MURANG’A UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS AND ECONOMICS

Programmes: BCom/[Link]. (Arts)/ BPSM// HRM YEAR 2, SEMESTER 2,

2020/2021 ACADEMIC YEAR

Unit Code: BCR 200

Unit Title: INSURANCE AND RISK MANAGEMENT

Department: COMMERCE

COURSE OUTLINE

Lecturer’s Tel. No. 0724644238. Email Address: [Link]@[Link]

Contact Hours: 3

Expected Learning Outcomes

At the end of the course, learners are expected to be able to:

i. State the nature, purpose and importance of Insurance.

ii. Define and differentiate the Risks, Perils and Hazards

iii. Analyze risks and Hazards respectively

iv. Develop strategies of managing business risks

Teaching Methodology

1. Lectures

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 2. Group discussions

3. Group work and individual assignments

Instructional Materials

1. Smart board

2. Tablet

3. Smart board

4. Videos

Course Evaluation Methods

1. Cats

2. Assignments

3. Presentations

4. Examinations

References

Course Text books

1. Gichira R.N.,(1994)Commerce for Kenya, MacMillan Kenya Ltd

2. Hanson J.L.,(1979),The Structure of Modern commerce, Macdonald & Evans Ltd, Estover

Plymouth PL6 7PZ

3. Vaughan E.J. & Vaughan T., (2011), Fundamentals Of Risk And Insurance, (9 th

Ed.),Sharda Offset Press ,Mumbai :ISBN 978-81-265-1306-2

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WEEK TOPIC SUB-TOPIC
No.
Week 1 INTRODUCTION TO • The Concept of Insurance
INSURANCE • Various definitions of insurance
• A working definition of insurance
• Why insurance companies are ready
to take up risks
Week 2 THE FUNDAMENTALS OF
INSURANCE • The Principle of Indemnity
• The Principle of Insurable interest
• The Principle of Insurable Risk
• The Principle of Uberima Fidei
• The Principle of Proximate Cause
Week 3 CAT 1
Week 4 PERILS,HAZARDS AND RISK • Definition of each Term
• The difference between each Term
• Importance of each Term
• Types of Hazards
Week 5 CLASSIFICATIONS OF RISKS • Definition of the term “Risk”
• Financial and Non-Financial Risks
• Dynamic and Static Risks
• Fundamental and Particular Risks
• Speculative and Pure Risks
Week 6 CLASSIFICATION OF PURE
RISKS • Personal Risk
• Property Risk
• Liability Risk
• Risks arising from the failure of
others
LIABILITY RISKS • Third Party Risks
Week 7 • Work Men Compensation Liabilities
• Breach of Contract

Week 8 CAT 2
Week 9 PROPERTY RISKS • Fidelity Risk
• Burglary Risk
• Risk of Fire
• Marine Risk
• Credit Risk

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Week 10 TYPES OF INSURANCE • Life insurance
• General Insurance
Week 11 RISK MANAGEMENT
• Definition of risk management
• Objectives of Risk Management
• Difference between Insurance and
risk
• management
• Essentials of risk management
• Risk management Programs

Week 12 INSURANCE REGULATIONS

• Importance of Regulation
• Insurance Regulatory Act(Kenya)
• Areas of interest that require
Regulations

THE ROLE OF THE

FEDERATION OF KENYA • Protecting the Insurance Image
INSURERS • Defending its Members
• Educating its Members

Week 13 RE-INSURANCE
• Definition of Re-insurance
• Importance of Reinsurance

THE ROLE OF INSURANCE • To An individual

INDUSTRY • To a community
• To the country as a Whole

Week 14 CAREERS IN THE • Insurance Brokers

INSURANCE INDUSTRY • Insurance Agents
• Actuary
• Loss Adjusters;
• Underwriting
• Accountants
• Lawyers
• Engineers

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 CHALLENGES IN THE • Terrorism Exposure
INSURANCE INDUSTRY • The HIV/AIDS menace
• Arson
• Motor Vehicles Theft
• Crimes against Property
• Insurance Frauds

Week 15 EXAMS

INSURANCE AND RISK MANAGEMENT

CHAPTER ONE

RISK

DEFINITION

• It is any threat to the security of an entity (individuals and corporate bodies).

• It is the chance of loss or possibility of an adverse occurrence.

• It is uncertainty of occurrence of loss. Uncertainty refers to frequency and severity of a

loss.

BURDEN OF RISK

Risk has direct and indirect costs to a business enterprise. The burden of risk include:

• The loss or damage to assets as a result of occurrence of destructive events.

• Foregone investments and income as a result of reallocation of resources as a response to

the existence of risk. That is an indirect cost of risk.

• The cost incurred in preventing the occurrence of loss (indirect cost of risk).

• Resources used to reconstruct or replace damaged or lost assets (indirect cost of risk).

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 • The increased charges to an entity which experience loss. Sellers of risk prevention tools

tend to charge higher rates to enterprises that have a history of loss (indirect cost of risk).

RISKS CAN BE CLASSIFIED INTO THE FOLLOWING CLASSES.

A. Pure and speculative risk

Pure risk are those occurrences which result in either loss or no loss. They can be divided

into three different categories: personal (these are risks that directly affect the individual’s

capability to earn income for example: premature death, old age, sickness or disability and

unemployment), property (these are risks to the persons in possession of the property being

damaged or lost for example: building being damaged due to flood, earthquake or fire,

personal assets being destroyed due to fire or theft ) and liability (these are risk arising out

of the intentional or unintentional injury to the persons or damages to their properties

through negligence or carelessness e.g. Work Injury Benefit Insurance).

Speculative risks have the probability of loss or no loss or gain e.g. gambling, charity

Sweepstake, business venture.

B. Financial and non-financial risk

Financial risk- are those in which the loss is capable of expression in monetary terms

for example assets, income, future earnings.

Non- financial risk are sentimental losses for example loss of a car beyond useful life.

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 C. Particular risk and fundamental risk

Particular risks are those risks whereby the cause of loss is attributable to specific parties

and the entity or entities suffering the loss can be identified. Dealt with by private risk

measures. Examples include: fire and robbery.

Fundamental risk are where the cause of loss cannot be attributed to specific parties

and the impact of loss is spread across many entities. Dealt with by society e.g. tremors

and earthquakes.

D. Static and dynamic risk

Static risk are caused by occurrences which do not change significantly over time e.g.

death.

Dynamic risk are volatile both in the cause as well as the structure e.g. tastes and

preferences.

TERMS USED IN INSURANCE

Insurance is one of the most interesting and important transactions made by individuals and

business firms.

Insurance defined

Insurance is a financial arrangement that redistributes the cost of unexpected losses. It involves the

transfer of potential loss to an insurance pool. The pool combines all the potential losses to an

insurance pool. The pool combines all the potential losses and then transfers the cost of the

predicted losses back to those exposed.

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Risk

It is any threat to the security of an entity.

Hazard

A condition that may create or increase the chance of the loss or increase the chance of the loss

arising from a given peril. It also refers to conditions that tend to make the loss more severe once

the peril has occurred. There are different categories of hazards.

Physical hazards refer to tangible environmental conditions that affect the frequency and/ or

severity of loss. Examples include slippery roads, which often increase the number of auto

accidents; poorly lit stairwells, which add to the likelihood of slips and falls; old wiring, which

may increase the likelihood of a fire.

Moral hazard refers to attitude of the insured towards the subject matter of insurance. There is

malice. Examples of moral hazards are:

• An individual who exaggerates a loss to collect more insurance proceeds;

• One who burns down his building and then makes claim from an insurance company;

• An insured who is careless.

Morale hazard lacks the intent of malice. It can be described as one’s indifference to loss or

increased carelessness due to the presence of insurance.

Peril

A peril is the primary cause of loss, i.e., the consideration for which the insurer gives protection to

the insured. It is the price of the insurance cover.

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Policy

This is a stamped document which contains terms and conditions of the insurance contract. It is

issued by the insurer as evidence of existence of an insurance contract.

Assurance

Assurance is a term used to refer to insurance in life insurance. It is generally used because the

event insured i.e. death will definitely occur.

Material Facts

These are facts which would influence the judgement of a prudent insurer in deciding whether or

not to accept a risk.

THE IMPORTANCE OF INSURANCE

The key role of insurance is to give protection to an individual or a firm against monetary losses

suffered and arising out of unforeseen circumstances. The world we live in is characterized by

risks and uncertainties’. People have always searched for security and protection from losses or

contingencies. Insurance has evolved as one of the most important ways that provide this security.

It offers protection based on the principle of mutual co-operation, and the sharing of losses of a

few unfortunate among many and by building a fund over a period of time.

Insurance provides financial protection, vital for industrial growth and improves the standard of

living of the community.

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BENEFITS OF INSURANCE

Peace of mind

When individuals know that insurance exists to meet financial consequences of their insurable

risks, they will invest larger amounts of money than those they could have invested if it were not

insurance.

Protection

Life assurance policies offer financial protection to the dependents of the insured person in the

event of their untimely death. The amount may be payable either as a lump sum or income. This

may go a long way in alleviating the financial consequences of one’s death.

Savings

Unlike life policies, general policies are usually for one year. General insurance premiums are

therefore usually put into short term investments. Premiums paid for life assurance constitute

income saved now for future consumption. A person who saves their current income for the future

well-being of their family generally ensures their future prosperity. The modest savings by many

policyholders are paid in form of premiums to life companies.

Job creation and retention

Investors have the confidence to put money in commerce and industry because insurers give

assurance of compensation in the event of a loss. The investments create job opportunities in the

society. At the same time, in the event of an unfavorable event, such as fire, a company does not

have to close down and render workers jobless because insurers compensate for the loss and,

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therefore, ensure that jobs are thereby retained. Creation and retention of jobs and social benefits

of insurance.

Preservation of source of income

Since insurers provide funds to be used in reconstructing damaged property, people are able to

contribute to the national economy. A major loss resulting in the closure of a business can impact

negatively on the community causing unnecessary financial hardship.

Loss control and reduction

Insurers are actively involved in the reduction and control of losses by enlightening the public on

loss control measures. They also offer advice that improves risk and reduce its effect should a loss

occur.

Investment of funds

Insurers have at their disposal large sums of money which they can lend to individuals, the

government, commerce and industry. The funds arise from a time lag between when premiums are

collected and when claims are paid. When borrowed, these funds are used for economic

development. Insurance companies are major purchasers of treasury bills and other government

securities.

FUNCTIONS OF INSURANCE

Risk Transfer

The first function of insurance is to act as risk transfer mechanism. Insurance does not prevent

losses from occurring. Even when one insures one’s property, the risk of loss is not removed. The

primary function of insurance, therefore is a transfer of risk and insurance only assists in

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transferring the financial consequences of the insured peril to an insurer. In return the insured pays

a premium.

Creation of a common pool.

The second function of insurance is to create a common pool. An insurance company gathers

people who want insurance protection. It takes contribution in the form of premiums from many

people exposed to similar risks, creates a common pool and sets itself up to operate the pool. From

this pool, it pays the few who incur the losses. The pool is based on the premise that the unfortunate

few will be compensated by the fortunate many.

Equitable premium

Modern day insurance makes it possible to pay a premium that reflects the risks insurance

companies hope to insure. For example a person proposing to insure a wooden house would be

charged a higher premium than that person proposing to insure a stone house. Similarly a person

who proposes to insure a house valued at Ksh. 4,000,000 would have to pay a higher premium

than a person who proposes to insure a house valued at Ksh. 2,000,000.

CHARACTERISTICS OF INSURABLE RISKS

In theory, it is possible to insure any risk provided the insured is willing to pay the required

premium and the insurer is willing to give cover. In practice, however, all insurable risks must

possess the following characteristics:

• Fortuitous

• Monetary value

• Insurable interest

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 • Homogenous exposures

• Pure risks

• Particular risks

• Public policy

Fortuitous nature

The happening of the insured event must be fortuitous or accidental in as far as the insured is

concerned. It is not possible to insure against an event that will definitely occur since this involves

no uncertainty of loss and therefore no transfer of risk would be taking place.

Monetary value

The risk must lead to a loss capable of being measured in financial terms. In property insurance,

the value is easy to determine. In life assurance, the value of the life may not be measurable, but

the sum assured would be determined at inception, being generally limited by the ability of the

assured to pay premiums.

Insurable Interest

In order for a person to insure any property, one must have insurable interest in it. This means that

there must be a legally recognizable relationship between the insured and the subject matter of

insurance.

Homogeneous exposures

Insurance operates on the basis of the law of large numbers. In order for this law to apply, there

must be a large number of similar exposures to enable insurers forecast expected losses. Given a

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sufficiently large number of exposures to the risk, insurers are able to calculate the likelihood and

the effects of occurrences.

Pure Risks

As a general rule, all pure risks are insurable, while speculative risks are not insurable. In reality,

however, certain aspects of speculative risks-especially the pure risk consequences of such risks-

may be insurable, for example, loss of profits.

Particular Risks

In general, all particular risks are insurable while fundamental risks are not insurable. According

to market practice, however, fundamental risks arising out of some physical cause, such as

earthquakes, typhoons, and floods, may be insurable while those arising out of the nature of the

society, such as war and unemployment, are not insurable.

Public policy

Like all other contracts, the contract of insurance must not be contrary to what the society considers

just and moral. This requirement rules out the possibility of insuring stolen property or inflicting

self-injury in a bid to benefit from insurance.

METHODS OF HANDLING RISK

Risk is pervasive, and therefore, people must find proper ways of dealing with it. In developed

countries, governments handle some fundamental risks, but in under-developed countries,

government’s role in handling fundamental risks is passive or absent. Given their nature, however,

particular risks are handled by individuals, who may use some or all of the following methods to

handle risks: avoidance, retention, reduction or risk transfer.

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Avoidance

Risk may be avoided if one does not engage in a venture which one considers risky. Risk

avoidance, however, is a negative approach to handling risk and may affect the society negatively.

This is whereby an individual or organization handles the consequence of risk on their own.

Retention/Assumption

Risk may be retained intentionally or unintentionally. Intentional or voluntary retention occurs

when an individual or organization recognizes the existence of risk but decides to retain the risk.

A fund may be created from where losses would be paid. This decision may be taken because there

are no attractive alternatives, an example being when premiums are very high. Involuntary

retention occurs when a risk is retained simply because an individual or organization does not

recognize the existence of the risk. In deciding on whether or not to retain risk voluntarily, the

guiding factor should be the frequency and severity of risk. Large, unpredictable risk requires

insurance.

Reduction/Prevention

Reduction is a method whereby the individual or organization takes steps to minimize the

frequency of a loss occurring or it severely should it occur. The essence of pre-loss minimization

is that effect of the loss is anticipated and steps taken to ensure that the frequency and (or) the

severity of the loss are reduced to the minimum. Pre-loss control measures are loss preventive, for

example, police escort in money insurance and employment of a watchman and burglar proofing

in theft insurance. Post-loss control measures are loss minimization steps taken once a loss has

taken place, for example, fixing sprinklers in fire insurance and economic disposal of salvage in

motor insurance.

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Risk transfer

Risk transfer is a mechanism by which financial consequences of an event are shifted from one

party to another. For example, a landlord may shift the risk of the house catching fire to the agent

and a transporter can shift the risk of loss or damage of goods to the owner. Risk transfer is

normally done through suitably worded contracts. The most commonly used method of

transferring risk is through insurance. Insurance is a means of spreading an individual’s risk across

a number of people so as to make it more bearable for individual’s exposed to the risk. Through

insuring a person transfers the risk to the insurer that, in turn, spreads the risk.

CAREERS IN THE INSURANCE INDUSTRY

Surveyors

The surveyor assesses the extent of the risk to which the insurance company is exposed and gives

advice on the extent of exposure and risk improvement measures. They also advice on rates, terms

and conditions.

Actuary

An actuary is a financial advisor who:

• Through the use of mathematical skills and past experience tries to predict the likely

outcome of future events;

• Calculates insurance premiums

• Values assets and liabilities of life insurance companies.

• Advises on cost of pensions.

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Risk Managers

Risk managers deal with identification, analysis (measurement) and control of risks. Risk control

may take the form of avoidance, reduction, retention, insurance and transfer to a third party. They

set up and advice on programs of loss minimization.

Loss adjusters

An insurance agent who assesses the amount of compensation that should be paid after a person

has claimed on their insurance policy.

Motor assessor

Motor assessors are registered to do motor vehicle assessment only, as this is their area of

competence. Insurers normally appoint and expect them to come up with independent report on

the extent of losses and the best method of granting indemnity. Some companies also have internal

motor assessors.

Loss assessors

Insurers appoint loss assessors after a loss has taken place to quantify the magnitude of loss and

advice on the method of compensation. They are used mostly in general classes of insurance.

Investigators

Investigators are appointed by insurers when they want to get facts leading to the loss. They are

used mostly in general and liability classes of insurance, and are especially useful when foul play

is suspected. They can also be used in life assurance when foul play is suspected.

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Claim settling agents

They negotiate and settle insurance claims on behalf of insurance companies. They may do this

for policies issued by insurers inside or outside Kenya.

CHAPTER TWO

FUNDAMENTALS OF INSURANCE

PRINCIPLES OF INSURANCE

Utmost good faith

It is a contract of adhesion and the insurer has no obligation to reveal the intentions to the insured.

The insured knows all pertaining to the risk to be insured and therefore must reveal everything in

good faith. The insurer and insured both have a reciprocal duty to act in good faith.

The principle may be breached by: misrepresentation innocently, fraudulently and through

concealment.

Innocently:

Giving wrong facts intentionally e.g. where you are asked if you are suffering from heart disease

and you do not know due to lack of a thorough check-up. In this case an insurance waives its right

and compensates.

Fraudulently:

• Done intentionally

• Discovered by use of investigators

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 • In such cases no compensation is given even if premium has been paid (this is because if

they knew the facts before entering into the contract they would not have entered into the

contract). The contract may be made void.

• An individual may have to pay damages.

Concealment:

Failing to reveal a fact for example when you are given a proposal and you leave the question

unanswered. For example how many times have you been sick? An individual fails to simply

answer.

• Innocent concealment

The insurance waives its rights and pays an individual

• Fraudulent concealment

Contract is made void

An individual is asked to pay damages.

Facts to be disclosed

Any facts that increase the risk (frequency of loss) for example if you keep inflammable material

in a building that is insured against fire it is important to reveal facts.

Any facts which the insured knows and which may influence the magnitude of loss or size of loss.

Any special features of the subject of insurance for example if you are advised to re-enforce a

building and you have not done so before insuring then it is important to tell the insurance.

Facts which need not be disclosed

Facts of law (everyone is expected to know)

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Facts of public knowledge for example parts of town which are susceptible to thieves.

Facts the insurer is presumed to know.

Facts which minimize risk for example insurance against fire and fire gadgets that have been

installed.

Insurable interest

The insured must have a relationship with the subject matter by virtue of which the insured benefits

from safety or freedom from loss. The loss or gain must be measured in financial terms (the

relationship must be legal).

The relationship takes the following forms:

Ownership-part ownership, trusteeship-bailment or custodianship (one that takes charge of

something)

Mortgagor- (Typically a homeowner)

Insurable interest must be proved at inception of contract and time of loss for property insurance.

For example when you insure a car and sell in between period- Insure in January and sell in June.

The insurable interest applies up to June.

Insurable interest in life applies in case of own life where there is unlimited insurable interest any

amount can be put across, it applies in case of spouses life, it applies in case of debtor’s life to the

extent of the debt, in cases of key employees like coca-colas employees who have formula.

Indemnity

Regulates compensation for loss (insurance is a contract of indemnity)

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It means to bring back to the original position before loss.

Indemnity is based on sum insured

Value of subject matter that is covered with the contract (highest amount that an insured can get

in event of loss). This is the amount insured e.g. you insure a building for sh. 1,600,000 at

1,800,000. The amount that can be compensated is sh. 1,600,000 because the aim of insurable

interest is to return back to original position.

It does not apply to life insurance because:

You cannot be able to bring lost life

It is so sure (if you valued life at sh. 1,800,000 then it is worth sh. 1,800,000.

It is exercised through:

• Cash payment

• Replacement

• Repair or reinstatement

It is the insurance company that determines how indemnity is going to be exercised.

Proximate cause

This is the actual cause of loss.

It is described as the “active efficient cause which sets in motion a train of events that cause a

result without the intervention of any other peril.”

Insurance covers specific perils and only losses caused by such perils are compensatable. For

example insured peril by fire: Fire occurs and furniture is salvaged and the goods after evacuation

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are stolen. In the event of a loss, insurers will pay if the active cause is insured. However, if two

perils operate simultaneously and one or more is not covered the loss will not be paid. Insurers

however, will pay out of grace if they so wish “ex-gratia payments”-payments done out of

sympathy.

Contribution

It supports indemnity (it is a corollary to indemnity).

Where some property is insured with more than one insurer through agreement among insurers

(co-insurance) or arbitrary by the insured.

Insurers contribute on a pro-rata (proportional) basis or one insurer pays fully and then claims from

the other (s) on a pro-rata basis.

Sum insured by an insurer * loss

Total sum insured
Example: Jubilee + Invesco
10m 15m
Sum Sum
Insured insured
Total sum insured is sh. 15 million.

10 * 15 =6 million
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15 * 15 =9 million
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Jubilee will compensate sh. 6 million and Invesco sh. 9 million.
Subrogation

One has to surrender his right to someone else. The party that surrenders his right is the insured.

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The insured can only claim compensation from the insurer but not from 3rd party, even if 3rd

party is to blame. It is the duty of the insurer to claim from 3rd party.

As an illustration, if the insured’s vehicle is damaged due to negligence of a third party, the insurer

compensates the insured under the insurance policy. The insured has no right of recovery from the

person who damaged the car because if this were allowed, the insured would recover from the

insurer and the offending party and thus be more than indemnified.

CHAPTER THREE

CLASSES OF INSURANCE

They are normally in two categories: Life insurance and general insurance. General insurance

classes comprise property, liability, accident, guarantee and transport insurances. Life assurance

classes are also referred to as long-term insurance contracts and are benefit policies. Unlike in

general insurance, in life assurance the key event being assured that is death is certain to happen.

The uncertainty is on when the event will occur. Life assurance comprises ordinary life assurance,

industrial life assurance and super annuation schemes.

1. Property Insurance

Fire and related perils (Material damage)

Currently fire insurance accounts for a high proportion of total non-life insurance premium

income. The basic fire policy is called the standard fire policy because it covers the same peril i.e.

fire, lightning and limited explosion (i.e. it covers boilers or gases used for domestic purposes).

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Special perils Under a Fire Policy

These may be classified as social (e.g. strikes, riots, malicious damage), natural (include storm,

flood, earthquake), chemical (e.g. include explosion and spontaneous fermentation), and

miscellaneous perils (e.g. escape of water, damage caused by any aerial device and impact damage

especially to buildings caused by vehicles).

Business Interruption Insurance (BIP)

The BIP policy is offered to protect future earnings of an enterprise after fire damage. It covers the

loss of profit, additional expenses like lease of alternative premises, and other incidental expenses

arising from damage to the physical property.

Domestic Package Insurance

A domestic policy provides the widest cover required in respect of private dwelling houses. It is

used to cover private dwelling houses. It is used to cover a private dwelling house and its contents,

owner’s legal liability, and domestic servants. The policy has various sections i.e. building,

contents, “all risks,” employees’, compensation, and liability (that covers third parties that sustain

injury or die while in the private dwelling house due to the owners, or occupiers’ negligence.

Theft insurance

A theft policy in insurance will only cover loss or damage involving entry into or exit from

premises by forcible and violent means. This means that shoplifting, pilferage, entry by use of key

or trick are not covered.

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‘All-risks’ Insurance

An ‘All-risks’ policy provides the widest cover available for property. It covers loss or damage to

property from all perils other than the ones excluded. The term “all risks” is therefore a misnomer

because the policy has some exclusions which includes:

• Wear, tear, gradual deterioration, atmospheric condition, mildew, moth, vermin or insects;

• Mechanical or electrical breakdown or derangement, unless caused by accidental, external

means;

• Breakage of glass (other than lenses) or articles of brittle nature (other than jewelry), unless

breakage is caused by fire or theft;

• Money and related items;

• Theft of any insured property from the motor vehicles unless the property stolen is

contained at the time of loss in a locked boot or locked locker forming an integral part of

the vehicle;

• Loss or damage due to or arising out of delay, confiscation, or detention by customs or

other officials or authorities.

Example of all risk policies are: money insurance, goods-in-transit insurance and contractors

all risk insurance.

Engineering insurance

The engineering insurance cover is intended to provide compensation to the insured in the event

of an insured plant being damaged by an extraneous cause or through its own breakdown.

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 2. Liability insurance

There are several classes of liability insurance whose objective is to indemnify the insured against

their liability to third parties which arises from their operations. The key ones are discussed below:

Public liability insurance

It indemnifies the insured against their legal liability to third parties for both accidental bodily

injury and loss of or damage to property arising from or in connection with the business insured,

for example, a factory owner faced with risk of escape of gas causing bodily injury.

Product liability insurance

The products’ liability policy covers liability for injury to third parties or damage to their property

caused by products sold, supplied, repaired, tested, altered or serviced. This occurrence has to be

unexpected and fortuitous, that is accidental. The policy can be given independently or as an

extension of a public liability policy.

Professional indemnity insurance

Any person who gives advice, designs, or offers similar services in a professional capacity is seen

as an expert. Such includes but are not limited to doctors, pharmacists, surgeons, lawyers,

insurance brokers, architects, accountant and the like. The standard of care expected of them is the

standard expected of the average member of that particular profession. The professional owes a

duty of care to any person likely to be injured as a result of their errors.

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Work Injury benefit insurance

Employers in Kenya are required, under law to compensate their employees who sustain bodily

injury through accidents or diseases arising out of and in the course of employment. The law in

force is the Work Injury Benefit Act (WIBA) 2017.

3. Guarantee Insurances

These are policies which cover the failure of a party to perform a particular task or a breach of

trust. Among them are fidelity guarantee and bonds.

Fidelity guarantee Insurances

A fidelity guarantee policy indemnifies the insured against losses suffered as a result of fraud or

dishonesty committed by the insured’s employees. Most companies take the policy to cover

employees holding positions of trust.

Bond Insurance

The purpose of bond or financial guarantees is to compensate the third party in respect of loss

suffered as a result of the failure of the insured to perform a task described in the insurance contract.

There are several types of bond insurance.

4. Accident insurances

Personal Accident Insurance

The intention of this policy is to provide compensation in the event of an accident causing death

or injury to the insured person. The personal accident policy has the following benefits: death,

permanent disability, medical expenses up to a specified amount and funeral expenses.

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Health Insurance

A health insurance policy covers the cost of private treatment for illnesses and other medical

conditions. It covers doctors, surgeons and anesthetists, fees, food, accommodation, bed charges,

drugs and dressings, diagnostic procedures such as x-rays, cost of theatre and nursing services

among other costs. Such costs are covered up to specified limits.

5. Transport Insurances

Motor Insurance

The cover required for a motor vehicle:

Below are covers offered:

Third party Only Cover- This level of insurance covers the insured’s legal liability towards third

parties in respect of property damage, as well as death and bodily injury.

Third party, fire and theft cover

This covers the insured’s legal liability towards third parties in respect of property damage, death

and bodily injury and also loss or damage arising from fire and theft to the insured vehicle.

Comprehensive cover

The term comprehensive is somehow misleading because it implies that everything is covered.

This is not the case as it only covers the insured’s legal liability towards third parties in respect of

property damage, death and bodily injury and also fire damage, loss and damage arising from theft,

own damage and malicious damage to the insured vehicle. Types of vehicles covered are: private

vehicles, motorcycles and commercial vehicles.

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Marine Insurance

Marine policies are issued to cover ‘perils of the sea’. These include: fire, theft, collision and a

wide range of other perils.

Marine policies issued relate to four areas of risk:

• The hull, that is, the vessel

• The cargo, that is, the goods carried by the vessel

• The freight, that is, the sum paid for transporting goods or for the hire of the ship; and

• Liability towards third parties.

Aviation Insurance

Aviation policies are issued to cover the hull (the aircraft), cargo (goods carried), liability to

passengers and liability to others. It provides cover for loss arising from fire, theft, accidents and

legal liabilities.

6. Compulsory classes of insurance

• The National Social Security Fund (NSSF)

• The National Hospital Insurance Fund (NHIF)

7. Investment Policies

These are policies which provide more investment than protection.

Annuities

An annuity is a method by which a person can receive an income in return for payment to an

insurance company for a sum of money.

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 8. Retirement Benefits Scheme

The aim of the retirement benefit scheme is to ensure that some form of payment is available on

retirement.

9. Life assurance

Ordinary life assurance

➢ What is insured is basically the risk of death.

➢ The only form of indemnity is cash.

➢ It can be used to get or secure a loan

There are 3 types of insurance that cover life

Whole life insurance- given to beneficiaries. It covers the whole life.

Term assurance- It can be given for a number of years, no. of days. It is temporary. The benefits

are paid strictly on death during the period of insurance.

Endowment Insurance-pays on survival or death during the period.

Industrial Life assurance

➢ There are for low income earners.

➢ Policies are given with low premium/ small values.

➢ The insurance company representative is supposed to collect the premiums from the

insured.

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CHAPTER FOUR

INSURANCE POLICY DOCUMENT

It is a document detailing the terms and conditions of a contract of insurance.

Contents of an insurance policy document.

Declarations-identifies who is an insured, the insured’s address, the insuring company, what risks

or property are covered, the policy limits ( amount of insurance), any applicable deductibles, the

policy period and premium amount. These are usually provided on a form that is filled out by the

insurer based on the insured’s application and attached on top of or inserted within the first few

pages of the policy.

Definitions- Defines important terms used in the rest of the policy.

Insuring agreement- Describes the covered perils, or risks assumed, or nature of coverage. This is

where the insurance company makes one or more express promises to indemnify the insured.

Exclusions- Takes coverage away from the insuring agreement by describing property, perils,

hazards or losses arising from specific causes which are not covered by the policy.

Conditions- These are specific provisions, rules of conduct, duties, and obligations which the

insured must comply with in order for coverage to incept, or must remain in compliance with in

order to keep coverage in effect. If policy conditions are not met, the insurer can deny the claim.

Policy form- The definitions, insuring agreement, exclusions and conditions are typically

combined into a single integrated document called a policy form, coverage form, or coverage part.

When multiple coverage forms are packaged into a single policy, the declarations will state as

much, and then there may be additional declarations specific to each coverage form. Traditionally,

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policy forms have been so rigidly standardized that they have no blank spaces to be filled in.

Instead, they always expressly refer to terms or amounts stated in the declarations. If the policy

needs to be customized beyond what is possible with the declarations, then the underwriter attaches

endorsements or riders.

Endorsements- Additional forms attached to the policy that modify it in some way, either

unconditionally or upon the existence of some condition. Endorsements can make policies difficult

to read for non-lawyers; they may revise, expand, or delete clauses located many pages earlier in

one or more coverage forms or even modify each other. Because it is very risky to allow non-

lawyer underwriters to directly rewrite policy forms with word processors, insurers usually direct

underwriters to modify them by attaching endorsements pre-approved by counsel for various

common modifications.

Riders- A rider is used to convey the terms of a policy amendment and the amendment thereby

becoming part of the policy. Riders are dated and numbered so that both insurer and policy holder

can determine provisions and the benefit level. Common riders to group medical plans involve

name changes, change to eligible classes of employees, change in level of benefits, or the addition

of a managed care arrangement such as a Health Maintenance Organization.

Jackets-It helps one understand better the language used in insurance policies.

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CHAPTER FIVE

INSURANCE REGULATION

THE ROLE OF THE IRA IN INSURANCE REGULATION, SUPERVISION AND

DEVELOPMENT

INTRODUCTION

The initials IRA stands for the Insurance Regulatory Authority. The IRA is an autonomous

government institution created through an Act of Parliament in 2006 and became effective on 1st

May 2007. It took over the functions of the former Department of Insurance of the Ministry of

Finance. The IRA is financed by a levy on insurance premium. It is also mandated to collect fees

from the regulated members of the industry. The IRA has been able to recruit and retain more

qualified technical staff to discharge its mandate.

The IRAs mandate is to regulate, supervise and develop the insurance industry in Kenya. It is

governed by the Board of Directors who are responsible of overseeing the running of the Authority.

It is run on day to day basis by the Commissioner of Insurance, who is also the Chief Executive

Officer of the Authority.

This shows that the IRA regulates and supervises all members of insurance industry on behalf of

the government, through the Ministry of Finance.

OBJECTS AND FUNCTION OF THE IRA.

The key function of the IRA are to:

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 • Ensure effective administration, supervision, regulation and control of insurance and

reinsurance business in Kenya;

• Formulate and enforce standards of conduct of insurance business;

• Issue licenses to qualified persons;

• Protect the interests of the insurance policy holders and insurance beneficiaries;

• Promote the development of the insurance sector in Kenya;

• Ensure prompt settlement of claims by insurers;

• Investigate and prosecute insurance fraud;

• Improve efficiency in handling of complaints against members of the insurance industry;

How the IRA regulates and supervises the insurance industry.

• Issue the supervisory guidelines and prudential standards for better administration of the

insurance business of persons licensed under the Act.

• Share information with other regulatory authorities and to carry out other related activities

in furtherance of its supervisory role.

• Licensing qualified applicants.

• Undertake such other functions as may be conferred on it under the Act or any other written

law.

REASONS WHY THE INSURANCE INDUSTRY IS REGULATED AND SUPERVISED.

The following are some key reasons why the insurance industry is regulated and supervised.

Business of Trust

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Insurance involves taking money from members of the public, who thereby become policyholders,

in return for promise of payment on the occurrence of some future event or, in the case of life

assurance, at some future date. If there was no mechanism in place to check this kind of system,

then some persons might be tempted to collect premiums and divert them without bothering to

honor their promises. This would make the public lose faith and develop a negative perception of

the insurance industry.

As an insurance company is required

As an insurance company is required to pay claims in the future, there is need to preserve long-

term financial stability of an insurer that is to ensure that the insurer will be in a financially sound

position to pay claims when the loss occurs. This is more so in life business where, for example,

claims could become payable many years after the date of the contract. This is done by

continuously monitoring capital adequacy and solvency levels of an insurer.

Maintain solvency

This relates to the assets and liabilities of a company. The insurance Act requires that the margins

between assets and liabilities of an insurer remain positive within the prescribed ratio to ensure

that the company is able to pay claims as they occur.

Fair treatment of customers

The IRA ensures that insurance related complaints are well addressed. It also regulates the

insurance industry to ensure that customers are fairly treated. It has a consumer protection

department where policy holders and others who might be dissatisfied with the way claims are

handled can forward their complaints. IRA does its best to try and sort out such issues.

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Fairness among Market Players.

IRA has a duty to ensure that all market players conduct their business in accordance with the

provisions of the Insurance Act. It also has the mandate to ensure that companies operate ethically.

To achieve this objectives, IRA ensures that:

• Claims are settled promptly;

• All players pay taxes and levies;

• Proper records of business transactions are kept;

• Insurance charge appropriate premiums;

• All players conduct their business ethically.

Competence

Unlike physical products, insurance is an intangible product because it only offers a promise of

payment in exchange of payment of premium. The IRA objective is to ensure that those who are

employed by members of the insurance industry who are competent, fit and proper persons and

are able to fulfill the pledges made.

STEPS TAKEN BY THE IRA TO ENHANCE THE GROWTH OF THE INSURANCE

INDUSTRY

1. Training of Insurance Agents

The broad objective of this exercise is to increase the number of insurance salespersons

so as to enhance the availability of the insurance services to the Kenyan people. It is

also a way of creating employment for Kenyans and involving Kenyans in the

development of the insurance industry and the economy at large.

2. Training of Traffic police Officers

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 The IRA aims at training police officers on how to handle motor insurance cases and

what they need to look for while on the road.

3. Insurance Fraud Investigation Unit (IFIU)

IFIU has been established because the incidences of fraudulent claims are quite

frequent in the insurance industry. The role of the IFIU is to investigate and prosecute

persons perpetuating fraudulent activities in the insurance industry. The unit is manned

by highly trained police officers.

4. Consumer Education

It aims at creating awareness among members of the public about risk and insurance.

5. Policyholders Compensation Fund (PHCF)

The purpose of the fund is to compensate policyholders in the event of collapse of an

insurance company due to insolvency.

RISK MANAGEMENT

All operations and projects have uncertainties. Without uncertainties, there would be no need for

management. Therefore, a disciplined handling of uncertainties would provide projects and

operations with the following benefits:

• To use risk as a planning tool

• To force project teams to think and plan in numbers

• To reduce “Blame” and improve team spirit.

• To avoid projects or operations not delivering their promised functions.

• To achieve higher quality by avoiding damaging events of direct interest to them.

• To identify areas where contingency plans are needed.

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 • To resolve problems early. Early detection make risks less expensive to handle.

• To identify options and trade-offs.

• To highlight documented risks. This makes them hard to ignore.

• To prepare contingency plans where necessary.

• To resolve problems early because early detection or risks is less costly.

• To cause expectations to be more realistic.

FEDERATION OF KENYA INSURERS.

Objectives:

• Enhancement of professionalism for effective management of the industry;

• Enhancement of underwriting standards and development of best practice guidelines;

• Creation of positive image of the industry through public education

• Lobbying government for the creation of an enabling legislative environment and

• Research.

Services:

• Protecting, promoting and advancing the common interests of members including the

taking of such concerted measures as may be deemed expedient whenever the business of

the members of the Association may be affected by the action or proposed action of any

authority, organization, body or person, and to acting as a medium of consultation and

communication with the government.

• Promoting agreement and co-operation among its members on matters of mutual interest

and providing machinery for the examination and reconciliation of any differences.

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• Doing all such things as may be necessary, proper or advisable for the general advancement

of insurance business or which may be necessary for or incidental or conducive to the

attainment of any of the objects of the Association;

• Promoting knowledge and a clearer understanding of insurance among all sections of the

community;

• Gathering and collating data, information and market-wide statistics from members of the

Association, for the purpose of determining market trends and satisfying any other

requirements set by the board from time to time;

• Consulting or co-operating with other Associations or similar bodies within and outside

Kenya in regard to matters of mutual interest and if deemed necessary in obtaining

affiliation with such Associations;

• Managing the assets and funds realized from contributions by members and out of

investments for the benefit of the members.

CHAPTER SIX

CHALLENGES IN THE INSURANCE INDUSTRY

New Pandemics/ Diseases

Since the advent of HIV/AIDS in the mid-1980s, it has become clear that new diseases can

spring up with devastating consequences to both the society and the insurance industry. Of

course the lesson learned from HIV/AIDS has helped the world to contain such new diseases

as Bird Flu, Swine Flu, and SARS, Mad Cow (Bovine Spongiform Encephalopathy (BSE))

and Ebola virus (caused by the virus Ebola virus (EBOV), and the new strains of TB. However,

the re-emergence of multi-drug resistant strains of TB and the various types of Hepatitis clearly

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demonstrates that the threat of new pandemics remain on the horizon. What, however, remains

a challenge is the preparedness of life assurance industry in case another pandemic enters the

human existence.

Fraud

For example: Money Laundering- Money laundering involves concealing, disguising,

converting or transferring criminal property so as to channel it to the mainstream of the

business. The anti-money laundering operations involves making sure that some unscrupulous

clients do not use the long term business sector for this purpose.

Social Issues

Consumer- The industry should remain conscious of changing consumer demands. It should

acknowledge the need for greater transparency, new product development (particularly in

relation to the previously underinsured market) and greater choice and flexibility.

Customer Changes- Rise of consumerism has made clients to become more sophisticated.

More customers now demand value for their money. This makes it difficult to competitively

price your products.

The Market

Competition- The insurance companies operating in the market compete for a limited market

characterized by low penetration. The uptake of insurance cover, both at corporate and personal

level, remains pre-dominantly in the motor, fire industrial and personal insurance in general.

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 The low penetration of insurance in the Kenyan market, relative to more developed markets is

attributable to the following factors:

• Low disposable incomes for the majority of the population, with close to 50% of

Kenyans living below the poverty line;

• Inadequate tax incentives that could encourage the middle classes to purchase life

insurance products; and

• A perceived credibility crisis of the industry in the eyes of the public particularly with

regard to settlement claims.

CHAPTER SEVEN

RE-INSURANCE

Reinsurance is insurance that an insurance company purchases from another insurance company

to insulate itself (at least in part) from the risk of a major claims event.

IMPORTANCE OF RE-INSURANCE

1. Reinsurance helps decrease risk.

When an insurance company singularly insures a large number of clients and their property, they

take on a huge amount of risk. Reinsurance is a great strategy to reduce that risk, placing some of

the burden on a reinsurance company instead of shouldering the burden completely alone.

2. Reinsurance companies offer valuable advice.

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When consumers need insurance advice, they turn to their insurance company. Where can

insurance companies turn? Because reinsurance companies are experienced and skilled at

understanding patterns in the industry, as well as risks that their individual clients face, they’re in

the perfect position to offer guidance and expertise. This is particularly helpful to fledgling

insurance firms that are just getting started, as well as insurance companies seeking to enter new

areas of the market.

3. It protects against natural disasters and catastrophic events.

This is especially important in areas with large numbers of high-risk policies. Places that are

often plagued by wildfires or that are constant targets for hurricanes and flooding mean that

insurance companies covering these areas face the potential of paying out huge numbers of high-

dollar claims should a disaster strike. Since having a large number of policy holders make these

kinds of claims all at once can be financially devastating, reinsurance helps soften the blow.

4. Reinsurance can stabilize financial losses.

Perhaps an insurance company has the financial ability to pay out a large number of high-dollar

claims. Even so, reinsurance can smooth the way so that a company need not face huge financial

losses that may cause undue strain.

5. It allows a company to take on more policyholders.

Reinsurance helps protect against insolvency. It ensures that insurance companies are able to

make payment on all claims, even in the case of a natural disaster or unexpected high number of

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expensive claims. Because of this, it puts companies on more solid ground, allowing them to

offer services to a greater number of clients.

6. Reinsurance helps with company expansion.

Each policy sold carries a certain amount of risk. It also carries a certain amount of cost, from

pay to sales agents to administrative costs. This is why company growth is so important.

Unearned payment reserve requirements can be a burden, and reinsurance can help lessen that

burden – allowing the company to focus its attention on growing the company and number of

clients nationwide.

7. It is a worthwhile investment.

Insurance companies understand the value of taking out insurance – it’s their business to do so.

Because of this, it seems natural that every insurance company would see the importance of

investing in insuring themselves and their reputation.

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