UNDERWRITING AND REINSURANCE
Underwriting: This is the process whereby a merchant of insurance company undertakes to cover, underwrite a portion of a risk or assume part of a risk. This is common in marine insurance because of the enormous cost involved which cannot be borne by one insurance company.
Underwriter: This is a marine insurer who offers to cover, underwrite or assume a portion of a risk. The underwriter would write under the details of the risk, his name and the proportion he has accepted. A common example is the Lloyds Underwriters, an association of London underwriters incorporated in 1871 by Edward Lloyds. They are organised in syndicates that undertake a fraction of the risks brought to them by the agent of the shippers. Lloyds Underwriters is not a corporation, but it provides facilities to members to transact business and it is not responsible for losses incurred by the underwriters.
Reinsurance: This is a situation whereby an insurer agrees to insure with another insurance company all or part of the risk. By spreading large risk among many insurance companies, losses will be reduced, e.g. the insurance of a large vessel will definitely involve a very heavy claim. The insurance company can therefore reduce its potential loss by spreading the risk to other companies whereby both of them will be liable for the loss. Reinsurance is the transfer of risk from one insurer to another. It provides additional security to the insured and all other policy holders. Presently, a very large international market has developed and many companies specialise in accepting the transfer of this risk. In Nigeria, the companies include Nigeria Reinsurance, African Reinsurance, Continental Reinsurance, etc.
THE MIDDLEMEN OR INTERMEDIARIES
The intermediaries in the insurance industry can be classified as insurance agents and brokers.
An insurance agent is somebody who is employed by the principal to bring him into a contractual relationship with the third party. Insurance agents act on behalf of insurance companies on part-time or fulltime basis.
Part Time Agent: This is an agent who brings the insured to the insurer. The agents that perform this function usually is a sideline. They are in different professions such as banking, accounting etc which frequently bring them into contact with people seeking insurance. These agents are not employed by the insurance company on full time basis; they are normally given commission.
Full Time Agent: This is employed by the insurer on full time basis. He is remunerated partly by commission and partly by salary. Fulltime agents are staff of the company who go about canvassing for the insurers.
An insurance broker is a person who negotiates insurance cover with an insurance company on behalf of a client. They are experts in insurance, hence can offer advice and professional assistance in arranging insurance policy on behalf of their clients, give advice on insurance needs, best type of cover, best marked and claim procedures.
A broker normally obtains commission called brokerage from the insurer. He is independent of the insurer.
Differences between Agents and Brokers
- Brokers are full time professionals.
- They can be sued for professional misconduct.
- They are remunerated with higher commission.
- They are experts in insurance business.
- They are always on part time basis.
- They cannot be sued for negligence.
- They are remunerated with lower commission.
- They do not profess to be experts.
Roles of Insurance Brokers and Agents
- They link the insurer with the third party, i.e ., buyer.
- They give advice and professional assistance to the buyer in arranging insurance policy.
- They can also handle claims procedure for the client.
IMPORTANCE OF INSURANCE
- It Facilitates International Trade: Insurance stimulates and facilitates international trade. This is because marine policy provides cover for cargoes and vessels. The export credit guarantee also guarantees credit sales.
- It Offers Investment Opportunities: Insurance makes funds available for investment. A large proportion of this resources are invested in the capital market where businessmen can obtain loan. This helps in developing the country’s economy.
- Leads to Risk Reduction: Insurance helps to reduce or control loss or liabilities of a businessman. It spreads the financial losses of the insured.
- Provision of Security: Insurance provides security to commercial activities. Some small enterprises would have collapsed as a result of major losses, but insurance always takes care of such uncertainty.
- Provides a Means of Saving: Insurance provides a means of saving regularly which will help to provide for the future, e.g. endowment
- It Serves as Collateral Security: Life assurance policy can be used as a collateral security to obtain loan from the bank for business investment.
- It Helps in Motivating Workers: Through group insurance policy, the workers are fully aware of a secured future, hence they will work harder which will bring about higher productivity.
- Provision for Old Age and Disability: Life assurance can be used as a way of providing for old age and to make provision for permanent disability.
PROCEDURES OF INSURANCE CONTRACT
The insured will make an inquiry through his agent to the insurance company. After due consultation, he will obtain a proposal form. The form will be filled and all relevant information relating to the insured must be truthfully stated and signed by the insured. Consideration in the form of premium will be paid to the insurance company on a weekly, monthly or yearly basis, depending on the agreement. The insurance company will then issue out a temporary cover called, cover note which gives him a temporary cover while it is being processed.
After processing, the insurer will issue out an insurance policy to the insured. This policy will give detailed terms of the insurance contract and make the insurer liable for losses or liabilities incurred as a result of the occurrence of risk insured against.
TERMS FREQUENTLY USED IN INSURANCE INDUSTRY
- Actuary: This is a person involved in life assurance, assessing the risks and calculating the premium and handling matters connected with pension funds.
- Proposal Form: This is a form that must be completed by a person wishing to enter into an insurance contract. He must disclose all relevant information truthfully in the form.
- Cover Note: This is a temporary insurance cover to enable the insured to enjoy the benefits of a policy while it is being processed.
- Insurance Policy: This is a document which sets out the exact terms of the insurance contract.
- Premium: This is the payment made to an insurance company for an insurance policy. It can be paid annually, weekly or monthly, depending on the agreement.
- Surrender Value: This is the amount in cash an assurance company will repay to an endowment policy holder if he wishes to discontinue prior to the date of maturity. It depends on the premium paid.
- Insurer: This is the insurance company who undertakes to indemnify another against a specified loss insured against.
- Insured: This is the person who has insurable interest in the subject matter of the policy. He pays premium to the insurer.
- Jettison: This occurs when a ship master, for the interest of the parties, deliberately and reasonably throws overboard some of the cargoes in order to lighten the ship.
- Brown Card: This is a kind of insurance card in which a motorist wishing to visit a country within the West African sub region is expected to carry with him to cover third party liability.
- Barratry: This refers to any act committed by the captain of a ship that is contrary to the interest of the ship owners.