FEDERAL UNIVERSITY DUTSIN-MA,

KATSINA STATE

FACULTY OF MANAGEMENT SCIENCE

DEPARTMENT BUSINESS MANAGEMENT

SUBMIT TO;- Dr AHMAD ABUBAKAR

COURSE CODE: BSM 341

COURSE TITLE: Business risk management

Daniel Ayoola
MAN/2020/14169

QUESTION
1. INSURANCE.
Introduction

What is insurance

An insurance is a legal agreement between an insurer (insurance company)

and an insured (individual), in which an insured receives financial protection
from an insurer for the losses he may suffer under specific circumstances.

A financial risk management tool in which the insured transfers a risk of

potential financial loss to the insurance company that mitigates it in exchange
for monetary compensation known as the premium.

Insurance policies, a contract between the policyholder and the insurance

company, are of different types depending on the risk they mitigate. Broad
categories include life, health, motor, travel, home, rural, commercial and
business insurance.

Principles of Insurance

In insurance, there are 7 basic principles that should be upheld, ie Insurable

interest, Utmost good faith, proximate cause, indemnity, subrogation,
contribution and loss of minimization.

1. Principle of Utmost Good Faith

This is a primary principle of insurance. According to this principle, you have

to disclose all the information that is related to the risk, to the insurance
company truthfully.You must not hide any facts that can have an effect on the
policy from the insurer. If some fact is disclosed later on, then your policy can
be cancelled. On the other hand, the insurer must also disclose all the features
of a life insurance policy.
2. Principle of Insurable Interest

According to this principle, you must have an insurable interest in the life that
is insured. That is, you will suffer financially if the insured dies. You cannot
buy a life insurance policy for a person on whom you have no insurable
interest.

3. Principle of Proximate Cause

While calculating the claim for a loss, the proximate cause, i.e., the cause
which is the closest and the main reason for a loss should be
considered.Though it is a vital factor in all types of insurance, this principle is
not used in Life insurance.

4. Principle of Subrogation

This principle comes into play when a loss has occurred due to some other
person/party and not the insured. In such a case, the insurance company has a
legal right to reach that party for recovery.

5. Principle of Indemnity

The principle of indemnity states that the insurance will only cover you for the
loss that has happened. The insurer will thoroughly inspect and calculate the
losses. The main motive of this principle is to put you in the same position
financially as you were before the loss. This principle, however, does not apply
to life insurance and critical health policies.

6. Principle of Contribution

According to the principle of contribution, if you have taken insurance from

more than one insurer, both insurers will share the loss in the proportion of
their respective coverage.If one insurance company has paid in full, it has the
right to approach other insurance companies to receive a proportionate
amount.

7. Principle of Loss Minimisation

You must take all the necessary steps to limit the loss when it happens. You
must take all the necessary precautions to prevent the loss even after
purchasing the insurance. This is the principle of loss minimization.

Benefits Of Insurance

It is a fact that Insurance penetration in Nigeria is quite low — it is between

0.3 to 0.4 percent compared with South Africa’s and Kenya’s 16.9 & 2.9
percent respectively. This low penetration implies that many Nigerians carry
a lot of burden transferable to the insurer.No one looks forward to losses but
losses occur and we have no control over many unfortunate incidents. Hence,
it is only wise to get covered when life comes forth with its negatives.

Insurance Covers Losses: Life is filled with uncertainties, hence when the
worse happens, Insurance comes forth to cover losses insulating you against
the shocks of losses.

Financial Stability: Relevant insurance policies guarantee financial stability

for a policyholder — monies that could have been expended by a policyholder
due to loss is taken care of by the insurer.

Provision of Economic Protection: It protects you against unexpected losses

that can affect your finances.
 Maintains Standard of Living: Insurance gives you a level of protection that
ensures you maintain your standard of living.

Grants/Loan: The insurance policy can be used to apply for loan as a security

Protects Against Tragedy: Events such as flood and fire caused by lightning
which are not caused by humans can also be protected with insurance.

Features of Insurance Coverage

Insurance coverage has the below mentioned salient features:

It is a kind of risk management plan to use an insurance policy as a hedge

against an uncertain loss

Insurance coverage does not mitigate the magnitude of loss one may face. It
only assures that the loss is shared and distributed among multiple people

Various clients of an insurance company pool in their risks. Hence, they pay
the premiums together. So when one or a few incur a financial loss, the
claimed money is given out of this accumulated fund. This makes each client
bear a nominal fee

Insurance coverage can be provided for medical expenses, vehicle damage,

property loss/damage, etc. depending on the type of insurance

Premium, policy limit, and deductible are the main components of an

insurance coverage policy. The policy buyer should check them thoroughly
while buying an insurance policy

Types of Insurance Coverage

Insurance policies can cover up medical expenses, vehicle damage, loss in
business or accidents while traveling, etc. Life Insurance and General
Insurance are the two major types of insurance coverage. General Insurance
can further be classified into sub-categories that clubs in various types of
policies. These are:

Life Insurance

One can avail the life insurance in order to protect the family due to
premature death or death during the tenure of the policy. It provides the
family with a lump sum when the insured person meets with an untimely
death. This helps the grieving family to battle with financial struggles that
may occur in absence of a breadwinner.

General Insurance

Non-life insurance policies count as general insurance policies that include

insurance coverages for home, auto, education, etc. as mentioned below

Health Insurance

You can buy health insurance for yourself or for your family that may include
your spouse, parents, siblings, and children. Some insurance companies have
tie-ups with hospitals. So here you can use your policy number to avail of
cashless services in-network hospitals. In other cases, you can claim
reimbursement for hospitalization and treatments. Do check the coverage of
the type of disease/illness/health issue. Also, verify what type of costs are
covered.

Home/Property Insurance
If man-made or natural calamities damage your valuable property then this
policy can cover the financial loss and provide monetary aid. Losses due to
theft, floods, or any other mishaps can be alleviated.

Motor/Auto/Vehicle Insurance

This is one of the mandatory policies in current times. First of all, it protects
your valuable asset against road accidents or any other damage and covers
the losses. Secondly, the traffic rules suggest you carry insurance papers while
driving.

Travel Insurance

You may have seen that you get an option to buy insurance for minimal costs
when booking a rail or air ticket. Alternatively, you can buy travel insurance
if you are a frequent flyer and especially if you travel internationally. You can
claim for baggage loss, trip cancellation, or delay in flight.

Apart from the types of insurances discussed above, there are miscellaneous
insurance coverage policies for furniture, goods, machines, etc. There are
other types of insurance such as Fire Insurance (damage due to fire), Marine
Insurance (for cargo ships), Tenant Insurance, Landlord’s Insurance, and so
on. Group Medical Insurance Policies often cover the employees of an
organization if the latter has

Advantages of Insurance

Financial Support

A family member may be eligible to receive financial support from Insurance

in the event of death. In the event of a loss to a business, Insurance offers
financial support to aid in the company's recovery and reconstruction. If they
have health insurance, they can be qualified for financial support for medical
care.There is no such thing as a guarantee in life. There can be a fatality as
well as some commercial mishaps. In both of these circumstances, the loss is
painful to accept. Therefore, Insurance offers financial security against such
an unforeseen loss.

Insurance Decreases Risks

Individuals pay an insurance firm a predetermined sum up to a

predetermined time limit or lifetime and are reimbursed in the event of a loss.
There is no way to eliminate risk in life or business, but it is possible to
decrease, disperse, or share it. In this instance, insurance companies take on
risk to share company and individual risk among insurance companies.

The Stability of the Living Standard

When there is a possibility of unanticipated losses, Insurance offers financial

help to ensure that people can maintain their living standards

Motivation for Savings

People pay a specific amount for Insurance based on an agreement for a

specific amount of time or for the rest of their life, which motivates them to
develop a saving habit. After discovering how important saving is, people start
doing it in several ways.

Stability of Business

Insurance can aid in loss management even if your business has unforeseen
losses. Your employees will be more inclined to come to work if you provide
them with Insurance. Insurance, therefore, helps the office run more
efficiently. Also, the economy will improve in stability.

Specialization

The use of Insurance is limited, just like that of other financial instruments.
Consequently, you can spend the money towards your original goal

Disadvantages of Insurance

Insurance Has Many Terms and Conditions

Insurance covers not all losses in a person's life or business situation.

Insurance plans' terms and conditions give consumers financial assistance
solely in accordance with those conditions. Therefore, one must carefully
study and comprehend the terms and circumstances before purchasing any
insurance.

Long and Costly Legal Procedures

The legal process to receive a claim submitted by an individual may be drawn

out. As a result, it occasionally may become problematic in an emergency. The
cost of an insurance plan can frequently fluctuate based on the type of policy a
person chooses as well as other considerations; occasionally, this cost may be
higher than the Insurance guaranteed. Therefore, people need to be conscious
of the price.

Fraud Agency

The market is filled with a variety of fraud agencies. People who choose to
purchase Insurance before purchasing it must be capable of handling
themselves and the issue or seek professional assistance when choosing
insurance firms.

Not for all People

It might be an issue for certain people that some insurance, such as life and
health insurance, typically does not provide coverage for sick and elderly
folks.

Potential Criminal Activity

Policyholders may be persuaded to engage in fraud or other criminal activity

to receive the promised insurance money, which may result in civil offenses.

Increases Cost

Business owners are continuously looking for methods to cut costs and
reviewing budgets. Insurance can be pricey, particularly in sectors workers'
compensation injuries are frequent. Insurance for the construction industry is
more expensive than Insurance for accountancy firms. A company should
examine its rules as it expands to ensure they continue meeting market
demands. Otherwise, the policy might only partially insure a loss, leaving the
company inadequately covered.

Limited Offers

It's important to remember that not all insurance brokers interact with all
insurance companies. Therefore there can be certain offers that are restricted.