Fundamentals of Insurance - Lutakome · 2019-01-23 · Fundamentals of Insurance ii GENERAL INTRODUCTION Fundamentals of Insurance COP101 is a compulsory foundational course in insurance

Fundamentals of Insurance

COP101

CONTRIBUTORS:

MILTON ASIIMWE, ACII, ACCA MBA

AMBROSE KIBUUKA, ACII, BSTAT

EDWARD NAMBAFU, ACII, MBA

THE INSURANCE INSTITUTE OF UGANDA

TRAINING DEPARTMENT

© The Insurance Institute of Uganda 2016

All rights reserved. Material published in this study text is copyright and may not be reproduced in whole or in part including photocopying or recording, for any purpose without the written permission of the copyright holder.

THE INSURANCE INSTITUTE OF UGANDA

Plot 91 Jinja Road, 2nd Floor Arrow House

P.O. BOX 4184, Kampala- Uganda

Tel: +256 414 733500 email: [email protected]

www.iiu.ac.ug

mailto:[email protected]


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GENERAL INTRODUCTION

Fundamentals of Insurance COP101 is a compulsory foundational course in insurance and

is studied by all students sitting for any of the insurance qualification Examinations offered

at the Insurance Institute of Uganda. It carries 15 points at both COP and CIU levels

The Fundamentals of insurance course is intended to produce graduates who are technically and practically competent to start a career in the insurance industry in Uganda.

Specific Course Objectives

The specific objectives are as follows:

i. To equip students with basic foundation knowledge of insurance in order to develop a better understanding of insurance practice.

ii. To apply the technical and practical skills needed in starting a career in the insurance industry.

iii. To acquire knowledge to improve the selling, underwriting, investigating or assessing losses of insurance products to the public.

iv. To appreciate the importance of business ethics with special reference to insurance.

Learning Outcomes

Upon completion of this programme, the Learner should be able to;

i) Apply the basic insurance knowledge and skills to his/her workplace.

ii) Operate as lower level officers with insurance firms or run an insurance agency.

iii) Acquire technical and practical skills needed in building careers in the insurance industry

iv) Acquire knowledge selling, investigating and underwriting insurance business functions in the workplace.

v) Gain the necessary business ethics with special reference to the insurance industry.


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Table of Contents

GENERAL INTRODUCTION ................................................................................................... i

Table of Contents .................................................................................................................. iii

CHAPTER 1: INTRODUCTION TO INSURANCE .................................................................. 1

Learning Outcomes ............................................................................................................ 1

Introduction ........................................................................................................................ 1

1A History of Insurance ................................................................................................. 2

1B Functions of Insurance .............................................................................................. 5

1C Importance of Insurance ........................................................................................... 7

Chapter Summary .............................................................................................................. 8

Test Your Understanding ................................................................................................... 8

CHAPTER 2: RISK AND INSURANCE .................................................................................. 9

Learning Outcomes ............................................................................................................ 9

Introduction ........................................................................................................................ 9

2A Risk ......................................................................................................................... 10

2B Components of Risk ................................................................................................ 10

2C Classification of Risk ............................................................................................... 11

2D Characteristics of Insurable Risks............................................................................ 11

2E Methods of Handling Risks ..................................................................................... 12

Chapter Summary ............................................................................................................ 13

Test Your Understanding ................................................................................................. 14


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CHAPTER 3: INSURANCE MARKET .................................................................................. 15

Learning outcomes ........................................................................................................... 15

Introduction ...................................................................................................................... 15

3A The sellers and buyers of insurance ........................................................................ 16

3B Intermediaries ......................................................................................................... 18

3C Insurance Service Providers .................................................................................... 19

3D Competition within the Insurance Industry in Uganda .......................................... 22

3E Insurance Industry Associations ............................................................................. 23

3F Penetration of Insurance in Uganda ........................................................................ 24

Chapter Summary ............................................................................................................ 25


CHAPTER 4: REGULATION OF INSURANCE INDUSTRY IN UGANDA ............................ 26

Learning Outcomes .......................................................................................................... 26

Introduction ...................................................................................................................... 27

4A Role of Insurance Regulatory Authority (IRA) of Uganda ...................................... 27

4B Key Provisions on Licensing and Operations .......................................................... 28

4C The Main Provisions of the Insurance Act ............................................................... 33

4D Approaches to Supervision ..................................................................................... 33

4E Compliance Mechanism .......................................................................................... 34

Chapter Summary ............................................................................................................ 35



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CHAPTER 5: BASICS OF INSURANCE BUSINESS ETHICS ............................................. 41

Learning Objectives .......................................................................................................... 41

Introduction ...................................................................................................................... 41

5A Understanding the Concept of Business Ethics ....................................................... 42

5B Fundamental Principles of Business Ethics ............................................................. 44

5C Responsibility of Insurance Market Players ............................................................ 45

5D Ethical Behaviour .................................................................................................... 46

5E Unethical Behaviour ............................................................................................... 46

Chapter Summary ............................................................................................................ 47


CHAPTER 6: PRINCIPLES OF INSURANCE ...................................................................... 49


Introduction ...................................................................................................................... 49

6A Principle of Insurable Interest ................................................................................. 50

6B Principle of Utmost Good Faith .............................................................................. 52

6C Principle of Proximate Cause .................................................................................. 53

6D Principle of Indemnity ............................................................................................ 54

6E Principle of Contribution ........................................................................................ 57

6F Principle of Subrogation ......................................................................................... 57

6G Principle of Loss Minimization ............................................................................... 58

Chapter Summary ............................................................................................................ 58


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CHAPTER 7: CLASSES OF INSURANCE ........................................................................... 61


Introduction ...................................................................................................................... 61

7A Differences between General/Non-Life Insurance and Life Assurance .................. 62

7B Categorization of General Insurance ....................................................................... 62

Examples of public liability insurance claims ................................................................ 69

7J9D Compulsory Insurances ....................................................................................... 78

7J10E Common Policy Terms & and Conditions ........................................................ 79

Chapter Summary ............................................................................................................ 83


CHAPTER 8: CONTRACTING IN INSURANCE .................................................................. 84


Introduction ...................................................................................................................... 84

8A Meaning of the Term ‘Contract’ .............................................................................. 85

8B Essentials of a Valid Contract .................................................................................. 85

8C Types of Contracts .................................................................................................. 89

8D Approaches of Discharging a Contract ................................................................... 90

8E Breach of Contract and Remedies ........................................................................... 90

Chapter Summary ............................................................................................................ 91



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CHAPTER 9: LAW OF AGENCY ......................................................................................... 93

Learning outcomes ........................................................................................................... 93

Introduction ...................................................................................................................... 94

9A Creation of Agency ................................................................................................. 95

9B Kinds of Agents ...................................................................................................... 96

9C Duties of Agents ..................................................................................................... 98

9D Remedies for Breach of Duty .................................................................................. 99

9E Rights of Agents ...................................................................................................... 99

9F Authority of Agents .............................................................................................. 100

9G Relationship between the Principal and Third Party ............................................. 101

9H Relationships between Agents and the Third Party .............................................. 102

9I Termination of an Agency ..................................................................................... 103

Chapter Summary .......................................................................................................... 103

Test Your Understanding ............................................................................................... 104

CHAPTER 10: CUSTOMER CARE .................................................................................... 105

Learning Objectives ........................................................................................................ 105

Introduction .................................................................................................................... 105

10A Understanding a Customer ................................................................................ 106

10B Nature and Character of Services .......................................................................... 106

10C Types of Customers .............................................................................................. 108

10D Customer Expectations and Perceptions Customers’ ......................................... 109


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10E Developing a Customer Service Culture ............................................................... 111

Chapter Summary .......................................................................................................... 115


CHAPTER 11: SALES AND MARKETING ......................................................................... 116

Learning Outcomes ........................................................................................................ 116

Introduction .................................................................................................................... 117

11A Differences between Sales and Marketing ......................................................... 117

11B Principles of Marketing ......................................................................................... 118

11D 11DC The Meaning of Branding and the Role it plays in Sales Branding ........... 120

11D Distribution channels Channels in insuranceInsurance .................................... 121

11E The Sales Process .................................................................................................. 123

11J 11F Qualities of a good Good sales Salesperson ................................................... 128

11G Determinants of Insurance Selling ..................................................................... 130

Chapter Summary .......................................................................................................... 133


CHAPTER 12: PRACTICE OF INSURANCE ..................................................................... 135

Learning Objectives ........................................................................................................ 135

Introduction .................................................................................................................... 135

12A Underwriting Procedures .................................................................................. 136

12B Insurance Policies.................................................................................................. 140

12C Renewals and Cancellations .................................................................................. 141


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12D Underwriting Considerations ............................................................................ 141

12E Pricing Factors ...................................................................................................... 143

12F Claims Procedure .................................................................................................. 143

Chapter Summary .......................................................................................................... 146


CHAPTER 13: MANAGEMENT OF INFROMATION SYSTEMS ....................................... 149

Learning objectives ......................................................................................................... 149

Introduction .................................................................................................................... 150

13A Understanding Management Information Information Systems (MIS) .............. 150

13B Role of Information Systems in Business Today.................................................... 150

13C Characteristics of Managements Information Systems .......................................... 151

13D Components of Information Systems ................................................................. 152

13E Types of Information Systems ............................................................................... 154

13F Supporting Managers with Information Systems .................................................. 156

13G Information Systems Challenges ........................................................................ 157

Chapter Summary .......................................................................................................... 157


CHAPTER 14: EMERGING ISSUES AND TRENDS IN INSURANCE ............................... 159

Learning objectives ......................................................................................................... 159

Introduction .................................................................................................................... 160

14A Bancassurance .................................................................................................... 160


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14B Micro-insurance .................................................................................................... 161

14C Takaful Insurance ................................................................................................... 162

14D Directors and Officers (D&O) Liability .............................................................. 164

14E Pension Trustee Liability ....................................................................................... 165

14F Environmental Risk and Role of Insurance ........................................................... 167

14G Oil and Gas Risk ................................................................................................ 167

Glossary of Key Terms used in Insurance .......................................................................... 169

Further Readings ............................................................................................................... 174


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CHAPTER 1: INTRODUCTION TO INSURANCE

Contents

Learning Outcomes

Introduction

1A History of Insurance

1B Functions of Insurance

1C Importance of Insurance

Chapter Summary

Test Your Understanding

Learning Outcomes

After studying this chapter, you should be able to:

Describe the historical development of insurance

Explain the importance of insurance

Explain the functioning of insurance

Appreciate the concept of risk transfer

Introduction

In Uganda the insurance service forms part of a larger financial market with several financial products to suit the needs and demands of the stakeholders.

In this chapter we shall trace the historical development of insurance in Uganda and East Africa. We shall also explain the importance of insurance to individuals, business entities and the economy at large. Further the chapter will explore the functioning of insurance.

In this chapter, we will cover the following topics:

• History of insurance

• Functions of Insurance • Importance of Insurance


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1A History of Insurance

In this section, we will look at how traditional insurance evolved into today’s modern insurance with the fundamentals of creating a pool of homogenous risks being maintained through this evolution. Also we shall look at how modern insurance was introduced in Uganda.

1A1 Overview of the history of insurance

There are divergent schools of thought attempting to explain the history of insurance in the world. However, in principle, these various schools of thought tend to point towards creation of a pool of funds to pay for the losses of the unlucky few. The history has it that marine insurance is the oldest form of insurance.

1A2 History of modern insurance

In some sense, we can say that insurance dates back to early human society. We know of two types of economies in human societies: natural or non-

monetary economies (using barter trade with no centralized nor standardized set of financial instruments) and monetary economies (with markets, currency, financial instruments, and so on).

Insurance in the former case entails agreements of mutual aid. If for example one family's house gets destroyed, the neighbours are committed to help rebuild it.

Insurance became more sophisticated in the Enlightenment era Europe, and specialized varieties developed. Some forms of insurance developed in London in the early decades of the 17th century.

Examples

• Marine insurance can be traced to maritime trade as early as 3000BC. Here, merchants suffered losses basically involving robbery of the goods and ransom and, so as to reduce the impact of these risks, they agreed to create a pool of funds from which they would draw funds to pay for the losses. Lloyds of London, which is the largest market of marine insurance in the world today, was among the earliest providers of modern marine insurance.


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• Fire insurance: The Great Fire of London of 1666 marked the beginning of fire insurance. This fire wiped out the entire town structure which by then was wooden. As a result of this calamity, several companies came up with fire insurance as a risk management solution against future incidences.


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• Life assurance: In England the first life assurance policy was done in the 16th century on the life of William Gybbons for the benefit of Richard Martins. The famous Amicable society for a perpetual assurance office started its operations in 1706.

1A3 Development of modern insurance in Uganda

Modern insurance was introduced to the country during the colonial era. The first locally owned insurance company, the East Africa General Insurance Company (EAGEN), was incorporated in 1946, followed by National Insurance Corporation (NIC) in 1964. Prior to that, about 95 agencies and branch offices of foreign insurance companies, mainly from the United Kingdom, India and the United States of America were in operation by Independence in 1962.

The Finance Act, 1970 required insurance companies not locally incorporated to allow 49/51% Government/private ownership participation. This led to the formation of Uganda American Insurance Co. Ltd, Jubilee, British American Co. Ltd, United Assurance which were locally incorporated and wholly owned by Ugandans in 1972.

In the mid-1970s to mid-1980s insurance experienced setbacks namely: economic war, internal armed conflicts, May 1987 Currency Reform etc.

Today, there are 28 licensed insurance companies, 28 insurance brokers and over 800 insurance agents in Uganda. The Insurance Regulatory Authority (IRA) established in 1996 to ensure the effective administration, supervision, regulation and control of the business of insurance in Uganda has raised confidence in the industry. To further boost this confidence, a number of insurance and brokerage companies have invested heavily in public awareness. IRA and the Uganda Insurers Association have also embarked on an extensive awareness campaign


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1A4 Development of insurance legislation

The following are the major legislation that have influenced the development of the Ugandan Insurance Industry since independence:

Motor Vehicle Insurance Third Party Risks, which first came to the scene in the Traffic and Road Safety Act 1970. This made motor thirdparty bodily injury /death insurance compulsory for all motorists

The Yellow Card Scheme - the Protocol on the establishment of the Third Party Motor Vehicle Insurance System by Preferential Trade Area (PTA) member states. This makes it compulsory for all vehicles travelling in states under the COMESA region to have the basic minimum cover of motor third party insurance whilst in a country in which the vehicle is not registered

The Workers’ Compensation Act 2000.This legislation makes it mandatory for every employer to have a form of compensation to an employee that may suffer illness, injury or death during the course of their employment

The Insurance Regulatory Authority of Uganda (IRA) was established under section 14 of the Insurance Statute 1996 now The Insurance Act (Chap213) Laws of Uganda, 2000 (Insurance Act) which came into effect on 4th April 1996 and commenced operations in April 1997.

The establishment of the Insurance Regulatory Authority of Uganda under section 14 of the Insurance Statute 1996 now The Insurance Act,(Chap213) Laws of

Uganda.was a consequence of Government’s adoption of the liberalization and privatization policies which ended its role of directly engaging in the provision of goods and services and taking on the role of supervisor or regulator.

1B Functions of Insurance

This refers to how insurance operates to manage the risks. The risks are transferred to the insurer by various individuals or organizations that are willing to pay up premium. The insurer has the responsibility of creating a financial pool out of which the few who suffer losses are compensated. There are three main functions of insurance and these are:

Risk transfer

It is a mechanism by which the financial consequences of an event are shifted from one party to another. Take an example of a property owner (landlord) asking a tenant to sign a tenancy agreement that holds the tenant responsible for any losses arising from the building catching fire.

Creation of a common pool

Insurance operates on the premise of large numbers where the insurer takes contributions in the form of premiums from individuals, corporate companies,


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government agencies/departments, non-government organizations, and business entities exposed to similar or homogeneous risks and creates a common pool/fund from which the insurer pays the few who suffer losses.

As in the example above, the insurance company would create a pool of residential house owners since they are exposed to similar or homogenous risks like theft, escape of water from its normal confines (tap and sink).

Equitable premium

It is a fair premium collected from members of a common pool that reflects the risk exposure that each of their risks brings to the pool. For example, a person proposing to insure a grass-thatched house would be charged a higher premium than that of a person proposing to insure an iron-roofed house. Equitable premium should take into consideration the risk profile (frequency and severity of the risk) being passed onto the pool.

Each of the house owners in the example above would be charged premiums depending on a number of factors that include the location of the house, security systems installed, nature of the contents inside the house, etc. such that a house in upmarket Kololo and Naguru hills will be charged fairly lower on the factor of high security as compared to a house in the neighbourhood of Bwaise where the chance of theft or burglary is close to 100% in a period of one year.

Pool of private cars

The owners of these cars will pay premium to an insurance company to cover the risk of accidental damage or theft of cars and Third Party liability risks. However each car is unique in terms of the model, year of manufacture, accessories; and because of such differences, they present different levels of risk exposure to the pool created by the insurance company and hence each will be charged a premium equal to the risk associated with its uniqueness (equitable premium).


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1C Importance of Insurance

The major role of insurance is to provide peace of mind to the insured, who could be an individual, a business entity and society as a whole. We will discuss the role and importance of insurance under three broad categories:

i. Individual ii. Business/company

iii. Society/economy

1C1 Importance of Insurance to an individual

Insurance provides security and safety. For instance where cover is taken for the assets of the business, the sole proprietor is guaranteed compensation inthe event that they caught fire and that indemnification would safe guard the existence and continuity of the business.

Insurance affords peace of mind. The major objective of any insurance cover is to provide a peace of mind in the assurance that your losses have been taken care of by the insurance company and you will not need to deep into your pocket to cater for any expenses resulting thereof from the insured event

Insurance protects mortgaged property. Where the individual uses the owned assets as collateral in a bank, the insurance company will have to state the interest of the specific bank/lender such that in the event of loss of the property through say accidental fire, then the insurance company will compensate the bank

Insurance eliminates dependency. This is better demnonstrated for health funeral,and life insurance covers. Forexample in the event of a terminal illness , the insured will be compensated upto a limit that would help fend for his family without necessarily burdening the othe family members

Life assurance encourages savings/profitable investment since premiums are usually paid on monthly basis and that pool of money can then be used to invest in profitable ventures for higher returns

1C2 Importance of Insurance to a Business/Company

Uncertainty of business losses is reduced

Business efficiency is increased since insurance compensation provides the necessary funds for business continuity

Keyman indemnification In a company that has key employees with exceptional leadership, managerial and technical skills, the business will take up Keyman insurance such that in the event that it loses him/her to death, then the compensation shall be used to hire another of similar or related skills without having to incur extra costs say in recruitment.

Enhancement of credit since the insurance policy can act as collateral for loans


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1C3 Importance of insurance to the economy

The wealth of society is protected; e.g., the loss/damage of property by fire or accident can be well indemnified by property insurance.

Insurance contributes to the economic growth of a country when, for instance, the pooled funds are deposited with commercial banks are accessed by borrowers to invest into the economy.

The insurance industry creates jobs for insurance professionals.

Chapter Summary

The key ideas covered this chapter can be summarized as below:

Insurance is a way or mechanism of transferring the insurable risk to an insurance company for a price called premium such that in the event of a loss, the insurance company will compensate the policy holder (individual or company) as per the terms set out in the insurance contract.

Insurance works by creating a pool of homogenous risks from which the losses of the unlucky few are paid for by the premiums of the pool of risks from different policy holders.

In the pool each policy holder is charged a price that is equal to the level of risk that their property brings to that pool.

Insurance as an industry is important to individuals, organizations and society as a whole.


1. Discuss the role of insurance to the community. 2. How was modern insurance introduced in Uganda? 3. What is the significance of the Insurance Act? 4. Name any three ways insurance companies can increase awareness of the

importance of insurance.


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CHAPTER 2: RISK AND INSURANCE

Contents

Learning Outcomes

Introduction

2A Risk

2B Components of Risk

2C Classification of Risks

2D Characteristics of Insurable Risks

2E Methods of Handling Risks

Chapter Summary


Learning Outcomes


Define the term ‘risk’

Highlight the components of risk

Explain the characteristics of insurable risks

Explain the methods of handling risks

Introduction

There is no single definition that has been advanced for the term ‘risk’, and yet no one can separate risk from insurance. In this chapter we shall attempt to define the term ‘risk’, explore the components, characteristics and classification of insurable risks as well as the methods of handling risks.


• Risk • Components of Risk • Classification of Risks • Characteristics of Insurable Risks • Methods of Handling Risks


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2A Risk

Insurable risk refers to the conditions that are vulnerable to danger of loss to a person or property. It can be defined as:

The chance of loss, where chance implies doubt about the outcome in a given situation which is favourable.

The possibility of loss.

The probability of any outcome being different from the one expected.

A combination of hazards.

The uncertainty of loss.

A condition in which loss or losses are possible.

Generally, a condition is an insurable risk if:

The peril insured against shall produce a definite loss not under the control of the insured,

There is a large number of homogeneous exposures subject to the same perils,

The loss is calculable and the cost of insuring it is economically feasible,

The peril is unlikely to affect all insured simultaneously, and

The loss produced by a risk is definite and has potential to be financially serious.

2B Components of Risk

Risk has three vital levels:

2B1 Uncertainty

This implies some doubt about the future based on either lack or imperfection of knowledge. Uncertainty exists even when the person exposed to risk does not know of its existence. For example, in our daily lives, we may not know when one will die or get involved in an accident; whether a house will be broken into or whether it will catch fire.

2B2 Levels of risk

Some risks are minor and occur frequently but with minimal impact/severity. For instance, shoplifting occurs frequently but has low severity to those affected. Some other risks occur rarely but the impact is severe; for example, plane crashes and marine accidents (low frequency with high severity).

2B3 Risk as the cause of the loss


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The terms peril and hazard are sometimes used interchangeably with each other and with risk

Risk is often used to mean peril and hazard. Peril is the prime physical cause of the loss. Examples include theft, fire, or

hailstorm. A hazard is the condition that may increase or decrease the effect of the

peril; for example, the nature of construction in Fire Insurance or the state of health in Life Assurance.

Hazards may relate to the physical characteristics that may increase hazards in fire insurance. Examples include: the type of construction; location of the building; age and place where the vehicle is kept.

Moral-nature and behaviour of human beings connected with the subject matter of insurance; for example, withholding material facts, lodging fraudulent claims, exaggerated losses, carelessness.

2C Classification of Risk

2C1 Financial Vs Non-Financial

Financial – if outcomes can be measured in monetary terms such as material damage to the building after fire, or theft of goods.

Non-monetary – if outcome though undesirable cannot be quantified, such as emotional attachments.

2C2 Pure Vs Speculative Risks

Pure risk involves loss or break-even situations. These risks might not only be unfavourable but may leave a person in the position he/she enjoyed before the loss such as fire/burglary risks.

Speculative risks involve loss, break-even and the possibility of gain, such as buying shares or inventing a new product.

2C3 Fundamental Vs Particular Risks

Fundamental Risks – Are beyond the control of human beings and are indiscriminate in nature. Examples include earthquakes, storm and tempest, and landslides, which were in the past uninsurable but can now be insured.

Particular Risks – These are personal in nature and consequences affect a particular individual. Examples include fire, theft and motor accidents, and these are insurable risks.

2D Characteristics of Insurable Risks

Insurable risks are characterised:


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As fortuitous or accidental in nature as far as the insured is concerned. It is therefore not possible to insure against an event that will definitely occur.

In monetary terms. For Property Insurance, the value is easy to determine. In Life Assurance, the value of 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 premium.

As an insurable interest. There must be a legal relationship between the insured and the subject matter of insurance.

By homogeneous exposure. A large number are exposed to similar losses. By pure risks. Unlike speculative risks, pure risks are insurable. As particular risks. They are personal in origin and consequences (e.g. fire,

theft and motor accidents) unlike fundamental ones, which beyond one’s control (earthquakes, hurricanes). Fundamental risks such as war and unemployment may also arise out of the nature of the society.

Insurable risks must never be against the public policy in terms of what society considers just and moral. For example, we cannot insure a stolen property.

2E Methods of Handling Risks

Given the negative consequences the insurable risks present to individual and business lives, there is need to devise ways of handling them. These include:

2E1 Risk Avoidance

Here one realizes the risk exists and decides to keep away from the event that exposes one to that risk. You may forbid your motor vehicle from plying a route that is considered insecure, for instance.

2E2 Risk Retention

Funds may be retained intentionally or unintentionally. Intentionally, individuals realize the existence of the risk and therefore decide to create fund from which losses are paid. Under involuntary retention, individuals or organizations do not see the existence of the risk. Here we need to consider factors such as the frequency, severity of risks. However, large unpredictable risk requires insurance.

2E3 Risk Reduction

Measures are taken to minimize the frequency and severity of risks. Here we have pre-loss risk reduction. Examples include police escort in Money Insurance; employment of guards and burglar proofing; fixing fire sprinklers, et cetera.

2E4 Risk Transfer


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Here financial consequences of an event are shifted to another party. For example, the landlord may shift the risk of the house catching fire to the tenants; a transporter can shift the risk of loss or damage to the owner of goods. Risk transfer is usually done through suitable worded contracts. Insurance is an example of risk transfer in that we spread an individual risk across many people in order to make it more bearable for individuals exposed to such risks.

Alternative methods of handling risks

Chapter Summary

The key ideas covered this chapter can be summarized as below:

Insurable risk refers to the conditions that are vulnerable to danger of loss to a person or property and it can be defined as:

- The chance of loss, where chance implies doubt about the outcome in a given situation which is favourable;

- The possibility of loss; - The probability of any outcome being different from the one expected; - A combination of hazards; - The uncertainty of loss; - A condition in which loss or loss are possible

Risk has three vital levels:

- Uncertainty - Levels of risk - Risk as the cause of the loss

Risk can be classified as:

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- Financial Vs Non-Financial - Pure Vs Speculative Risks - Fundamental Vs Particular Risks

Insurable risks may be characterised as:

- Fortuitous or accidental - Monetary - Insurable interest - Homogeneous exposure - Pure risks - Particular risks - Never against the public policy

Methods of handling risks include:

- Risk avoidance - Risk retention - Risk reduction - Risk transfer


1. Give six definitions of the term ‘risk’. 2. Explain the differences between:

a) Fundamentals and particular risks b) Pure and speculative risks c) Financial and non-financial risks

3. List at least six characteristics of insurable risks. 4. Explain the three methods of handling risks.


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CHAPTER 3: INSURANCE MARKET

Contents

Learning Outcomes

Introduction

3A The Sellers and Buyers of Insurance

3B The Intermediaries

3C Role of Insurance Providers

3D Competition in Insurance

3E Penetration of Insurance in Uganda

3F Insurance Industry Associations

Chapter Summary


Learning outcomes


Describe the general structure of the insurance market in Uganda

Name the various players in the insurance market

Identify various associations in the insurance market

Describe the nature of competition in the insurance market

Explain the role of service providers in the insurance industry

Introduction

In simple terms, a market can be described as platform where buyers and sellers meet to transact business. An insurance market refers to the mechanism where insurance buyers and sellers meet to enter into an insurance contract. Like any other market, the insurance market also has intermediaries and service providers.



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• The sellers and buyers of insurance • The intermediaries

• Role of Insurance Providers

• Competition in insurance

• Penetration of insurance in Uganda • Insurance industry associations

3A The sellers and buyers of insurance

In this section, we will look at the major players in the insurance market.

3A1 Sellers of Insurance

Generally insurance is sold by insurance companies, captives and reinsurance companies. In Uganda there are 25 insurance companies and only one reinsurance company that are currently supplying the insurance market. The population that does not take up or buy formal insurance have the option of self-insurance. These form the majority of the Ugandan population which is largely in the informal sector with little awareness about insurance and its benefits.

3A1A Insurance Companies

In order to provide insurance, an insurance company must register as a company and also be registered under the Insurance Act 2011. Insurance companies operating in the market can be classified either by ownership or by the nature of business they transact.

Classification by ownership

Here, we have two forms:

Proprietary Companies: Proprietary companies are owned by shareholders who appoint directors to run them on their behalf. Profits, if any, belong to the shareholders. The liability of the shareholders is limited to the nominal value of their shares. If a company is unable to meet its financial obligations, it will go into liquidation. The majority of the insurance companies in Uganda belong to this category.

State-owned Companies: National Insurance Corporation was the only company with government stake at 40% by December 2009. Initially it used to be 100% owned by the Government of Uganda until it was publicly listed, with the government retaining 0% shareholding. Meaning the Government of Uganda is no longer a shareholder and therefore there is no state-owned insurance company in Uganda.

Classification by nature of business transacted


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Here, the insurance companies are categorized by the class of insurance business being transacted.

Specialist Companies: Specialist companies specialize in one class of insurance only. There are few specialist companies in this region, for example the Direct Line Insurance Company which offers only motor vehicle insurance in Kenya. We do not have a specialist company in Uganda.

Composite Companies: Composite companies underwrite several classes of business, that is both life and nonlife classes of insurance. The majority of companies in Uganda used to fall into this category. However, with the amendment of the Insurance Act in 2011, all composite companies were required by law to separate their life business transactions from the nonlife (general) business.

The companies that had to separate include Gold Star Insurance Company, Insurance Company of East Africa, Jubilee Insurance Company, National Insurance Corporation and UAP Insurance Company. All the above companies had to create new entities to run the separate businesses of life and nonlife thus increasing the number of insurance sellers in the market.

Currently the insurance companies those that sell life insurance include, Liberty Life, ICEA Life Assurance Co. Ltd, Sanlam Uganda, UAP Insurance Co. Ltd whilst those underwriting general business include Jubilee Insurance, UAP Insurance, AIG, Lion Assurance, Goldstar, ICEA General Insurance Co. Ltd, APA Insurance Company, Phoenix Insurance Company, Excel Insurance, Statewide Insurance Company, Britam Insurance Company, et cetera.

For more details, refer to the Insurance Regulatory Authority Website: www.ira.go.ug.

3A1B Captives

These companies are subsidiaries formed by parent companies to underwrite some of their insurance risks, their incentive being that of paying low premiums and keeping the funds within the group for additional investment incomes. This is usually done by very big non-insurance companies with multinational operations that would mean high cash flows in premiums.

3A1C Reinsurance Companies

The purpose of insurance is to transfer risk from the public to the insurer. Sometimes an insurer finds the risk too big for its own underwriting capacity and therefore seeks cover for the excess amount of risk. If an insurer insures part of the risk it has assumed, this is called reinsurance.

Uganda Reinsurance Company Ltd is the only insurance company in Uganda that covers reinsurance. Most of the insurance companies in Uganda are mandated to cede 15% of all risks underwritten to Uganda Re. The rest of the

http://www.ira.go.ug/


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reinsurance can then be bought from national and regional reinsurers like Kenya Reinsurance Corporation, Africa Reinsurance Corporation, PTA Reinsurance Corporation, East Africa Re and multinational reinsurance companies like Munich Re, Swiss Re, and Hannover Re.

3A1D Self-insurance

As an alternative to insurance or in addition to it, some big companies set funds aside to meet certain insurable losses. Such organizations may opt for self-insurance if they feel they are strong enough financially, if they feel self-insurance is cheaper than commercial insurance, or where the market does not cater for its special needs.

In order to be operational, a self-insurance programme should possess these three characteristics.

The organization must be big enough to make the losses predictable. The plan must be financially dependable. The exposure units should be widely distributed geographically in such a

manner as to prevent a catastrophe wiping out the fund.

Self-insurance schemes have the following disadvantages:

In times of difficulty there may be a temptation to borrow from the fund. A catastrophe may occur and wipe out the whole scheme. Funds are kept in a short-term easily convertible form, which earns little

interest. They may be criticized by shareholders because it reduces their profits.

3A2 Buyers of Insurance

Buyers of insurance comprise individuals and organizations. Personal

insurance buyers are the private individuals who buy insurance policies for their personal belongings like motor vehicles, domestic appliances, and personal accident and life assurances. Commercial insurance buyers comprise the biggest percentage of buyers of insurance. Under commercial buyers we have government departments, parastatals, non-governmental organizations, and industrial and commercial organizations (banks, telecom companies) et cetera. The products they will be most interested in are Workers Compensation Insurance, Group Personal Accident, Money Insurance, Fire and Allied perils.

3B Intermediaries

In this section you will learn that just like in any other market, the insurance market has middlemen that connect the buyers of insurance to the sellers of insurance or vice versa. Insurance may be bought directly or through


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intermediaries. The main intermediaries operating in the Ugandan market are insurance agents and brokers who act on behalf of the insurance company and the insured respectively. For their services, they receive a commission from the insurance companies.

3B1 The Agent

An agent acts for or on behalf of an insurance company. In Uganda the agent is tied to a single insurance company for their licensed business. There were over 1,000 licensed agents in Uganda.

In order for one to be an agent, one has to possess a certificate of proficiency and be registered under the Insurance Act 2011.

The agent can either be an individual or a company registered as an insurance agency.

3B2 Insurance Brokers

These are specialists in the field of insurance. They act on behalf of the buyer or the insured, however their commission is paid by the insurance company with which the business is placed. In Uganda we have over 25 insurance brokerage firms that include AON, Marsh, Liaison, Legacy, Grassavoye, Clarkson, and Intercontinental. Refer to the Authority Website for the complete list of licensed brokers: www.ira.go.ug.

3B3 Health Management Organizations (HMO)

These are medical insurance providers who do not carry the risk but only manage the funds for their clients. If company ABC Ltd has many employees whose cost of insurance would be millions of shillings, it may contract or outsource the function of managing the medical allowance expense for each employee as per their defined benefit limits. The HMO is only paid a management fee which could be a percentage of the fund value. You will study these in depth under Health Insurance Certification.

3C Insurance Service Providers

These are persons or companies that provide various types of services to the insurance industry.

3C1 The Surveyor

The surveyor assesses the extent of the risk to which the insurance company is exposed and gives advice on the extent of the risk exposure and risk improvement measures. Ideally, a surveyor should be consulted at the planning stage of a project since the main work of the surveyor is to give advice before the commencement of risk. A surveyor may be needed in



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almost all classes of insurance but is mostly used in fire and burglary insurance.

3C2 An Actuary

An actuary is a financial engineer, who, through the application of mathematical skills, uses past experience to predict the likely outcome of future events. At the same time, in addition to calculating premiums, the actuary is involved in valuing assets and liabilities of life assurance companies after a period specified in the Insurance Act with a view of determining whether the assets will be sufficient to pay off the liabilities of a company.

In pension schemes, the actuary will determine the benefits payable to individual pensioners and the cost of joint pension schemes. This said, actuarial science is a highly complex mathematical discipline. In computing the life premium, the actuary will take into account:

mortality, which is a method of expressing the probabilities of living or dying at any given age;

Expenses and loading for profits; Interest paid to an insured for an insurer’s use of the insured’s money

before a claim matures; and reserves representing pre-payment of future premiums.

3C3 Risk Manager

Risk management is a fairly new concept in Africa. Risk managers deal with identification of risks, analysis of risk (measurement), and control of risk, which may take the form of reduction, avoidance, insurance and transfer to a third party. Risk managers will majorly be employed by manufacturing company or in financial service companies to mitigate loss through setting up robust risk management systems.


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The Insurance Market

3C4 Loss Adjuster

Loss adjusters are professionals qualified in assessing the magnitude and cause of loss. They advise on loss minimization and negotiate with the policyholders and insurers on claim settlement. Though insurance companies commission them, loss adjusters operate independent of them. Multiple Consult, General Adjusters, McLarens Young are some of the loss adjusting companies operating in Uganda.

3C5 Loss Assessors

Insurers appoint loss assessors after a loss has occurred to quantify the magnitude of the loss and advice on the method of compensation. They are used mostly in general classes of insurance to assess losses which are of a

INSURANCE

COMPANY

INSURANCE

BUYER INTERMEDIARY

SERVICE

PROVIDERS


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small magnitude. Some assessors can decide to specialize in either property classes like motor hence the name motor assessors. Motor assessors are expected to provide independent reports on the extent of the loss and the best method of compensation.

The trend in Uganda is that companies are employing internal assessors partly to manage the claims cost and improve the turnaround time in servicing clients. However the internal assessors have authority limited to relatively small claims.

3C6 The Investigator

These are professionals who are appointed when foul play is suspected about the claim. When an insurance company suspects fraud around the claim, then the services of the investigator are needed to establish the facts surrendering the cause of loss.

3C7 Doctors

Under liability classes like Group Personal Accident and Worker’s Compensation, the benefits under the policy are based on percentages determined by specialized medical doctors based on the extent of assessment of incapacity following the accident. A number of specialist clinics are engaged to come up with an opinion in that regard to form a basis of compensation by the insurance company.

3D Competition within the Insurance Industry in Uganda

Competition, which is very intense in the insurance industry, may take various forms but majorly insurance companies will compete on prices, quality of products offered, customer service, gifts, location, business hours, and commissions paid out.

We now discuss each of the forms in turn.

3D1 Prices

Insurers compete on the basis of price by offering lower priced products than other companies dealing in the same line of insurance. An insurer can reduce premiums by cutting down on the cost of operations. If a company succeeds in reducing the following costs that are common to all insurance companies, the price of its insurance will go down; payment of losses, loss adjustment expenses, cost of marketing, administrative expenses, and taxes.

3D2 Quality


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Insurers compete on the basis of price by offering different forms of policies, or offering policies with benefits, to the insured. One aspect of this competition has been the broadening of coverage under manifold policies and services.

3D3 Service

Insurance is a promise of future performance. The individual rarely knows if the service he or she has purchased will materialize until a loss occurs. A major feature that some insurers are good at is the service or the advice their agents give to clients. Insurers who give good advice or service will enjoy competitive advantages over those that give none of them or give inadequate advice.

3D4 Gifts

Certain insurers give free gifts in addition to the service they give. Umbrellas and T-shirts are examples of free gifts.

3D5 Location and Hours of Business

Insurers use location and hours of business for competitive purposes. Some insurers have established branch offices to acquire business thus taking services close to the people. Some insurers open during lunch hours and/or on Saturdays, thereby using hours of work as a means of competing with other insurers.

3D6 Commissions

Commissions may be used for competition. Insurers who give maximum commissions or who treat their agents/brokers in a special way will have a competitive edge over those who give low commissions or who do not give intermediaries special treatment. In Uganda, the maximum commission rates are prescribed under the regulatory authority and, therefore, this form of competition is seldom used.

3E Insurance Industry Associations

Although there is intense competition in the insurance market, there are many areas in which the players cooperate. In most cases cooperation arises out of economic necessity. Sometimes, co-operation is designed to spread risk among insurers while at other times cooperation is aimed at improving public relations and insurance education in the country. The most important cooperative bodies are the Uganda Insurers Association (UIA), Uganda Association of Insurance Brokers, Uganda Insurance Agents Association, Association of Loss Adjusters and Assessors, and the Insurance Institute of Uganda. It should be noted that these are voluntary, independent and non-


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profit organisations that act in consultancy and advisory capacity for the interests of the members and the overall development of the insurance industry in Uganda.

3F Penetration of Insurance in Uganda

The Insurance Regulatory Authority of Uganda (IRA) has licensed 88 firms that will transact insurance business this year with seven new companies entering the market. At least 21 firms have received licenses for nonlife insurance businesses while eight for life insurance and one reinsurance company.

The authority also licensed 12 health membership organizations, 27 insurance brokerage firms and 18 loss assessors. The sector continues to grow, albeit slowly. The entry of new players might attract more and fuel competition in the market. Some of the new entrants are: Alliance Africa General Insurance Ltd, CIC General Insurance Company, CIC Africa Life Assurance Ltd, Assured Partners Insurance Brokers Ltd, Interlink Insurance Africa, Milvik Uganda Ltd and Claim Care Uganda Ltd. Insurance penetration in Uganda remains dismally low at less than one per cent (0.85% for 2013). The authority is looking at bringing in more players.

With progress in the insurance industry as demonstrated by the 30 per cent growth registered in the previous year, the industry regulator has said its problem has since shifted from stimulating the growth to sustaining it. The latest Insurance market report indicates that the previous year gross insurance premium written rose to Shs463 billion from Shs351 billion, representing a remarkable 31 per cent growth in the industry. Despite this impressive rate of growth in the previous year, competition among industry players remains minimal, with huge disparities visible in terms of written premiums. Statistics from the Insurance Regulatory Authority (IRA) indicate that more than 60 per cent of the nonlife insurance market – the biggest sub-section in Uganda’s insurance industry – is still controlled by only three players: Jubilee, UAP and AIG. Despite being highly concentrated, with 29 insurance companies, Jubilee Insurance, which accounts for 23.75 per cent of the total market, underwrote (realized) Shs83.4 billion out of the industry’s gross written premiums of Shs456.86 billion.

The insurance sector is adapting to the needs of the average Ugandan by introducing low cost micro-insurance policies, cutting red tape on compensations, and opening a complaints bureau for aggrieved clients.


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Chapter Summary

The key ideas covered in this chapter can be summarised as below

The main players in the insurance market are the sellers of insurance and the buyers of insurance who are connected by intermediaries and supported by other service providers.

The sellers of insurance are mainly insurance companies, reinsurance companies and captives

The buyers of insurance can either be individuals for personal insurance or commercial entities or companies

The main intermediaries in the insurance industry are insurance brokers and insurance agents

There are various services that will be provided to the insurance industry by certain professionals with the main ones being surveyors, risk managers, loss adjusters/assessors actuary and investigators

Insurance companies will compete through various forms like process, quality of service, gifts, locations and commissions paid to intermediaries


1. Name two categories into which insurance companies can be classified? 2. What is a captive company 3. Outline three advantages and three disadvantages of self-insurance 4. Discuss any three service providers in the insurance market 5. What methods do insurers use to compete for business in the Ugandan

insurance market?


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CHAPTER 4: REGULATION OF INSURANCE INDUSTRY IN

UGANDA

Contents

Learning Outcomes

Introduction

4A Role of Insurance Regulatory Authority of Uganda

4B Key Provisions on Licensing and Operations

4C The Main Provisions of the Insurance Act

4D Approaches to Supervision

4E Compliance Mechanism

Chapter Summary


Learning Outcomes

After studying this chapter you should be able to:

• Explain the role of the Insurance Regulatory Authority (IRA) of Uganda in regulating the insurance industry

• Outline the key provisions on licensing and operations • State the main provisions of the Insurance Act • Explain the approaches to supervision • State the compliance mechanism


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Introduction

Insurance is a promise to pay claims in the event that the policyholder suffers loss/damage that is covered under the terms of the policy. There is need to check on unprincipled insurers who might be tempted not to honour their promise. To meet this need, governments world over strongly regulate the insurance industry.

During the 1980s, insurance companies could start business simply after registering with the Registrar of Companies. There was no established government body with the technical know-how to monitor the activities of insurers and other key players in the sector. The insuring public was therefore left with little recourse in the event that their insurers unlawfully declined to settle legitimate claims. The insured public was suffering at the hands of unethical players in the insurance industry. To address this concern, in 1996 the government enacted The Insurance Act CAP 213 which came into effect in 2002 and was later amended as per the Insurance (Amendment) Act, Act No.13 of 2011. This Act established the Insurance Regulatory Authority of Uganda. The Chief Executive Officer of the Authority is mandated to run and supervise all activities in the insurance industry.


• Role of Insurance Regulatory Authority of Uganda • Key Provisions on Licensing and Operations • The Main Provisions of the Insurance Act • Approaches to Supervision • Compliance Mechanism

Note: It is highly recommended that readers refer to the website of the IRA (www.ira.go.ug) to keep abreast with all regulatory developments.

4A Role of Insurance Regulatory Authority (IRA) of Uganda

The object of the IRA is to ensure the effective administration, supervision, regulation and control of the business of insurance in Uganda and these functions include:

i. Establish standards for the conduct of insurance and reinsurance business

ii. License all persons involved in or connected with insurance business, including insurance and reinsurance companies, insurance and reinsurance intermediaries, loss adjusters and assessors, risk inspectors, et cetera

iii. Approve texts of policies and proposal forms iv. Approve minimum rates of insurance premiums and maximum

commissions in respect of all classes of insurance v. Safeguard the rights of insurance policy holders and insurance

beneficiaries to any insurance contract



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vi. Receive complaints from members of the public on the conduct of a person licensed under this Act and arbitrate and grant restitution to the complainant, as may be possible

vii. Advise the government on adequate insurance protection and security for national assets and national properties

viii. Promote a sound and efficient insurance market in the country ix. Supervise and control transactions between insurers and reinsurers x. Ensure strict compliance with the Act and Regulations made under it

and any other law relating to insurance xi. Undertake other functions as the Minister may designate

4B Key Provisions on Licensing and Operations

All insurance and reinsurance companies must meet the following requirements for licensing:

Must be incorporated under the Companies Act Payment of appropriate registration fees Submission of Articles and Memorandum of Association Required minimum paid up capital (as of 2014, Ushs.4 billion for general

insurance companies, Ushs.3 billion for life insurance companies, Ushs. 10 billion for reinsurance companies, Ushs.75 million for brokers)

Curriculum vitae of the proposed Principal Officer; Directors and Management staff

Name of proposed actuaries where applicable A statement of all classes of business the applicant intends to transact Proposal and policy forms of all the classes of business the proposer

intends to transact The manual of premium rates the proposer intends to use Copies of reinsurance treaties Evidence of deposits with the Central Bank The proposed contract documents with Agents and Brokers (for insurance

and reinsurance companies) A statement of how the company intends to cover initial costs (for start-up

companies)

4B1 Investment of Insurance Funds

The Act gives clear guidelines with regard to areas where insurers can invest their funds. This is done on the understanding that insurers are in possession of large funds held in trust for policyholders. The Chief Executive Officer’s office provides these guidelines on investment with a view to ensuring that the security, liquidity and profitability of the company is not jeopardized. There should be a proper mix between short-term and long term investments (matching of assets and liabilities) to avoid situations where a company with


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excess fixed assets may experience liquidity problems thus impeding its claims-paying ability.

4B2 Contractual Documents

Insurers are required to submit copies of proposal forms and policy documents to the supervisory authority for approval. The Chief Executive Officer is supposed to ensure that the documents are up to standard and have outlined clearly the circumstances in which the claims are payable and when they are not payable. The documents should not contain ambiguous terms and clauses.

4B3 Management

Before an insurer is registered it is an important requirement that the insurer has adequate and technically qualified staff. Therefore, experience, academic and professional qualifications of key staff should be provided in the application for registration.

The Chief Executive Officer is also supposed to approve the board of directors of an insurer to ensure that they bring necessary skills and expertise to the company.

4B4 Requirements after Registration

The Act requires insurers to submit returns to the Supervisory Authority at specified intervals. These comprise among others:

Balance sheets Revenue accounts Profit and loss accounts Report on technical reserves Asset statements and their valuations Statements of maximum permitted expenditure Summary of claims Details of inward and outward reinsurance Outstanding premium returns and actuarial valuations

4B5 Investigation

In some cases, the Chief Executive Officer might come across some instances which require specialised knowledge. In these instances, the Chief Executive Officer might appoint investigators such as accountants, lawyers, actuaries and auditors to gather facts of such a situation. The insurer is enjoined in law to fully cooperate with and to pay costs of such an investigator.

4B6 Rates, Policy Terms and Claim Settlement

Premium Rates


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Insurers charge premium based on the prescribed minimum premium rates by Insurance Regulatory Authority of Uganda except Life Business. This is done to enable fair play. Life premium rates have to be approved by an actuary and for products like Travel Insurance, the insurer has to file the manual of rating to the IRA before commencing operations.

Claims Settlement as per IRA Guidelines

The Act has given the following guidance in respect to claim settlement:

This is provided for under issued guidelines in relation to timelines when claims should be settled (see Appendix A at the end of this chapter for details).

There is a Complaints Bureau in place. Insurance Appeals Tribunal in place to arbitrate disputes before

disgruntled parties resort to Courts of Law. If the insurer fails to comply with the requirements, the Supervisory

Authority, after giving the insurer reasonable opportunity to be heard, shall direct the insurer to expedite the settlement of the claim

4B7 Intermediaries

These act as intermediaries between the insured and the insurer.

Insurance Brokers

Before being registered as a broker, an applicant must meet the following conditions:

Submit a formal application to the Chief Executive Officer's office Payment of the appropriate registration fee Make the appropriate deposit with the Central Bank. Have a minimum paid-up capital of UGX 75,000,000 Have professional indemnity policy with a minimum of UGX

100,000,000/=

Insurance Agents

To be registered as an Agent, one must fulfil the following:

Completion of formal application forms Payment of applicable registration fee Submit a statement of business form from the principals Provide a certificate by insurer in a prescribed form Pass or be exempted from Certificate of Proficiency examination Submit a certificate of registration of business name for Agents using a

trade name; such a name must reflect the kind of business done Submit annual audited accounts in case of corporate agents


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Types of Agents

Individuals – they use their own or registered names Corporate Agents – they must have their names registered with the

Registrar of Business Names

Before seeking registration to operate an insurance agent in Uganda, an applicant must have a Letter of Appointment which complies with the provisions of the Act, from one’s principal.

Persons not to act as Agents

Section 80 of the Insurance Act CAP 213 prohibits the following persons to act as insurance agents:

Civil servants or employees of a local government An Administrator, Manager, Director, Auditor or employee of

insurance/reinsurance/reinsurance broking company Risk inspectors, insurance loss adjusters or insurance valuers Persons who lack minimum knowledge, skill or experience in the

insurance business or whose financial stand does not measure to the requirement

Acting for two or more insurers transacting the same class of business. An insurance agent may however act for one insurer transacting life business and one insurer transacting non-life business

4B8 Requirements for Health Management Organisations

A copy of the Professional Indemnity Insurance Policy cover to protect the business interests against claims for error or omissions, professional neglect for both principals and employees, of at least Ushs.100 million for the said staff.

Details of the company Accountant who should be recognized as such by ICPAU and approved IRA.

A certified true copy of the Articles and Memorandum of Association or other document by which the Health Membership Organization (HMO) is constituted.

Annual accounts within three months from the end of the financial year duly audited by an Auditor approved by the IRA.

Management Accounts within a month from the end of each quarter. Detailed and signed curriculum vitae of all directors and the Chief

Executive Officer. Names, nationality and shareholding of shareholders. Detailed signed curriculum vitae of the management and technical staff. List of all branch offices, addresses and telephone numbers. Copies of valid work permits for all expatriate staff. Listing of Service Providers (affiliates) who have signed contracts with the

HMO. List of all agents employed.


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Company Business Plan for three (3) to five (5) years duly endorsed by an external auditor.

A certified true copy of each type of policy of insurance/contact which the Company proposes to issue.

Copy of the various benefit packages to be offered to prospective members and the Premium thereof.

Copy of the registration certificate for the Medical Director or the person in charge of health services issued by the Uganda Medical and Dentist Practitioners’ Council for the professionals.

Evidence of membership to the Insurance Institute of Uganda. Copy of the latest insurance licence (if any) Such other documents and information as the Authority may require.

If the form is satisfactory filled and all the above mentioned enclosures received, the application is sent to the licensing committee of the Authority for consideration. The Authority may, however, in the process of considering the application, require other documents or information in addition to the submissions listed hereinabove.

Once the completed application is approved, a licence fee of Shs.UGX 3,000,000/= is payable.

All licensed players are required to pay Annual contribution as will be advised by the IRA.

All licensed players are required to pay a training levy of 0.5% payable quarterly to the Insurance Institute of Uganda.

4B9 Licensing Requirements for Risk Manager, Loss Assessor, Loss Adjuster, Insurance Surveyor, Claim Settling Agent

Incorporation status, state whether partnership, company or sole proprietor.

Name and address of bankers. Name and address of external auditor. Insurers with whom business was done in the last preceding year – if any. Number of years of experience. Share capital and paid-up capital (if applicable). Attach detailed and signed CVs of shareholders, directors, partners or

associates. Attach detailed signed CVs of Management and technical staff (ensuring

compliance with Reg. 11 of the Insurance Regulations 2002). Attach a copy of Profession Indemnity policy of sum insured of at least one

hundred million shillings. Attach clearance of membership and subscription to the Uganda

Association of Engineers Valuers and Loss Assessors. On being licensed, the company will be required to become a member of

the Insurance Institute of Uganda.


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If any of the Directors has been convicted of any offence involving fraud or dishonesty give details.

If any of the Directors has been adjudged to be bankrupt or compounded with creditors, he/she should give details.

If the applicant is a company incorporated under the Companies Act-Cap 85, attach copies of Memorandum and Articles of Association and Certificate of Incorporation. If it is registered under the Business Names Registration Act, attach photocopy of a Certificate of Registration.

Once the application is approved, a licence fee of UGX.400,000/= is payable.

4C The Main Provisions of the Insurance Act

i. The establishment of IRA ii. Licensing of Insurance and Reinsurance Companies as well as other

Industry Players- Intermediaries, Risk Managers, Loss Assessors, Loss Adjusters, Insurance Surveyors, Health Management Organisations and Claims Settling Agent

iii. Conduct and operation of insurance iv. Insolvency and winding up of Insurance Players v. Establishment of Training Levy and Policyholders Compensation Fund

vi. Establish of the Insurance Appeals Tribunal to handle disputes among the insurance players.

4C1 Other Relevant Laws and Regulations Governing Insurance Other Relevant Laws and Regulations include:

Insurance Regulations, 2002

Insurance Amendment Act, 2011

Motor vehicle Insurance (Third Party Risks) Act 1989

Workers Compensation Act,2000

Investments Regulations of Paid up Capital and Insurance Funds

Various circulars and guidelines issued by IRA

Other Industry Bodies that actively support IRA in carrying out its work include:

The Uganda Insurers Association

The Uganda Insurance Brokers Association

Uganda Association of Engineering Valuers and Loss Assessors.

4D Approaches to Supervision

Like any other regulator of the insurance business in the world, the IRA has a number of methods at its disposal. There are three approaches to supervision – rules-based, principle-based, or risk-based – and the selection of each depends on the prevailing circumstances and what the regulator seeks to achieve. For a long time, the IRA has been using the rules-based method, not


34

until 2014 when the regulator started embracing the risk-based approach to regulation.

4D1 Rules-based Regulation

Here the firm uses its own internal risk models to set capital requirements and systematised decision making frameworks and procedures to prioritise regulatory activities and deploy resources, principally relating to inspection and enforcement, based on an assessment of the risks that regulated firms pose to the regulator’s objectives.

4D2 Principle-based Regulation

A simple set of key objectives are set out to ensure good reporting. Common examples are provided as guidance and explain the objectives. Although some rules are unavoidable, the guidelines or rules set are not meant to be used for every situation. The fundamental advantage of principles-based regulation is that its broad guidelines can be practical for a variety of circumstances. Precise requirements can sometimes compel managers to manipulate the statements to fit what is compulsory.

The problem with principles-based guidelines is that lack of guidelines can produce unreliable and inconsistent information that makes it difficult to compare one organization to another.

4D3 Risk-based Regulation

This is the most recommended system of regulation. Here the insurance company identifies all the potential risks to its business and proactively uses the firm’s own internal risk models to set capital requirements. It uses systematised decision making frameworks and procedures to prioritise regulatory activities and deploy resources, principally relating to inspection and enforcement, based on an assessment of the risks that regulated firms pose to the regulator’s objectives. In Uganda, this approach was embraced in 2014 and IRA is pushing for its implementation by all the insurance players.

4E Compliance Mechanism

a) Licensing all members of the industry annually b) Revoking of the licenses of members who do not comply with the

provisions of the Act c) Calling for any information regarding insurance business from any

member of the industry d) Conducting on-site inspection of any member of the industry e) Appointing an investigator to gather relevant facts where there may be

reasons to believe that a member of the industry is not operating in


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accordance with the law and on the basis of the investigation, proceed to take necessary action

f) Intervening in the management of a troubled member of the industry

Chapter Summary

During the 1980s, insurance companies could start business simply after registering with the Registrar of Companies. There was no established authority with the technical know-how to monitor the activities of insurers and other key players. The public suffered at the hands of unethical players in the insurance industry.

To address this concern, the government in 1996 enacted The Insurance Act CAP 213 which came into effect in 2002 and later amended it as per the Insurance (Amendment) Act, Act No.13 of 2011. The Act established the IRA which generally supervises the conduct of insurance business in Uganda whose players include insurance and reinsurance companies, agents, insurance brokers, risk surveyors, loss adjusters, and health management organizations.

Other Relevant Laws and Regulations include:

Insurance Regulations, 2002 Insurance Amendment Act, 2011 Motor vehicle Insurance (Third Party Risks) Act 1989 Workers Compensation Act,2000 Investments Regulations of Paid up Capital and Insurance Funds Various circulars and guidelines issued by IRA

Other Industry Bodies that actively support IRA in carrying out its work include:

The Uganda Insurers Association The Uganda Insurance Brokers Association Uganda Association of Engineering Valuers and Loss Assessors.

There are three approaches to supervision and the selection of each depends on the prevailing circumstances and what the regulator seeks to achieve. These include:

Rules-based Regulation

Principle-based Regulation

Risk-based Regulation

To ensure compliance with the Regulations, the IRA may lawfully employ the following mechanism:


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Revoking of the licenses of members who do not comply with the provisions of the Act

Calling for any information regarding insurance business from any member of the industry

Conducting on-site inspection of any member of the industry

Appointing an investigator to gather relevant facts where there may be reasons to believe that a member of the industry is not operating in accordance with the law and on the basis of the investigation, proceed to take necessary action

Intervening in the management of a troubled member of the industry


1. Explain at least five (5) roles played by IRA in the insurance industry in Uganda. 2. List at least 10 requirements for licensing an insurance company in Uganda. 3. Explain the three methods/approaches to supervision that can be used by the

regulator of insurance in Uganda. 4. List four compliance mechanisms that can be used by IRA in instances of

noncompliance to the Insurance Act by insurance players in Uganda.


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Appendix A: The Claims Process and Service Standards by IRA with UIA comments

Step No

Activity IRA Position Recommendations

1 Claim intimation As per policy conditions Ok

2 Claim acknowledgement and acquisition of documents/ contact with the claimant

Within 3 working days from intimation.

OK

3 Site visit/ or appointment of external assessor

Within 3 working days - ‘Within 3 working days of intimation of the claim, in order to avoid any ambiguity.

- Complex claims that require the appointment of a foreign assessor should be exempted from this requirement. Within 5 working days of intimation of the claim,

4 Submission of interim adjusting/ investigating reports

Within 3 working days from date of appointing adjuster/ investigator

- This period should be set in consultation with the Assessors/ Service providers who are better placed to advise on the time it would reasonably take to furnish these reports. Reference is made to observation (3) above.

5. Progress Updates (For rare/complex cases)

Every 5 working days - Noting the category of claims as ‘rare/complex’, it is proposed that updates are provided on a monthly basis.


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Step No


6. Submission of final adjusting/

investigating reports and documentation

20 working days from date of submission of support documents to the adjuster/ investigator.

On receipt, the insurer should furnish the final report and documentation to the insured/ broker.

- Similarly as proposed under 4 above, the timelines should be set in consultation with the Assessors/Adjustors.

- In reference to provision of the Final Report, this should not be mandatory but at the underwriter’s discretion.

- It is important to bear in mind that such Reports usually contain confidential information which should not necessarily be disclosed to the insured/broker (including fraud). In addition, certain cases may result in litigation and such early disclosure affects a party’s case.

- Further still, knowledge that a report will be distributed may affect the quality of the Final report produced and result in concealment of vital information.

7. Making settlement offer or communicating repudiation of the claim

5 working days from receipt of final adjustment/ investigation report or, where no adjustment/ investigation is required, date of receiving the final supporting documents.

a) Internal Assessments for small claims (Not more than Shs.10M): Within 10 working days from receipt of final support documents.

b) External Assessment: 10 working days after receipt of final report. Final report is deemed to mean a report where no


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Step No


more inquiries/ discussion is required.

Note: Claims deemed payable after receipt of a duly executed discharge voucher, salvages and subrogation letters.

8 Settling claim Up to 2.5M: Within 5 working days

- Up to limit of 10M, and payable within 10 working days

- Above 10M to 50 M within 20 working days

Above 2.5M to 25M: within 10 working days

Above 25M to 50M: Within 15 working days

Above 50M: Within 20 working days or upon receipt of cash call payment from reinsurers whichever occurs first.

Note: To avoid delays, Insurers should do cash calls to reinsurers immediately on receipt of the final adjuster’s report.

- Above 50 M, within 30 working days.

The insurer must document all communication with the insured as proof of receipt will be required.

The insurer to provide a written reason explaining why a claim cannot be settled within the above timelines. This explanation to reach the insured or broker before expiry of applicable time limit with copies to the IRA & UIA.

Insurer to give constant updates to the insured/ Broker including reasons for delay of payment, but not copying to IRA & UIA.


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CHAPTER 5: BASICS OF INSURANCE BUSINESS ETHICS

Contents

Learning Outcomes

Introduction

5A Understanding the Concept of Business Ethics

5B Fundamental Principles of Business Ethics

5C Responsibility of Insurance Market Players

5D Ethical Behaviour

5E Unethical Behaviour in Insurance

Chapter Summary


Learning Objectives


• Define the term ‘ethics’. • Explain the responsibility of insurance practitioners and service providers

to themselves and other parties • Distinguish between ethical and unethical behaviour • Describe the role of continuous education in the maintenance of

professionalism and discipline

Introduction

Under this chapter, the student is expected to appreciate that business ethics is a fast changing area and while some tactical and operational matters are considered to enhance understanding, the main aim of the chapter is to consider the strategic importance of ethical issues to the individual, companies and the insurance industry at large.


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• Understanding the Concept of Business ethics • Fundamental Principles of Business Ethics • Responsibility of Insurance Market Players • Ethical Behaviour • Unethical Behaviour in Insurance

5A Understanding the Concept of Business Ethics

Ethics is often defined, at least in part, as acting to prevent substantial harm to others when an individual or group has an opportunity to do so for their own benefit. Organizations and society at large recognize that ethically and socially responsible behaviour plays a crucial role in good business practice.

5A1 What is ethics?

In general, ethics is understood as a set of rules of human behaviour that are based on individuals’ beliefs about how things should be in unbiased circumstances. Throughout literature, there is an existing range of definitions of ethics; for example:

a set of moral principles and values; or

the principles, norms and standards of conduct governing an individual or group

The field of ethics in business is generally perceived as a study of situations and decisions that address moral issues of right and wrong. These might include matters such as truth, honesty, fairness, respect, dignity, transparency and even-handedness. It should be noted, however, that there is no agreement that these are the only relevant concepts nor is there a general agreement as to what these concepts mean. What could be right or wrong from an ethical view point could considerably differ if the same is analysed from a legal perspective. In fact ethics and the law are at times two separate issues within the broader scope of ethics and values.

5A2 What is Business ethics?

Business ethics is often one of the most important but misunderstood concerns in the business world. Besides long-term thinking, business people also need to address ethical issues on a daily basis.

Business ethics are the standards and conduct that a company or business sets itself in its dealings with the organization and externally within the business and social environment. It concerns the application of moral principles and how individuals conduct themselves in social affairs. Consequently, business


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ethics can be defined as a set of moral principles and standards that guide the behaviour of a business group in running its business functions.

In any situation that addresses right or wrong, there will always be conflict especially where there is a mismatch between expectation and the associated actions. In other words people may perceive that their duties towards one group are inconsistent with their duties and responsibilities towards other groups.

What is the reward for a business that chooses to act ethically? The benefits of ethical behaviour are not usually apparent in the short term; many share the view that there are benefits in the long term.

Critical Reflection

We know for a fact that the company’s principal objective is that of profit maximization. Clearly, does this mean maximization of profits in the short term or could this also mean consideration of long-term profits?

There are a number of issues and questions to address here:

In order to meet the requirements of their investors and comply with legal duties, should companies sacrifice their ethical stance in order to pursue short-term performance?

To what extent do investors consider the long-term in their investment decisions?

Is it actually imperative for a business to consider ethical matters even in the short-term?

It should be noted that business ethics is approached from two interrelated viewpoints:

Moral, and

Legal

It is recognized that the moral principle of ethics concentrates on doing only what is right from the perspective of a wise and prudent individual. However the legal principle of ethics considers only what is allowed or disallowed by law. In this sense the literature of business ethics is divided into two main categories, i.e. principle-based and rule-based, respectively.

5A3 Advantages of a ‘rule-book’ approach

Certainty

Clarity regarding what is not permitted

However it is impossible for rule-based approach to deal with every situation that may arise. The rules can also be interpreted narrowly in order to circumvent the underlying ‘spirit’ or intention of the rule.


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5A4 Advantages of Principles-based Approach

This approach has advantages over the rule-based approach.

A framework is more appropriate to changing circumstances in a dynamic professional and business environment

Principles may be applied across national boundaries, where laws may not

The onus is placed on the insurance company and individuals to demonstrate that all matters are considered within the principles of the framework

A principles-based approach may include some specific prohibitions or may provide guidance on how to deal with specific matters.

It is therefore imperative that all professions and companies have a code of

ethics and conduct to provide guidance on such matters.

5B Fundamental Principles of Business Ethics

All players in the insurance industry and students are obliged to follow the fundamental principles.

5B1 Definitions

Integrity: Members of the insurance industry should be straight forward and honest in all professional and business relationships.

Objectivity: Members or players in the industry should not allow bias, conflicts of interest or undue influence of others to override professional or business judgment.

Professional competence and due care: Members have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service based on current

FUNDAMENTAL

PRINCIPLES

COMPETENCE

AND DUE CARE

PROFESSIONAL

BEHAVIOUR INTEGRITY

OBJECTIVITY CONFIDENTIALITY


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developments in practice, legislation and techniques. Members should act diligently and in accordance with the applicable technical and professional standards when providing professional services.

Confidentiality: Members should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose such information to third parties without proper and specific authority or unless there is a legal or professional right or duty to disclose. Such information should not be used for the personal advantage of the member or third parties.

Professional behaviour: Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

5C Responsibility of Insurance Market Players

5C1 To themselves

Individuals should endeavour to enhance the image and respect the insurance profession as a fully-fledged occupation. This requires enhancing product knowledge as well as being conversant with all the aspects of the business. They should engage in continuous professional development to ensure their advice is still relevant to their clients.

5C2 To the Industry

Act ethically at all times not to bring disrepute to the industry. Examples of such unethical acts include giving misleading information and misrepresenting product features.

5C3 To the Company

Hold the organizations they represent in high esteem. We should remain loyal even after leaving; all information obtained during that time should be treated with the highest level of confidentiality.

5C4 To Clients

All practitioners must keep the interests of clients uppermost, conduct business with truthfulness and accuracy. Confidentiality is very important especially for life insurance where clients are subjected to medical check-ups before they can be offered the cover.


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5D Ethical Behaviour

Insurance practitioners should observe the utmost good faith and disclose all material facts in respect of their products. Agents and brokers should use the right methods in persuading clients or prospects to take up their products. All information obtained at that stage should be treated confidential.

5E Unethical Behaviour

5E1 Twisting

This is an act of advising policyholders to cancel policies and change insurers and intermediaries with the motive of making additional sales. Clients lose discounts, are subjected to short-term rates for annual covers that allows them less refunds than they would get if it was not for the cancellation, and application of surrender value where it is a condition of the policy.

5E2 Churning

This is where the agent or broker encourages the insured to increase policy limits with the aim of increasing commissions earned.

5E3 Duplication of covers

This exists where agents or other intermediaries advise clients to take policies which cover needs that are already catered for by similar existing policies so as to earn extra commission. The client is bound to lose in non-life insurance where the principle or condition of contribution is applicable.

5E4 Concealment of status

Intermediaries should disclose their status to prospective clients; for example, they should disclose if they are tied to a particular insurance company or products.

5E5 Non-remittance of premium

In the event that the intermediary collects premium on behalf of the insurance company, the same should be remitted immediately to avoid any temptations to use it for personal issues that would lead into probable termination of the agency contract.

5E6 Concealment of commission earned

An intermediary should disclose the levels of commission earned to the client.

5E7 Other Unethical Behaviours


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Insurance companies: Some insurance companies are fond of charging low and below the approved minimum premium rates in order to gain competitive edge in business. Also, there are reported cases of unnecessary delays in claims processing.

Insurance brokers: Quote low and incorrect premium leading to difficulties in placing covers; giving inappropriate gifts, inducement and commission rebates to win business; falsified returns to the regulator.

Motor Assessors: Collude with garage operators to accept exaggerated repair invoices; declaring repairable vehicles as total losses. This causes unnecessary financial losses to insurers.

Doctors: Giving false reports which may result in insurers paying high claims and not carrying out prudent underwriting for life policies and exaggerating disability levels under Group Personal Accident and Workers Compensation policies.

Lawyers: They may help clients lodge fraudulent claims. They could also lodge claims on behalf of the public with the aim of drawing huge sums of money in court fines and penalties. This adversely affects the image of the industry.

Risk Surveyors and Loss Adjusters: These tend to have lengthy turnaround times for submission of reports affecting the timelines at both underwriting and claims stage. This negatively affects the quality of service to clients.

Investigators: These will handle claim cases where foul play is suspected. They engage in unethical behaviour when they misuse confidential information they have discovered in the course of their duties. Such investigators may collude with lawyers to defraud insurance companies by provoking innocent third parties to lodge dubious claims.

Chapter Summary

In a business like insurance where promises, other than physical products, are sold or made is ethics vital. Ethics can be defined as the study of situations that address moral issues of right and wrong. Note the legal, ethical and moral distinctions and the debate surrounding the relationship between the pursuit of profit and an ethical stance.

Ethical conduct can be enforced through Codes of Conduct relating to professional and business standards. Disciplinary procedures can be invoked where unethical behaviour is identified to correct the image of the profession and industry.


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There are two major approaches to ethical behaviour: principles- or rules-based approach.

The fundamental principles of business ethics include integrity, objectivity, professional competence and due care, confidentiality and professional behaviour.


1. What is business ethics? 2. Assess the impact of ethics in business and insurance in particular. 3. Explain the fundamental principles of ethics. 4. Why is it relevant for players in the insurance industry to sit relevant

professional insurance examinations? 5. Differentiate between ‘twisting’ and ‘churning’.


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CHAPTER 6: PRINCIPLES OF INSURANCE

Contents

Learning Outcomes

Introduction

6A Principle of Insurable Interest

6B Principle of Utmost Good Faith

6C Principle of Proximate Cause

6D Principle of Indemnity

6E Principle of Contribution

6F Principle of Subrogation

6G Principle of Loss Minimization


Learning Objectives


Explain the various principles of insurance

Apply the principles to various classes of insurance in Uganda

Introduction

Insurance contracts must have elements that are required for all legally binding contracts. Many insurance practices have been adopted over the years and upheld by Courts of Law and enacted by National Parliaments. With the above legal backing they have become what we call Legal principles of

insurance. In this chapter the basic principles of insurable interest, utmost


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good faith, indemnity, proximate cause, contribution, subrogation and loss minimization will be discussed. You should note that not all the above principles apply to life assurance. The three principles that apply to life assurance are insurable interest, utmost good faith and proximate cause.


• Principle of Insurable Interest • Principle of Utmost Good Faith • Principle of Proximate Cause • Principle of Indemnity • Principle of Contribution • Principle of Subrogation • Principle of Loss Minimization

6A Principle of Insurable Interest

An insurance contract is legally binding only if the assured or insured has an interest in the subject matter of insurance. Life insurance contract is not a contract of indemnity and a person affecting a policy must have an insurable interest in the life to be assured. Insurance policy is illegal/void if no insurable interest exists between the insured and the subject matter of insurance.

6A1 Essentials of Insurable Interest

1. There must be property, life, and liability to be insured. 2. The above must be the subject matter of insurance. 3. The insured must have a relationship with subject matter whereby he/she

benefits from its existence and would suffer a loss or be prejudiced by its loss or damage

4. The relationship between insured and subject matter of insurance must be recognized by law.

6A2 Importance of insurable interest


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The principle of insurable interest ensures that the insurance contract is not used for wagering or gambling purposes and to mitigate any moral hazards.

6A3 Application of insurable interest

Persons having relationship by marriage (example, husband and wife), blood (example, father and son) or adoption (example, adopted son and his mother), have been recognized as having insurable interest. In life assurance, a person has unlimited insurable interest in his own life. A debtor has an insurable interest of the life of creditor and vice versa.

NOTE: In Marine and Life, transfer of one’s insurable interest is possible, unlike property insurances.

6A3A Life

A person has unlimited insurable interest in one’s own life and can assure him/herself up to any limit. It is the ability to pay the premium that determines the limit. A husband can effect policy on behalf of the spouse or parents for their children.

6A3B Property Insurance

Insurable interest in property is acquired through:

Ownership Bailee - Custodian of the other person’s property Agent acting on behalf of the principal Husband and wife Part or joint ownership

6A3C Liability

Every person (individual or company) through their activities may cause loss or injury to others. For example, through the use of a car on the road, the driver could injure or cause death to a pedestrian or damage property along the road following an accident. In that case the car owner has insurable interest on such liabilities of having to compensate the pedestrian or owner of the damaged property.

6A4 When does insurable interest exist?

In Marine Insurance, insurable interest is at the time of the loss because maritime trading continues changing from time to time. In life, insurable interest should exist at inception. In all other classes, insurable interest should exist at inception, during the currency of the policy and at the time of loss.

6A5 Assignment


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This means the transfer of one’s interest in the insurance contract. Interest is freely transferrable in Marine and Life policies but not in the other classes of insurance.

Illustration The owner of a taxi-cab has insurable interest in the taxi-cab because he is getting income from it. But, if he sells it, he will not have an insurable interest left in that taxi-cab.

From the above example, we can conclude that, ownership plays a crucial role in evaluating insurable interest. Every person has an insurable interest in his own life. A merchant has insurable interest in his business of trading. Similarly, a creditor has insurable interest in his debtor.

6B Principle of Utmost Good Faith

Utmost Good Faith can be defined as a positive duty voluntarily to disclose, accurately and fully all the facts material to the risk being proposed. In insurance doctrine of caveat emptor (let the buyer beware) doesn’t apply since one party (the assured/insured) knows or ought to know all about the risk being proposed for insurance and the other party (the insurer) relies largely on information disclosed by the insured/assured. Most of the facts relating to health, habits, personal history, family history, etc., which form the basis of the Life Insurance contract, are known only to the proposer (the individual, company, business entity or NGO buying the insurance service). So both the insurer and insured/assured must disclose material facts that affect the insurance contract. By this principle it means the insurer and the person who is applying for insurance have a duty to deal honestly and openly with each other in the negotiations which lead to the formation of the contract.

6B1 Facts that Need disclosure

Just disclose all the material

facts about that car.


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Age Occupation Height and weight Medical history

6B2 Facts which need not to be disclosed

Those which lessen the risk Of public knowledge Of the law Those which an insurer is deemed to know Those which the proposer does not know Those which the insurer has put on inquiry

The Insurer is not expected to:

1. Make false statements during negotiations 2. Issue policies that are not authorised under the Insurance Act 3. Issue ambiguous policies 4. Take advantage of the insured’s ignorance by offering inadequate claim

settlements and limited scope of cover

6B3 Remedies for breach of utmost good faith

If the insured is found to be in breach of this principle, the insurer has a right to any of the following remedies:

1. Avoid contract from inception 2. Avoid liability for the claim 3. Sue for damages 4. Waive the above rights and let cover continue (e.g., making an ex-gratia

payment)

Illustration The person getting insured must willingly disclose and surrender to the insurer the complete true information regarding the subject matter of insurance. The insurer's liability gets void (i.e., legally revoked or cancelled) if any facts about the subject matter of insurance are either omitted, hidden, falsified or presented in a wrong manner by the insured.

6C Principle of Proximate Cause

Before a claim can be settled by insurers it is necessary to determine the cause of the loss. A proximate cause can be defined as the active, efficient cause that sets in motion a series of events which brings about a result without the intervention of any force, started and working actively from a new and independent source.


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Illustration A cargo ship's base was punctured due to rats and so sea water entered and cargo was damaged. Here there are two causes for the damage of the cargo ship - (i) The cargo ship getting punctured by rats, and (ii) The sea water entering the ship through the puncture. The risk of sea water is insured but the first cause is not. The nearest cause of damage is sea water which is insured and therefore the insurer must pay the compensation.

The cause can be:

1. An insured peril (e.g. death/permanent disability/maturity/surrender) 2. An excepted peril (e.g. riot and strikes) 3. An uninsured peril (e.g. suicide)

6D Principle of Indemnity

This principle relates to placing the insured in the same financial position after a loss as he/she occupied before the loss. Exceptions to this principle are Life

and Personal Accident contracts which are benefit policies. Amount payable (limits of liability) is normally agreed to or specified at inception of the insurance cover.

6D1 Methods of providing indemnity

The insurance policy will in most cases specify the mode of providing indemnity. The options available to the parties include cash, repair, replacement and reinstatement.

6D1A Cash Cash is the most appropriate method of indemnity for bodily injury or death liability classes and benefit policies. For example, on occurrence of death, the life cannot be reinstated; a lost limb cannot be repaired by any amount of money. That explains why they are called benefit policies and not indemnification policies.

6D1B Repair

This method is mainly used in property insurances especially in Motor Vehicle insurance.

6D1C Replacement

This method is mainly used in glass insurance and in motor vehicle insurance following partial losses. For example, a broken windscreen cannot be repaired but rather replaced.

6D1D Reinstatement (new for old)


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In this method, the basis of settlement is where the damaged, lost or destroyed subject matter of insurance is exchanged with a new one.

6D2 Factors which limit indemnity

It should be noted that much as the intention of an insurance policy is to provide full indemnification, certain factors may limit the amount of compensation that may be derived from a specific policy document and these form part of the terms and conditions of the policy document. These factors include but not limited to:

6D2A Sum insured

This defines the maximum limit of indemnity or compensation in any policy. It is the maximum amount an insurer may pay under any insurance policy. However it is rare that the sum insured will be paid because of the other restrictions within the insurance policy.

If, for example, a motor vehicle is insured for declared value of UGX 20,000,000 and a loss of UGX 21,000,000 (amount necessarily required to put the same car back to the road), the maximum amount that can be paid under the policy is UGX 20,000,000, other factors remaining constant.

6D2B Policy limit

In some classes of insurance, the benefits may be limited to a certain lump sum amount expressly stated in the policy. This limit may be per loss/claim or per accident/event and/or per year. An example is Public Liability where the insurance policy is designed in such a way that the exposure of the insurance company on a claim is limited to a specific amount and the aggregate claimable amount over the insurance period of twelve months is also limited to a specified amount.

Illustration ABC Ltd arranges a public liability policy for third party property damage and third party bodily injury or death arising from its business activities at its Nakawa Yard with XYZ General Insurance Company Ltd as follows:

Limit of liability any one claim ……………………………………UGX 5,000,000

Limit of liability in aggregate any one period of insurance… UGX 20,000,000

It implies that in the event of a single loss of say UGX 6,000,000, the maximum amount the insurance company can pay is UGX 5,000,000.

6D2C Excess

Most of the insurance policies have an excess clause which specifies the amount of the claim amount that MUST be borne by the insured for every loss incurred. The intention is to have the insured share in the risk management so


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that the insurance policy is not used for immoral purposes. For example, if an insurance policy has an excess amount of UGX 100,000, then a windscreen claim of UGX 1,500,000 will be reduced by the excess amount of UGX100,000 and the net payable will be UGX 1,400,000.

6D2D Deductible

Done voluntarily with the aim of premium discount and is usually larger than excess. It should be noted that the higher the deductible in the policy, the higher the discount on premium. The deductible is usually associated with the large engineering projects.

6D2E Franchise

In cases where the policy is subject to a franchise, the insurer the bears whole loss provided the franchise amount is exceeded. For example, if a property policy has a franchise of UGX1,000,000, then a loss of say UGX1,500,000 occurs, then the insurance company will pay the entire UGX1,500,000.

6D2F Average

In property insurance, if at the time of loss it is discovered that a motor vehicle was insured for say UGX20,000,000 when it should have been insured at UGX35,000,000, then the condition of average applies with intention of penalizing the insured for underinsuring the vehicle.

If the loss is say UGX10,000,000, then the maximum compensation would be calculated as 20,000,000/35,000,000 X 10,000,000 =UGX5,710,000.

6D3 Factors that Modify Indemnity

6D3A Reinstatement (new for old)

This concept has been explained in this chapter. Please note that the reinstatement basis is usually applied in property insurance. It simply means that a damaged old fashioned building will be rebuilt to new designs.

6D3B Agreed Value Policies

Agreed Value Policies are mainly arranged in Marine insurance where the value of goods of insurance is agreed at inception of cover. In the event of loss, the items are replaced at their agreed costs. In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. The amount of compensations is limited to the amount assured or the actual losses, whichever is less. The compensation must not be less or more than the actual damage. Compensation is not paid if the specified loss does not happen due to a particular reason during a specific time period. Thus, insurance is only for giving protection against losses and not for making profit.


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However, in case of Life Insurance, the principle of indemnity does not apply because the value of human life cannot be measured in terms of money.

6E Principle of Contribution

This refers to the right of insured to get claim settled by all insurers covering the same risk. It prevents insured from being more than indemnified if one has more than one policy covering the same subject matter of insurance. It applies to contracts of indemnity only and not Life contracts. Life insurance policies are commonly purchased to provide income replacement should a breadwinner die.

6E1 When contribution arises for contracts of Indemnity only

1. At least two contracts covering same subject matter of insurance 2. All policies are in force at time of loss 3. Policies cover same interest 4. Policies cover same peril that caused the loss

Illustration Mr. John insures his property worth UGX100,000,000 with two insurers “X." for UGX90,000,000 and “Y." for UGX60,000,000. John's actual property destroyed is worth UGX60,000,000 then Mr. John can claim the full loss of UGX 60,000,000 either from X or Y, or he can claim UGX36,000,000 from X (90/(90+60)*60) and UGX24,000,000 from Y.

So, if the insured claims full amount of compensation from one insurer then he cannot claim the same compensation from the other insurer and make a profit. Secondly, if one insurance company pays the full compensation then it can recover the proportionate contribution from the other insurance company.

6F Principle of Subrogation

This refers to the right of insurer having indemnified the insured to take over all rights of the insured. It only applies to contracts of indemnity, not Life contracts. If the insurer settles any claim the insured must give up all rights they may have had against any third party to the insurer. This principle in only applicable after settling a claim. However, it is not applicable where ex-gratia payments have been made. Subrogation rights are exercised after indemnifying the insured for contracts of indemnity only.

Exceptions:

1. “Knock-for-Knock” agreements 2. Employee injures another at work place


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Illustration

Mr. Sawa insures his house for UGX1million. The house is totally destroyed by the negligence of his neighbour Mr. Gombe. The insurance company shall settle the claim of Mr. Sawa for UGX1million. At the same time, it can file a law suit against Mr. Gombe for UGX1.2million, the market value of the house. If insurance company wins the case and collects UGX1.2million from Mr. Gombe, then the insurance company will retain UGX 1 million (which it has already paid to Mr. Sawa) plus other expenses such as court fees. The balance amount, if any will be given to Mr. Sawa, the insured.

6G Principle of Loss Minimization

Under this principle it is the responsibility of the insured to take all reasonable measures to minimize the severity of the loss.

Illustration Assume, Mr. Sawa's house is set on fire due to an electric short-circuit. In this tragic scenario, Mr. Sawa must try his level best to stop fire by all possible means, like first calling nearest fire department office, asking neighbours for emergency fire extinguishers, etc. He must not remain inactive and watch his house burning hoping, "Why should I worry? I've insured my house."

Chapter Summary

It should be noted that the principles covered in this chapter are central to the insurance profession world over. The key ideas covered in this chapter are that:

Insurable interest is required for an insurance contract to be valid. Insurable interest means that the policyholder must have the legal right to insure, arising out of a financial relationship recognized by law between the insured and the subject matter of insurance.

Where there is no insurable interest the contract is generally void. The time when insurable interest is required is subject to different rules according to class of insurance. The main examples of insurable interest in Life Insurance are for family and business relationships.

Utmost Good faith in insurance contracts relates to a proposer’s duty to disclose all material facts in respect of the risk for which they are proposing, whether they have been requested or not. This principle also applies to the duty placed upon the insurer to disclose facts to an insured; e.g., to provide information about the cover being offered and terms applicable under the policy. A material fact is something that has a bearing on the risk insured. A fact that would influence the decision of a prudent underwriter to either


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accept or reject the risk. Under common law, the duty of disclosure starts when negotiations begin and ends when the contract is formed (at its inception). A breach of duty of disclosure may arise in two circumstances: misrepresentation and non-disclosure.

.

The concept of indemnity means that insurance should provide exact financial compensation for the insured, it also means that the insured should not be overcompensated and should not ‘profit’ from their loss. The measure of indemnity depends on the type of insurance and the nature of its subject matter.

Factors which could limit the insured’s entitlement to a full indemnity include the sum insured or limit of liability, other policy limits, underinsurance, and average clauses, the excess or deductible, and operation of the franchise. In some situations, the insured can receive more than a full indemnity including where cover is provided on a reinstatement basis, new for old cover, agreed value cover, and partial losses on undervalued policies.

The main methods by which the insurer will provide indemnity are: payment of money, reinstatement, repair and replacement.

.

.

Subrogation can be defined as the right of one person, having indemnified another under a legal obligation to do so, to stand in the place of that other and avail himself of all the rights and remedies of that other, whether already enforced or not. The main purpose of subrogation is simply to prevent what is known as the ‘unjust enrichment ‘of the insured. In other words, to prevent him or her from unfairly profiting from their loss and so to preserve the principle of indemnity.

Contribution is the right of an insurer to call upon others similarly but not necessarily equally liable to the same insured, to share the cost of an indemnity payment. Contribution will arise only when certain conditions are satisfied

A contribution condition is a clause that sets out how the loss is to be met if the insured has another policy which covers it.


1. What is the importance of insurable interest? 2. Give three ways insurable interest applies in Property and Life insurance.


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3. What is a material fact? 4. Discuss the methods of providing indemnity. 5. Differentiate between an excess and a franchise. 6. When does contribution arise? 7. Define proximate cause.


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CHAPTER 7: CLASSES OF INSURANCE

Contents

Learning Outcomes

Introduction

7A Differences between General Insurance and Life Assurance

7B Categorization of General Insurance

7C Categorization of Life Assurance

7D Compulsory Classes of Insurance

7E Common Policy Terms and Conditions

Chapter Summary


Learning Objectives

After studying this chapter you should be able to;

Differentiate between General Insurance and Life Assurance

List the classes of insurance; scope of cover and their key exclusions

List the compulsory classes of insurance

Explain the key policy terms and conditions

Introduction

Insurance is classified into two major classes namely: General/Non-Life Insurance and Life Assurance. In this chapter we shall differentiate between General Insurance and Life Assurance; review the scope of cover under the different classes of insurance, discuss the compulsory classes of insurance and examine some common policy terms and conditions. Various classes of insurance have continued to be developed in response to society’s needs and


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in this chapter we shall look at the main classes of insurance offered in the Ugandan Insurance market.


• Differences between General Insurance and Life Assurance • Categorization of General Insurance • Categorization of Life Assurance • Compulsory Classes of Insurance • Common Policy Terms and Conditions

7A Differences between General/Non-Life Insurance and Life Assurance

The differences between General and Life insurance are summarised in the table below:

Genera Insurance Life Assurance

The duration/term of the policies is usually 12 months with the option to renew save for some engineering classes.

Cover is long-term and a minimum duration of 5 or more years is commonly required

Claims are payable in the very near future (less than 12 months) e.g. Car damage claims and household insurance claims.

Claims are usually made after a long time save for claims following death, which can occur at any time.

Claims may or may not be paid by the insurer under the policy depending on whether the insured suffers loss caused by a covered peril during the policy period.

A claim materialising is a certainty. A claim can be paid when the life assured dies or when the policy matures in the case of term policies.

Cover is on the risk of damage to property, Accidental Injuries to insured persons and the insured’s professional and public liability.

Cover is for the risk of death or total incapacitation of the life assured.

7B Categorization of General Insurance

Categorization of general insurance is based on the type of risk or property insured. Below are the categories of general insurance and the types of policies issued under each.

1. Property Insurances. Examples: Fire and Related Perils; Theft (All Risks; Money; Goods in Transit, etc.); Contractors All Risks; Engineering; Domestic Package, etc.


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2. Liability: Public Liability; Product Liability; Professional Indemnity; Employers Liability; Workers Compensation

3. Guarantee Insurances: Bonds (Performance; Bid/Tender; Immigration/Security Bond; Court Bond; Warehouse Bonds)

4. Transport Insurance: Motor Insurance (Act Only; Third Party Only; Third Party/Fire/Theft; Comprehensive); Marine and Aviation insurances

5. Accident: Personal Accident; Workers Compensation; Health Insurances

7B1 Property Insurances

a) Fire and Related Perils (Material Damage)

Currently this class of insurance is yet to be embraced especially among the private individual clients save for a few organisations. A Fire and Special Perils policy provides insurance cover against the following perils:

Fire - is the actual ignition of something that should not be on fire, the cause being accidental or fortuitous. There are exclusions under this peril, however.

Lightning - Any loss caused by lightning is covered under fire policy.

Explosions - of boilers or gases used for commercial purposes; for example oxy-acetylene gas used for welding.

This is in sharp contrast to the Standard Fire Policy which covers above to a limited scope.

b) Special Perils

Chemical Perils: For example explosion, spontaneous ignition or fermentation.

Natural Perils: For example earthquakes, bush fire, tempest, storm, flood, cyclone, typhoon, etc.

Social perils: Perils arising as a result of communal living; for example riot, strike and civil commotion, malicious damage, etc.

Miscellaneous perils: For example sprinkler leakage, impact, aircraft damage, burst pipes or overflowing of water tanks, etc.

7B2 Business Interruption (BI) Insurance

Many companies refer to business interruption as Consequential Loss or Profit Interruption policy. It is offered to protect future earnings of an enterprise after fire damage. The Fire and Related Perils policy (material damage) covers a building and its contents. Loss of income occasioned by fire or any other peril insured is not covered under the material damage policy. It is covered under the business interruption policy. The perils under the business interruption policy are the same as those covered under the material damage policy. For a claim to be admissible under the Business Interruption section of the policy, the Material Damage Proviso must be fulfilled. This requires that


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there must be a payable material damage loss arising from the same occurrence for the BI loss to be considered.

7B3 Long-Term Agreements under Fire Policies

A premium discount is given where the insured agrees to offer to renew a policy for a term of three or five years and signs an agreement to that effect. The insured is under obligation each year to renew the policy.

Policy Conditions

Policy conditions associated with fire policies are divided into general and claims related. General conditions make the policy voidable if they are not complied with and the main ones are:

Any alteration to the risk

Warranties or undertakings to be complied with

Reasonable care/precaution by the insured

Claims conditions are:

Immediate notification in the event of a loss or police notification

Fraud when proved will forfeit benefits under the policy

Reinstatement of sum insured

Insurer’s rights to access and take control of damaged premises

Contribution where more than two policies cover same property, same period, same insured and all are contracts of indemnity.

Average applies where underinsurance exists.

Subrogation rights the insured passes to insurer when claim has been paid

Arbitration to resolve disputes arising from the policy.

7B4 Home Insurance or Domestic Insurance Package

This class of insurance is subdivided into five sections as indicated below:

a) Buildings and / or contents cover

People often use the terms "home insurance" or "household insurance" in a general way to refer to insurance that covers any aspect of their home and belongings. However, these policies are usually split into separate sections - "buildings" and "contents" - and not all policyholders will be covered under both sections. It is also possible to buy a "contents-only" or a "buildings-only" policy.

While many homeowners buy both types of cover, some have only one. There may be a very good reason for this. Typically, for example, people who live in blocks of flats will only need to buy a policy to cover their contents. This is because the landlord will be responsible for arranging buildings insurance to cover the entire block. And some policyholders obtain contents insurance from


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one insurer and buildings insurance from another, because this may work out cheaper than insuring both contents and buildings together.

Even if a policyholder has both contents and buildings insurance, the scope of cover may vary so that, for example, an accidental damage claim might succeed under one section but not under the other.

Buildings insurance covers the structure of the building, plus permanent "fixtures and fittings" such as baths, fitted kitchens etc. The test is - can it reasonably be removed and taken to another home? If it can, then it is part of the "contents" and it will not generally be covered by a buildings policy. Buildings policies usually include outbuildings - garages, garden sheds etc.

Contents insurance covers your possessions - your television set, furniture, clothes etc. In other words, just about everything you would take with you if you moved.

b) “All Risks” Section

This section extends cover to Sudden and accidental direct physical destruction of or damage to the property or theft whilst on the insured’s premises directly and wholly attributable to any cause, such as fire, lightning, explosion, typhoon, flood, breakage, etc., except as may be specifically excluded, occurring during the currency of the policy. This may be extended to cover portable items like cell phones, tablet computers, laptops and cameras whilst away from the insured’s premises.

c) Liability Section

Bodily Injury and Property Damage Liability to third parties and related legal expenses are covered under this section of the home insurance policy. The Insurer will pay those sums that the Insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.

d) Workers’ Compensation Act

Employers are legally obligated to take reasonable care to ensure that their workplaces are safe. Nevertheless, accidents happen. Workers compensation insurance serves two purposes: It ensures that injured workers get medical care and compensation for a portion of the income they lose while they are unable to return to work. It usually protects employers from lawsuits by workers injured while working.

Here this cover is limited to domestic servants such as house helps and gardeners. In case of accidental death while at work the maximum compensation is 5 years’ earnings as per the Workers Compensation Act 2000.


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Workers receive benefits regardless of who was at fault in the accident. If a worker is killed while working, workers compensation provides death benefits for the worker’s dependents.

e) Accident Classes of Insurance

Theft Insurance

Covers property insured that is lost, destroyed or damaged by Burglary or Housebreaking or robbery (theft following upon actual forcible and violent entry into or exit from the premises by the person or persons committing such theft) or Hold-up (Forcible removal by actual or threatened violence against the insured or employee(s) of the insured).

Any damage caused to premises resulting from burglary and/or housebreaking or any attempted threat thereof occurring during the currency of the policy is covered.

“All Risks” Policy

Sudden and accidental direct physical destruction of or damage to the property or theft whilst on the insured’s premises directly and wholly attributable to any cause, such as fire, lightning, explosion, typhoon, flood, breakage, etc., except as specifically excluded in the policy, occurring during the currency of the policy is covered.

This is the widest cover but has following exclusions:

Wear, tear, gradual deterioration, atmospheric conditions, vermin, insects etc.

Mechanical or electrical breakdown or derangement unless caused by accidental external means

Breakage of glass and other brittle items unless caused by theft Money and related items Theft from motor vehicles unless property is contained in a locked boot or

locked locker forming an integral part of the vehicle.

f) Money Insurance

Money Insurance policy provides cover for loss of money in transit between the insured's premises and bank or post office, or other specified places occasioned by robbery, theft or any other fortuitous cause.

The policy also covers loss by burglary or housebreaking whilst money is retained at insured's premises in a safe or strong room.

Loss of money is defined to include cash, bank and currency notes, cheques, postal orders etc. Cover is extended to cover loss of money in hands of senior officials or at their residence.


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Policy can be issued on a per transit basis or annual carryings. The Key Clause warrants that insurer is not liable for loss from safe/strong room opened by a key which has been left on the insured’s premises whilst closed for business.

Escort Warranty stipulates amount to be carried with or without armed guard.

Exclusions include loss occasioned by fraud of employees discovered within three days, shortages due to error and omission, loss of money from strong rooms due to use of a key, loss of money from unattended vehicles and loss outside the geographical limits.

g) Plate Glass Insurance

Provides all risks cover to accidental breakages to fixed glass windows et cetera. Claim payment is based on current replacement cost of the glass

Exclusions include:

Any damage to frames Costs of removal or replacement of any fittings or fixtures Damage by fire or explosion (covered under fire).

h) Contractors All Risk

Contractors “all risks” insurance provides “all risks” cover in respect of both temporary and permanent works in the course of construction. Cover also includes:

Contract works (permanent and temporary works forming part of the contract)

Removal of debris Professional fees Free issue materials Construction Equipment (Site offices, storage sheds, silos, scaffolding,

utilities, etc.) Construction machinery (earthmoving equipment, cranes, site vehicles) Principal’s existing property Third party liability: Bodily injury and Property Damage

i) Goods in Transit

This provides cover against all risks of loss and/or damage to the insured goods whilst in transit by road, rail and or air. All risks cover on damage to insured goods by fire, theft and accidental damage while in transit, loaded or unloaded from any road train or temporary house. Cover can be issued on the basis of a single transit, individual vehicle or declaration. Single transit is issued on short period basis and cover expires when goods reach destination. Declaration basis is for many consignments. Insured declare expected annual carrying; premium is a provisional and adjusted at year end.


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Exclusions are:

Loss or damage due to delay, loss of market, or any consequent loss Loss to money and other treasury notes, precious metal, watches

dangerous goods, livestock Loss/damage from wear and tear, depreciation or defects in goods

insured Loss due to theft or pilferage by employees Loss or damage due to confiscation by the state Loss due to defective packaging of goods

j) Engineering Insurances

Engineering insurance cover is intended to provide compensation the insured in event of an insured plant being damaged by an extraneous cause or through its own breakdown.

Under engineering insurance, the plant insured is grouped into six headings:

Boilers and pressure plant for example, steam boilers. Steam receivers, economisers and other pressure vessels, these are covered under the boiler explosion policy.

Engine plant, for example steam engine, gas and oil engines and other plants subject to mechanical breakdown

Electrical plant, for example electric motors, generators, transformers and all kinds of electrical equipment either rotating plant or stationery plant.

Lifting machinery for example cranes of all types, tractors and passengers, goods and service lifts. These items are insured under crane policy or lift policy.

Miscellaneous plant, for example steam turbines and refrigerator Computers are covered under computer insurance policies.

7B2 Liability Insurance

Public liability insurance will protect your business if you cause an injury to a member of the public, or property belonging to another business or individual.

You should consider taking out public liability insurance if members of the public visit you at your place of work, or if you perform work at places of work owned by third parties. There are several types of liability insurances and some of these include:

7B2A Public Liability


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A public liability insurance policy will protect your business from claims made by third parties for injuries to the person, or damage to property caused as a result of your business activities.

A typical policy will pay for the cost of putting right any damage, or medical fees in the case of injuries. It will also cover the potentially crippling costs of legally representing your business, related expenses, and any damages your business is found to owe in relation to a claim.

Public liability insurance does not cover claims made by any of your employees since these are more specifically covered under Worker’s compensation Insurance where an employer is legally required to have this cover in place if they employ anyone, and the penalties for failing to comply are severe.

Examples of public liability insurance claims

To help illustrate how public liability insurance works in practice, here are some classic scenarios where public liability cover will protect your business:

An electrician re-wires a building as part of a general refurbishment. He doesn’t fit the fuse box correctly, resulting in several circuits getting burnt out.

You own a shop. One of your customers trips over some boxes of stock you carelessly left in a walkway. The policy will cover the costs of treating the injury caused to the customer.

7B2B Product Liability Insurance

Product liability insurance protects companies in the event that the products they have manufactured injure someone or cause property damage. In lawsuits, product liability insurance shields the insured against the cost of claims arising from product defects of any nature. If you manufacture products to sell to the public it is a good idea to get product liability insurance so you can avoid unpleasant situations like a lawsuit that could possibly put you into bankruptcy or cause you to go out of business.

Cover can be extended to include damage during testing, supply, alteration or servicing such manufactured products.

7B2C Professional Indemnity

Professional indemnity insurance covers the cost of compensating clients for loss or damage resulting from negligent services or advice provided by a business or an individual while acting in their professional capacity. A professional owes a duty of care to all who seek his/her services and is liable under common law for negligence and or error.


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If you offer your knowledge, skills or advice as part of your profession – either as a self-employed individual or for a company – you should consider taking out professional indemnity insurance.

Some professions are required to have professional indemnity insurance by their professional bodies or regulators – these include: solicitors; Accountants, Architects; Medical practitioners; Insurance brokers, etc.

Professional indemnity insurance protects you against claims for loss or damage made by clients or third parties as a result of the impact of negligent services you provided or negligent advice you offered. Compensation claims can be brought against you even if you provided a service or offered advice for free.

7B2D Employers Liability

The policy protects the insured against legal liability to pay compensation, claimants’ costs and expenses in respect of bodily injury sustained by employees arising out of, and in the course of the employment.

Here, this caters for cases where an employee feels that the employer was negligent much as one would have been compensated under the workers compensation policy.

7B2F Workers Compensation

According to the Workers Compensation Act it is a statutory obligation for every employer to compensate employees who sustain bodily injury by accident or disease arising out of and in course of their employment.

Cover attaches from the time an employee sets off from home directly to work, during the course of work and while travelling directly back home until the employee reaches home.

Policy also covers employees when upcountry/out of station on official duty

Policy covers employees only while in Uganda (Now modified to include all other countries)

Natural diseases (malaria, headaches, stomach-aches, fever etc.) are not covered unless they are as a result of an occupational disease (Ref: 54 scheduled diseases)

Others benefits include: Compensation for Death, Permanent Disability; Temporary Total Disability and Medical Expenses

The Act does not compel employers to insure but to compensate which therefore leaves the employer with two options: Either to retain the risk and


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pay from their resources the amount of compensation or to transfer the risk to an insurance company which option most employers choose.

7B2G Group Personal Accident

Scope of cover similar to Workers Compensation. Optional to Workers Compensation but needs to satisfy the requirements

of the Workers Act (i.e. Benefit for Death/Permanent Incapacity should be 5 years earnings plus cover for the 54 scheduled diseases).

Capital Sum Insured can be based on employees’ earnings or fixed. Cover is on 24 Hour basis (both at work and at leisure) unlike Workers

Compensation which covers employees only whilst on duty. Cover is on worldwide basis unlike Workers Compensation which is

country specific. Policy is recommended for permanent employees from supervisory roles

upwards.

Benefits

Death – 60 months earnings/5 years earnings Total Permanent Disablement (unable to engage in any gainful

employment) – 60 months earnings/5 years earnings Partial Permanent Disablement (Not able to attend to a substantial part of

one’s work permanently) - %-ages of 60 months earnings as set out in the Act

Temporary Total Disablement (unable to attend to work temporarily) – actual weekly earnings up to 96 months

Temporary Partial Disablement (unable to attend to a substantial part of work) – percentages of actual weekly earnings up to 96 months

Medical expenses including hospitalization – Limit agreed to per employee Funeral Expenses – limit agreed to per employee Transport and Incidental costs – limit agreed to per employee Artificial Appliances – limit agreed to per employee Evacuation costs – limit agreed to per employee

7B2H Health Insurance

This policy covers the cost of treatment for illness and other medical conditions. It covers doctors, surgeons and anaesthetist fees, hospital bed charges, drugs and dressings, diagnostic procedures such as x-rays, cost of theatre and nursing costs, etc.

7B3 Guarantee Insurance

These are policies which cover the failure of a party to perform a particular task contract or when they act fraudulently while are in a position of trust.

a) Fidelity Guarantee


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The policy covers the employer in respect of any direct financial loss which he may suffer as a result of employees’ dishonesty. It covers infidelity of employees/staff (theft of cash/stocks belonging to the insured by employees/staff). Cover can be arranged on individual (named) basis or blanket basis.

b) Bonds Insurance

There are several classes under this sub-category and these include:

Performance bond

Performance bonds cover against the risk of a contractor failing to complete contractual work as per their contract with the principal. The principal usually requires the contractor to execute such a bond as a fall back measure in the event of non-performance.

Bid /Tender bond

Bid or tender bonds are used when the cost of new tendering has to be incurred, should the highest bidder fail to take up an offer

Immigration / security bonds

Immigration or security bonds are issued to non-citizens whose conduct the insurer guarantees. Should one fail to be of good conduct, the insurance company undertakes to pay the costs of deportation/or the consequences of his/ her bad conduct.

Court bonds given to administer estate.

Customs bonds given as a guarantee to pay customs duties to the tax authorities.

Warehouse bond given as a guarantee to pay taxes for goods in the warehouses.

7B4 Transport Insurances

7B4A Motor Insurance

The key differentiating factor for motor insurance is the scope of cover desired. Below are the various types of cover available with increasing cost as you move further down the list.

Act Only


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Act only is the minimum cover required by the insurance (motor vehicle Third party Risks) Act 1989. This covers the insured against liability to third parties for death or bodily injury arising from the use of the insured’s car. The limit of cover is as stipulated in the above act. The legislation regarding Compulsory Motor Third Party insurance is under review and the student is encouraged to keep abreast of development in this area of regulation.

Third party only/ Enhanced Third Party

A third party is any person outside the insurance contract. This level of insurance covers the insured’s legal liability towards third parties for both property damage and bodily injury and or death. The limits of cover are also usually higher than the statutory limit payable under Act Only cover. As an example, if the insured is involved in an accident where he veers off the road and in the process injures a pedestrian and damages the perimeter wall of the property bordering the road, Enhanced Third Party would cover him for costs of compensating the injured pedestrian and the owner of the damaged wall. Act Only insurance would only cover the bodily injury claim for the pedestrian.

Third Party, Fire and Theft

In addition to the full third party cover, the third party, fire and theft level of insurance cover includes loss or damage arising from fire or theft but only to the insured vehicle.

Comprehensive Cover

The comprehensive insurance level provides very wide cover. The term comprehensive is somehow misleading, however; though it implies that every conceivable risk is covered, this is not the case under comprehensive policies. In addition to full third party, fire and theft cover, it covers own damage and also malicious damage.

The most commonly covered are Private Cars, Commercial Vehicles and Motor Cycles.

Private Cars

Private Car policies have restrictions to use as follows:

Social, domestic and pleasure purposes Used by insured or representative on business Carriage of goods for hire and reward is excluded Usually confined to small cars used in a business

Commercial Vehicles


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Used for transportation of goods and services, people and other commercial activities.

Commercial vehicle Insurance is offered to vehicles, buses and taxis used for transportation of goods and passengers for commercial purposes.

Motor Insurance (internal and external) is offered to companies involved in selling or repairing motor vehicles. (expand)

Agricultural and Forestry Vehicles Insurance which are normally restricted to moving in agricultural land. They may be exempt from compulsory insurance because they are rarely used on public roads.

Special Types are used for specialized activities like construction i.e. cranes, or medical services like ambulances, fire engines etc.

Motor Cycles

Should be mechanically propelled and includes scooters and moppets Basic cover is same as private car with the following differences:

o Theft of accessories and spare parts only covered if the MC is stolen at the same time

o No additional benefits like personal accident or medical expenses are normally offered

o Accessories and spare parts are covered only while on machine

COMESA Yellow Card

Initiated by UNCTAD in 1976 for CEMESA countries as a scheme for Africa

COMESA replaced PTA countries and was established in 1994. The idea was to promote regional integration through trade and human

resource.

Purpose was to allow motorists passage through member countries by producing a yellow card as a proof of minimum TP motor vehicle insurance required by laws in countries to facilitate;

Inter-state traffic movements Accidents victims to be compensated promptly Act as incentive for trade facilitation Enhance greater cooperation amongst insurance companies in the trade

members A national bureau government-designated in each country is responsible

for management and control of cards Handling Agency dealing with claims was established Every Underwriter to submit monthly returns National Bureaus in each country to be notified and handle all claims at

handling fee of 3% of claim Handling Agency can settle claims up to US$3,000

7B4B Marine Insurance


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This is the oldest form of insurance leading to the birth of Lloyds Corporation. Lloyds supplied information to merchants on tonnage, routes, age of ship etc.

Marine policy has the following covers:

Hull and liability of the vessel Cargo i.e. goods carried Freight i.e. cost of transporting or hiring a ship. Marine covers are perils of the sea and include fire, theft and collusion

7B4C Aviation Insurance

Aviation insurance is a class that requires a lot of reinsurance & technical expertise. Large aircraft are insured with established markets in Europe and most of these policies are taken to outside reinsurers with no or little participation of the local reinsurers on such risks. The policies are issued to cover the hull (the aircraft), liability to passengers and the liability to others that is fire, theft, accidents and legal liabilities.

7C Categorization of Life Assurance

1. Ordinary Life Assurance-( Term, Endowment, Pure Endowment, Whole Life Assurance)

2. Industrial/Group Life Assurances- Retirement Benefits Schemes; Group Life and Annuities/ Investment Policies such as Unit linked/ Bonds Investments

In Uganda, life business is being revitalized. It had picked up during the 1960’s and 1980’s but due to the economic turmoil, life business was greatly affected. Long term business is called benefit policies. Unlike in non-life insurance, in life assurance the event being assured is to happen that is death or maturity. We have individual/individual or group life policies

7C1 Term Assurance

Term assurance is the simplest and oldest form of assurance and provides for payment of the sum assured on death, provided death occurs within a specified term. Should the life assured survive to the end of the term, then the cover ceases and no money is payable.

This type of cover is cheap. It is suitable for young married men earning low incomes. The aim is to provide reasonable sum for their wives in the event of the husbands’ deaths.

7C2 Whole Life

The sum assured is payable upon the death of the assured whenever it occurs. Premiums are payable throughout the life of the assured or until


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the retirement of the assured. Although premium payment may cease at retirement, the policy will still be in force and if the assured dies, later the policy will provide the benefit to the assured’s representatives.

7C3 Endowment

An endowment policy is a contract designed to pay a lump sum after a specific term (on its 'maturity') or upon the death of the policy holder. Typical maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness.

Endowments can be cashed in early (or surrendered) and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid into it.

7C4 Superannuation insurance businesses

The term superannuation refers to retirement benefits and group life assurances and some of these include:

7C5 Retirement Benefits Schemes

The aim of the pension scheme is to ensure that some form of pension is available on retirement. Life assurance companies perform a vital role in running pension schemes by;

Organizing a whole scheme ,receiving premium contributions, investing funds and administering the pension;

managing funds of a pension scheme Providing life assurance benefits for widows of scheme members who

die before retirement. Benefits for these eligible for the scheme relate to service and salary.

Policies are usually issued insuring death in serve benefits for employees who do not reach retirement age.

7C6 Group Life Assurance

Covers a group of people, usually who are the members of societies, employees of a common employer, or professionals in a common group.

Offered by an employer or large-scale entity (i.e. association or labour organization) to its workers or members. Group life insurance is typically offered as a piece of a larger employer or membership benefit package. By purchasing coverage through a provider on a "wholesale" basis for its members, the coverage costs each individual worker/member much less than if they had to purchase an individual policy.


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From the above we can infer the following are the characteristics of Group Life Insurance

there must be a group of people to be insured which should have something in common other than the purpose of obtaining insurance

there must be a Master Policy Holder who will retain the contract on the behalf of the member and the carriers

Such covers are typically available at a discount to the respective individual rates.

7C7 Annuities

An annuity is a method by which a person can receive a yearly sum in return for payment to an insurance company for a sum of money. It is not a life assurance, though life assurance companies deal with it and is based on actuarial principles. For example; if a person with a large sum of money wants to provide on income for oneself when on retirement, or at any other time, she or he can approach a life assurance company and purchase an annuity.

Forms of Annuities

The annuity can start immediately ( that is immediate annuity or may start at a future date ( that is deferred annuity ) . it can provide an annuity for the life of the person ( the annuitant) or may be payable irrespective of death for a certain period ( annuity certain )

Guaranteed annuity provides annuity for a guaranteed period until the annuitant dies

Reversionary annuity provides for payment to annuitant that is wife or death of another named person that is husband.

Joint and last survivor annuity; payable while two people husband and wife are alive and on death of one, will continue at the same rate or less rate on the life of survivor

7C8 Investment Policies

This is where insurance companies collect large sums of money some of which is used for investment purposes.

Unit Linked

These are policies where the values of policy are linked to the investment performance

Is a product offered by insurance companies that unlike a pure insurance policy gives investors the benefits of both insurance and investment under a single integrated plan.

This is basically a combination of insurance as well as investment. A part of the premium paid is utilized to provide insurance cover to the

policy holder while the remaining portion is invested in various equity


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and debt schemes. The money collected by the insurance provider is utilized to form a pool of fund that is used to invest in various markets instruments (debt and equity) depending on members appetite

The sum assured payable on death or maturity will depend on returns from investment.

Bond Investment

An investment bond is generally a single premium life insurance policy. They have a small element of life insurance that is paid out after your death. However, it is an investment rather than insurance in the general sense.

An insurance company will take the premium and invest it for income and or capital gains which accrue until a policyholder withdraws money from the policy.

Bonds pay out income monthly or annually or accumulates interest to make cash payment at the end of the term. Terms of one to five years are common and the bond may be linked to some form of shares, property or cash fund operated by the insurer.

7J9D Compulsory Insurances

Compulsory insurance is any type of insurance coverage that is required by law before individuals or businesses may engage in certain activities. The idea behind this type of mandatory coverage is to protect the well-being of those who would otherwise be adversely affected if the events covered in the terms of the policies were to take place.

7D1

Reasons for compulsory insurances

Provision of certain forms of insurance which are compulsory. The funds must be available to compensate injured third parties – e.g., motor third party insurance and professional indemnity policy for insurance brokers.

State regulation need standardization in terms of benefits to policyholders of such compulsory insurances.

Most of the compulsory insurances are in areas which tend to concern the public such as health and old age. These are services governments are expected to provide.

By making insurance compulsory, the insured is availed all the expertise all the expertise of the insurer in the loss prevention.

7D2

Examples of Compulsory insurances in Uganda

The Motor Vehicle Insurance (Third Party Risks) Act 1989

The Workers Compensation Act 2000


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The National Social Security Fund (NSSSF)

Professional Indemnity for insurance Brokers

Now yet to be enacted, the National Health Insurance Scheme

7J10E Common Policy Terms & and Conditions

7E1 Premium Rates

This refers to the amount paid or payable for an insurance policy. It is in fulfilment of one of the conditions of a contract (Consideration-Benefit Vs Detriment). The Insurance Act does not impose standardized rates. It requires general insurers to file a manual for the premium rates in use with the Commissioner’s office. Life premium rates have to be approved by an actuary.

7E2 Commission Rates

This is the fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer, and the marketing methods. The Act restricts the payment of commission to a portion of premiums of the business solicited by the agent. This is detailed in the 11th schedule of the Act. A few examples include:

Class of Business Commission Rate

Most individual life policies 50% of the 1st year premium

20% of 2nd year premium

5% of the 3rd to 10th year Premium

Motor 12.5% of annual premium

Liability 20% of annual premium

Theft 10% of annual premium

Personal Accident 20% of annual premium

Workmen’s Compensation 20% of annual premium NOTE: These are maximum rates and insurers are free to pay rates below to their Agents

7E3 Policy Terms

The written contract effecting insurance, or the certificate thereof, by whatever name called, and including all clauses, riders, endorsements, and papers attached thereto and made a part thereof. The Act provides some of the following as the terms which have to be incorporated in policies of insurance:

No policy shall be issued on the life or lives of any person or persons without insurable interest

Companies should only issue policies which they are licenced to issue 7E4 Policy Document


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After the submission of the proposal, underwriting is done and risk is accepted. A contract is made between the underwriter and the proposer. There is need for evidence of the existence of that contract. This therefore calls for a policy document. This is a statement issued by the insurer as evidence of an existing contract between the insurer and the insured. It states the terms and conditions of the contract. It includes the proposal form which is the basis for the contract.

7E5 Cover Notes

The proposer should be able to read and understand all the contents of the policy. Courts of law will always refer to this document in case of any dispute. They are usually pre-printed and contain standard terms but additional clauses and typed materials can be added.

7E6 Parts of a policy document

These include: the heading, the preamble/recital clause, operative clause, exclusions, conditions, the policy schedule, the signature and attestation.

a)

b) Heading

This includes: the name of the insurer, the address of the place where business is conducted, and company logo.

c) Preamble/ Recital clause

This section emphasises that the proposal is the basis of the contract and it is included in the policy. It also shows that premiums have been paid or there is an agreement to pay and a brief introduction of the type of perils covered.

d)

e) Operative clause

It is also known as the insuring clause. It gives in detail the perils covered under the contract as well as the type of losses the insurer undertakes to pay. It is the heart of the contract.

f) Exclusions

Under this part or section, the type of losses that the insurer will not pay are stipulated. Such losses may be excluded because of:

The risks are uninsurable

Inadequacy of premiums

g) Conditions


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These are provisions, rules of conduct, duties and obligations required for coverage. If policy conditions are not met, the insurer can deny the claim. They are actions that the insured must take or continue to take for the contract to be in force. Conditions apply in different ways:

Precedent to the contract

Subsequent to the contract

Precedent to liability In case any of them is broken, the insurer may not pay the claim. They can be:

Express

Implied

h) Express conditions

These are conditions set by the insurer and they appear in the policy for example

Cancellation

Subrogation

Resolution of a dispute regarding the amount of claim

Contribution in case of other policies on the same loss.

i) Implied conditions

These are conditions that must be complied with but they don’t appear in the policy; for example:

The insured has insurable interest

The parties have disclosed all material facts

The subject matter of insurance can be identified

j)

k) Policy schedule

This is where the policy is personalised. It makes the policy personal. It includes information like:

Name of the insured

Address of the insured

Nature of the business

Period of insurance

Sum insured

Premiums

Policy number

References to special exclusions and conditions

l)

m) Signature and attestation clause

In this section, an authorized official signs the document to make it legally binding.


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7E7

Cover note

It is a document evidencing issuance of an insurance policy and it gives a summary of the information given in the certificate of insurance. In insurance a cover note is issued to an applicant, usually for a month, to cover the risk until an official insurance policy document can be prepared and delivered, and the appropriate premium paid to the insurance company

7E8

Insurance certificate

An insurance certificate is a representation of the insurance policy taken out. It is a document used to verify that an entity is insured. It entitles its holder to demand that the policy operates.

7E9

Endorsement

An endorsement is a written document attached to an insurance policy that modifies the policy by changing the coverage afforded under the policy. An endorsement can add coverage for acts or things that are not covered as a part of the original policy and can be added at the inception of the policy or later during the term of the policy. It is also Known As: Rider, addendum, attachment. This is documentary evidence of a change in the wording of an existing policy or qualification of wording if the policy is written on restricted terms. It is a provision added to an existing insurance policy to modify its coverage.

n)

o) Renewal

Most contracts are annual but can be renewed on expiry. There is no obligation on either party to renew the contract Renewal means new terms and conditions. Renewal premiums are usually required before the policy expires but some days of grace can be given

7E10 Sum Insured

This is the maximum liability on the subject matter of insurance. Premium rate applied on the sum insured. Determination of limits of liability on policies whose exposure cannot be determined in advance e.g. PL. For Life Policies, It is the ability for the Insured to pay up the premium

7E11 Claims Process & and Settlement


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A demand made by the insured, or the insured's beneficiary, for payment of the benefits as provided by the policy

7E12 Indemnity

Methods of providing indemnity

Cash/Repair/Replacement/Reinstatement (New for old)

Exception to this principle are Life and Personal Accident contracts. (Benefit contracts). Amount payable is normally agreed to/specified at inception.

Chapter Summary

In this chapter, we have got a snap shot of the various classifications of insurance and the scope of cover under each of the major classes of insurance.

We have also considered the differences between the two major categories of insurance – General Insurance and Life Insurance.

We identified the compulsory insurances in Uganda and discussed the reasons why the government makes certain insurances compulsory.


1. Outline the differences between General Insurance and Life Insurance 2. List four insurances that are compulsory in Uganda 3. Give four reasons why the government of Uganda has made some insurances

compulsory 4. Describe the scope of cover under the following forms of motor insurance

a. Act Only b. Enhanced Third Party c. Comprehensive Motor Insurance

5. Describe the scope of cover provided under the following classes of insurance.

a. Professional Indemnity b. Public Liability c. Group Life Assurance d. Term Life Assurance


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CHAPTER 8: CONTRACTING IN INSURANCE

Contents

Learning Outcomes

Introduction

8A Meaning of the Term ‘Contract’

8B Essentials of Valid Contract

8C Types of Contracts

8D Approaches of Discharging a Contract

8E Breach of Contract and Remedies

Chapter Summary


Learning Objectives

After studying this chapter, you should be able to

• Define the term contract • Describe the main elements or essentials of a valid contract • Describe the various types of contracts in insurance • Explain how a contract may be discharged • Explain the remedies available for breach of contract

Introduction

In the previous chapters, we have already introduced the idea of a policy document being evidence of an insurance contract. In this chapter we shall concentrate on the general meaning of a contract, the main elements of a valid contract, various types of contracts, how a contract can be discharged and the remedies for a breach of the terms and conditions of the contract.


• Meaning of the Term ‘Contract’ • Essentials of Valid Contract • Types of Contracts


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• Approaches of Discharging a Contract • Breach of Contract and Remedies

You will study the legal principles of an insurance contract in depth elsewhere in your course of study. In this chapter we shall concentrate on the basic concerns of any contract.

8A Meaning of the Term ‘Contract’

A contract is a legally binding agreement between two parties. Under the contract, the parties to the contract expressly state their rights and obligations which are recognized at law, meaning that they are enforceable in the courts of law of that country. In law, the doctrine or principle called Privity of a

contract means that the terms and conditions or rights and obligations spelt out in the contract only apply to the persons or parties who originally made that contract. If, for example, you enter into an insurance contract with ABC General Insurance Company Ltd to comprehensively insure your motor vehicle, then that contract is between you the owner of the car (the first party) and the insurance company (the second party). Under the doctrine of Privity of contract, it means your son has no right or obligation to enforce any terms or condition within that contract.

Contracts can be either contracts under seal (a formal contract in writing which must be witnessed) or simple contracts (all other contracts)

Contracts can be either bilateral contracts or unilateral contracts. There must always be two persons to make a contract but under a unilateral contract only one is bound.

A contract may not be fully valid in law for a number of reasons; it can be void, voidable, or unenforceable.

8B Essentials of a Valid Contract

As explained in the previous section, a contract must be legally binding; but not all agreements are legal contracts. For a contract to be legally binding, certain elements must be present. These include but are not limited to:

Intention to create legal relation

Agreement (offer and acceptance of the offer)

Consideration

Capacity to contract

Formality


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Elsewhere in your course of study you will learn that there are other important elements which also must be present, but for purposes of this course we are going to focus on these four aspects.

8B1 Intention to create legal relation

The parties to the contract must be willing to be legally bound. It implies that all commercial contracts are legally binding while social contracts like promising to marry a girl/boyfriend are not legally binding.

8B2 Agreement (Offer and Acceptance)

For any contract to be valid there must be agreement between the two parties to the contract. For this to happen, there must be an offer being made by one party and this offer must be accepted by the other party. A contract requires agreement. The law identifies this as an offer which is communicated to the other party and which the other party accepts without alteration. As a general rule, this acceptance also needs to be communicated.

A valid contract cannot be created unless there is a definite offer and a complete acceptance of the offer. When a person makes and offer to another, one signifies a willingness to enter into a contract on terms set out in the offer. An offer, if accepted involves the intention to be bound there. An offer must be distinguished from an invitation to treat. An invitation to treat is an invitation to make an offer. For example, a bookseller who sends a price catalogue is merely making an invitation to treat, leaving the person to whom the catalogue is sent to make an offer; similarly, merchandise displayed on shop shelves is an invitation to treat.

An offer is made when one party makes a proposal to another party to enter into an agreement designed to crate legal relations between them. It is made


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only when it is communicated to the “offeree”, that is the party to whom the offer is made. It may be made orally or in writing or by conduct. An example of an offer made by conduct occurs when a bus travels along a street. This constitutes an offer by an owner of the bus to carry passengers to specified places at specified fares. An offer may lapse before it has been accepted. It is then too late for any contracts to arise from the original offer. It may also lapse if either party dies before acceptance, or after failure to accept the terms of the offer if a special mode of acceptance is stipulated. An offer may be revoked at any time before acceptance. The general rule is that a revocation must be communicated to the “offeree” before the “offeree” has signified acceptance. The revocation must actually be brought to the notice of the “offeree” and is rejected if the person to whom the offer is made rejects it out right or if the person makes a counter offer, or if the person accepts the offer subject to certain conditions. A counter offer must be regarded as a refusal of the original offer that there upon lapses and cannot be accepted afterwards

An acceptance may be made orally or in writing or by conduct. An acceptance by conduct occurs where an offer is accepted by being acted upon. For example, if an offer of reward is made for finding a lost cat, the offer is accepted upon finding the cat provided that the finder is aware of the offer; it is not necessary to give oral or written notice of acceptance. An acceptance must be strictly in accordance with the terms of the offer, because any variation constitutes a counter offer and a consequent rejection of the original offer. Except where acceptance of a general offer is made by conduct, an acceptance should be made to the “offeror” and in accordance with any special form prescribed to the “offeror”. The party accepting the offer must make some outward sign of acceptance and cannot be bound in advance by the “offeror”. When making an offer, a person may specify that use of post is a suitable means of acceptance. In this case the contract is completed the moment the letter of acceptance is posted even though it does not reach its destination. Where it is reasonable to use the post, the letter must be properly addressed, stamped and posted. This is called the Postal Rule.

8B3 Consideration

Consideration converts a bare promise into a bargain and becomes the price paid for another party’s promise. Its standard definition, given in the English case of Curie Vs Misa 1875 is “some right, interest, profit or benefit accruing to one party or some forbearance, detriment, loss or responsibility given, suffered or undertaken by the other.” It therefore that consideration may be positive; that is give, pay, do; or it may be negative; that is not to do something one is entitled to do or to suffer as a result of forbearance or loss. Though consideration is necessary for all simple contracts, there are requirements that consideration must fulfil:

It must have value, but it need not be adequate. The court will not normally be interested in whether a fair bargain has been struck. It will only seek to ensure that a bargain of some sort was made.


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It must not be “past”. In this sense, a promise of payment to reward past service is not a bargain and so will not be enforceable. This does not apply to situations where services may have been performed on the common understanding that there would be a payment at some time in the future. In that particular situation, the latter promise to pay is merely an attempt to quantify the obligation.

It must be legal, for courts will not support a wrongdoer.

Must move from a “promise”. This means that the person who receives a promise must buy it with his or her own, not someone else’s endeavour.

In insurance, consideration is the premium paid for the risk placed with the insurance company.

8B4 Capacity to contract

Capacity in the law of contract is the right recognized whereby a person may enter into a binding agreement. While, in general it is presumed that every “legal person” may be a party to a contract, there are some people who, by reasons of age or special circumstances, are deprived wholly or partly of the capacity to enter into a contract. Minors, the insane and the drunk belong to this category of people that we will now discuss in some details.

8B4A Minors

A minor is a person who is below 18 years of age. Minors however may be bound by contract for purchase of necessaries defined as actual requirement (such as articles of apprenticeship) or goods beneficial or suitable to young people’s station in life. When minors buy or agree to buy goods that are necessaries, they are bound to make payments for them. They however are not bound to pay more than reasonable, which may not be the same as either agreed price of a cash or credit price.

8B4B Insane persons

A person who has been judicially declared insane cannot make valid contacts. People who have not been declared insane are bound by their contract, unless they can prove that:

When they made contracts, they were so insane that they were incapable of understanding what they were doing; and

The persons with whom they made the contracts were aware of their insanity and incapacity.

If one can prove these two points, one can avoid the contract in any event, however, one is liable to pay a reasonable price for any necessaries supplied.

8B4C A drunken person


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A person cannot avoid one’s contractual duties merely because one was drunk when one made the contract. One is entitled to a contract, however if:

One was so drunk that one did not understand what one was doing; and

The other party knew that one was in this state.

Like insane people, drunken people are liable to pay fair prices for necessaries.

8C Types of Contracts

8C1 Formality

Generally, the law does not require a contract to be in any format. Certain contracts however must be in prescribed formats. For example, contracts for sale of land must be in writing, a certificate of insurance must be issued in motor vehicle third party insurance and a hire purchase agreement contract must be in writing and signed by the two parties.

8C2 Legality of a contract

A contract is not valid if its subject is illegal. For example, a contract to defraud or evade the court of justice would be unenforceable. At this point, we need to discuss distinctions between illegal contracts, void contracts, voidable contracts and unenforceable contracts.

p) Illegal contracts

An illegal contract is prohibited by law and may incur penalties. For example, a contract to commit murder or sell explosives, with intentions of blowing up public facilities, would be illegal.

q) Void contracts

A void contract did not exist from inception and therefore has no legal effect and cannot be enforced at law. This means that the parties to the agreement cannot look upon the court system to sort out disputes that may arise from the contract such as a life contract without insurable interest. An illegal contract is void.

r) Voidable contracts

Terms of a voidable agreement allow one party or both parties to refuse to be bound by the terms of the agreement in certain circumstances. This means that a “voidable” contract can either be enforceable or repudiated by one of the parties at its option. In this respect, non-disclosure of material facts gives an insurer the option to void a contract.


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s) Unenforceable contracts

An unenforceable contract is perfectly valid but cannot be enforced in a court of law if one of the parties refuses to carry out obligations under it. An unenforceable contract, however can be used as a defence to a claim.

8D Approaches of Discharging a Contract

A contract can be discharged through performance, breach, agreement or frustration. We now discuss each of these forms of a discharge of a contract in some detail.

8D1 By performance

Performance is the discharge of the obligations expressed in the contract. For example, a life assurance contract is discharged by payment of the sum assured upon death or maturity. Performance must be exact and precise for it to suffice in discharging a contract.

8D2 By breach

Breach is failure to perform. A major breach of the contract by one of the parties discharges it, but in that case, the aggrieved party must have the right to sue for damages.

8D3 By agreement

Having entered into a contract by mutual consent, parties to a contract may similarly agree to discharge each other and hence bring the contract to an end. If both parties still have obligations to execute under the contract, they may mutually agree to release each other from the obligations.

8D4 By frustration

Frustration occurs when a supervising event makes a contract impossible to perform. One such situation is destruction of the subject matter of the contract or non-occurrence of the event on which a contract depends.

8E Breach of Contract and Remedies

A breach of contract by one party gives the aggrieved party certain remedies which depend on the extent and importance of the breach. The injured party has one or more of the following remedies available to one.


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One may regard the contract void as a result of the total breach by the other party and bring an action for damages for the breach of the contract. The idea underlying damages is that they are calculated in order to put the innocent party in the financial position that the party expected to enjoy had the contract been performed.

One can regard the contract as still open and bring an action for damages.

When one has already performed part of the contract, one may claim for an amount equivalent to the work done. This is known as “quantum meruit”.

an action for damages,

an action for specific performance,

an action for an injunction.

rescission

Chapter Summary

In this chapter, we noted that:

Contracts can be either contracts under seal (a formal contract in writing which must be witnessed) or simple contracts (all other contracts)

Contracts can be either bilateral contracts or unilateral contracts. There must always be two persons to make a contract but under a unilateral contract only one is bound.

A contract may not be fully valid in law for a number of reasons; it can be void, voidable, or unenforceable.

There are five essentials for the formation of a valid contract

An agreement (offer and acceptance)

Intention to create legal relations

Consideration (for simple contracts)

In the form required by law (if any)

The parties must have capacity to contract

The contract also must not be illegal or contrary to public policy.

Special rules restrict the capacity to contract minors, mental patients and drunken persons.

A contract may be discharged by performance, by breach, by frustration, by agreement or by operation of law.

The main remedies for in the law of contract are rescission; an action for damages, an action for specific performance, and an action for an injunction.


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Privity of contract is a doctrine which restricts the rights and duties created by a contract to the persons who originally made it.


1. What are the essentials for the formation of a valid contract? 2. A person goes to a supermarket, picks up a bar of soap from the shelf

and pays at the counter. At what point is the contract of sale concluded? 3. What is an invitation to treat? 4. Acceptance must generally be communicated to the offeror. How can

this be done? 5. Give two examples of contracts which must be by deed. 6. What are necessaries? 7. When may a contract become frustrated? 8. How may a contract be discharged? 9. Distinguish between liquidated and unliquidated damages?


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CHAPTER 9: LAW OF AGENCY

Contents

Learning Outcomes

Introduction

9A Creation of Agency

9B Kinds of Agents

9C Duties of Agents

9D Remedies for Breach of Duty

9E Rights of Agents

9F Authority of Agents

9G Relationship between the Principal and the Third Party

9H Relationship between Agents and the Third Party

9I Termination of Agency

Chapter Summary


Learning outcomes

After studying this chapter you should be able to:

Define the terms ‘agent’, ‘principal’ and ‘third party’

State how agency is created

Describe the various types of agents

Explain the rights and duties of an agent

Explain the various types of authority an agent has

Explain the relationship between:


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1. Principal and agent 2. Agent and third parties 3. Principal and third parties

Explain how agency is terminated.

Introduction

The law of agency is based on the principle that one who does something through another does it oneself. An agent acts on behalf of another, who is known as the principal. The agent is therefore a mechanism through which the principal acts. The agent binds the principal by a contract without being personally bound to it. Once a contract is concluded, the agent has no further interest in the arrangement. An agent may have authority to bind the principal in connection with one specified transaction or with a series of transactions of a particular kind with all the principal’s affairs. The scope of the agent’s authority must be clearly defined, however.


• Creation of Agency • Kinds of Agents • Duties of Agents • Remedies for Breach of Duty • Rights of Agents • Authority of Agents • Relationship between the Principal and the Third Party • Relationship between Agents and the Third party • Termination of Agency


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9A Creation of Agency

The relationship between a principal and an agent can arise through consent, the application of the doctrine of apparent authority, necessity, ratification, or the application of the “rule of the undisclosed principal”.

9A1 Consent

The most usual way of creating a relationship between a principal and an agent is through consent. In this case, the agent is authorized by the principal to act on the latter’s behalf. The agent may be appointed by deed, in writing but not under seal, or orally. Generally it is of no consequence which method is adopted. If an agent is appointed by a deed, the deed is known as power of attorney.

9A2 Apparent Authority

When a third party deals with an agent, often the third party cannot know the precise limit of the agent’s authority. For example, a member of the public cannot be expected to know the extent, if any, to which an insurance agent is entitled to give temporary cover to the insured or the party proposing for insurance. Therefore the third party is bound to rely on what appears to be (apparent) authority of the agent.

The law recognizes the reliance on apparent authority. This means that a principal is bound not only by acts that are within the express authority of the agent, but also by acts that are within the agent’s apparent authority. There could be circumstances where the agent has no authority at all but the third party is justified in presuming that the agent has the authority.

9A3 Necessity

Agency by necessity arises where a person is entrusted with goods of another and it becomes necessary to do something to preserve the property in an emergency. For example, should a live animal be conveyed to a bus station where no one is waiting to take charge of it, the bus station officials may have to tend to it and feed it in order to preserve its life. In such circumstances, the Bus Company becomes an agent by necessity and the owner of the animal becomes liable to compensate the company.

9A4 Ratification

There are occasions when an agent will act outside the scope of what is permitted in terms of an agency agreement. An option open to the principal is that the principal accepts the act as having been done on the principal’s behalf. This is called ratification. Sometimes, ratification may be either expressed or implied from the principal’s conduct where the principal takes the benefit of the act with the knowledge of the circumstances in which it is done. There are certain rules in relation to a valid ratification.


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The person performing the act must purport to do it as an agent and not on one’s own behalf.

The principal must be the person whom the agent had in mind at the time the latter performed that act (though the principal need not be named)

At the time of ratifying the act, the principal must have full knowledge of the circumstances relevant to the act or must have waived further inquiry

The principal must have been in existence at the time the authority act was performed. The principal must have had the capacity to perform the act at the time it was performed.

Ratification must take place within a reasonable time.

The whole contract must be ratified.

A valid ratification is generally retrospective to the date of the original act. Sometimes an agent may make an offer in respect of something that is outside the scope of the agent’s authority, subject to ratification by the principal whom the agent has in mind; if the offer is accepted, the principal still has the right to ratify the act. If the principal does not, there would be no valid contract.

9A5 Undisclosed Principal

It is important to distinguish between the doctrine of the “undisclosed principal “and that of ratification. In the case of ratification the agent must contract an agent to act for an undisclosed principal, whilst purporting to act on his or her own behalf and unless the terms of the contract otherwise provide, the undisclosed principal may be sued under it. Where a contract is made on behalf of an undisclosed principal, the agent must have had authority to act at the time when the contract was made.

9B Kinds of Agents

9B1 The Universal agent

A universal agent had full powers to perform any act on behalf of the principal. The manager of an overseas branch of a company may be a universal agent if his or her powers are sufficiently wide.

9B2 General Agent

A general agent is empowered to act for his or her principal in certain specified capacities. This kind of agent includes persons such as shop managers and company officials.

9B3 Special agent


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A special agent is empowered to perform one act or class of act. For example an insurance agent is normally employed to obtains new business and receive premiums on behalf of the company but not usually empowered to admit liabilities under claims.

9B4 Broker

An agent who negotiates and contracts for the purchase and sale of goods and other property is known as a broker (not to be confused with insurance brokers); for example, a stock broker and a share broker. Brokers are agents of both parties for whom the brokers are acting, and may bind both to the extent to which the brokers are authorized but they do not have actual possession of the goods, neither do they appear as principals.

In insurance, the insurance broker advises and negotiates for the purchase of insurance services on behalf of the client/insured for a fee called brokerage commission that is paid by the insurance company. This commission is a percentage of the risk premium charged by the insurance company.

Illustration AON Uganda Ltd will act on behalf of MTN Uganda by advising on the various forms of insurance relevant to the business of MTN in Uganda. It will proceed to source for quotations from the different insurance companies in Uganda. After analysing the terms and conditions in the quotations, it will advise MTN Uganda on which insurance company to place which risk. The selected companies will then pay a fee of say 20% of the premium charged to AON Uganda as appreciation of the business acquired.

9B5 Mercantile Agent

A mercantile agent is one who has authority to sell goods or consign goods for the purpose of sale or to buy goods or raise money on the security of goods. Unlike brokers, mercantile agents, therefore: have actual possession of goods which have been entrusted to them for sale; have authority to sell the goods in their own names; possess liens upon their principals’ goods for their commissions; and, possesses insurable interest in the goods. The essential point is that a mercantile agent has possession with the owner’s consent.

9B6 Auctioneer

An auctioneer is a licensed agent who undertakes to sell by public auction properties over which the auctioneer may or may not have possession. The auctioneer is an agent of the seller but carries out sales by auction only, and has to be specifically authorized to deal with purchase for the purposes of signing the memorandum required to bind the purchase.


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9C Duties of Agents

The duties of an agent are obedience, care and skill, performance, good faith and accounting for money received. Remedies exist for an agent’s breach of duty.

9C1 Obedience

Agents must act either expressly or implicitly within areas of their authority but have no right to exceed that authority even if it would be to the principal‘s benefit to do so. In this respect, they will be liable in damages for any breach of contract between them and the principal, if they do not carry out the terms of the contract.

Further, they are under no obligation to perform any act that is either illegal or void. In circumstances where insurance agents are non-contractual, that are gratuitous, they are under no obligation to commence the performance of any act. If they do so, however, they have the same duties as paid agents.

9C2 Care and skill

The basic principle is that a person must exercise due care and skill in the performance of all acts done in the course of one’s duty as an agent. An insurance broker is expected to exercise a higher degree of care and skill than an agent does.

9C3 Personal performances

Generally, agents may not delegate their duties. Although this is a general rule, there are important exceptions to it. Sometimes the personal qualities and skill of agents are essential to the transaction. In these circumstances it is not possible to delegate duties. Delegation of duties is possible in the following circumstances, however:

Where principal expressly authorizes the agent to delegate all or some of their functions;

Where delegation is implied from the circumstances of the case straight line - which is true of many business transactions; or

Where it is recognized that the agents will delegate all or part of the work, for instances, their employees, where the delegation relates to some purely administrative function. In all these circumstances, agents are liable to the principal for work delegated to any of their personal fault. Additionally they are liable in principle for any fault on the part of the person or persons whom they have delegated the duty.

9C4 Good faith

An agent’s relationship with the principal is one of trust. It therefore, follows that agents must not allow their own interest to conflict with the duties


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towards their principal. They are entitled to accept their normal remuneration, such as commission. If they receive bribes or secret commissions from a third party, however, they are liable to prosecution under law. They may then be instantly dismissed and forfeit their rights under a contract, and the principal is entitled to repudiate any contract by an agent who has been bribed.

It is implicit that agents must not make use of confidential information that comes to them as agents for the purpose of obtaining some personal benefit. Even after the termination of the agency, such information may not be used. There is an additional requirement that if agents are employed to sell something on behalf of their principal, they cannot buy the thing themselves unless they disclose this fully to the principal since this would obviously lead to a potential conflict of interest.

9C5 Accounting for Money Received

Insurance agents must remit to the principal all the money they have received on behalf of the principal. They must keep the principal’s property distinct from their own and must keep proper accounts to be produced on request on behalf of the principal.

9D Remedies for Breach of Duty

When an agent is in breach of duty, the principal can:

sue the agent for damages for breach of contract;

in certain circumstances, sue the agent in tort. This may occur when the agent has refused to return the principal’s property;

sue the agent to recover any secret money received by the agent;

sue for an account if the agent fails to keep proper accounts of the agency transaction;

dismiss the agent without compensation.

9E Rights of Agents

Agents have, broadly speaking, three rights in relation to their employment as agents: indemnity, remuneration, and lien.

9E1 Indemnity

If agents incur liability or pay out money in the performance of their duties as agents, they have a right to be indemnified by a principal. The only exception to this is if an agency agreement provides otherwise. They, however, lose their right to indemnity (or reimbursement of expense) if:


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their acts are not authorized or ratified by the principal;

they are in breach of their duties as agents;

they incur liability or expend money solely as a result of their own faults; or

The act in respect of which they claim indemnity is illegal, unless they can show that they were unaware of the illegality.

9E2 Remuneration

On fulfilling their obligations, agents have the right to be paid the commission or other reward that has been agreed upon. This rule applies even where the principal, through no fault of an agent, does not benefit by the agents’ actions. For example: Where the principal employs an estate agent to find a purchaser for a house and the agent arranges a contract, if the principal subsequently allows the purchaser to break the agreement, the agent is still entitled to the agreed remuneration.

9E3 Lien

A lien is the right to retain the goods of another as security for payment of a debt. There are two types of lien: particular and general. If, for example, a person has both a current account and a deposit account at a bank and the current account becomes overdrawn, the banker has a particular lien if his or her right is restricted to possession of any amounts which may be paid into the current account. If the right extends over both the current and deposit accounts, however, it is a general lien, but the court will consider a lien to be particular unless there is clear evidence to the contrary.

9F Authority of Agents

Agents’ authority may be express, implied, usual, or apparent.

9F1 Express authority

Express authority is normally straightforward. It may be given orally or in writing and, if in writing, it may or may not be under seal.

9F2 Implied authority

In order to perform the tasks which are within the terms of their express authority, agents have authority to do anything which is necessary for, or incidental to, the carrying out of their express authority. This is known as implied authority.

9F3 Usual authority


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The express authority and implied authority that an agent possesses carry with them a usual authority to perform acts that are usual in a particular trade or profession. If there are certain customs of trade then the agent has a usual authority to comply with these customs.

9F4 Apparent authority

A principal is responsible for acts that are within the apparent authority of the agent. This is so even if they are not within the actual authority. If the principal acts in any way that that implies to a third party that a particular person is his or her agent, this will make the principal liable. The representation is made to the person who seeks to hold the principal liable. A principal may be held liable on the grounds of apparent authority even if agents act fraudulently and for their own benefit.

9G Relationship between the Principal and Third Party

Where an agent makes a contract on behalf of a principal, the relationship between the principal and a third party will depend on whether the principal is named, disclosed, or undisclosed.

In a straightforward situation, the agent makes a contract on behalf of a named principal and having done so, the agent is generally no longer concerned with the contract but drops out of the picture. The parties to the contract are the principal and the third party. The principal is liable if the agent had authority in any of the forms we have looked at or if the principal has ratified the act of the agent even in areas where there was no authority. Similarly, the third party is liable to the principal under the terms of the contract.

Illustration Named Principal (ABC Insurance Company Ltd)

Mr. Rex works for ABC Insurance Company Ltd as an insurance agent and makes a contract with Nyanzi General Merchandise Ltd for Public Liability Insurance. It therefore means the contract is between the Principal – ABC Insurance Company Ltd – and Nyanzi General Merchandise Ltd who must comply with the terms and conditions of the signed insurance contract.

A different situation arises if an agent discloses to a third party that he/she is acting on behalf of a principal but does not disclose who that principal is. The legal rights and liabilities of the principal and the third party are the same as if the principal had been named but the position of the agent is different. When the third party discovers the identity of the principal, the third party generally has the same rights as if the principal had been named.


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If a principal owes a debt to the third party and pays the agent, the principal is still generally liable to the third party if the agent fails to pass over the money. There are two exceptions to this rule:

It would clearly be inequitable to the principal to be liable to pay twice where the third party has led the principal, by the third party’s own conduct, to settle with the agent. This is common where the third party has some form of relationship with the agent.

The second exception is where an undisclosed principal has paid an agent before the third party has discovered the existence of the principal. The principal cannot be asked to pay again.

There is a general rule that a third party who owes a debt to a principal is still liable to the principal if the third party pays the agent but the agent does not pass over the money to the principal. This is heavily qualified by the fact that this rule will not apply if the agent has actual, usual, or apparent authority to receive payment (which in many cases he has). Of course there are circumstances where the third party is unaware of the existence of identity of the principal. In such a case, payment by a third party to an agent is equivalent to payment to the principal.

9H Relationships between Agents and the Third Party

As a general rule, agents can neither sue nor be sued under a contract to which the only parties are the principal and the third party. However, there are a number of exceptions to this rule:

Where agents are in fact the principal (even though described in the contract as the agents), they will be liable as principal. There is also liability where agents contract for a principal not yet in existence (for example a company still to be formed).

Agents are liable under a contract if it is made in such a way as to indicate that they have assumed personal responsibility. This could happen in a situation where there is an undisclosed principal.

Agents who appear to be a contracting party cannot relieve themselves of liability by proving that they were merely acting as agents for another party. It is possible that the custom of a particular trade will mean that agents are personally liable. Courts will take note of, and give effect to, the custom, provided that the custom is not contrary to the terms expressed in the contract.

Agents are personally liable where they act in a dual capacity. A common example of this would arise in connection with hire purchase contracts. In the course of negotiating with a buyer, a dealer may make certain representations to the buyer, and if the sale is agreed upon, a hire purchase contract is arranged. The hire purchase contract, in fact, gives the finance company the


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ownership of the goods and the so-called purchaser is merely a hirer. In this case, representations are made by the dealer, both as an agent for the finance company and in his or her personal capacity as a seller of the goods.

One further event which may arise is when agents warrant that they have authority to a third party who relies on that information when in fact they have no such authority. In these circumstances, the agents can be sued for breach of warranty of authority. The third party may not do this if the third party either knew that the agents were not warranting their authority or ought to have known the position from the circumstances of the case.

9I Termination of an Agency

An Agency may be terminated:

on the completion of the purpose for which the agency was created;

by lapse of time, where the agency has been created for a specific period;

by the bankruptcy of the principal, and also by the bankruptcy of the agent if, as usual, the bankruptcy prevents the agent from carrying out his duties;

by the principal revoking the contract, provided that any compensation due to the agent is paid;

by the action of the agent in recounting the agreement;

by mutual consent or agreement between the parties;

by frustration, where the subject matter of the agency has been destroyed or become impossible to fulfil; or

where the objects of the agency have become illegal.

Not all the consequences flowing from the principal-agent relationship cease immediately the agency is terminated. For example: If at the time of the termination the agent has a right to commission or indemnity, these vested rights do not cease to exist. Equally, if the agent has been guilty of a breach of duty (and that is the reason for dismissal, bringing the agency to an end) the principal’s right to sue the agent in respect of the breach still remains. When the principal terminates an agency, the principal remains liable to third parties for acts the agent has performed on the principal’s behalf until the third parties have been notified of termination.

Chapter Summary

In this chapter, we learned that:


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An agent is a person who has the authority or power to act on behalf of another person called the principal. Agency may be created either by agreement or consent, by ratification, and by necessity.

The duties of an agent are to obey the principal’s instructions, to exercise proper care and skill, to perform duties personally, to act in good faith towards the principal, and to account for monies received on behalf of the principal.

The main rights of an agent are right to remuneration and the right to indemnity. Agents can have different types of authority: actual authority (express or implied); apparent or ostensible authority

Contracts made by the agent with third parties can be for a named, disclosed or undisclosed principal.

Agencies can be terminated by agreement, performance, lapse of time, withdrawal of authority, renunciation by the agent, death of principal, or agent, bankruptcy, insanity or frustration.


1. The concept of agency is tripartite. What are the three relationships? 2. What types of authority might an agent have? 3. State three ways in which an agency may be created. 4. What conditions need to be fulfilled to achieve a valid ratification? 5. What is meant by an agent by necessity? 6. When may the agent delegate their duties? 7. What are the rights of the agent? 8. What are the duties of the agent? 9. Against whom may the third party enforce the contract when the principal

is wholly undisclosed? 10. How may an agency be terminated?


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CHAPTER 10: CUSTOMER CARE

Contents

Learning Outcomes

Introduction

10A Understanding a Customer

10B Nature and Character of Services

10C Types of Customers

10D Customer Expectations and Perceptions

10E Developing a Customer Service Culture

Chapter Summary


Learning Objectives


Define the term ‘customer’

Outline the various types of customers

Describe the various levels of customer expectations

Explain how the customer service culture can be developed

State the nature and character of services

Introduction

Insurance being like another financial service product requires customer service and care in all its operations if a company is to survive in this extremely competitive environment. Insurance offers a unique service because the customer does not see the immediate benefit of what they are buying. It is


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an intangible service which cannot be standardized and therefore requires specialized consideration. In insurance, people who deliver the service become part of the service package.


• Understanding a Customer • Nature and Character of Services • Types of Customers • Customer Expectations and Perceptions • Developing a Customer Service Culture

10A Understanding a Customer

A customer may be referred to as any person who buys the company’s product.

Customer service, also known as client service, is the provision of services to customers before, during and after purchase or interaction. It is a series of activities designed to enhance the level of customer satisfaction (Turban et al., 2002). It can also be defined as the process of knowing what the customer wants and seeing that the need is satisfied.

Customer service is the act of taking care of the customer's needs by providing and delivering professional, helpful, high quality service and assistance before, during, and after the customer's requirements are met. Customer care is more than just a smile and ‘thank you’. It means that the organization conducts itself in such way that its customers feel that they are the reason it exists; that they exist to serve their needs.

10B Nature and Character of Services

Before we can deliver a quality level insurance service, we need to understand the features of a service. These include:

10B1 Heterogeneity in service marketing

Given two insurance companies, even if they have the same policies, the people serving would be different, the staff offering the product will be different, and hence the experience can be completely different.

Since people are the dominant factor in the marketing mix for services, people themselves can be the dominant cause of heterogeneity. No two customers are alike. Thus, the perception of service by all customers is different, which contributes to heterogeneity. Hence we can say that heterogeneity mainly


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arises through interactions between customers and various salespeople. Each interaction with a service is important to maintain the service levels. Heterogeneity needs to be controlled to give a uniform customer experience.

10B2 Services perish

The concept is simple – if you do not watch the movie now, you won’t get a refund of the ticket. If you do not board your bus, you cannot ask back for the ticket fare. A service once ordered, perishes, if it is left unused.

10B3 Intangibility of services

This is derived from the fact that you cannot see or touch a service. A service is made and delivered on spot and hence it cannot be measured as easily as a tangible product. Intangibility of services can be explained by comparing an insurance service and soap. Soap has a clear metric like 500 grams of soap and it is something which you can touch and feel and you know what the exact cost of the product is and what it has to be priced at. A service like an insurance service is always varying because you pay as per the service that you receive. You cannot taste the services and then order later. You have to first order it and then hope that it will ‘taste’ good. Thus, unlike products, services cannot be touched or felt beforehand. They have to be first ordered and then they become tangible. Services must be consumed at the time of delivery and cannot wait any longer.

10B4 Inseparability

Services cannot be separated from the service providers. A product when produced can be taken away from the producer. However a service is produced at or near the point of purchase. Take visiting an insurance company, you order for a policy, the waiting and delivery of the policy, the service provided by the staff is all a part of the service production process and is inseparable. The staff in an insurance company are therefore as much part of the process as the quality of service being provided.

10B5 Non-ownership

Unlike a physical product, the consumer does not secure ownership of the

service. Rather the customer pays only to secure access to or use of the service.

Similarly, with insurance services, although the customer may be given a

policy document, they serve only to allow the customer to make use of what

he or she is actually buying, namely, insurance services.


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10C Types of Customers

Customers can be divided into two distinct categories:

Internal customers

External customers

10C1 Internal customers

Your customers do not only include people who enter your establishment or place orders by telephone or the Internet. Customers also include those who work every day to make your operation a success: your employees. An internal customer is any member of your organization who relies on assistance from another to fulfil her job duties, such as a sales representative who needs assistance from a customer service representative to place an order. While external and internal customers may fulfil different roles, both are critical to the viability of your business.

While internal customers may not necessarily purchase the products or services offered by their employer, the internal customer relationship also plays a key role in the business's success. In the sales example, the salesperson who does not work well with customer service may have greater difficulty placing orders or obtaining answers to his external clients' questions, resulting in a poor level of service. Strained internal relationships can also adversely affect company morale.

10C2 External customers

An external customer is someone who uses your company's products or services but is not part of your organization. An external customer is an individual who enters your office and buys a policy. External customers are essential to the success of any business; they provide the revenue stream through their purchases, which the enterprise needs to survive. Satisfied external customers often make repeat purchases as well as refer your business to other people they know. A customer who suffers through a negative experience with a business, such as being treated rudely by an employee, can also hinder a business by dissuading others from patronizing it.

External customers can be classified by status, product or sales volume.

a) Status

Current customers – These are customers already in your books and require quality service if they are to remain with your company.

Prospective/Potential customers – These are the ones yet to be brought on board.

Dissatisfied/Lost customers – These were previously in your books but due to, say, poor service, lost interest in your company. All efforts must be done to bring them back to the company.


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b) Product

Personal buyer – These buy insurance for their own personal use; for example travel and home insurance.

Commercial buyers – These buy insurance for business reasons; that is to say, to protect their business interests; for example, a fire policy for a factory.

c) Sales Volume

Research shows that customers’ sales volume tends to follow the rule that:

80% of the sales come from 20% of the entire customer base who are commercial buyers

20% of the sales come from 80% of the customer base of personal buyers who buy on individual basis.

The above depends on the company’s objectives and product offerings as well as their targeted clientele.

External customers may influence the company through:

Competition – There is need to keep excellent customer service in order to retain customers or they will move on to your competitors.

Consumer awareness – Today’s customers know their rights to quality service and product, legal protection, etc.

Customer expectations – Customers demand and expect high quality goods and services because they know their rights which are dynamic in nature.

10D Customer Expectations and Perceptions Customers’

Customer expectation refers to the total perceived benefits a customer expects from a company's product or service. If the actual experience customers have with a product exceeds the expectation, they are typically satisfied. If the actual performance falls below the expectation, they are typically disappointed.

Basic level of expectation – Customers’ expectations are met according to the contract entered into. A customer has no incentive to change insurers BUT can won over by a competitor.

Below level expectation – Your insurance company may have failed to perform according to the contract and so the customer has every reason to switch to competitor.


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Incremental quality level expectation - When the organization adds some element of quality onto the core product at a reasonable cost, this exceeds the customer’s expectations. The customer is satisfied and has no reason to change service providers.

10D1 Customer service dynamics

Companies must know what the customers want. Here are some tips on cultivating good customer service:

Be easy to find by your clients

Do not be closed when you should be open

Answer the telephone promptly

Handle queues/seating conveniently

Allow the customers to do it their way

Do not keep people waiting – explain delays

Know your product and its benefit levels well

Never be out of stock

Get the right order; this requires good listening skills

Make it easy to pay through flexible payment methods

Do not overcharge for silly extras especially on the extra benefits

Be fast with refunds where necessary

Give a reward for dealing with you

10D2 Product or service development

Generate products to meet identified needs and provide value for money through:

• Quality product • Make sure it works • Always exceed the expectations • Constantly seek improvement • Never accept that it is good enough • Do not tell yourself there is nothing you can do about it • Worry if your customers will not buy your product • Respect your own product • Make sure there are no excuses

10D3 Communicating value

Use the different tools of marketing to convince potential customers of the true value of the product over and above the alternatives existing in the market. The following tips will help you to communicate value to your customers:

• Make your objectives achievable but challenging • Keep up with the times – innovate • Be strategic and share your strategies


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• Monitor your competition • Concentrate on the big picture – and worry about detail • Concentrate on detail – and worry about the big picture • Be part of the solution, not the problem • Do not promise the moon • Empower your people to make fast decisions • Admit mistakes • Check, do not assume you did it right • Do not just try to do it • Do not run misleading adverts • Never lie • Keep your promises • Listen and • Ask why

10D4 Product availability

Ensure that the product is available when and where the customer requires it. This can be effected by having convenient distribution channels in place.

Feedback – finding out what is good or bad about your product/service – is very important. It helps to ensure corrective measures; keeps you in direct contact with the client; rebuilds trust and enhances customer loyalty.

The following tips are important for you to consider:

• Make it easy to complain • Respond to complaints • Analyse complaints • Respect existing customers • Do not take customers for granted • Allow customers feel cared for • Make customers your best ambassadors • Encourage customer loyalty • When you lose a customer, find out why

10E Developing a Customer Service Culture

These are values comprising of unwritten codes of behaviour that are exhibited in organizations. If you look at companies lauded for their superior customer service, you almost always find that those companies create a culture that supports excellence in customer service. It is not that they simply train their employees in customer service skills. What they do is ensure that customer service is interwoven into everything the company does. Customer service excellence simply becomes ‘the way things are done around here’.

Management style – whether bureaucratic, autocratic, flat, etc.


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Attitude towards customers – respected, valued, etc.

Staff attitudes and practices

Culture will be influenced by:

History and ownership of the organization

The operations of the organization

Values and beliefs of key personalities in the organization

Need to change organization’s cultures in order to change values of members of the organization to the desired level

Size of the organisation

10E1 Why customer care/service is vital to an insurance company

a) Repetitive sales

A company with excellent customer service is more likely to get repeat business from customers. Consequently, the company will benefit from greater sales and profits. Contrarily, companies with poor customer service may lose customers, which will have a negative impact on business. It costs a lot more money for a company to acquire a customer than to retain them, due to advertising costs and the expense of sales calls. Therefore, the efforts that go into maintaining quality customer service can really pay dividends over time.

b) Publicity or Corporate Image

People that have a positive experience with a company's customer service department will likely tell two or three others about their experience, according to Consumer Affairs website. Therefore, quality customer service can be a source of promotion for organisations. Contrarily, a person who has a bad customer service experience will likely tell between nine and 20 people.

c) Prevention/Solution

Customer service is important to an organization because of potential complaints. Consumers can file a complaint with your company and a solution can easily be got rather than losing such a customer.

d) Differentiation

In a competitive marketplace where businesses compete for customers; customer satisfaction is seen as a key differentiator. Businesses who succeed in these cut-throat environments are the ones that make customer satisfaction a key element of their business strategy.

e) Reduces customer churn


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An Accenture global customer satisfaction report (2008) found that price is not the main reason for customer churn; it is actually due to the overall poor quality of customer service.

f) Increases customer lifetime value

A study by InfoQuest found that a ‘totally satisfied customer’ contributes 2.6 times more revenue than a ‘somewhat satisfied customer’. Furthermore, a ‘totally satisfied customer’ contributes 14 times more revenue than a ‘somewhat dissatisfied customer’. Satisfaction plays a significant role in how much revenue a customer generates for your business.

g) Reduces negative word of mouth

McKinsey found that an unhappy customer tells between 9-15 people about their experience. In fact, 13% of unhappy customers tell over 20 people about their experience. That is a lot of negative word of mouth. How much will that affect your business and its reputation in your industry?

Customer satisfaction is tightly linked to revenue and repeat purchases.

h) It is cheaper to retain customers than acquire new ones

This is probably the most publicized customer satisfaction statistic out there. It costs six to seven times more to acquire new customers than it does to retain existing customers. If that statistic does not strike a cord with you then, there is not much else one can do to demonstrate why customer satisfaction is important. Customers cost a lot of money to acquire.

10E2 Customer Service Delivery

Customers face difficulties when making decisions but products can be differentiated through customer-driven methods of service delivery. There is need for management to develop a mission statement that embodies customer-based practices and beliefs such as commitment to:

The customer

The organization’s success

Work

Staff development

Staff involvement in decision making

Issues central to customer service include:

a) Dependability

Dependability is a valuable quality in the workplace, whether it comes from your employees or vendors. Having a staff of dependable employees and managers helps your business run more smoothly and ensures that tasks are


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seen through to completion. An employee whom the boss can depend on is beneficial in offering excellent customer service, and a dependable employee has a greater possibility of seeing job growth and security.

b) Responsiveness

When an employee shows up late for work, especially on a regular basis, it can turn into a snowball effect including lateness to meetings and completing tasks after the deadline and this greatly impacts customer service. A repeated lack of timeliness on the part of an employee can cost your business money by turning off customers who have waited too long or by failing to deliver services or goods promised within a certain amount of time.

c) Competence

Employers need to consider the right set of skills when hiring the all-important people who will be taking care of their customers.

With that in mind, let us get into some specific skills that every support employee can master to meet and exceed the expectations of the customers that they interact with on a daily basis.

d) Credibility

One thing that needs to stressed for any business claiming to have great credibility and a great service is that your customer service must follow you where ever you go. You must have top notch customer service or else your company will be reviewed horribly no matter how great your product. They have one bad chat with customer support and all of a sudden the product now sucks and the company is now worthless. This happens all the time even though it is probably not the product’s fault. Telling people you are credible is easy, but showing proof that you are credible in every single area of your business is hard and takes time, devotion and honest effort to make happen.

e) Accessibility

Accessible customer service is about understanding that people come with different needs and finding the best way to help them access goods and services that satisfy those needs. It can be as easy as asking, “How can I help?”; making small changes to how you serve customers with disabilities; and working flexible working hours convenient to customers.

f) Communication

Effective communication is a critical component of customer service for any organization. Customer service efforts are designed to ensure the prompt and efficient delivery of quality products and services to customers, as well as the effective recovery from any service-related issues that may arise. In dealing


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with customers, communication is essential, whether it is face-to-face, over the phone, via email or, increasingly, through online channels.

10E3 Ten Golden Rules of Customer Care (Cartwright & Green, 1997)

It costs far more to gain a new customer than to retain an existing one.

Unless you recover the situation quickly, a lost customer will be lost forever.

Dissatisfied customers have far more friends than satisfied ones.

The customer is not always right but how you tell them they are wrong can make the difference and ultimately do pay your wages.

Welcome complaints – they allow for recovery.

In a free market economy, never forget that a customer has choice.

Treat internal customers as you would treat external ones.

You must listen to the customer to find out what they want.

If you do not believe, how can you expect the customer to?

If you do not look after your customers, somebody else will.

Chapter Summary

In this chapter, we have considered the following:

Difference between Customer service and customer care

We have identified the nature and character of services

We have identified the two major categories of customers we deal with

We have seen the golden rules of customer service


1. Define the term ‘customer’ 2. Outline the various types of customers. 3. Describe the various levels of customer expectations. 4. Explain how customer service culture can be developed. 5. State the nature and character of services.


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CHAPTER 11: SALES AND MARKETING

Contents

Learning Outcomes

Introduction

11A Differences between Sales and Marketing

11B Principles of Marketing

11C The Meaning of Branding and the Role it plays in Sales

11D Insurance Distribution Channel

11E The Sales Process

11F Qualities of a Good Salesperson

11G Determinants of Insurance Selling

Chapter Summary


Learning Outcomes

After studying this chapter you should be able to;

Define the key terms used in sales

Differentiate sales from marketing

Explain the principles of marketing

Explain the insurance distribution channel

Describe the sales process

List the qualities of a good sales person

Explain the determinants of insurance selling


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Introduction

In this chapter, we will generally look at the role played by sales and marketing in insurance; the sales process including the various available distribution channels and what influences the sales process as well and how to become a better sales person


• Differences between Sales and Marketing • Principles of Marketing • The Meaning of Branding and the Role it plays in Sales • Insurance Distribution Channel • The Sales Process • Qualities of a Good Salesperson • Determinants of Insurance Selling

11A Differences between Sales and Marketing

Sales and marketing are often used interchangeably and some people take it to have the same meaning, which is not the case as it will be explained shortly.

Sales or selling is considered as any activity that lets potential customers know about your product or service, what makes it special or better than others, in order to encourage them to buy it. The aim of selling is to help customers make best buying choices. Selling is a transaction between two parties where the buyer receives (tangible or intangible) goods, services and/or assets in exchange for money. An insurance company may have various products including motor third party insurance that is needed by customers. In order for these customers benefit from the third party insurance, they must be prepared to pay up the applicable premium.

Marketing on the other hand often refers to activities or processes for creating, communicating, delivering, and exchanging offerings that have value for customers. The main aim of marketing is to ensure that customers get what they want.

Other key terms used in Sales and Marketing include:

11A1 Goods and Services

Often the term ‘goods’ and ‘services’ are used interchangeably and to some people their meaning is the same. It is worth noting that much as goods and services facilitate the sales process/transaction between the potential buyer and the willing seller, if taken in their typical sense they have different meaning.


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Goods refer to physical products that are offered by the seller to meet the needs of the willing buyer. Goods have been classified as consumer durables used to satisfy personal needs, fast-moving consumer goods (FMCG), or industrial goods used purposely for production of goods. We refer to a good as a physical product and, in our case, a physical product is anything that is offered to the market and is tangible in nature. Examples include: Different forms of beverages; clothes. We often refer to insurance services as a product. The issue we need to address here is whether insurance is a physical product or not. Insurance services tend to be considered as products because of the policy document that is given after one has bought an insurance policy.

11A2 Service

Services are identifiable, intangible activities that are sometimes the main object of a transaction and at other times support the sale of tangible products. They have no physical dimension, meaning you cannot see or touch it, unlike a physical product or good. Examples include: Insurance, banking, hotel, and transport services.

11A3 Needs

These can be taken as something that a person must have: something that is needed in order to live or succeed or be happy. Needs are basic necessities of life such as food, shelter, a desire to be loved.

11A4 Market

The place where buyers and sellers meet is called a market place. In insurance, the market place refers to the mechanism by which buyers and sellers meet rather than the actual physical location. Like any other market, the insurance market consists of sellers, buyers, intermediaries, and other service providers.

11B Principles of Marketing

These are the foundations upon which marketing operates and if selling is to be successful, these principles must have been implemented well. In some cases, they are referred to as the “marketing mix”. The marketing mix refers to the set of actions, or tactics, that a company uses to promote its brand or product in the market. They are seven in number:

11B1 Price

Price refers to the value that is put for a product. It depends on costs of production, the market segment targeted, ability of the market to pay, supply, demand and a host of other direct and indirect factors. There can be several types of pricing strategies, each tied in with an overall business plan. Pricing can also be used as a demarcation, to differentiate and enhance the image of a


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product. Pricing of an insurance product can render it valueless or too expensive in the eyes of the customers. It is therefore very important to come up with appropriate pricing in line with competition.

11B2 Product

Product refers to the item actually being sold. The product must deliver a minimum level of performance; otherwise even the best work on the other elements of the marketing mix will not do any good. In insurance this can be seen in terms of benefits being offered that will determine if customers are attracted to the company’s product offerings.

11B3 Place

Place refers to the point of sale. In every industry, catching the eye of the consumer and making it easy for her to buy is the main aim of a good distribution or 'place' strategy. Retailers pay a premium for the right location. While choosing the place for customers in accessing your product, it is very important to consider convenience, depending on the product being offered.

11B4 Promotion

This refers to all the activities undertaken to make the product or service known to the user and trade. This can include advertising, word of mouth, press reports, incentives, commissions and awards to the trade. It can also include consumer schemes, direct marketing, contests and prizes.

11B5 People

Develop the habit of thinking in terms of the people inside and outside of your business who are responsible for every element of your sales. It is amazing how many entrepreneurs and businesspeople will work extremely hard to think through every element of the marketing strategy and the marketing mix, and then pay little attention to the fact that every single decision and policy has to be carried out by a specific person, in a specific way. Your ability to select, recruit, hire and retain the proper people, with the skills and abilities to do the job you need to have done, is more important than everything else put together. Having well motivated and customer-centric staff will be very vital in servicing and customer retention, which in the long run benefits the company.

11B6 Process:

The next thing to consider within the marketing mix is the process of how your products are delivered. It is how you are going to get paid, and deliver your products. Will you need a distributor to take your products around the country or will you hire salesmen to do this? The option chosen depends on the product or service being sold.


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11B7 Physical Evidence:

When it comes to online marketing “physical evidence” pertains to how you, your products, or your company is presented in the market place. We can also consider company premises, staff appearance, and websites.

11D 11DC The Meaning of Branding and the Role it plays in Sales Branding

Branding is an important element of the tangible product and, particularly in consumer markets. It is a means of linking items within a product line or emphasizing what they stand for; e.g., Coca-Cola. The brand mark is the element of the visual brand identity that does not consist of words, but of design and symbols.

11C1 The benefits of branding

a) To the consumer

1. Easier product identification 2. Communicates features and benefits 3. Helps products evaluation 4. Establishes product’s position in the market 5. Reduces risk in purchasing

b) The manufacturer

1. Helps creates loyalty 2. Defends against competition 3. Creates differential advantage 4. Allows premium pricing 5. Helps targeting/positioning 6. Increases power over retailer

c) To the retailer

1. Benefits from brand marketing support 2. Attracts customer 3. Helps differentiate the product from competitors

11C2 Types of brands

There are many forms of branding but primarily there are manufacturer, distributor, price and generic brands.

11C3 Brand equity

a) is an asset


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b) a degree of brand-name recognition, perceived brand quality, strong mental and emotional associations, and other assets such as patents, trademarks and channel relationship.

c) is a measure of a number of different components, including the beliefs, images and core associations consumer have about a particular brand. Brand equity is the positive differential effect that knowing the brand by the buyer has on the seller.

Packaging and labelling form part of the branding in any company.

11C4 Essential elements to be considered in branding

a) Your brand must fit your product. Despite what many people think, your brand is not your product, website, logo. Say the word “Apple” for example, and chances are good that you will think of computers and music equipment. That is because Apple has a strong brand message and they keep that message on track to fit their company.

b) Consistency. Do not allow your branding message to get diverted or splintered. In many cases, especially when there are several managers affecting the message, companies end up with different branding messages being sent out. This is confusing to everyone, especially your consumers. Keep yours a one brand company.

c) Emotional Appeal. Head logic does not sell products; emotions sell products.

d) Reward Loyalty. Did you ever wonder why there is so much advertising directed at owners? The answer is obvious. Companies want to assure that buyers of their products made the right choice. In short, they’re rewarding loyalty on the part of their customers.

e) Measurable. Make sure you are able to measure the success of your branding. If you can’t effectively measure what effect your efforts are having on your sales figures, your efforts are probably falling on deaf ears.

11D Distribution channels Channels in insuranceInsurance

11D1 Insurance Agents

An insurance agent is defined under the Insurance Act (Cap.213) as a person who is or has been carrying on insurance business as a registered agent for one or more insurers and these can be individual agents or corporate agencies. In Uganda, agents’ business is more compared to other channels namely that from brokers.

11D2 Insurance Brokers

http://www.business2community.com/b2b-marketing/swot-analysis-infographic-01116079


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They are registered under the Insurance Act (Cap. 213) to carry on insurance business as agents of insureds or intending insureds. They advise individual or corporate buyers of insurance on their insurance needs. They act on their clients' behalf to negotiate and obtain the most appropriate insurance covers at competitive premium rates from their insurers, exercising care and skill in doing so. In Uganda, examples of insurance brokers include Aon Uganda, Marsh Uganda Limited; Liaison Uganda Limited; etc.

11D3 Bancassurance

Banks, including finance companies, with their huge database of customers, sell insurance through a network of branches. In Uganda, under the Insurance (Amendment) Act, Act No.13 of 2011, the relevant law was enacted and what is pending is the Financial Amendment bill that will allow banks to start selling insurance products.

Bancassurance is the term used to describe the partnership or relationship between a bank and an insurance company, whereby the insurance company uses the bank sales channel in order to sell insurance products, most of which are personal lines. Bank staff members, rather than insurance agents, become the point of sales or point of contact for customers. Bank staff members are advised and supported by the insurance companies through product information, marketing campaigns and sales training.

Personal line products such as Household Insurance, Private Motor Car Insurance and Travel Insurance can easily be sold through this channel.

11D4 Online Internet Portals (Company Portals)

The growth of information on the Internet has also increased the amount of time people spend on it. This has in turn generated a new market for online offering of insurance products. Online insurance selling is limited mostly to personal line products such as motor, home and travel insurance. General insurers involved will sell these individual products through their own informative websites, which can provide for quotations and accessibility to web brochures, proposal forms and policy wording.

11D5 Direct Marketing

Rapid technological advancements have changed the way in which individual insurance companies can now serve their customers. At the same time, new technology has allowed for more information on individual policyholders, which enables their buying habits to be stored in the IT systems of direct insurers. The build-up of such databases over the years is a useful marketing tool to harness the power of information technology by the insurers. They can then execute segment marketing to focus on customised products for niche target groups.


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Insurers have directly marketed personal lines, such as Personal Accident Insurance, Travel Insurance, Private Motor Insurance, Household Insurance, Golfer’s Insurance, through their informative websites.

Insurers also periodically send out promotional product brochures (direct mailers) to existing policyholders without servicing agents. Telemarketers from call centres owned or appointed by insurers also phone customers to advice and market personal lines, as well as help to file claims. Insurers also embark on cross-selling strategies to serve the needs of their customers.

11D6 Alternative Distribution Channels

These include supermarkets, car bazaars etc.

11E The Sales Process

The sales cycle is the process that companies undergo when selling a product to a customer. It encompasses all activities associated with closing a sale. Many companies have different steps and activities in their sales cycle, depending on how they define it.

7. Gain commitment/ closing

SELLING PROCESS

6. Over coming objections

5. presentation

8. Deliver the product and follow up

4. Need assessment

3. Approach

2. Pre - approach

1. prospecting

Edward Nambafu

11E1 Prospecting/ Identifying Clientsclients

This is one of the selling activities related to generating and satisfying customers. It is part of the personal selling process. Prospecting is the


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method (or system) by which salespeople learn the names of potential clients – who need the product and can afford it. Prospects can be individuals or groups of people, an organization. Prospecting is an important key to sales success.

A list of potential customers or clients can be generated through:

Referrals from customers’ positive word of mouth – number one source of prospects.

Referrals from internal company sources of sales manager, marketing department, customer inquiries generated from direct mail, advertising, website, tradeshows, etc.

Referrals from external agencies, at a fee.

Published directions from post office, business directory, yellow pages, trade associations, the government, chambers of commerce.

Networking by sales people - Use friends and acquaintances to make new contacts and join professional and civic organisations to meet new people – who may become potential customers or provide leads.

Cold canvassing or cold calling: you pick a name from a directory and call it. It is very time consuming but not cost effective owing to high rejection rates.

Do not bother people who have no need for your products. It is very expensive to make calls with little chances of success.

A good prospect is a customer who has a need for the product being sold; can afford to buy the product; and is receptive to being called or visited by an agent or salesperson.

11E2 Pre-Approach

This step includes all information gathering activities agents must perform to learn key facts about their prospects through customer research:

Where? What? Who? When? How? Why?

What is the business of the organisation

Where? - Location

Who - makes purchase decisions?

Why - the need?

When - now?

11E3 Needs assessment and interviews

At this stage the salespeople must discover, clarity and understand the buyer’s needs. This is done mainly by asking questions. The types of questions are categorised as:


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a) Situational questions - factual questions about the buyer’s current situation.

b) Problem discovery questions - potential problems, difficulties and dissatisfactions the customer wants solved.

c) Problem impact questions

Ask questions to make the buyer think about the consequences of not solving the problem. These questions help the buyer see that the seriousness of the problem justifies the time and money.

11E4 The Presentation

Here is the opportunity to show that you understand the five groups of knowledge that every Salesperson should know.

Be Smart (as required by the job and the organization's dress code) Avoid strong perfumes and colons, odour Avoid smoking (and later chewing gum) Have a file with your presentation (details included)

It is very important that you determine the customer’s attitude towards you.

This is one of those little understood and usually less considered secrets of selling. Attitude is a learned predisposition. Therefore if a client is treated badly he/she get a lesson. That lesson is a bad experience. That customer may never come back.

Perception is the way we see the world around us. The seller’s attitude affects the customers’ attitude

Positive breeds positive Negative breeds negative Laughter breeds laughter Tears breed tears Sincerity breeds sincerity Sorrow breeds sorrow Excitement breeds excitement (Lack of) confidence breeds (lack of) confidence Smiles beget smiles

As salesperson seeking to present a proposal to a prospect you must ensure that you have these 11G The five groups of knowledge at your fingertips:

Knowledge of your products and those of your competitors. Knowledge of your inventory and that of your competitors. Knowledge of your campaigns (advertising, sales promotion, et cetera) and

your competitors’ campaigns (advertising, sales promotion, etc.). Knowledge of your (finance) credit plan and that of your competitors. Knowledge of your policies (and programs) and those of your competitors.


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11E5 Always Ask For for a Sale

People make presentations about the products or services they offer without ever asking customers to buy. Oftentimes salespeople present without asking for a sale. A good salesperson always looks for signals from the prospective buyer that could indicate an inclination to buy and he/she seizes these to make a sale.

Non-Verbal Buying Signals

The Customer leans slightly forward. He looks at you more. His eyes open up and twinkle or the pupils dilate slightly. He smiles and his eye brow is relaxed and unfurrowed. He nods in agreement with what you say. His lips are relaxed and open, rather than tight and drawn. His palms are relaxed and open and the palms of his hands are open

toward you His legs are uncrossed, or crossed facing toward you. He rests his hand on his chin or cheek or rubs his hands together He handles or studies order forms or sales materials. He makes calculation on paper. He reaches for the sales contract He unconsciously reaches for his cheque book, wallet, or purse.

Successful salespeople are driven and confident. They are positive thinkers who see the silver lining in every cloud. To be successful, respected expert recommends the following in terms of words to forget and words to remember:

Words to forget words to remember

I can’t …………………. …I can I’ll try …………………...... I will I have to …………………. I want to Should have …………… …will do If only ……………… …… Next time Problem ………………… Opportunity Difficult …………………. Challenging

(Source: Being the Best, Denis Waitley)

11E6 Objections

They have no need for your product or service They have no money They are in no hurry to (buy) enjoy the benefits They have no desire to own


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They have no trust in you.

The reply to all these objections is …….”But you need this product… It’s not about money but the benefits you receive”. Emphasize the importance of the benefits offered by your services/products. Then talk about payment structure or program – not at once but once monthly.

Please remember to:

Respect the buyers concern. Avoid being over defensive Respond to the objections. Respond to ALL objections.

When the customers say “No”, keep these points in mind.

Make every moment of truth count. You cannot always make a sale but you can always make some progress toward your ultimate goal of winning and keeping customers.

For example,

You can ask prospects if you may be of help in the future. You can schedule another appointment. You can get information to find out if they would be a good customer

for you. You can ask them for referrals. You can learn from any mistakes that you may have made. You can

always leave a good impression. Think long-term and keep the big picture in mind. It is not the

customers you lose but the ones you win and keep that count. Do not take refusals personally or let them immobilize you. When a

customer says ‘No’ it is not you that is being rejected. Resolve to learn something from every refusal. Every person who says

‘No’ can provide you with valuable feedback. It is not failure, it is a lesson.

Never leave a customer without having achieved at least one of those goals. While there is no point in feeling bad about a ‘No’, take the time to review each refusal contact and learn from it. Then use what you learn to help you perform better with future customers.

Some of the things you may want to consider are:

Were you prepared with a thorough knowledge of your products or services?

Did you take the time to really listen and find out the customer’s needs and wants? Did you match your product or service’s benefits to his needs and wants?


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Did you stress the benefits that a customer would receive from buying and speak to him in his own language?

Were you friendly and polite after he said ‘No’? Did you ask to be of help in the future? Did you ask for referrals? Did you leave him feeling glad that he talked with you?

Review the above check list whenever a customer says ‘No’.

11E7 Common sales closes

a) The assumptive close

Now, how many policies will your organisation take?

What size/quantity do you want?

When can we deliver?

If these questions are answered then you are on your way to closing

b) Special-offer close c) Summary close

Provide a summary of the benefits that the buyer has already acknowledged. Then suggest an action for closing the sale.

11E8 Delivering the products

Tangible products as well as services once sold must be delivered to the customer. In most cases, insurance policies cannot be finalised right away after closing the sale. Agree when to deliver the products, and do not delay delivery because the buyer may cancel the order due to post-purchase behaviour, including cognitive dissonance.

11E9 Follow Up

Service your clients regularly. Do not lose a client due to poor customer service. Keep in touch with your clients. Some may buy more products. Call up the customers to give them reassurance. That the purchase was the right one. Many customers suffer from cognitive dissonance (Did I make the right choice?)

11J 11F Qualities of a good Good sales Salesperson

11F1 Personable

Being personable is universal among people who do well in sales. "The most successful salespeople know how to get along with and enjoy


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meeting and talking to a wide variety of people," he said. "They also tend to be comfortable and confident in social settings."

11F2 Ambitious

Good salespersons set goals for themselves and focus on achieving those ambitions. They have a drive to succeed in all that they do and thrive on success.

11F3 Confident

Sales is not a profession for people with thin skins, because rejection is commonplace. Salespeople hear the word "no" all the time, but successful sellers have the confidence to take "no" as a challenge, not a personal rejection.

11F4 Passionate

Successful salespeople have a deep belief in and a dedication to what they do and sell.

11F5 Independent

Sales is not a field for the insecure or faint of heart. Since many positions are commission-based, the most successful salespeople are typically self-starters who can take personal initiative by identifying the work steps needed to achieve success.

11F6 Hard working

Successful salespeople have a good work ethic and do what it takes to get the job done. They are also willing to roll up their sleeves and work long hours to reach and surpass their goals.

11F7 Disciplined

Procrastination is a non–starter for successful salespeople. They possess tremendous follow-through and are not easily swayed from their tasks or goals. They are good at organizing, planning and prioritizing, and have a "do it now" mentality.

11F8 Positive

Successful salespeople see the glass as half-full. Their positive attitudes allow them to turn negatives into positives in any sales situation. They learn from defeat to better improve their chances of success.

11F9 Persuasive


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The best salespeople know what it is like to be in their prospect's shoes. That is why successful salespeople act more as "consultants" and tailor their approach to meet the different needs of prospective buyers, to better influence a customer's decision to buy.

11F10 Adaptable

Successful salespeople understand that change is sometimes necessary and are able to quickly adapt and do something differently if it does not work. In other words, they have learned the art of the pivot.

11F11 Confidence

The sales person requires being confident to overcome barriers that he/she may encounter while selling insurance. Clients always want to deal with confident people

11F12 Continuous learning

The sales person needs to continuously be prepared to acquire or improve on his/her knowledge and with more knowledge, the sales person will become more confident in what he/she does

11F13 Ability to listen

A good sales person must do more of listening than the talking if he/she is to understand the client’s needs and offer a relevant solution.

11F14 Caring

A good salesperson must be caring and it is this care that will attract customers to their company. Caring is usually seen when clients lose a dear one and the salesperson attends the funeral.

11G Determinants of Insurance Selling

There are several factors that determine insurance sales in Uganda. Some factors are social, political, legal and others economic.

11G1 Salesforce performance

By providing enough information to the customers, sales personnel enable them to form their assessment about the products or services, which ultimately becomes customer value. In Uganda, this has been lacking but the situation is improving through aggressive training programmes.

11G2 Company liquidity in settling payable claims


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Liquidity refers to the degree to which debt obligations coming due in the next 12 months can be paid from cash or assets that will be turned into cash. This is essential in determining the level and timelines of settling claims.

11G3 Company size

The size of the firm affects its financial performance in many ways. Large firms can exploit economies of scale and scope and thus be more efficient compared to small firms. In addition, small firms may have less power than large firms; hence they may find it difficult to compete with the large firms, particularly in highly competitive markets.

11G4 Company age or length of stay in business

Newer and smaller firms thrive on taking away market shares from older firms in spite of disadvantages like lack of capital, brand names and corporate reputation. Regarding firm age, older firms are more experienced, have enjoyed the benefits of learning, are not prone to the liabilities of newness, and can, therefore, enjoy superior performance.

11G5 Management competence

This can be taken to mean a bundle of skills and technologies that enable a company to provide benefits for customers rather than a single skill or technology, and this will determine the firm’s level of innovation.

11G5 Level of distribution and professionalism

The lack of concreteness of many services of which insurance is one, increases the value of the persons responsible for delivering them. Putting the customer first, and, exhibiting trust and integrity have been found essential in selling insurance. Insurance sales agents fully understand the customers’ needs and requirements as well as build a trusting relationship between themselves and their clients to promote long-term mutually beneficial relationships.

11G6 Social Factors

a) Demographic Factors

There is a positive relationship between education and insurance sales. It is recognised that those who have a better education will purchase more insurance, potentially due to the fact that households with greater education can expect their incomes to continue to increase at a faster rate and for a longer period of time than their counterparts. For example, households with a head with greater education have potentially higher incomes. The death of such a household head will bring more financial loss to the family as compared with those with lower education.


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Family size and number of children were also found to be significant explanatory variables for determining the sales for insurance. This may not make a lot of sense especially in the African set-up where children are considered as the main of source of social security as one grows older.

b) Economic Factors

Income is commonly found to be positively related to the sales for insurance, holding other factors constant. There is a positive relationship between net worth or wealth and the sales for insurance since life insurance might provide protection for households’ wealth.

Several researchers have examined whether consumers are sensitive to market rates of interest when making insurance purchases. For example, interest rate has a different effect on the sales of insurance depending on whether it is in a short or a long run situation. In the short run, the sales increase with higher interest rates, whereas in the long run, the interest rate has no obvious influence on the sales for insurance.

Inflation has also been taken as a factor in the insurance purchase decision and has been found to not be a significant factor in the sales for insurance.

c) Psychographic Factors

It is expected that the greater a household’s risk aversion, the greater their incentive to buy insurance. Studies have showed that above-average risk takers were more likely to buy term life insurance than those who preferred taking average risk. Also, those who take average risk hold 10% more cash value life insurance than those who take no risk.

11G7 Attitudes towards the sales for insurance products in Uganda

First, there are several informal and social connections, particularly founded upon the extended family systems that sometimes extend help to defray some pressing needs. These have the potential to overshadow the individual‘s sense of vulnerability to financial shocks.

Lack of awareness of the existence of insurance products, and a poor understanding of the concept of insurance greatly influences insurance sales in Uganda.

The level of trust for an insurance service provider, marketing methods of a provider, and the extent to which providers make information available on the sales side of the scheme to community members are known to affect sales. On the other hand, a provider‘s inability to undertake good marketing methods could lead to a lack of awareness and poor understanding of insurance schemes by communities and households.

11G8 Ways of mitigating the challenges the insurance sector in Uganda


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(i) The management of the different insurance companies in Uganda need to lower the premium rates especially to certain sectors of the economy like agriculture such that these particular groups are encouraged to embrace the concept of insurance.

(ii) Insurance should be considered a key component of economic development and the best mechanism to take care of multidimensional risks in modern economies. It is necessary to clear the confusion regarding considering insurance as a superior or luxury good among potential consumers in developing countries with comparatively low per capita income. The results are of importance to the policy makers if they are aspiring to elevate insurance density and penetration in the economy. This is because the Ugandan economy has recently undergone tremendous changes, particularly in terms of regulatory reforms.

(iii)Rather than enacting policies that stifle their survival and operations, the government of Uganda should develop policies that encourage the general Ugandan population to embrace and adopt insurance if its contribution to economic growth is to be realized. This will help in the mitigation of risks and encourage investment in the economy.

(iv) To enhance insurance sales in Uganda, Insurance Regulatory Authority of Uganda (IRA) and the relevant government bodies like the Ministry of Finance, Planning and Economic Development (MFPED) should establish harmonious working relationships with all stakeholders and finally, embrace vigorous public relations to reverse the negative socio-cultural factors set against the concept of insurance.

(v) There should be massive sensitization programmes carried out to increase awareness, educate the public about the advantages and importance of insurance. Once the government and IRA adopt this stance, the concept is likely to be perceived as more important to the population, which will in turn boost the sales for insurance.

Chapter Summary

In this chapter, we have looked at the sales process and how salespeople can improve their skills in a very competitive environment.

We looked at the distribution channels used in insurance and differentiated between Customer Care and Customer Service.

We have described the qualities of a good sales person and emphasized the need to ask for a sale at the end of any presentation to a potential buyer.


1. Differentiate between Customer Care and Customer Service? 2. Describe the distribution channels used to sale insurance


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3. Identify the qualities of a good salesperson 4. What obstacles do salespeople face and how can they overcome them?


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CHAPTER 12: PRACTICE OF INSURANCE

Contents

Learning Outcomes

Introduction

12A Underwriting Procedures

12B Insurance Policies

12C Renewals and Cancellations

12D Underwriting Considerations

12E Risk Rating, Pricing Factors

12F Claims Procedures

Chapter Summary


Learning Objectives

After studying this chapter, you should be able to

• Explain the underwriting process for majority of the risks underwritten in Uganda.

• Explain the significance of reinsurance in managing exposure to risks • Describe the claims management process for major classes of insurance

business.

Introduction

Under this chapter, you are expected to learn and appreciate the basics on how a risk is underwritten, how the anticipated accumulation of losses can be controlled and managed through reinsurance, and what is expected to be done


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in the event of a claim or loss. This chapter makes a lot of reference to other chapters in the book, like Chapter 6: Principles of Insurance.


• Underwriting Procedures • Insurance Policies • Renewals and Cancellations • Underwriting Considerations • Pricing Factors • Claims Procedures

12A Underwriting Procedures

In chapter 6, the Principle of Utmost Good Faith was defined as a positive duty to voluntarily disclose, accurately, and fully all the facts material to the risk being proposed whether requested or not. A material fact is something that has a bearing on the risk insured; for example, Household insurance: the risk address has a thatched roof, Motor insurance: the proposer has had three claims in the previous year. Therefore every circumstance is material which would influence the judgement of a prudent underwriter or insurer in fixing the premium or determining whether he will take the risk.

Activity Asimil buys a house and is looking for house insurance. The house is built about 100 metres from a stream. He understands that four years ago the house was damaged by floods, but he was not the owner of the property at the time. Should he declare? If so what are the implications?

When considering a proposal for motor insurance, what fact would not be considered to be material?

A. The age of the main driver B. Where the vehicle is kept overnight C. Details of hire purchase agreement D. Use of vehicle

Also discuss the implication of each fact on the underwriting of the risk by a prudent underwriter.

12A1 Duty of Disclosure

Broadly speaking it is the duty on both parties to an insurance contract to inform the other party of everything that is relevant to the contract. It flows from the principle of Utmost Good Faith.

a) Duration of the duty of disclosure


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The duration of the duty of disclosure in non-life insurance can be required at inception of the policy, midterm of the policy, at renewal and or as a policy wording requirements; e.g., in Group Personal Accident where the employer is expected to disclose the names, their monthly earnings, etc. of employees that are recruited or terminated from the cover to determine either a premium refund or need to pay additional premiums.

b) Consequences of non-disclosure

Breach of Utmost Good faith or duty of disclosure can arise in two circumstances: misrepresentation and non-disclosure. If the non-disclosure or misrepresentation is fraudulent (concealment):

The policy is voidable.

The insurer can keep the premium and due for damages.

The insurer can ignore the breach of good faith, in which case the policy continues and the insurer would have to pay the claims.

Illustration Paula bought a Toyota Spacio to use as a special hire taxi, but informed her insurers it was for private use. The vehicle was subsequently stolen. Can the insurer refuse liability for the theft claim? Give reasons for your answer.

Discussion Physical and Moral Hazards

A hazard should be viewed in relation to a peril. A peril can be defined as that which gives rise to a loss. A hazard can be defined as that which

influences the operation of the peril. A physical hazard relates to the physical nature of the risk and includes any measurable dimensions of the risk, e.g.:

• Motor insurance: age of driver, condition of vehicle. • Security protection at a shop: Better security system equals lower physical

hazard. • Property insurance: nature of building material (grass thatched Vs iron

roofed).

12A2 Obtaining material facts

Material facts can be obtained through a number of ways including but not limited to the following:

a) Proposal forms: the proposal form is the most common way for the underwriter to obtain information regarding the risk. There are however, alternative ways of obtaining material facts available to underwriters, their use depending on the class of business involved.

b) Brokers through Risk Notes/registers: brokers are used extensively in arranging commercial insurances where their role may extend to preparing documentation for use by the underwriter in the assessment of the risk. This documentation could include risk registers highlighting individual


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exposures and claims experience, site inspection reports and preparation of health and safety reports.

c) Risk surveys: surveys are used to obtain information where the risk is large and/ or complex such as is the case with many commercial insurance risks for instance Kinyara Sugar Works factory insurance would require a survey by a professional surveyor to obtain the relevant underwriting information.

d) Supplementary Questionnaires: These are used when dealing with particular aspects of the risk. Examples of such areas include; money risks involving high value transits, fire risks in respect of old or obsolete buildings

e) Meeting with clients: This is again useful for commercial insurance risks where the underwriter desires to pick the attitude of the client in respect to risk being insured. It is very useful in mapping out the extent of moral hazard the underwriter will have to deal with should the risk be accepted.

f) Call centres: For personal lines, some underwriters operate call centres. These centres are considered to be cost effective with supporting computer systems which process documentation very quickly.

g) Internet: again, for simple risks insurers may make use of internet technology where material facts are declared following a series of questions on the website.

12A3 Procedures

Underwriting can be viewed as the link between the proposal form and the policy that comes into existence. You should be able to outline the procedures relating to, and significance of quotations, proposals, policies, cover notes and certificates of insurance and apply the basics of premium computation.

When the underwriter is in possession of all the relevant information disclosed to them, they will then assess the risk in terms of the information they have and decide whether to accept or reject the risk, and if they are to accept it, on what terms.

a) Quotation

A quotation specifies the price/premium, features or benefits, terms and conditions of the potential cover without being actually committed to the contract and accepting the terms and conditions

Activity JK is buying a car and needs motor insurance. He calls AIG for a quotation. Pauline the underwriter asks a number of questions about JK and the car to be able to decide whether to insure JK and if so at what price and on what terms. What questions would you ask if you were Pauline?

b) Proposal Forms

A proposal form may not be necessary where the insurer provides a quotation on the assumption that the quotation was done on the basis of available


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sufficient information. However, if a quotation is provided without a proposal form, it will normally be subject to the proposer completing one. Questions in the proposal form may be

• General questions e.g. proposer’s name, address, occupation , period of insurance etc. or

• Specific questions e.g. proposer’s age, description of the subject matter to be insured, business details, past insurance history, sum insured or limit of liability etc.

Premium calculation

A premium is the amount paid to an insurer in consideration of the insurer agreeing to cover the risk. The premium must be equitable- One that reflects the risk presented by the proposer to the insurance company. If for example, Wendy owns a small family car, rather than a fast sports car, she is statistically less likely to incur accidental damage to the vehicle. Wendy therefore brings a lower risk to the pool and should therefore pay less premium than a sports car owner.

Calculation of Premium

Premiums are arrived at by applying a premium rate to a premium base, with the rate reflecting the hazard associated with the insured and the base being the measure of the exposure.

Premium=Sum insured x rate

Illustration: If a Toyota Premio valued at Ushs30M is used for private use and all other underwriting factors are standard and normal, the applicable minimum rate as per IRA rating guide is 4%. Therefore premium would be calculated as: 30MX4%=Ugx 1,200,000

Under Liability Insurance, if Nana investments ltd has a turnover of Ush 20M per year. AIG offers product liability insurance with an indemnity limit of up to 2M at a rate of 0.5% on turnover. If Nana investments Ltd want a higher indemnity limit of 5M, AIG has quoted a rate of 0.7%. What would the premium be in both cases (2m vs. 5m)

Note: The increase in the limit of indemnity is by 150% while the increase in premium is by 40% because the premium is geared towards the measure of exposure (turnover) and to a lesser degree towards the limit of indemnity

c) Policies cover notes and certificates of insurance

Policies

The policy contains all the details of the item/exposure insured, the operative perils, period of cover, exceptions, conditions, the premium and other relevant


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information. The policy is effectively evidence of the contract and not the contract of insurance itself

Note: The contract of insurance comes into effect once the insurer has accepted the insurance proposal, terms have been agreed and the premium has been paid or agreed to be paid. Therefore the contract exists irrespective of the existence of the actual policy document.

Cover Notes: It is essentially a document issued as evidence that insurance has been granted, pending the issue of a policy or endorsement.

d) Characteristics of a cover note

Commencement date

Statement that the policy follows the normal terms and conditions of the insurer for that class of insurance

Risk specific information that identifies the property or liability that is covered

Any special terms that apply

Expiry date of the cover

e) Certificates of insurance

For compulsory insurance like motor third party, it is legal requirement that a certificate is issued to prove a policy is in force. It is evidence that a contract of insurance exists and that the policyholder/insured complies with the law.

Premium Payment

As previously mentioned, the insurance contract comes into force once the insurer accepts the proposal and the premium have been paid. However if the premium is not paid at the acceptance of the proposal, it is implied that the proposer promises to pay and this promise is sufficient at law to support a valid contract. Depending on the relationship between the proposer and the insurance company, the client can be allowed to pay cash/cheques, instalments or credit for an agreed period.

12B Insurance Policies

Under this section, we learn that the insurance policy is issued to formalise what the respective parties to the insurance contract have agreed. There are certain major things you should remember about the insurance policy:

the policy will contain the details of the terms and conditions

generally speaking, the parol evidence rule applies i.e. neither party can rely on any negotiations leading up to the contract, only on the contract itself and

the policy is only evidence of the contract and not the contract itself


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Structure, form and content: Every insurance company has its own form of policy for the various classes of insurance business it offers, and these vary considerably in style and length. The length of the policy document will be dictated more by the class of business.

Generally, the basic structure of all insurance policies will be the same, and will incorporate the following: Heading, preamble, signature clause, operative clause, exceptions, conditions, policy schedule, information and facilities.

12C Renewals and Cancellations

12C1 Renewals

As we may know from previous chapters and studies, most general insurance policies are issued for a period of twelve months. Towards the end of the period they are said to be due for renewal. The anniversary date is called the Renewal date.

This is an important date as it allows reconsideration of the insurance by both the insurer and the policyholder. It allows the insurer to review the existing terms, conditions and premium for the risk, and then for the policy holder to decide whether they want to renew the insurance in light of the terms. There is usually no obligation on either party to renew.

Insurance companies are usually very keen to encourage retention of the business because its cheaper to retain than to acquire new business.

12C2 Cancellation

All insurance policies must contain a cancellation condition. This condition defines how an insurance contract can be cancelled during its currency, usually by the insurer. The insurer usually has to send at least seven days written notice of the cancellation by recorded delivery to the insured’s last known address. It also undertakes to refund a proportionate premium for the unexpired period if no claims have been made during the policy period.

An insured may also have the right to cancel but in this case, a short period premium may be charged giving a less than proportionate refund of premium for the unexpired period.

12D Underwriting Considerations

In this book we have discussed the nature of insurance as a “common pool” that operates on the premise of the law of large numbers where contributions of many people going into the pool are being used to pay the losses of the few.

It is the insurance company’s task to manage this pool effectively and profitably. The individual underwriters must therefore


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Assess the risk that a person brings to the pool

Decide whether to accept the risk and if so, how much;

Determine the terms conditions and scope of cover to be offered

Calculate a suitable premium

Under this section, we will look at the fundamentals of underwriting in general and more inclined to the nonlife classes of business.

In relation to general (nonlife) insurance, we can distinguish insurance company’s general approach to underwriting in respect of personal insurances and commercial insurances.

Underwriting personal insurances can be relatively straightforward. The proposal form should be sufficient to provide the required relevant information. Commercial business insurance is generally more complicated. Commercial insurances range from small shops and factories to large multi-national corporations with operations in many countries throughout the world. Risks can range from a few vehicles to a fleet of vehicles. The degree of complexity of the underwriting required will obviously vary with the sheer size of the risk, but certain principles are still recognised.

The insurance underwriting process will always consist of an assessment of the following;

The major underwriting factors affecting claims experience for the particular class of business. For example carpenters use potentially dangerous powered machinery, it is therefore of no surprise that the injury rate for such employees is higher than injuries to office workers.

The ‘average’ claim per member of the group

The proposer’s characteristics in comparison to the ‘average ‘member

Taking an example of motor insurance, many different factors are used in the underwriting process. Some of the key factors are: Driver’s age, Type and make of vehicle, type of use, Geographical area, storage, driving record, cover required and vehicle modifications.

Under fire and special/allied perils, the main factors are: Use of the building, type of goods stored on premises, construction and material, safety measures, risk management features, number of floors and area, method of heating and lighting, location relative to peril

In liability insurance, underwriting factors are different for the type of liability cover required. For instance under employer’s liability, the principal consideration is the trade and occupation of the employee concerned

Activity What are the major underwriting factors for Household insurance and professional indemnity insurance?


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12E Pricing Factors

When pricing a risk, the charged premium should be able to cover the following factors: risk premium, expenses, return on Capital employed, investment income, premium taxes and other levies

Risk premium: Can be defined as the expected ultimate cost of the risk being accepted, including an allowance for the degree of uncertainty attaching to the claims cost.

In other words it’s the amount of money required today to fund claims that is the time value of money is taken into account. The key features of risk premium include frequency, severity, large claims, latent claims, reinsurance cost, claims reserves.

Expenses: There is a cost to running an insurance business and this need to be recovered through the ‘price charged’. The total of these costs together with any commission paid also needs to be considered. Examples of costs include staff costs, rent, utilities, marketing and advertising etc

12E2 Premium Taxes/Levies

In Uganda, these come in a variety of forms ranging from pure taxation expressed as fixed percentage of the taxable premium e.g. VAT at 18%, to quasi-taxation e.g. stamp duty and other levies like Training levy.

12E3 Managing Exposure

The insurance company must endeavour to manage its exposure to large losses that could wipe out all the reserves. One of the steps the company can take is to reinsure all risks and losses that the company is exposed to.

Reinsurance: is an extension of the fundamental concept of insurance, that is, the sharing of risk. It is a form insurance taken out by the insurance company against claims incurred under the contracts of insurance.

The reinsurance can be arranged either proportionately or non-proportionately depending on the risk/claims profile of the company’s business portfolio.

12F Claims Procedure

Under this section, we will briefly explain the basic procedure for managing claims. Please note that the procedures may considerably vary from one insurance company to another.


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Claims should be immediately reported to the claims handlers in any case not later than the specified policy claim notification period; usually within 7days of occurrence through email, phone call etc.

Once the agents/brokers receive the claim notifications, they immediately report to claims department and the specific claims handlers begin the claims process as specified below for some classes of business

12F1 Motor Insurance Claims

Usually the claims handlers will confirm premium payment, provide a list of required documents and then followed by appointment of a loss assessor depending on the magnitude of the claim,

On submission of the Assessor’s report, Claims handler will authorize repairs or advise otherwise; the garages will notify the company when repairs are done. At that point, the Discharge voucher and satisfaction note are released to be signed and returned for payment by the insured or claimant.

Payment should be made within the company’s acceptable time and in consideration of the amounts payable to the insured. Simple claims of low quantum should be paid within 14 working days.

12F2 Injury Claims

Injury /death claims should equally be reported to the claims handlers immediately in any case not later than one month of occurrence.

The claims handlers will guide the Agents or broker on the relevant claims documents to enable prudent processing of the claim.

Injury claims are however discharged at recovery of the claimant or a permanent incapacity award from the attending or independent Doctors.

The insurance company may send claimant for reassessment or discharge the claim at this level.

12F3 Liability Claims

The claims should be immediately reported to the legal team and in any case not later than one month of occurrence.

The Legal team will advise on the relevant claims documents and may appoint an investigator or loss adjuster when relevant and depending on the complexity of the claim.

The loss adjusters report and investigation reports greatly depend on the level of cooperation from the clients and this will determine the speed at which the final reports will be submitted to the insurance company


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Where the company does not require external claims experts, the legal team will examine the submitted claims documents and advise the clients accordingly.

12F4 Property claims

Report all claims immediately to the claims handlers and in any case not later than two days.

The claims handlers will immediately appoint loss adjusters and investigators to carry out initial inspections on incident sites.

All claims as may be required will be communicated by the loss adjusters before they leave the incident site.

The claims handlers will follow up with the insured and the loss adjusters to confirm full submission of claims documents and later await the final loss adjusters report.

Discharge of the claim, payment or declinature follow the same process as the other classes.

12F5 Medical claims

The principle members and dependents must present their identification and billing cards to the medical service centres at every visit.

After treatment and billing the medical facilities will forward the bills directly to the insurance company for the medical claims team to pay.

The claims team will verify and process the valid claims for payment while the invalid claims will be returned to the hospitals as rejections with our covering explanation letter.

The valid claims will be paid directly to the medical service providers.

12F6 The role of the claims handlers in the claims process

The claims handler must be available to receive all claim notifications and to guide both the agent and the insured on the entire claims requirements.

They should have the ability to appoint external claims experts in the given timelines and effectively give feedback to the insured and to the Agent.

They should advise the Agent/broker and the insured about the fate of each claim after full documents and final investigation reports have been received.

They should be able to advise the client and Agent on the payment status after signed discharge vouchers have been returned to the insurance company


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Also hold meetings with clients in case of disputes resulting from the claims investigations.

12F7 The role of external service providers in the claims process

a) Loss assessors, adjusters and investigators

Inspect damage on site with prior notification to the client.

Ask appropriate questions, advise and collect claim supporting documents.

Prepare an independent findings report and forward to the insurance company

b) Doctors

Examine current health status of the injured with prior appointment.

Prepare an independent medical assessment report and sent to ICEA.

12F8 The role of the Agents in the claims process

It begins with complete knowledge of the clients’ nature of business and the policy you have given to cover the client.

Highlight the key claims areas in the policy like exclusions, conditions, warranties and deductibles to the client before a claim occurs.

Ensure that full premium is paid before the claim occurs. Pick the clients’ calls even after the sale is closed, he/she might be

reporting a claim. Prudently advise the client on the initial requirements of the claims process

and immediately inform the claims team to take over the claims process. Follow up with the claims handler until the claim is paid or repudiated.

Chapter Summary

To ensure material facts are disclosed to the underwriter, a duty of disclosure rests on both parties to an insurance contract, although principally with the proposer.

Non-disclosure will have consequences depending on the form of the non-disclosure.

Insurers use various methods to obtain material facts, for example, proposal forms and risk surveys

Narrative: Beatrice calls Milton one of the underwriters at ICEA insurance company and she informs him that she needs car insurance. He sends her a


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motor insurance proposal form to complete and sign, which he checks to make sure that the details, are as the earlier quotation sent two weeks back where Beatrice intimated the value of the value, use and other details. When Milton is satisfied with the information in the proposal form, attached logbook and photos, he goes ahead to issue a Motor Third Party Insurance Certificate. He then proceeds to make a policy document that contains the header, preamble, operative clause, conditions and exclusions. Beatrice is now insured to drive the cover for the next twelve months and if ICEA is going to invite renewal, a renewal notice will be sent, quoting the premium and terms to her to insure the car for another one year in good time before expiry of the period.

Insurance policies are issued in a scheduled form and a schedule is incorporated into the policy. The schedule contains all the variable information concerning the insured and details of the risk insured.

The underwriting process consists of evaluating the hazard associated with the risk which is being proposed. An underwriter will consider different underwriting factors depending on the class of business

The premium charged by the insurance company should be sufficient to cover risk premium, expenses, investment income, return on capital employed and premium taxes/levies

Reinsurance is one step used by insurance companies to manage the loss exposure. The type of reinsurance purchased depends on the portfolio mix of the business

The claims process must be well communicated to both internal and external customers for quality service. At every stage of the claim process, the insured should be updated to avoid frustrations and negative image to the industry. The claims process for each class varies considerably given the variations in claims profiles for insured risks.


1. What are the most common methods by which an underwriter can obtain material facts in respect of a risk?

2. What type of business do you think is suited to call centre and internet based solutions?

3. If a house is valued at UGX 120,000,000 and the insurer sets a rate of 0.6%, what would the premium be? (A) UGX 36,000 (B) UGX 72,000 (C) UGX 600,000 (D) UGX 720,000.

4. Distinguish between general and specific questions in a proposal form? 5. What is an insurance premium? 6. What is the purpose of the renewal notice?


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7. What will be the underwriter’s principal concern when considering a proposal for business interruption insurance?

8. What is the risk premium? 9. Explain the role of an agent in the claims process.


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CHAPTER 13: MANAGEMENT OF INFROMATION SYSTEMS

Contents

Learning Outcomes

Introduction

13A Understanding Management Information Systems (MIS)

13B Role of Information Systems in Business Today

13C Characteristics of MIS

13D Components of Information Systems

13E Types of Information Systems

13F Supporting Managers with Information Systems

13G Information Systems Challenges

Chapter Summary


Learning objectives


• Explain the importance of information systems in the insurance business • Use the information systems in the insurance business today. • Define an information system and describe its management, organization,

and technology components in an insurance industry setting. • Define complementary assets and explain how they ensure that

information systems provide genuine value to an insurance organization.


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Introduction

Management information systems (MIS) is the study of people, technology, organizations, and the relationships among them. MIS professionals help firms realize maximum benefit from investment in personnel, equipment, and business processes. MIS is a people-oriented field with an emphasis on service through technology.

Management information systems are typically computer systems used for data managing, to make searching, analysing data, and converting that data into information that aids in the decision making process of organizations. Management information systems are distinct from other information systems in that they are used to analyse and facilitate strategic and operational activities.


• Understanding Management Information Systems (MIS) • Role of Information Systems in Business Today • Characteristics of MIS • Components of Information Systems • Types of Information Systems • Supporting Managers with Information Systems • IS Challenges

13A Understanding Management Information Information Systems (MIS)

An information system (IS) is a system composed of people and computers that processes or interpret information. The term is also sometimes used to refer to only the software used to run a computerized database or to refer to only a computer system. Information systems is an academic study of the complementary networks of hardware and software that people and organizations use to collect, filter, process, create and distribute data. It can also refer to the information and communication technology (ICT) that an organization uses, and also the way in which people interact with this technology in support of business processes. Any specific information system aims to support operations, management and decision making.

13B Role of Information Systems in Business Today

13B1 Information storage and analysis

Many companies no longer manage their data and information manually with registers and hard-copy formats. Through the adoption of information systems, companies can make use of sophisticated and comprehensive databases that can contain all imaginable pieces of data about the company.


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Information systems store, update and even analyse the information, which the company can then use to pinpoint solutions to current or future problems. Furthermore, these systems can integrate data from various sources, inside and outside the company, keeping the company up to date with internal performance and external opportunities and threats.

13B2 Making decisions

The long-term success of a company depends upon the adequacy of its strategic plans. An organization’s management team uses information systems to formulate strategic plans and make decisions for the organisation's longevity and prosperity. The business uses information systems to evaluate information from all sources, including information from external sources, which provide information on the general economy. This analysis of and comparison to market trends helps organisations analyse the adequacy and quality of their strategic decisions.

13B3 Business processes

Information systems aid businesses in developing a larger number of value added-systems in the company. For example, a company can integrate information systems with the manufacturing cycle to ensure that the output complies with the requirements of the various quality management standards. This will have a number of benefits, including:

Adoption of information systems simplifies business processes and removes unnecessary activities.

Information systems add controls to employee processes, ensuring that only users with the applicable rights can perform certain tasks.

Further, information systems eliminate repetitive tasks and increase accuracy, allowing employees to concentrate on more high-level functions.

Information systems can also lead to better project planning and implementation through effective monitoring and comparison against established criteria.

13C Characteristics of Managements Information Systems

13C1 Accurate

Management information systems are expected to be accurate and provide up-to-date and correct information based on factual data. They should capture only the most relevant data, process it, store it and provide access to it if and when required. Important organizational decisions are based on the information provided by a management information system; their accuracy is therefore essential. All processed information derived from an accurate and correct management information system should be free of flaws, consistent and complete.


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13C2 Integrated

Organisations are involved in various functions and sub-functions, such as manufacturing, finance, human resources, marketing and other specialised areas. A management information system is an integrated collection of information systems, each designed to support a unique functional area. For instance, manufacturing is supported by an individual management information system, finance by another management information system, and so on. All these individual modules, or units, are connected and form part of the larger, organizational management information system. Coordination and integration are central functions of a well-organized information system, with each individual component designed to provide essential support to other components.

13C3 Flexible

A management information system is flexible and is designed to allow the integration of additional components. It automatically updates key processes and software components to include the latest trends, practices, technologies and information. Management information systems are flexible in terms of data analysis and evaluation, and are programmed to study and analyse data from various different angles. They are also capable of supporting a wide range of knowledge and skills.

13D Components of Information Systems

The main components of information systems are computer hardware and software, telecommunications, databases and data warehouses, human resources, and procedures. The hardware, software, and telecommunications constitute information technology (IT), which is now ingrained in the operations and management of organisations.

13D1 Computer hardware

Today even the smallest firms, as well as many households throughout the world, own or hire computers. These are usually microcomputers, also called personal computers. Individuals may own multiple computers in the form of smartphones and other portable devices.

Large organisations typically employ distributed computer systems, from powerful parallel-processing servers located in data centres to widely dispersed personal computers and mobile devices, integrated into the organizational information systems. Together with the peripheral equipment, such as magnetic or solid-state storage disks, input-output devices, and telecommunications gear, these constitute the hardware of information systems.


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The cost of hardware has steadily and rapidly decreased, while processing speed and storage capacity have increased vastly. However, hardware’s use of electric power and its environmental impact are concerns being addressed by designers.

13D2 Computer software

Computer software falls into two broad classes: system software and application software. The principal system software is the operating system. It manages the hardware, data and program files, and other system resources and provides means for the user to control the computer, generally via a graphical user interface (GUI).

Application software refers to programs designed to handle specific tasks for users. Examples include general purpose application suites with their spreadsheet and word-processing programs, as well as “vertical” applications that serve a specific industry segment; for instance, an application that schedules, routes, and tracks package deliveries for an overnight courier.

Larger firms use licensed applications, customising them to meet their specific needs, and develop other applications in-house or on an outsourced basis. Companies may also use applications delivered as software-as-a-service (SaaS) over the Web. Proprietary software, available from and supported by its vendors, is being challenged by open-source software available on the Web for free use and modification under a license that protects its future availability.

13D3 Telecommunications

Telecommunications are used to connect, or network, computer systems and transmit information. Connections are established via wired or wireless media. Wired technologies include coaxial cable and fibre optics. Wireless technologies, predominantly based on the transmission of microwaves and radio waves, support mobile computing. Pervasive information systems have arisen with the computing devices embedded in many different physical objects. For example, sensors such as radio frequency identification devices (RFIDs) can be attached to products moving through the supply chain to enable the tracking of their location and the monitoring of their condition. Wireless sensor networks that are integrated into the Internet can produce massive amounts of data that can be used in seeking higher productivity or in monitoring the environment.

Various computer network configurations are possible, depending on the needs of an organization. Local area networks (LANs) join computers at a particular site, such as an office building or an academic campus. Metropolitan area networks (MANs) cover a limited densely populated area. Wide area networks (WANs) connect widely distributed data centres, frequently run by different organizations.


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The Internet is a network of networks, connecting billions of computers located on every continent. Through networking, users gain access to information resources, such as large databases, and to other individuals, such as co-workers, clients, or people who share their professional or private interests. Internet-type services can be provided within an organization and for its exclusive use by various intranets that are accessible through a browser; for example, an intranet may be deployed as an access portal to a shared corporate document base. To connect with business partners over the Internet in a private and secure manner, extranets are established as so-called virtual private networks (VPNs) by encrypting the messages.

13D4 Databases and data warehouses

Many information systems are primarily delivery vehicles for data stored in databases. A database is a collection of interrelated data (records) organized so that individual records or groups of records can be retrieved to satisfy various criteria. Typical examples of databases include employee records and product catalogues. Databases support the operations and management functions of an enterprise. Data warehouses contain the archival data, collected over time, that can be mined for information in order to develop and market new products, serve the existing customers better, or reach out to potential new customers. Anyone who has ever purchased something with a credit card in person, by mail order, or over the Web is included within such data collections.

13E Types of Information Systems

13E1 Transaction Processing Systems (TPS)

Transaction processing systems today generally work in on-line mode by immediately processing a firm's business transactions. A Transaction is an elementary activity conducted during business operations.

TPS may work either in batch mode, processing accumulated transactions at a single time later on, or in on-line mode, processing incoming transactions immediately. Today, most TPS work in the on-line mode.

13E2 Management Reporting Systems

The objective of management reporting systems is to provide routine information to managers. Managers receive performance reports within their specific areas of responsibility. Generally, these reports provide internal information rather than spanning corporate boundaries. They report on the past and the present, rather than projecting the future.

13E3 Decision Support Systems (DSS)


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Decision support systems directly support a decision-making session. These systems facilitate a dialog between the user, who is considering alternative problem solutions, and the system that provides built-in models and access to databases. The DSS databases are often extracts from the general databases of the enterprise or from external databases.

13E4 Executive Information Systems (EIS)

Executive information systems support top managers with conveniently displayed summarized information, customized for them. They make a variety of internal and external information readily available in a highly summarized and convenient form. EIS are used to:

Monitor the performance of the organization

Assess the business environment

Develop strategic directions for the company's future

13E5 Office Information Systems (OIS)

The main objective of OIS is to facilitate communication between the members of an organization and between the organization and its environment. OIS are used to:

Help manage documents represented in an electronic format

Handle messages, such as electronic mail, facsimile, and voice mail

Facilitate teleconferencing and electronic meetings

Facilitate the use of the Internet for communication and access to information

Facilitate the use of task oriented teams through the use of groupware

13E6 Professional Support Systems

Professional support systems help in tasks specific to various professions. As both organizational and individual experience with information systems grow, more and more specialized categories of professional support systems emerge.

13E7 Expert Systems in Information Systems

Expert systems are system that employs knowledge about its application domain and uses an inferencing (reason) procedure to solve problems that would otherwise require human competence or expertise. The essential component of the knowledge base is heuristics - informal, judgemental elements of knowledge within the expert system's domain, such as oil exploration or stock valuation. The knowledge base is developed by working with domain specialists. It is further enhanced as the system is used.


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13F Supporting Managers with Information Systems

A variety of information systems support managers as they play their interpersonal, informational, and decisional roles. The three management-oriented types of systems (management reporting systems, decision support systems, and executive information systems) provide different kinds of support to the three levels of management:

Strategic

Tactical

Operational

13F1 What Managers Do and How Information Systems Can Help

The fundamental functions of management include:

Planning establishing goals and selecting the actions needed to achieve them over a specific period of time.

Controlling measuring performance against the planned objectives and initiating corrective action, if needed.

Leadership including the people in the organization to contribute to its goals.

Organizing establishing and staffing an organizational structure for performing business activities.

Mintzberg classified all managerial activities into ten roles falling into three categories:

Interpersonal Role

Informational Role

Decisional Role

13F2 Information Systems for Management Support

The objectives of the three levels of corporate management are:

Operations Management: performed by supervisors of smaller work units concerned with planning and control of short-term (typically, a week or six months) budgets and schedules.

Tactical Management: performed by middle managers responsible for acquisition and allocation of resources for projects according to tactical plans, set out for one or two years.

Strategic Management: Carried out by top corporate executives and corporate boards responsible for setting and monitoring long-term directions for the firm for three or more years into the future.


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Classification of IS

13G Information Systems Challenges

Workforce downsizing Information overload Employee mistrust Difficult to build Security breaches Rapidly changing technology

Chapter Summary

In this chapter we have looked at the qualities of a good Management Information System

We have also looked at the uses of a good MIS to an insurance company

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1. What is the importance of information systems in the insurance business? 2. Define an information system and describe its management, organization,

and technology components in an insurance industry setting. 3. Define complementary assets and explain how they ensure that

information systems provide genuine value to an insurance organization.


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CHAPTER 14: EMERGING ISSUES AND TRENDS IN

INSURANCE

Contents

Learning Outcomes

Introduction

14A Bancassurrance

14B Micro-insurance

14C Takaful Insurance

14D Directors’ and Officers’ Liability

14E Pension Trustee’s Liability

14F Environmental Risk and Climate Change

14G Oil and Gas Risks

Chapter Summary


Learning objectives


• Explain the alternatives methods of product distribution through banc assurance, micro-insurance and takaful insurance.

• Explain what is covered under directors and officers liability and Pensions Trustees liability.

• Explain the impact of climate change on the underwriting of weather related risks.

• Briefly describe insurable risk associated with oil and gas.


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Introduction

This chapter focuses on the emerging risks and trends in the economy that are likely to impact the way companies operate and the role of insurance in providing solutions to the non-standard risks that evolve with changing trends in society.


• Bancassurrance • Micro-insurance • Takaful Insurance • Directors’ and Officers’ liability • Pension Trustee’s liability • Environmental Risk and Climate Change • Oil and Gas Risks

14A Bancassurance

Bancassurance or Bank Insurance Model (BIM) is the partnership or relationship between a bank and an insurance company whereby the insurance company uses the bank sales channel in order to sell insurance products. In this arrangement, a bank and an insurance company form a partnership so that the insurance company can sell its products to the bank's client base. BIM allows the insurance company to maintain smaller direct sales teams as their products are sold through the bank to bank customers by bank staff and employees as well. Bank staff and tellers, rather than an insurance salesperson, become the point of sale and point of contact for the customer. Bank staff are advised and supported by the insurance company through product information, marketing campaigns and sales training.

This partnership arrangement can be profitable for both companies. The banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their customer base without having to expand their sales forces or pay commissions to insurance agents or brokers. The bank and the insurance company share the commission. Insurance policies are processed and administered by the insurance company.

Bancassurance, the sale of insurance and pensions products through a bank, has proved to be an effective distribution channel in a number of countries in Europe, Latin America, and Asia. In the Classic or Traditional Insurance

Model (TIM), the insurance companies tend to have larger insurance sales teams and generally work with brokers and third party agents. The Hybrid

Insurance Model (HIM) is a mix between BIM and TIM. HIM insurance companies may have a sales force, may use brokers and agents, and may have a partnership with a bank.


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14B Micro-insurance

Under this arrangement, insurance firms design products that offer coverage to low-income households. A micro-insurance plan provides protection to individuals who have little savings and is tailored specifically for lower valued assets and compensation for illness, injury, or death.

Micro-insurance is the protection of low-income people (those living on between approximately USD1 and USD4 per day) against specific perils in exchange for regular premium payment proportionate to the likelihood and cost of the risks involved. This definition is exactly the same as one might use for regular insurance except for the clearly prescribed target market: low-income people.

14B1 Micro-insurance target population

The target population typically consists of persons ignored by mainstream commercial and social insurance schemes, as well as persons who have not previously had access to appropriate insurance products. Insurance functions on the concept of risk pooling, and likewise, regardless of its small unit size and its activities at the level of single communities, so does micro-insurance.

Micro-insurance links multiple small units into larger structures, creating networks that enhance both insurance functions (through broader risk pools) and support structures for improved governance (i.e. training, data banks, research facilities, access to reinsurance, et cetera). This mechanism is conceived as an autonomous enterprise, independent of permanent external financial lifelines, and its main objective is to pool both risks and resources of whole groups for the purpose of providing financial protection to all members against the financial consequences of mutually determined risks.

14B2 Micro-insurance products


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Micro insurance, like regular insurance, may be offered for a wide variety of risks. These include both health risks (illness, injury, or death) and property risks (damage or loss). A wide variety of micro insurance products exist to address these risks, including crop insurance, livestock/cattle insurance, insurance for theft or fire, health insurance, term life insurance, death insurance, disability insurance, insurance for natural disasters, etc.

14C Takaful Insurance

Takaful is an Arabic word meaning “guaranteeing each other” or "joint guarantee". The tabarru system is the main core of the takaful system making it free from uncertainty and gambling. Tabarru means “donation, gift, or contribution”. Takaful is a type of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. It is a cooperative system of reimbursement or repayment in case of loss, paid to people and companies concerned about hazards, compensated out of a fund to which they agree to donate small regular contributions managed on behalf by a Takaful Operator. It is defined as an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law. It also introduces the basis/concept of shared responsibility among members of the group.

Each participant that needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. The objective of takaful is to pay a defined loss from a defined fund. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and cooperation. Encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.

The principles of takaful insurance are as follows:

Policyholders cooperate among themselves for their common good.

http://en.wikipedia.org/wiki/Islamic_banking


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Every policyholder pays his subscription to help those that need assistance. Losses are divided and liabilities spread according to the community

pooling system. Uncertainty is eliminated in respect of subscription and compensation. It does not derive advantage at the cost of others.

Theoretically, takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of “bear ye one another’s burden.”

14C1 How does takaful as a form of insurance operate?

Generally members contribute a sum of money to a takaful fund in the form of participative contribution (tabarru). You undertake a contract (aqad) to become one of the participants by agreeing to mutually help each other, should any of the participants suffer any form of misfortune, either arising from death, permanent disability, loss, damage or any other such misfortunes as covered under the takaful you personally undertake.

The contributions collected from the policyholders are considered as donations and they constitute the takaful fund from which all claims are reimbursed. At the end of each financial year, after deduction of expenses, any remaining cash surplus will not be retained by the company or its shareholders, but returned to the policyholders in the form of cash dividends or distributions.

14C2 How is takaful different from conventional insurance?

In this respect, takaful business is different from the conventional insurance in which the policyholders, rather than the shareholders, solely benefit from the profits generated from the takaful and investment assets. The investment assets representing the takaful fund that accumulate over the retained reserves, surpluses and provisions are invested by the shareholders who manage the company on behalf of the policyholders. The shareholders are rewarded with a percentage of the profit on these investments.


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14D Directors and Officers (D&O) Liability

What is Directors and Officers Liability (D&O) insurance? It is a form of insurance that protects directors, officers and other people with managerial responsibility from legal and other costs they may become personally liable to pay as a result of litigation.

14D1 Why do I need D&O insurance?

Being a company director is a wonderful thing but it is a position of great responsibility which involves running the affairs of the company. Legislation over the last decade has made the position of directors and senior managers more onerous in that it has increased their accountability for their actions or inactions.

There are many laws now that regulate companies and their directors. In addition ‘no win, no fee’ schemes have increased the potential for claims to be made against a company and its senior management. See our case studies below to understand the types of claims being made.

It is frequently misunderstood that a company having limited liability status protects its directors and senior managers from personal liability. It does not. In reality, a director’s liability is potentially unlimited even to the extent of a charge on his salary if assets such as his home, cars and savings do not meet his liabilities.

14D2 Who can sue directors and senior management?

There are many and varied groups of people or bodies who can bring actions, including:

Employees


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Customers Competitors Suppliers Government departments or organizations, e.g. for health and safety, local

authorities, HM Revenue and Customs, agencies for the protection of the environment and many more

Contractors Creditors Regulatory bodies

14D3 What kinds of actions might senior management be personally liable?

Employment disputes, including wrongful, unfair or constructive dismissal, harassment and wrongful discipline

Involuntary, constructive or gross negligence, manslaughter and far reaching health and safety legislation

Anti-discrimination regulations, including sexual, racial and age discrimination

Wrongful trading i.e. trading in the knowledge the business is or will become insolvent

Unpaid taxes where the company has become insolvent

Even if allegations are unfounded defence costs can be crippling, especially to smaller companies. Other legal costs, such as attending at investigations into the affairs of the company, should not be underestimated. A senior manager may be held personally liable for the actions or inactions of others.

14E Pension Trustee Liability

In recent years, the number of duties and obligations placed on trustees has grown as a result of government intervention, making the role of trustee more onerous than ever. Trustees who breach these increasingly complex responsibilities may place their personal assets at risk or, in certain circumstances, find themselves liable for civil and criminal penalties.


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This personal liability stays with a trustee to the grave and, arguably, beyond. Add to the mix a generally more litigious society, scheme members becoming more aware of their pension rights, adverse market conditions and the ever increasing profile of pensions in the news and it is easy to understand trustees’ interest in the protections available to them. ACE Pension Trustee Liability insurance provides valuable protection for the assets of individual trustees, the pension fund, the sponsoring employer and the employees against claims of wrongdoing.

14E1 Product Highlights

It provides trustees and the sponsoring employer with the confidence to perform their roles secure in the knowledge that they have considerable protection. Can advance funding to cover defence costs, in addition to providing cover for settlement of an action if required

14E2 Cover

The standard policy has a broad definition of wrongful acts and will pay for (among others):

Damages, judgments, expenses and defence costs Costs of legal representation

It covers a comprehensive range of allegations, including:

Breach of trust Breach of duty Breach of statutory provision Maladministration Negligence Administration errors Wrongful omissions Misstatements or misleading statements


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14F Environmental Risk and Role of Insurance

The role of insurance and reinsurance companies in the management of environmental risks is more concentrated towards issues related to two different kinds of environment-related risks, namely:

Environmental liability risk; i.e., the financial risk associated with environmental pollution and contamination; and

Natural catastrophe risk; i.e., the risk of major damages in connection with the occurrence of natural disasters, such as earthquakes, floods or other extreme environmental conditions.

Both these environment-related risks, as mentioned, are characterized by the potential for catastrophic consequences. However, even if they may share some common features, they are structurally different from the standpoint of the insurer and, therefore, they deserve to be treated separately.

There is growing acknowledgement among insurers that the impact of climate change on future insured losses is likely to be profound.

14G Oil and Gas Risk

Running an oil and gas business is no easy task. Overseeing rig equipment and tools, conducting well evaluations, managing crew and complying with ever-evolving government regulations are rife with potential problems. While you need to know that you are protected in case something does go wrong, troubleshooting any of the numerous events that could threaten your operation is likely to be your first priority.

With the discovery of oil in western Uganda, the insurance industry must be well prepared with the relevant skills and capital to manage oil and gas insurable risks.


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Offshore Rig on Fire

On-shore Rig


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Glossary of Key Terms used in Insurance

Acceptance This means agreeing to comply with the terms and conditions of the insurance contract

Assignment This means the transfer of ownership of a policy from one person to another. This only applies in life assurance.

Assurance This is a term that is used in life insurance to reflect the fact that the event of death against which cover is taken is certain. That is death will definitely occur. However cover is not taken against the event of death but rather against the uncertain timing of death.

Banc assurance This is a where insurance products are distributed through the banking system to take advantage of the bank’s wide customer base.

Breach this means failure to conform to the term and conditions of the contract. This means that the obligations created by the terms or condition were never fulfilled.

Business ethics This is a set of moral rules that govern how businesses operate, how business decisions are made and how people are treated.

Capacity this means being legally able to enter into a contract. Several things make one legally able to contract like age and state of mind

Captive this is an insurance company which is formed by another company not involved in the business of insurance with the objective of managing insurance risks of its parent company or of the group of companies under single or related ownership

Churning This is where the agent or broker encourages the insured to increase policy limits with the aim of increasing commissions earned

Commercial insurance

This is insurance intended for business organisations that need a wide range of insurance policies to cover the risks to which they are exposed

Computer hardware

Is the collection of physical parts of the computer system.


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Computer software

Any set of machine readable instructions that instructs the computer’s processing system to perform specific operations

Consideration

Is a price stated in contract that must be paid by one of the parties to the contract in exchange for a service or goods.

Contract this is an agreement between two or more parties

ContributionThis is the right of an insurer to call upon others similarly but not necessarily equally, liable to the same insured to share the cost of a claim.

Claim A formal request to an insurance company asking for payment based on the terms of the insurance policy when the insured risk occurs.

Database

it is a collection of information held in a computer and organised such that it can easily be accessed, managed and updated.

Duty of disclosure

An obligation imposed to parties to a contract to disclose all material facts to each other to guide decision making process

Ethical behaviour

Acting in ways consistent with what society and individuals typically think are good values

Formality The conditions which must be observed in making a specific contract in order to render it valid by law

Frustration this is legal termination of the contract due to unforeseen circumstances that make it impossible to perform

Hazard Is a condition that may increase the chance of loss

Indemnity It is defined as the process of placing the insured in the same financial position after a loss, damage or liability as one occupied immediately before the loss.


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Information systems

These are systems responsible for processing, storing, managing, using and gathering of data and communications

Insurable interest

Insurable interest can be defined as the legal right to insure, arising out of financial relationship, recognized at law, between the insured and the subject matter of insurance

Insurance The equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to cushion against the risk of a contingent, uncertain loss.

Insurance company

This is a company that is formed to sell insurance services . it can also be referred to as insurer .

Intermediary

Is either an individual or company that connects two parties for purposes of completing a transaction.

LAN Local Area Network

Legality The state of being consistent and in accordance with the law in a given jurisdiction of a country, state or nation.

Loss It is the unintentional decline in or disappearance of value arising from a contingency.

Material facts

These are facts which would influence a judgment of a prudent underwriter in deciding whether or not to accept a risk.

Peril It can be defined as a cause of loss.


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Policy It is a legal document that contains terms and conditions of an insurance contract between the insurer and the insured. It is issued as evidence of existence of cover for the insured risk.

Policy schedule

This part of the policy document giving details of the items covered and their values.

Premium The amount of money charged by the insurer in exchange of the insurance service.

Proximate cause

It is the dominant cause of loss. It is that active, efficient peril that sets in motion a chain of events which brings about a result (loss, damage or liability) without the intervention of any force, started and working actively from a new and independent source.Re-insurance

This is the transfer of risk from an insurance company to a reinsurance company

Reinsurance company

This is an insurance company whose major business involves insurance for risk ceded to it by other insurance companies.

Risk It can be defined as uncertainty of a financial loss. In broader terms risk can also be described as the object of insurance (subject matter of insurance)

Risk premium

The component of premiums charged that is intended for settling claims.

Subject matter of insurance

It is the object against which insurance is taken. It is the property, right, life, limb or potential liability that devolve upon the insured capable of being covered

Subrogation This is the right of one person, having indemnified another under a legal obligation to do so, to stand in the legal place of that other person and avail oneself of all rights and remedies of the other person, whether already enforced or not.

Takaful


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In the context of insurance, this refers to insurance that is compliant with the tenets of sharia law.

Twisting

This refers to changing facts regarding a matter so as to match one’s personal wishes.

Utmost good faith

It is a duty imposed on the two parties to the insurance contract to disclose all relevant and material facts about the risk being proposed for insurance and the terms that are deemed necessary to be known by the proposer or the individual, company, business buying insurance.

WAN wide area network

Weather-related insurance risks


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Further Readings Anson, W. R., Beatson, J., Burrows, A. S., & Cartwright, J. (2010). Anson's law of contract. Oxford University

Press.

Dorfman, M. S., & Cather, D. (2012). Introduction to risk management and insurance. Pearson Higher Ed.

Vaughan, E. J., & Vaughan, T. (2007). Fundamentals of risk and insurance. John Wiley & Sons.

Vaughan, E. J., & Vaughan, T. M. (2002). Essentials of risk management and insurance. Wiley.

McKendrick, E. (2014). Contract law: text, cases, and materials. Oxford University Press.

Hank G. et al, (2009); Underwriting: What every producer must know,

Mangan, J.F. & Connor, M. H., (2011);Underwriting principles:

Ksravitz, S. & Barinsky, L. (2009); Mastering insurance marketing: How to make your agency forward in

the new media age.

The Insurance Regulatory Act. 2006

The Silver Lake Editors (2011); Ethics: A Guidebook for Insurance Agents and Other Financial Services

Professionals, 5th Ed., Silver Lake Publishing;

The Uganda Insurance Act.