Chapter 11

2. Chapter 11

3. Insurance for Households and Individuals

4. Learning Intentions • Upon completion of this chapter you should be able to: • Explain what insurance is • Outline the principles of insurance • Determine the types of household/personal insurance that you may need at different times • Identify jobs in the insurance industry • Complete insurance documentation • Calculate a premium

5. What is Insurance? Insuranceoffers financial protection against possible loss and is designed to place the insured person back in the same financial position they were in before the loss occurred. Insurance is based on the sharing of risk and requires many people to pay a small amount called a premium into a fund to cover a particular risk. This fund is managed by an insurance company and is used to pay compensation to claimants and to cover insurance company expenses. Compensation Running costs Insurance company fund Large number of premiums Profit

6. Premium A premium is the amount charged by an insurer in return for providing insurance cover for a particular risk. Compensationis a financial payment to an insured person if they suffer an insured loss.

7. Five Basic Principles or Rules of Insurance • Insurable Interest: To insure something, you must benefit by its existence and suffer (financially) from its loss. You can insure your own property and possessions but not your friend’s or neighbour’s. • Utmost Good Faith: When applying for insurance, all material facts relating to the policy must be disclosed to the insurance company. A material fact is anything that is likely to influence the decision to grant insurance, or, to affect the level of premium charged. The basic rule here is to be truthful and honest and tell the insurance company everything which may be relevant. • Indemnity:A profit cannot be made from an insurance claim. This is the most important rule of insurance and recognises that insurance exists to put the insured person back in the same financial position as they were in before suffering the loss.

8. Five Basic Principles or Rules of Insurance (cont.d) 4. Subrogation:Once an insurance company has paid compensation for any insured item, the right of ownership of that item passes to the insurance company.The insurance company is also entitled to sue any third party responsible for the loss in order to recover any compensation paid. • 5. Contribution:Where the same risk is insured with more than one insurer they will divide the cost of the claim between them. • For activities on the principles of insurance see pg. 110 of your Time for Business textbook

9. Types of Household and Personal Insurance • Life Assurance: Assuranceis protection against a certain future loss; in the case of life assurance, this means death. • There are three main types of life assurance cover: • Term policy: This is for a fixed time period and usually covers the duration of a loan or mortgage, so that if the insured person dies during the term of the loan or mortgage, any outstanding amount is paid off. • Whole-life policy: This pays compensation on the death of the insured person. • Endowment policy: This pays a guaranteed amount on a specified date or, if it occurs sooner, on the death of the insured person.

10. Motor Insurance • Motor insurance is compulsory in Ireland. This means that it is required by law and this makes it a criminal offence to drive without motor insurance. • There are three types of motor insurance policy: • Third party only: Covers injury to another person or damage to another person’s car or property caused by the insured driver. It does not cover the policyholder or their vehicle. This is the cheapest type of motor insurance and is the minimum required by law. • Third party, fire and theft: As for third party, plus covers the insured person for their car catching fire or being stolen. • Comprehensive: Covers all parties and vehicles that suffer loss in an incident, including the insured person and their car.

11. In Insurance Terms The first party is the person who takes out the insurance. The second party is the insurance company the first party is insured with. The third party is any person or item (vehicle, property, etc.) that suffers a • loss caused by the first party.

12. Home Insurance Home insurance (buildings cover): This covers the building in the event of fire, flood or storm damage. It provides compensation if the structure of the building is damaged. Home contents insurance: This covers all the contents of the house from damage such as fire, flood, burst pipes, etc. It also covers against burglary. Most home insurance policies cover both buildings and contents.

13. Household & Personal Insurance Policies. Personal Accident Insurance: This covers the insured person in the event of an accident. Health Insurance: This covers the cost of hospital care and some medical bills in the event of serious illness or accident. It can provide cover for a hospital stay and operations. Critical Illness Cover: This is cover in the event of a serious illness. It pays out a tax-free lump sum if you are diagnosed with one of the serious illnesses or disabilities that your policy covers. Holiday/Travel Insurance: This covers the insured person while they are on holiday or travelling, e.g. in case their belongings are stolen or they have an accident, cancelled flights, delayed or missed departure, loss or theft of passport or money and illness or injury.

14. Household & Personal Insurance Policies. Mortgage protection insurance: This is a type of life insurance policy that repays your mortgage if you die during the repayment term. The cover lasts until your mortgage is paid off. Payment Protection Insurance (PPI): This covers your repayments on a loan for a certain period of time (usually one year) if you suffer from an accident, illness, death or compulsory redundancy. Mobile phone insurance:This is an insurance a person can take out in case their mobile phone is lost or stolen. Other devices, such as laptops and tablet computers, can also be insured.

15. Insurance for Workers Pay Related Social Insurance (PRSI): By law, all employees must pay this insurance. It entitles the worker to illness, disability, maternity or jobseeker’s benefit, should they require them. This payment is deducted at source by employers. Self-employed people pay their contribution when they pay their annual tax bill. Unlike other forms of insurance, this is paid to the government instead of an insurance company. Income/salary protection insurance: This protects the policyholder in case they get sick and have to take time off work.

16. Jobs in the Insurance Industry • Insurance broker:A broker helps households and individuals to get the insurance that best fits their needs and their budget. Insurance brokers search the market to find the best policy and price for their client. • Agent: An agent sells policies on behalf of only one insurance company. • Actuary: An actuary decides on the premium that should be charged, based on the risk of a loss occurring and a claim being made. They use statistics and probability to assess risk. The greater the risk, the higher the premium will be. • Loss adjuster: A loss adjuster will investigate a claim for compensation and decide if the claim is covered by the insurance company. They recommend the amount of compensation to be paid.

17. Taking out insurance • Proposal form:Before you can take out insurance, you have to complete a proposal form. • This is an application form for insurance and should be filled out by the person seeking insurance cover. • The proposal form must be completed truthfully and all relevant information must be disclosed to the insurance company.

18. How to Calculate a House Insurance Premium Example Margaret Finley’s house insurance is due for renewal. Her insurance company has • given her a quote of €15 per €10,000 value for the house and €25 per €5,000 value for the contents. She estimates that she should insure her house for €200,000 and her contents for €80,000. • Calculate the insurance premium that Margaret will have to pay.

19. Suggested Solution

20. Making a Claim • In the event of an accident, loss or damage occurring, the first step in making a claim is to talk to the insurance company. • They will ask you to complete a claim form. This is a standard form from the insurance company that the insured must complete when seeking compensation for a loss that has occurred. • The claim form requires details of how the loss occurred and the amount being claimed.

21. Average Clause • The average clause applies in the case of underinsurance and partial loss and is based on the principle of indemnity. • Underinsurance occurs when the insured person fails to insure their assets for their full replacement value. • Example • A house was flooded and partially damaged. The actual value of the house is €300,000 but it is insured for only €250,000. The owners are claiming €30,000 compensation for the damage. • How much compensation will be paid out to the owners in this case?

22. Suggested Solution

23. Renewing an Insurance Policy • Insurers will send a renewal notice when your policy is due for renewal. • At this time it is always worth shopping around for a new deal, as you may be able to get the insurance more cheaply from another company. Check every policy for its conditions, as they will differ from policy to policy and there may be something in the terms and conditions that doesn’t suit your needs.

24. Is Insurance Really Necessary? • Insurance cannot prevent accidents from happening, but it can enable households and individuals to recover from the financial impact of a loss. • Most people who take out insurance hope that they will never suffer an insurable loss. While insurance has an obvious financial cost, many are willing to pay it because it protects them from the financial uncertainty of loss and buys them some ‘peace of mind’. If you drive a motor vehicle, you are required by law to have insurance.

25. Risk Management • Insurance is not always necessary and is just one aspect of household risk management. The steps involved in risk management are: • 1. Identify the major sources of household or personal risk, e.g. the risk of fire damage to the home. • 2. Take appropriate steps to eliminate or reduce the level of risk, e.g. install smoke alarms. These measures will also help to reduce premiums if insurance is required. • 3. If necessary, insure against those risks which cannot be eliminated. You need insurance with enough cover for potential losses. There are costs associated with having too much insurance cover and also with too little insurance cover.

26. Can All Risks Be Insured? The answer is no; some risks are uninsurable. In general it is not possible to insure a risk where the insurer cannot work out the chances of a loss occurring, e.g. it is not possible to insure against failing an exam or making a business loss. Other types of uninsurable risk include losses that are certain to occur.

27. Recap and Review • Can you do the following?: • Explain what insurance is. • Outline the principles of insurance. • Determine the types of household/personal insurance that you may need at different times. • Identify the jobs within the insurance industry. • Complete insurance documentation. • Calculate a premium.