DEFINITION OF INSURANCE AND ASSURANCE
Insurance can be defined as an agreement whereby one party promises to indemnify or pay another party a sum of money in the event of his suffering a specified loss or damages. It can also be defined as a system for providing financial compensation for the effects of loss, the payments being made from the accumulated contributions of all parties participating in the fund or scheme.
The main principle of insurance is the pooling of risks. The insurer will collect premium from a group of people who suffer similar risk to create a common fund out of which compensation will be paid to those who suffer losses. Compensation for victims will depend on the premium paid and the extent of losses suffered.
Insurance is one of the aids to trade. Although it cannot cancel out the risk, it offers monetary assistance. A great variety of risks can now be covered by insurance. On the other hand, assurance is the provision of cover against some eventuality which must occur at some time in the future, e.g. death of a person. It deals with events which must happen, hence it is based on possibilities.
Differences between Insurance and Assurance
- The risk insured against may not occur.
- It is a provision of cover against eventualities which may never occur.
- It hinges on probabilities.
- Examples are fire, marine, burglary.
- The risk is certain to occur.
- This is a provision of cover against some eventualities which are certain to occur at some time in the future.
- It hinges on possibilities.
- Example is life assurance.
HISTORY OF INSURANCE IN NIGERIA
Some forms of insurance schemes existed in Nigeria before the coming of western civilisation. The predominant system during this period was the organised social scheme which included the extended family system, association of age grade and other unions.
The rationale behind this system was to ensure periodic contribution from members and to rally round any member that suffer a loss such as death, illness, etc. This form of social insurance is still in existence in Nigeria among community groups.
In the 20th century, the British merchants introduced modern commercial insurance into West Africa. In 1921, the Royal Exchange Insurance established the first insurance company with a branch in Lagos. This company dominated the scene for 30 years until 1949 when other companies like General Assurance Society and Tobacco Insurance Company Limited were established.
In 1950, indigenous participation in insurance business was enhanced with the establishment of African Insurance Company. By the time Nigeria got independence, the number had risen to 25 and were mostly owned by Nigerians. The National Insurance Corporation of Nigeria (NICON) was established in 1969 as a ploy by the Nigerian government to check the operators of insurance business. The Nigeria Reinsurance Corporation was also established in 1977.
In the 1980s, the number of insurance companies had increased to over 100 as some reinsurance companies were established, e.g. Universal Reinsurance Company. In addition, over 150 insurance brokers were also registered. At present, the leading insurance company in the country is NICON, which was formerly owned by the federal government, and it underwrites at least 35% of the total insurance in Nigeria.
Over the years, different acts have been promulgated to control and regulate the insurance industry, e.g. Insurance Companies Act 1961, Marine Insurance Act 1961 and Insurance Decree 1976. Today, the current legislation is the Insurance Decree 1991.
Presently, the share capital for the setting up of an insurance company has been increased and new measures aimed at controlling the activities of the industry have also been introduced. Some insurance companies in Nigeria are:
- Reinsurance Corporation of Nigeria.
- Industrial and General Insurance (IGI).
- Lion of Africa Insurance.
- Amicable Insurance.
INSURABLE AND NON-INSURABLE RISKS
- Insurable Risks
Insurable risks are the type of risks which the insurer can make provision for or insure against because it is possible to collect, calculate and estimate the likely future losses. Insurable risks have previous statistics which can be used as a basis for estimating the premium. It holds out the prospect of loss but not gain. The risks can be forecast and measured, e.g. Motor, Life, Marine, Insurance etc.
- Non-Insurable Risks
Non-insurable risks are the type of risks which the insurance company is not ready to insure against simply because the likely future losses cannot be estimated and calculated. It holds the prospect of gain as well as loss. The risks cannot be forecast and measured.
Some examples of non-insurable risks are:
- Loss of profit through competition.
- Launching of new product.
- Opening of a new shop.
- Risks due to war.
- Change in fashion.
- Loss incurred as a result of bad management.
- The poor location of a business.
- Loss of profit through fall in demand.
Indemnity Insurance is the type of insurance in which the insured is restored to his former position before the incident occurred, by receiving compensation. The examples are insurance against fire, marine, burglary, etc.
Non-indemnity insurance refers to those associated risks for which no amount of compensation could equate to the loss suffered by the insured. However, only a consolation payment is made to the insured. An example of non-indemnity insurance is Life Assurance.
PRINCIPLES OF INSURANCE
Principles of Insurance refer to the basic principles which must be fulfilled in insurance. These are:
- Indemnity: Indemnity is the compensation given to the insured by the insurer in the event of his suffering a loss. Under this principle, the insured will be given compensation for loss suffered. He will be restored to his former position before the loss occurred. All other types of insurance are insurance of indemnity except life assurance, e.g. if a man loses a car, he will be compensated for it.
- Insurable Interest: This is one of the principles of insurance which states that, one can only insure properties that will bring loss or liabilities to him upon destruction. The properties of a neighbour or friend cannot be insured by the individual. He can only insure property that will bring financial loss to himself. Any insurance without this principle is void and destitute of any legal effect, e.g. you cannot insure the motor car of your friend.
- Utmost Good Faith (Uberrimae Fides): This principle states that in any insurance contract, all relevant information that will affect the validity of the agreement must be disclosed by the parties involved. The parties must disclose all material facts truthfully so as not to render the contract void. The true value of the property must not be under or overstated, e.g. in a life assurance, if the assured did not disclose to the insurance company that he has a terminal disease before the signing of the agreement, when he dies, the insurer may refuse to honour its own part of the contract.
- Contribution: The principle states that where a person has insured a certain risk with many insurance companies, he cannot claim compensation in full from each of the insurance companies. This means that each of the insurance companies will pay a certain proportion of the loss. The insured cannot make gain or profit. If he has been settled by one insurance company, he is not entitled to receive contribution from other insurance firms.
- Proximate Cause: This principle states that only the losses or liabilities which arise from the direct and immediate cause of the event insured against are indemnified. There must be a link between the loss suffered and the risk for which the insurance has been taken. The loss must arise directly from an insured peril or must be the result of a direct chain of events initiated by an insured peril, e.g. Mr Ojo insured his car against fire but the car had accident. The insurance company can only compensate if it is fire and not accident.
- Subrogation: Under this principle, once the insurer has given an indemnity for loss, he can take over the subject matter of the insurance and the rights relating to it. The principle implies that the insurance company can take over the rights of the insured once he has been compensated. The insurer can take over the scrap and sell it to reduce their liabilities. A very good example in which subrogation arises is in motor insurance. Mr Abiodun’s car had for instance, an accident and he has been compensated. The car is no longer his own; the insurer can sell the scrap.
- Abandonment: This principle states that property that has been insured may be abandoned in certain cases if its actual loss appears to be unavoidable or if the cost of repairing the damaged property will exceed their value. In such cases, the insured will inform the insurer that he wishes to abandon the goods, e.g. as a constructive total loss under marine insurance.