
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iii. Jacob, age 30, is married with two dependants. He wants his income to continue if he becomes totally disabled and unable
to work.
- Discuss how the contract of life insurance is different from other classes of insurance.
- Discuss the reasons for pension provisions in Kenya.
Hall
CHAPTER EIGHT
INSURANCE DOCUMENTATION
Lecture objectives:
i) Explain the use of a proposal form and its content in aiding the insurance business.
ii) Discuss the main components of a policy document normally used by the insurers.
iii) Discuss factors that can determine the amount of premium one pays in an insurance policy
and document the claims procedure used by most insurance claims departments
Refers to the various documents used by insurers in the insurance practice
They include
- Proposal Forms
- Policy Document
- Claim Documents
- Premium reciept
- Certificate of Insurance
- Cover note
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8.1 Proposal Forms
A proposal form is the mechanism by which the insurer receives information about risks to be
insured. It is completed by the proposer and submitted to the insurer for most classes of
insurance. However, there are classes of insurance where the proposal form is not necessary.
This is particularly so for corporate fire or marine insurance. The details for fire are so complex
to be confined to a proposal form. In these cases, insurers use their own risk surveyors to visit the
premises to discuss the risk with the proposer. Every proposal has a declaration that the proposer
confirms that the information which has been supplied is true to the best of the proposers
knowledge and belief.
- When the proposer fills a proposal form and submits it to the insurance company
accompanied by a premium it becomes and offer.
- When the proposer fills a proposal form and submits it to the insurance company without
the premium it does not constitute a legal offer but an invitation to treat.
- When after delivery of the proposal form plus a premium and the insurer acknowledges
receipt of money it becomes formal acceptance
8.1.1 Parts of a Proposal Form
1. Name-Name of proposer is very important for identification.
2. Address-Address should be accurately given because of several reasons, such as, identity and
communication, and sometimes this is important for rating purpose, e, g., motor, burglary etc.
3. Occupation-Information as to occupation is particularly important in case of life insurance,

personal accident insurance and liability insurance as this will influence the rate or decision of an
underwriter.
4. Subject-matter-This is the subject-matter of insurance and, therefore, should be properly

described so that correct insertion can be made on the policy.
5. Sum-insured-The amount for which insurance cover is required should be adequately

mentioned. This is the limit of the insurer’s liability. It must represent the actual value of the
property or the subject-matter of insurance.
6. Claims History-This has an influence on underwriter’s decision and must, therefore, be

truthfully answered. Details of all previous related losses, whether insured or not, must be
correctly given.
7. Other Insurances-Information as to other insurances also enables the insurer to make necessary
queries with other insurers about the proposer.
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8. Declinature-The insurer would like to know whether any insurance of this proposer was
previously declined by any other insurers.
9. Declaration-The answers given in the proposal form are true and nothing has been concealed
or misrepresented.
8.1.2 Functions of a Proposal Form
-To elicit information: They provide underwriters with the information they need to decide
whether or not to accept the proposal and, if so, at what price and on what terms.
-To make a legal offer: A proposal form often constitutes a legal offer by the proposer, although
offers can also be made orally.
-To elicit a quotation: Sometimes a proposal form is filled in as a request to the insurers for a
quotation on price and terms. The insurer’s quotation is then the legal offer.
To describe the cover available: Many proposal forms or prospectuses summarise the cover
obtainable under the insurance contract.
-As a form of advertising: Proposal forms may also advertise other products available from the
insurer.
-To establish a warranty: In some cases, the wording and declaration in a proposal form often
warrants the truth of the answers thereon. It is to be noted, however, that this practice has now
been ameliorated in view of consumer protection
8.2 Policy Document
Once a proposer has completed a proposal, submitted it to an insurer and is accepted, then there
is a contract of insurance. A contract of insurance is subject to all laws of contract and it exists
whether policy is issued or not. The policy is only evidence of the contract. Components of the
policy document are:
i) Heading – It includes the name of the insurer, address and logo.
ii) Preamble – This is the wording at the beginning of each of the policies. It covers the
following aspects:-
a) The proposal is stated as being the basis of the contract and incorporated in it.
b) It also states that premium has been paid or agreement that the insured will pay
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c) It states that the insurer will provide cover detailed in the policy subject to the terms and
conditions.
iii) Signature – Under the preamble or close to it is the signature of an authorized official of the
insurer.
iv) Operative Clause – It is the part that outlines the actual cover provided. It begins with “The
company will…….” And then states what the company promises.
v) Exceptions or Exclusions – This is the inevitable consequence of having a scheduled policy

e.g. war and nuclear risks.
vi) Conditions – they include a condition that the insured will comply with all terms of the policy
and procedure in the event of a claim etc.
vii) Policy Schedule - This is where the policy is made personal to the insured. The details
specified include; name of the insured, address, nature of business, period of insurance,
premiums, sum insured and policy number among others.
8.3 A Certificate of Insurance
Is a document used to provide information on specific insurance coverage.

The certificate provides verification of the insurance and usually contains information on types
and limits of coverage, insurance company, policy number, named insured, and the policies'
effective periods.
8.4 A Premium Receipt
A receipt issued to the policyholder by the insurer or the insurer's agent which proves that
payment has been received.
- Explain five sections of a typical insurance policy document used in the Kenyan market
- Explain the functions and parts of a proposal form
- Explain what is a Certicate of insurance
Page 57 of 69
Hall
CHAPTER NINE
INSURANCE UNDEWRITTING AND PRACTICE
Lecture objectives:
i) Explain the underwriting practice in Kenya
ii) Discus the claims practice in Kenya
9.1 Introduction
The survival of the insurance industry depends on effective and sound underwriting and claims
procedures. The two procedures come at the opposite sides of the insurance mechanism.
Underwriting creates insurers obligations and on the other hand claims fulfills these obligations.
9.2 Definition of Underwriting
Underwriting is the process of risk selection, risk classification and rating of risks. In common
circumstances, underwriting begins with securing information using a proposal form. In order for
insurers to rate risks properly, they have to secure information from the proposer through a
proposal form.
9.2.1 Sources of Underwriting Information
Other sources of underwriting information are
- Field underwriters i.e. Agents and - Information Bureaus

Brokers - Private investigators
- Internal Valuation i.e. Desk - Direct visits and investigation
underwriting - Surveys
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- Inspection reports - Doctors and other professionals
- Banks - Local administrator
- - Law enforcement agencies
- Creditors - Fire department
- Employers
9.2.2 Reasons for Underwritting
To avoid adverse selection
To scrutinize the proposal form thoroughly
To determine insurable interests
To determine premiums on a scientific basis
9.2.3 Classification of Risks for Underwriting Purposes
i. Proffered/ Superstadard- Those risks that have a very low probability of happening and
are Proffered by insurers. The insurer offers less than a standard rate. For example a market
which has never made any claim for some time
ii. Standard Risks- Standard risks have an average probability of happening and are charged
normal standard premiums without any surcharges or conditions restricted
iii. Substandard risks- This is a risk that attracts surcharges or certain conditions imposed to
coverage. It is not rejected by insurers, but will be charged a higher than standard rate premium
iv. Uninsurable- This is a risk that will be rejected by insurers for not meeting underwriting
standards set by the insurer.
9.3 Claims Handling
Claim is a demand by the insured to make good the promise made, it is a demand for payment by
the insured after happening of a loss.
9.3.1 Requirements before Making a Claim
-The loss must have occurred
- The loss must have occurred due to an insured event
- The insurer must be informed
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- Proof of loss must be provided- in life insurance a death certificate and in general insurance a
police abstract
- The claim submitted must be a legal claim
- The size of loss must be determined
9.3.2Insureds Responsibilities Following a Loss
1. It is the insured responsibility to notify the local police

2. The insured should arrange for the property to be protected by hiring security personnel
to prevent further damage or loss
3. The agent, broker or the insurer should be contacted as soon as possible
4. The insurer should be provided with the time and place of loss, a description of events
prior to the accident, names and addresses of any injured persons and witnesses
5. If sued, the insured must forward all documents to the insurer
6. The insured must cooperate with the insurer in making settlements, in the conduct of suits
and in the enforcement of any right of subrogation made by the insurer
7. The insured must attend hearings, trials and give assistance in securing and presenting
evidence and help the company in seeing that witnesses appear whenever they are
scheduled
8. The insured cannot, except at his own expense, make any voluntary payments, assume
any obligations or incur any costs other than necessary first aid to others at the time of
loss
9. The insured must produce all pertinent records and invoices and file a sworn proof of
loss statement usually within 60-90 days from the time of loss
10. The damaged property must be made available for inspection by the insurer and the
insured must cooperate in seeing that the transfer to any salvage including the insured
property if it is a total loss, is made to the insurer or their nominee.
9.3.3 Claims Process
The claims process is the step by step procedure on how a claim is settled or compensated and it
involves the following steps.
1) Receive Notification - The first thing the insured is expected to do is to notify the
insurer as soon as possible the occurrence of a loss.
The policy will have stipulated the manner in which the loss should be reported.
Failure to follow the procedure may lead to the insurer refusing to pay the claim.
In most general insurance, the notification must be within 48 hours.
2) Established Loss - The insurer cannot just pay a claim because it has been notified.
Proof must be furnished of such a loss and the claim must be legal.
The insurer will accomplish this by looking at various reports such as investigation such
as investigation and surfing reports, police abstracts and statements made by the insured
also reports from doctors or fore departments.
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3) Interpretation of Various (Conditions)- This will help to interpret the extent of
liability and or whether the claim has been made in an authorized manner or whether the
insured violated any of the clauses or conditions.
Some of the clauses include; Notification, premium payment, contribution etc.
4) Established Value of Loss - The value of the loss will depend on whether the loss is
partial or total.
In partial loss it may require that an accessor establishes the value of the loss.
In total loss the insured need only to look at the sums insured or try to establish the
market value.
5) Establish the Beneficiaries Under The Contract - It is important that the claims
department establishes who the beneficiaries under the contract are; sometimes we may
have more than one interest in the subject matter of insurance which need to be
recognized e.g. when a property is purchased through a loan.
There will be an insurable interest of a financing institution and also the insured or owner
of the property.
6) Replacement (Payment Initiation) - In initiating payments the claims department
must have established that the claim is legal and that the relevant legal issues have been
sorted out. Sufficient funds must also be available before payment is made.
7) Fall up on subrogation and contribution cases - The principles of subrogation and
contribution are in fall at this stage. If a third party was responsible for the claim/ loss
then the insurers will step in the shoes of the insured and recover from the third party
who caused the loss. If there were under insurers covering the same subject matter must
also be called upon to share the cost of the loss in the same way the risk was shared. If
there was reinsurance at this stage , the insurers will initiate recoveries.
9.4 Self Test Questions
- You have been appointed as a consultant to give a presentation on effective underwriting of large
non-life insurance products for a company based in Kenya. Demonstrate how a prudent underwriter
can classify risks for selection.
- Explain the main requirements that must be met before making an insurance claim in Kenya
Suggestion for Further Reading
Hall
Page 61 of 69
CHAPTER TEN
INSURANCE MARKET PLACE
Lecture objectives:
i) Explain the various players in the insurance industr
The insurance market is not a physical location but it is a system where sellers and buyers
interact in exchange of goods and services i.e. insurance products. This means that the buyers of
insurance are able to transact business with the sellers of insurance. Certain contracts can be
arranged wherever required by phones, emails, meetings etc. The players in the insurance market
include buyers, intermediaries, sellers who can lead insurance companies and reinsurance
compani
10.1 Sellers of Insurance
Sellers of insurance can be captive can be captive limited liability companies with shareholders
etc. classified in various ways.
Page 62 of 69
Classification of insurers
10.1.1 Specialist Companies
This are companies which transact business into one class only.-For instance a company that
may offer marine insurance only, fire insurance only, Motor insurance only . In Kenya , direct
line insurance company almost meet this classification.
10.1.2 Life and General Insurance Company
– Life insurance companies are those companies that under write/ write only life Insurance
business. An example of such in Kenya is whole mutual insurance company, pan African life
company CFC Life. General insurance only transact general business or short term or non-life
classes of business like property insurance, liability insurance, motor insurance etc.
Examples of such companies include First assurance, heritage.
10.1.3 Composite
– these are companies that underwrite both general and life business. Majority of companies in
Kenya fall under this category but because of the legal requirement they operate as two separate
companies under the leadership of 2MDS.
1.0.1.4 Proprietary Companies –
These are companies owned by shareholders who appoints directors to run business on their
behalf. Profits if any belongs to the shareholders example CIC insurance, heritage, marison First
Assurance.
10.1.5 State Owned Companies
The state owned companies are those ones owned by the government and the government
appoints directors to run business on their behalf.
They are started with an objective of handling government businesses but later compete with
other companies. There are no such companies in Kenya.
10.1.6 Captive Companies
They are subsidiaries formed by current companies to underwrite some of their insurable risks.
In Kenya Pacis insurance is a captive company which was started to transact or handle the
catholic business.
Page 63 of 69
10.2 Reinsurance Companies
These companies can also be sellers of insurance. They underwrite insurance business from
insurance companies. I.e. they sell their insurance to insurance companies. Reinsurance is
insurance of insurer’s i.e. An example in Kenya is Kenya RE, Africa Re and the reinsurance
corporation. Reinsurance is a contract whereby the reinsurers indemnify the reinsured.
Once insurers have received or underwritten original risk from the insured they transfer parts of
the risk to another insurance company or a professional reinsurer and this is referred to as
Reinsurance- The process of transferring the risk by the insurer to another insurance company
or a professional reinsurer can be referred to as Ceding.
There are two main forms of reinsurance namely facultative and treaty. For facultative, each risk
is offered to the reinsurer by the direct office and the reinsurer assesses it and decides whether to
accept or not to accept. Treaty is where there is an agreement to the effect that all risks within
certain parameters will be offered (ceded) to the reinsures. The reinsure cannot decline the risk
and the direct office cannot select which risk offering and which ones to retain.
The methods of provision of treaty reinsurance can either be by proportional treaties or non-
proportional treaties. The arrangements under proportional treaties include:
a) Quota share treaty where a fixed proportion of every risk defined in the treaty is reinsured e.g.
reinsures 80% of each and every risk.
b) Surplus treaty - The direct office decides how much to retain on each risk (retention) e.g.
Ksh.20, 000. The direct office then arranges reinsurance measured in lines. A line being equal to
the retention. Reinsurance will be multiples of this line e.g. a risk of Ksh.500, 000 is placed with
an insurer whose retention is Ksh.20, 000. There are two surplus treaties, a ten line first surplus
and a ten line second surplus. The reinsurance arrangement would be as follows:-
Retention - 20,000
First surplus treaty (10 x 20,000) - 200,000
Second surplus treaty (10 x 20,000) - 200,000
TOTAL 420,000
Page 64 of 69
Facultative reinsurance 80,000
TOTAL RISK VALUE 500,000
The arrangement under non-proportional treaties include; Excess of loss and stop loss
reinsurance.
10.3 Buyers of Insurance
Buyers of insurance comprise of individuals and organizations.
Individuals buy personal insurances like life insurance, domestic package, personal accident, etc.
Organizations also form the largest position of insurance buyers.
This can be private organizations like companies, institutions, government agencies, parastatals,
local authorities etc.
Counting government – they usually buy commercial lives of insurances like fire, burglary , all
risks insurance, machinery breakdown etc.
10.4 Intermediaries
Insurance products may be bought directly or through intermediaries. The main intermediaries
operating in the Kenyan market are insurance agents, brokers and banc assurance, Consultants
and Aggregators.
10.4.1 Agent
An agent is a person who acts on behalf of another referred to as a principal. The requirement
for one to be an agent in Kenya is to sit for a COP examination and be authorized by an
insurance company after which will be required to obtain a license from IRA. The insurer
represented by an agent issues a certificate by the insurance. A fee of sh 1000 is paid for a
license to operate and this is annual. An agent is remunerated by way of commission. An agent
cans either exclusively (tied) or independent. An exclusive agent represent only one insurance
company while an independent agent can represent more than one company but their names must
be endorsed in his/her license. The actions of an agent can bind the principal
10.4.2 Insurance Broker
He is a professional who specializes in the transaction of insurance business. Because he is a
professional, he is required to obtain a professional indemnity policy as a requirement to be
licensed. A broker represents a client and therefore his actions will not buy the insurer. A
broker is required to deposit or obtain a bank guarantee of 3 million deposited with central bank
of Kenya to be allowed to operate. Administrative fee for a broker is 10,000.
10.4.3 Bancassurance
Bancassurance is a new trend of new business or marketing of insurance product in Kenya and
other parts of the world through the banks using bank cards usually majoring bank customers.
The advantage of this distribution channel is that it facilitate premium payment by the insurer i.e.
it encourages cash and carry. The bank pay premium upfront on behalf of the insured and then
continue to deduct premium in a form of installments which also attracts interests to the principal
amount paid on behalf of the insured. The requirement to do banc assurance payment as a
Page 65 of 69
channel of distribution as the requirement i.e. the principal officer of banc assurance must obtain
a COP bank certificate. The license fee is 10,000 paid annually to IRA. They can also represent
more than one insurance company but whose names must appear in the license.
They are remunerated by way of commission
10.4.4 Insurance Aggregator
This is a website portal or search utility to enable a client to gain several quotes via an electronic
e-quote form. The Insurance Aggregator concludes agreements with a number of Insurers to
provide a comparative quote based on pre-determined list of specified needs as disclosed by
potential clients.
The Insurance Aggregator develops the “quotation portal/ search utility”, markets this medium
and agrees with the participating insurers to be paid a referral fee for policy contacts concluded
based on the client information provided to the insurers by the aggregator.
Internationally there has been a significant increase in the amount of insurance contracts
concluded via the internet. The aggregators are developed with this in mind and are marketed as
an “ultimate online one-stop insurance shop, giving consumers instant and easy access to a range
of insurance solutions, tailored specifically to their insurance profile.”
- Diffentiate between an insurance agent and a broker

- Analyze the reinsurance sector in Kenya outlining its significance to the national
economy.
- Discuss the concept insurance intermediary. With help of relevant examples, discuss
the insurance intermediaries promoting insurance products in Kenya.
- Discuss the competitive challenges associated with the marketing of insurance
services in Kenya.
Hall
Page 66 of 69
CHAPTER 11
REGULATION AND SUPERVISION OF INSURANCE INDUSTRY
Lecture objectives:
i) Explain the reosons and ways of insurance regulation in Kenya
The regulation and supervision of the insurance industry is done by IRA. IRA stands for
Insurance Regulatory Authority which is an autonomous or independent body created by the
government through the act of parliament. It is under the ministry of finance and its operations
are financed by a levy on insurance premium. IRA has a mandate to regulate, supervise and
develop the insurance industry in Kenya. It is governed by a Board of Directors who are charged
with the responsibility of running of the organizations.
11.1 Functions of IRA
The functions of IRA include the following;
1. Ensure effective regulation, supervision and development of insurance in Kenya.

2. They issue license to qualified persons who can be individual ( Natural persons) and
artificial person.
3. They protect the interest of insurance policy holder and insurance beneficiaries by
ensuring that claims are paid promptly.
4. They promote the development of insurance sector in Kenya. This is done through
Education to the public and synthertiction in creating a positive image.
5. They are also encouraging other alternatives channels of distribution like churches,
supermarkets, motor dealers – Enhancing insurance penetrations.
6. They improve efficiency in adding complains against members of insurance industry by
the insuring public.
7. They investigate and prosecute insurance fraud which in turn improves the underwriting
profits of insurance companies.
8. This has got an effect of promoting investments and consequently improving the
economy.
Page 67 of 69
IRA can do all this by ensuring compliance with the provisions on the insurance Act cap 487 of
laws of Kenya. The IRA also ensures that all members of insurance industry conduct their
business ethically and in accordance with the provisions of the insurance Act. IRA also approves
all insurance products (policies) before they are launched for sale by insurance companies.
The insurers come up with new products file the same with IRA for approval.
11.2 Reasons Why IRA Supervises the Insurance Industry and Regulate It
Insurance is a business of trust -Insurance involves taking money from members of the public
who eventually become policy holders. In return for a promise or payment on the occurrence of
some future events. If there was no mechanisms in place to check this kind of system the some
fraudsters might collect premiums and divert them without bothering to honor their promises.
Need to maintain financial stability -As a result to maintain the liquidity of the organization,
the insurance company needs to be regulated.
Fair treatment of customers-IRA ensures that insurance related complains are well addressed.
It also regulates the insurance industry so that clients or customers are fairly treated.
This is done through the customer care or protection department where policy holders and others
who might be dissatisfied the way claims are handled can forward their complains.
Competence- Unlike physical products, insurance is an intangible product because it only offers
a promise or payment in exchange of a premium.
The governments objective is to ensure that those who are employed by members of insurance
industry are competent and with a high level of integrity such that they are able to fulfill the
promises made.
- Discus five ways how the insurance regulatory Authority regulates and supervises the insurance industry in Kenya
- Discus the functions of the IRA
Page 68 of 69
Hall
Page 69 of 69

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BUST 321-Risk Management and Insurance

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COURSE OUTLINE

BUST321: RISK MANAGEMENT AND INSURANCE

LECTURER: Andrew T. Muguna

CELL PHONE NO: 0721407360

 Definition and significance of Insurance

 Life and Health Insurance

7. Risk management strategies

8. Regulation of insurance Industry

 Functions of Insurance Regulatory Authority

Assignments & CATs 30%

Final Examination 70%

CHAPTER ONE- INTRODUCTION AND OVERVIEW OF RISK...........................................10

1.2 Definition of Risk.................................................................................................................10

1.3 Characteristics of Risk-........................................................................................................11

1.4 Self – Test Questions...........................................................................................................11

1.5 Suggestion for Further Reading...........................................................................................12

CHAPTER TWO- THE CONCEPT OF RISK........................................................................12

2.1 Components of Risk/ Other Terms Related to Risk............................................................12

2.1.2 Measurement of Risk and the Heinrich Triangle.........................................................13

2.1.3 Peril and Hazard (Causes of Risks)..............................................................................14

2.2 The Burden of Risk/ Negative Aspects of risk....................................................................15

2.3 Utility of Risk/ Positive Aspects of Risk............................................................................15

2.4 Self-Test Questions..............................................................................................................16

2.4 Suggestion for Further Reading..........................................................................................16

3.1 Classification of Risk...........................................................................................................17

3.1.1 Static and Dynamic Risks..............................................................................................17

3.1.2 Financial and Non-Financial Risks-.............................................................................18

3.1.3 Subjective and Objective Risks....................................................................................18

3.1.4 Personal and Business Risks........................................................................................18

3.1.5 Fundamental and Particular Risks.................................................................................18

3.1.6 Operational Risk and Strategic Risks...........................................................................19

3.1.7 Pure and Speculative Risks..........................................................................................19

3.2 Types of Risks.....................................................................................................................21

3.3 Self-Test Questions..............................................................................................................23

3.5 Suggestion for Further Reading...........................................................................................23

CHAPTER FOUR -INTRODUCTION TO RISK MANAGEMENT STRATEGIES..........24

4.1 Risk Management Strategies...............................................................................................24

4.1.1 Risk Control-.................................................................................................................24

4.1.2 Risk Financing...............................................................................................................25

4.1.3 Risk Transfer.................................................................................................................26

4.1.4 Risk Management Matrix for One Risk........................................................................27

4.1.4 Self-Test Questions.......................................................................................................27

4.2 Suggestion for Further Reading..........................................................................................28

CHAPTER FIVE: INTRODUCTION TO INSURANCE.......................................................28

5.1 Functional Definition of Insurance......................................................................................28

5.2 Contractual Definition of Insurance.....................................................................................28

5.4 Historical Development of Insurance..................................................................................29

5.5 Unique Characteristics of an Insurance Contract.................................................................30

5.6 Requisite of Insurability (Characteristics of Insurable Risks).............................................31

5.7 Significance of Insurance.....................................................................................................32

5.7.1 Individual point of View...............................................................................................32

5.7.2 Business point of view..................................................................................................33

5.7.3 Social Point of View......................................................................................................34

5.8 Functions of Insurance.........................................................................................................34

5.8 Scope and Limitation of Insurance......................................................................................35

5.9 Insurance, Assurance and Wagering...................................................................................35

5.10 Self-Test Questions.........................................................................................................36

5.11 Suggestion for Further Reading........................................................................................36

6.1 Principle of Insurable Interest..............................................................................................37

6.1.1 Essential Features of Insurable Interest.........................................................................37

6.1.2 Examples of People with Insurable Interest..................................................................38

6.1.3 When Insurable Interests Must Exist;...........................................................................39

6.2 Principle of Utmost Good Faith...........................................................................................39