CHAPTER 5

CLASSIFICATION OF INSURANCE

From business point of view, insurance can be classified in to two categories. They are: life

insurance and non-life insurance.

3.7.1 Life Insurance

Some Definitions

Definition 1
Life insurance is a contract whereby the insurer for certain sum of money or premium

proportionate to the age, profession, health and other circumstances of the person whose

life is insured engage that if such person dies with in the period specified in the policy

the insurer will pay the amount specified by the policy according to the term there of to

the person in whose favor the policy was entered to.

Definition 2
Life insurance is a social and economic devise by which a group of persons may

cooperate to ameliorate the loss resulting from the premature death of members of the

group. The insuring organization collect contributions from each member, invest this

contribution, grants both their safety and a minimum interest return and distribute

benefits to the estates of the members who die.

The main purpose of life insurance is financial protection to the dependents of the insured upon

the premature death of the insured. The sum assured is, then, upon the death of the insured will

be paid to the beneficiaries. The financial compensation will provide security for a certain period

of time.

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The insured may also purchase life insurance policy with such objectives as settling personal

loans and other debts. If the insured dies before settling his debts, the insurer will settle the debt

outstanding to the creditors, hence protecting the family from financial loss.

Life insurers are generally engaged in the provision of both protection and saving. The protection

is against financial loss difficulty and is acquired for a consideration called premium, which is

the price that keeps the policy in force. The protection given by the insurer is death benefits to

the beneficiary of the insured, or in the case of survival of the insured, other financial benefits in

accordance with the policy contract.

Essential Features of Life Insurance

 The benefits are determined in advance. The insured decides for himself the amount of

insurance protection he needs. The insurer will then decide on the corresponding

reasonableness of the amount of coverage and sets the corresponding premium.

 The amount of money required to pay the death benefits in a given period are to be collected

in advance so that there should not be shortage of funds to pay claims as they occur.

 Each insured in the group should be charged an appropriate premium, which reflects the

amount of risk he brings to the group. In other words, losses are to be distributed among the

group of insureds in an equitable manner.

 The probability of claim increases with the passage of time since insureds exhibit

deteriorating health condition as they grow old.

 In addition to protection against uncertainty, life insurance has the function of accumulation

of money/saving.

Life insurance is not strictly a contract of indemnity for the value of a person cannot be precisely

put in financial terms. The provision of life assurance is a quite different process from the

provision of non-life insurance. The main distinction is that in life assurance the event being

assured is either certain to happen, in the case of those policies paying on death, or scientifically

calculable, in the case of policies not paying a benefit on death.

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 In addition to these there are a number of special features, which are worth mentioning at this

stage:

a. Premium payments. Life assurance premiums are payable by level amounts throughout

the period of the policy. This means that each person pays the same amount throughout, that

amount being determined by his age on affecting the policy. Premiums can be paid annually,

half-yearly, quarterly or monthly and are often met by standing orders with banks whereby

the policyholder instructs his bank to make the appropriate payments at the correct times. It is

also possible for the insured to pay premiums for a specified period of time or even a single

payment at lump sum at the time the policy is purchased. (This will be discussed in detail in

later section).

b. Participation in profits. Life assurance companies value their assets and liabilities at regular

intervals, say every year or others every three years. This valuation of their operation allows

them to determine whether any surplus exists after calculating all future liabilities and

allowing for other contingencies. Should such a surplus exist, it is distributed among those

policyholders who have 'with-profits' or 'participating' policies. Such policies allow the

policyholder to participate in any profits the company makes. It does not guarantee a bonus

to each policyholder, as the company may not have a surplus, but it does mean that any

available surplus will be distributed.

The policyholder pays an additional amount for the privilege of participating in profits. The

bonuses are then added to the sum assured and payable at the maturity date. They can be

either simple reversionary bonuses, that are computed at a rate percent on the basic sum

assured, or compound reversionary bonuses, that are computed at a rate percent of the basic

sum assured plus any existing bonus payments already declared.

c. Surrender values. When a person no longer wants his policy, or for some reason cannot

continue the premiums, he can ask for the surrender value. (this is discussed in later

sections).

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d. Investments. We have already identified the life assurance industry as being of considerable

size by considering the number of policies in force and the value of premiums paid each year.

These vast amounts of money are held by companies to meet future liabilities and are termed

life assurance funds. These funds do not lie dormant waiting for claims to come in; rather

they are invested to provide income for the companies and so assist policyholders and

shareholders. Not only do these two groups benefit, but the country as a whole benefits, as

we have already seen in section 2 of this unit.

3.7.1.2 Basic Types of Life Insurance

There are three basic types of life insurance

1. Whole Life Insurance

In this kind of life insurance, the sum assured is payable on the death of the life assured

whenever it occurs. Premiums are payable either throughout the life of the assured or can cease

at a certain age, often 80 or 85.

This policy provides protection to the dependants of the insured upon the event of his/her death.

I.e. the sum assured is payable only upon the death of the insured. One option is that the insured

pays annual premiums as long as he lives. The second option is that premium payments are made

for a specified number of years or up to a certain age limit, normally up to the age of retirement.

Premium payments after retirement are discontinued because of a decline in the income of the

insured. The policy provides permanent protection to the insured’s dependants in the case of

death. Besides this protection, whole life insurance allows for the accumulation of savings over

the life of the insured. In essence, the policy encourages saving.

Whole life policy acquires cash value after two or three years of premium payment. When a

person no longer wants his policy, or for some reason cannot continue the premiums, he can ask

for the surrender value. He ceases payment and receives not a proportion of the sum assured, but

a proportion of the premiums already paid. Not all policies allow a surrender value and surrender

within the first few years of any policy will not normally produce an amount for the

policyholder. This is because surrender value is calculated using the premiums paid, less

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expenses incurred in issuing and renewing the policy, and less the cost of the life assurance cover

provided during the years it was in force. In view of the level premium system, any surrender

value in the early years will be low, if any accrues at all.

The cash value gradually grows to equal the sum assured upon maturity or at the time the insured

attains age 100. If the assured, for some reasons, discontinues premium payments after the policy

accumulates cash value, then the cash value can be used to keep the policy in force under the

automatic premium loan provision. Moreover, the assured can apply for loans when the policy

acquires cash value. In some cases, an alternative to the surrender value is the paid-up policy.

The premiums cease and the policy continues, but on maturity a smaller sum than would

originally have been paid will be due to the policyholder. Depending on the policy and the

company concerned, these paid-up policies may or may not continue to participate in profits.

In general, whole life insurance has two salient features:

i. Protection – It protects the insured in the case of premature death. If the insured died

prematurely the face amount is paid to the beneficiary.

ii. Saving - premium will accumulate with interest till the date of maturity of the policy (age

100) the face value of the policy will be paid to the beneficiary.

Depending upon the manner of premium payments, whole life insurance contracts are classified

as: straight life, limited pay and single pay policies.

A. Straight life insurance

It is also called ordinary life insurance. Under this policy, premiums are to be paid at regular

interval until the death of the insured or until the achievement of a specified age limit, say 100

years. Such policy gives permanent protection at the lower cost

B. Limited pay life insurance

Under this insurance scheme, premiums are paid for a definite period of time which is

determined in advance. That is for 10, 15, 20, 25, and 30, years or up to age 85. After the

expiration of the specified time, the policy is said to be paid-up, which means that no more

premiums are to be paid to keep the policy in force until the time of death of the insured at which

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time compensation amounting the face value of the initial policy is to be made to the insured’s

beneficiary. This policy is desirable when one intends to stop payment of premiums after

reaching a given age level, usually upon retirement, but wants to continue with the insurance

protection till the end of his life. Since premiums are to be paid for a limited period, they are

usually higher than those under the straight life policy. Similarly, the cash values under the

limited whole life insurance are higher than the straight-line policy.

C. Single payment life insurance

Here, premium payment is made in one lump sum at the time of purchase of the whole life

insurance. In most cases, insurance buyers do not prefer this type of arrangement (mode of

payment).

2. Term life insurance

This insurance scheme provides compensation to the beneficiary if the insured dies within the

stated period mentioned in the policy. If the insured survives beyond the specified time limit in

the policy, the policy will expire and there will be no payment made by the insurer. Term life

policy gives temporary protection and there is no saving element involved. Since the policy is

taken for a specified period to deal with premature death, the cost of this policy is relatively low.

It is a form of temporary life insurance.

This 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. Depending on the age of the life

assured, this is a very cheap form of cover and would be suitable, for example, in the case of a

young married man with medium to low income who wants to provide a reasonable sum for his

wife in the event of his death.

Term policies do not provide the insured with loans, cash surrender or non-forfeiture options.

Insurance coverage terminates at the end of the period unless it provides an option for conversion

into other insurance schemes.

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Term life policies can be single or level premium policy. Single premium policy requires the

insured to pay premiums at the time the policy is purchased at lump sum while level premium

requires the payment of equal amount of premiums at definite intervals. Most of the term policies

are level premium. More appropriately, term contracts can be classified as: level term, renewable

term or decreasing term.

A. Level term policy

Level term policy provides a constant sum assured throughout the term of the policy. For

example, under a 15-year term policy of birr 30,000, the amount of payment to the insured will

be birr 30,000 if the insured dies at any time during the policy period. Level term policies can be

convertible or nonconvertible.

I. Convertible term policy

Convertible term policy is a term policy that gives the policyholder the option to convert his term

policy into the other types during the tenure of the term policy. No new evidence of insurability

is required upon conversion. If conversion is not made, the policy lapses at the end of the term.

The term contract can be converted into whole life or endowment insurance. Conversion may be

effected using either the attained age at the time of conversion of the term policy or using the

date of the initial term policy issued. In the case of the latter, premiums are calculated

retroactively, and the insured would be required to make up the difference in premiums including

interest, through lump-sum payment at the time of conversion. This is similar to term assurance

but includes a clause in the contract which allows the life assured to convert the policy into an

endowment or whole life contract at normal rates, without medical evidence. A young person can

therefore purchase low-cost life cover and convert it into the more expensive types as his career

progresses and he can afford more suitable contracts.

To eliminate anti-selection problem, the following requirements are expected upon conversion.

a. There will not be an increase in the sum assured.

b. The option will have to be exercised within a specified period.

II. Nonconvertible term policy

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Under this scheme, the term policy cannot be converted into other forms of life insurance

contracts. The policy terminates upon maturity. However, it could be renewable.

B. Renewable term policy

This is a term life insurance which can be renewed upon expiration. No new evidence of

insurability is required, but the premium charges are adjusted to reflect the standard premium at

the attained age. Accordingly, yearly renewable term policies require renewal every year.

Similarly, a 5-year term policy may be renewed upon its maturity. In most cases, group policies

fail under this category.

C. Decreasing term insurance

In a decreasing term insurance, the sum assured decreases periodically. These policies are

usually issued to cover the outstanding claims (debts) of a creditor (debtor) in the event of

accidental death of the debtor. The outstanding claims (debts) diminish periodically as

installment payments are made by the debtor at regular intervals. In its basic form this is a type

of decreasing term assurance, with the benefit on death paid out by installments every month or

quarter. It is intended to replace the income which the life assured would have produced for his

family if he or she were still alive.

In each case, under the basic term, decreasing term, convertible term, or family income policy,

the benefit is only paid if the life assured dies within the term of the policy. It should be noted

that all these types of policy can also be coupled with an endowment assurance. This is

particularly true of decreasing term assurance, where the combination can be used in conjunction

with a standing mortgage. In this case, the benefit will be paid on death within the policy period,

or the endowment part only on survival to the end of the period.

This type of policies provides financial protection to the policyholder (creditor) and the family

(dependents) of the debtor. The dependents of the insured are saved from raising funds or selling

certain property in order to pay the outstanding loans.

Premiums for a decreasing term insurance are made in a lump-sum payment at the beginning

(single payment).

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3. Endowment insurance
This policy provides payment if the insured manages to live till the end of the endowment period

specified in the policy, or upon the death at the time during the term of the policy or whichever

occurs first. The period of this policy is shorter than that for whole life insurance, and hence the

premiums are higher than for the same age level. The shorter the endowment period the higher

the premium. The sum assured is payable in the event of death within a specified period of, say

15, 20, 25 or 30 years. However, if the life assured survives until the end of this period (until the

'maturity date') the sum assured will also be paid. For a given level of cover, the endowment has

the highest premium because the life assurance company is guaranteeing to pay out the sum

assured at a given date, or before it if the person dies. The maturity date is usually no later than

the date when the life assured will reach age 65.

The whole life assurance, mentioned earlier, will be slightly cheaper than a long-term

endowment because the average policy will not become a claim by death until a person is in his

or her seventies. The company has the premiums to invest for a longer period and can charge

lower premiums. The shorter the term of an endowment policy, the more expensive per sum

assured it becomes, since the company has fewer years in which to collect premiums.

Those buying houses can use endowment assurance. The assurance policy is taken out for the

amount of the loan, or mortgage if a building society is involved, and written in such a way that

the sum assured is payable to the lender or society. The borrower then pays the interest and the

premium. At the end of the term of the loan, the endowment policy matures and repays the

amount borrowed (the capital sum) to the lender. In the event of the borrower dying prior to the

end of the repayment period, the interest to date will have been paid and the endowment policy

will payout to repay the capital sum.

This can be an expensive method of protecting a loan for house purchase, and therefore many

building societies accept modifications involving convertible or decreasing term and endowment

combinations, which are considerably less expensive, but still provide the same security.

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In addition to the above-indicated types of life insurance contracts, the following can also be

considered.

4. Group life assurances

Employers sometimes arrange special terms for life assurance for their employees, with the sum

assured being payable in the event of death of an employee during his term of service with the

employer. Membership of the scheme is open to all employees working on the inception date, or

the anniversary date in future years.

One policy is issued to the firm and each employee is given a certificate of membership. Many

people wish to make special arrangements for their children, and two common schemes are the

child's deferred assurance and the school fees policy.

Under a child's deferred assurance, a policy is effected on the life of a parent with an 'option' date

normally coinciding with the child's eighteenth birthday. Should the parent survive until the

option date, the child has the option of continuing the policy in his own name from then on, as

either an endowment or whole life. The policy can be continued without further medical

examination and this can be extremely important where a child has contracted an illness which

would otherwise make effecting a policy difficult or extremely expensive. Alternatively, a lump

sum can be taken at the option date rather than continue cover. In the event of the parent dying

before the option date the policy is continued, with out payment of premiums, until the option

date. Should the child die before the stated age, the premiums can be returned to the parent or the

policy is continued.

5. Insured pension schemes

These schemes provide a variety of benefits for members, but their main aim is to ensure that

some form of pension is available on retirement. Life assurance companies perform a vital role in

running pension schemes. Those constructing a scheme may approach a company to:

 organize the whole scheme, receive premium contributions, invest the funds and

administer the pensions;

 manage the fund of a pension scheme; or

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  provide life assurance benefits for widows of scheme members who die before retirement

or widowers.

Many employers' pension schemes are insured by means of group or master policies issued to the

employer or to the trustees of the scheme. These provide retirement pensions and other benefits

in respect of the employees who are eligible for the scheme, usually related to their service and

salary.

A record-keeping and administration service is usually provided in association with the issue of

the policy. The contract may be based on one of the types of policy used in ordinary life

assurance, for example endowment assurances, or annuities (as described later), or it may be

specially devised for the purpose. The extent to which there is a transfer of risk varies

considerably, and in some cases the main emphasis is on the provision of an investment service

by the insurance company.

In association with the provision of retirement benefits, policies are usually issued insuring death

in service benefits for those employees who do not reach retirement age. These may be in the

form of group life assurance, as described earlier, or of widows' pensions.

6. Annuities
Certain of the assurances mentioned above have had the aim of ensuring an income of one form

or another. An annuity is a method by which a person can receive a yearly sum in return for the

payment to an insurance company of a sum of money. This is not life assurance as we have

described it, but it is dealt with by life assurance companies and is based on actuarial principles.

When a person has a reasonably large sum of money and wants to provide an income for himself

after he retires, or at some other time, he can approach a life assurance company and purchase an

annuity. The annuity may start at once, an immediate annuity, also sometimes called annuity due,

or may start at some date in the future, a deferred annuity. Regardless of when it starts it can take

various forms. It may provide an annuity for the life of the person, the annuitant, or it may be

payable irrespective of death for a certain period, as in the case of the annuity certain. The

guaranteed annuity is similar in that it provides the annuity for a guaranteed period or until the

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annuitant dies, whichever is later. The reversionary annuity provides for payment to the

annuitant, say the wife, on the death of another named person, say the husband. The joint and last

survivor annuity is payable while two people, husband and wife, are alive and on the death of

one will continue at the same or smaller rate on the life of the survivor.

Life Insurance Premium Calculations

Dear student, before any extended discussion on life insurance premium calculation, it seems

quite logical for you to know about the types of premiums available in life insurance. To this

effect, we have mentioned two types of life insurance premiums.

1. Net premium. The determination of net premium considers only the mortality rate and rate

of interest. It ignores operating costs charged by the insurer. N.B. Net premium provides the

insurer only with the amount of money required to pay death claims. The net premium to be

paid could be single or level premium. Net single premium is the net premium to be paid as a

single sum at the beginning of the contract while a net level premium is a premium charge

that doesn't change from year to year throughout the term of the policy.

2. Gross Premium. The insurer's costs of operating the business are added to the net premium,

which is called loading. Loading is the act of adding costs of running business to the net

premium costs including operating expenses, commissions, advertisement expenses, etc.

Non-life Insurance/ Property Insurance

As insurance has developed, the various types of cover have been grouped into several classes,

which have come about by practice within insurance company offices, and by the influence of

legislation controlling the financial aspects of transacting insurance. Insurance offices are

generally split up into departments or sections, each of which will deal with types of risk, which

have an affiliation with each other. There is a very wide variety in the way in which companies

organize their business, but the following divisions are not unusual:

 Fire, including business interruption;

 Accident, including theft, all risks, goods in transit, glass, money, credit, fidelity

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  Liability, including employers' liability, public liability, products and professional

indemnity;

 Motor; engineering; marine and aviation; life and pensions.

A discussion on the above non-life insurance will be made as follows;

Personal Accident Insurance

This type of cover is devised to compensate the insured that is temporarily or totally disabled

from engaging in his usual occupation due to sickness. Personal accident and sickness

policies are renewable annually and, if a claim has occurred, which could be of a recurring

nature, the cover may be restricted at renewal or in severe cases renewal may not be offered.

Permanent Health Insurance

This type of cover has been devised to overcome the limitation of the personal accident and

sickness policies. It provides benefits for those who are disabled for longer periods or who,

due to accident or illness; have to change to a lower paid occupation. It may also be called

long term disability insurance.

It is usual to arrange cover to exclude the first month, six months or twelve months of

disablement with appropriate discounts in the premium rates, since many people will receive

a substantial part of their salaries for a certain period when off-work. Cover cannot continue

beyond age 65 and in order to save premium some people elect for cover to cease at age 55

or 60. The maximum benefit payable is usually 66 per cent or 75 per cent of earnings, less

any other disability benefits payable.

The intention of the basic policy is to provide compensation in the event of an accident

causing death or injury. What are termed capital sums are paid in the event of death or

certain specified injuries, such as the loss of limbs or sight as may be defined in the policy.

The policy is usually extended to include a weekly benefit for up to 104 weeks, or

compensation if the insured is temporarily totally disabled due to an accident and a reduced

weekly benefit if he is temporarily only partially disabled from carrying out his normal

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duties. In the event of permanent total disablement (other than loss of eyes or limbs) an

annuity is paid.

In addition to the purchase of personal accident insurance by individuals, it is also possible

for companies to arrange coverage on behalf of their employees and many organizations

arrange 'group schemes' to this end.

Motor Insurance
The minimum requirement by law is to provide insurance in respect of legal liability to pay

damages arising out of injury caused to any person. Policies with various levels of cover are

available:

 Third party only: provides cover in respect of liability incurred through death or injury

to a third party, or damage to third party property.

 Third party, fire and theft: provides cover as above and in addition includes cover for

damage to the vehicle from fire or theft.

 Comprehensive: provides cover as above and in addition including cover for accidental

loss of, or damage to, the vehicle itself. This is the most common form of policy.

Private car insurance applies to private cars used for social and domestic purposes and/or

business purposes. Comprehensive policies issued to individuals also include personal accident

benefits for the insured and spouse, medical expenses and loss of, or damage to, rugs, clothing

and personal effects.

Vehicles used for commercial purposes (including lorries, taxis, vans, hire cars, milk floats and

police cars) are not insured under private car policies, but under special contracts known as

commercial vehicle policies.

Separate cover is available for motorcycles. The type of policy depends upon the machine,

whether it is a moped or a high-powered motorcycle, and on the age and experience of the

cyclist. The cover is comparatively inexpensive relative to motorcar insurance.

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Special policies are offered to garages and other people within the motor trade, to ensure that

their liability is covered while using vehicles on the road. Damage to vehicles in garages and

showrooms can also be included under such policies.

In addition to private cars, motorcycles and commercial vehicles, there are a number of vehicles

which fall into a category known to insurers as 'special types'. These will include forklift trucks,

mobile cranes, bulldozers and excavators. Such vehicles may travel on roads as well as building

sites and other private ground. Where these vehicles are not used on roads and are transported

from site to site, it is more appropriate to insure the liability under a public liability policy, since

the vehicle is really being used as a 'tool of trade' rather than a motor vehicle and include fire,

theft, collision and a wide range of other perils.

Marine and Transport Insurance

I. Marine cargo
Marine policies relate to three areas of risk: the hull, cargo and freight. While hull and cargo are

self-explanatory, the word freight may not be: it is the sum paid for transporting goods, or for the

hire of a ship. When goods are lost by marine perils then freight, or part of it, is lost; hence the

need for cover.

The risks against which these items are normally insured are collectively termed 'perils of the

sea' Cargo is usually insured on a warehouse (of departure) to warehouse (of arrival) basis and

frequently covering all risks. Terms of sale and conditions of carriage have important

implications for cargo insurers where goods may change ownership and pass through the hands

of more than one shipper or haulier. It is vitally important in cargo insurance to establish who is

responsible for the insurance cover and to work out when the risk passes from the consignor to

the consignee.

Insurers often rely on inadequate packing/loading to modify claims under cargo covers. Where

appropriate insurers will pay claims and then seek recoveries from carriers.

II. Marine liabilities

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The custom has been to provide insurance for three-quarters of the ship owner’s liability for

collisions at sea under a marine policy. The remaining quarter, and all other forms of liability,

are catered for by associations set up for the purpose by ship owners and known as Protecting

and Indemnity Clubs (P and I clubs). It should be noted that the P and I clubs can now insure hull

and machinery as well as liabilities.

III. Aviation insurance

The use of aircraft as a means of transport is increasing each year and because of the specialist

and technical nature of the risks associated with it, plus the high potential cost of accidents, all

aviation risks, from component parts to complete jumbo jets, are insured in the aviation

insurance market.

Most policies are issued on an 'all-risks’ basis, subject to certain restrictions. The buyers of these

policies include the large commercial airlines, corporate aircraft owners, private owners and

flying clubs. Usually a comprehensive policy is issued covering the aircraft itself (the hull), the

liabilities to passengers and the liabilities to others.

Liability for accidents to passengers is governed by a maze of international agreements and

national laws around the world. The main ones are the Warsaw Convention 1929, which made

signatories liable to passengers without negligence, subject to certain maximum amounts, and the

Hague Protocol 1955, which raised some of these limits. The national laws may place higher

limits on domestic flights. For domestic flights within the UK the provisions of the Carriage by

Air Act 1961 apply together with Orders made under it. You will find reference to limits of

liability in the small print, which forms part of the standard airline ticket.

The position has been made more complex by some governments imposing on their national

airlines increased limits of liability, which do not have worldwide approval. Although the

appropriate rules for calculation of legal liability are normally determined by reference to the

country at point of departure and the country of destination recorded on the ticket, an airline

disaster may produce claims from passengers of many nationalities.

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It is interesting to note that in Goldman v. Thai Airlines International (1981), it was held that

the limits did not apply when the aircrews were 'reckless' in flying the aircraft. In the aftermath

of the Lockerbie disaster, there have been a number of attempts at securing much higher

compensation than the agreements laid down. Some claims have been settled for higher amounts,

especially when the limits have appeared low in relation to the earning capacity of the passenger.

There have been unsuccessful efforts to increase the Warsaw/Hague limits. Change will only be

piecemeal without the support of the major airline operating countries, notably the United States

of America.

The two international agreements also place limits on liability for goods carried by air. Unless of

special risk or value, cargo is usually insured 'all-risks’ in the marine or general markets rather

than in the aviation market. Other groups of persons requiring aviation liability cover are aircraft

and aircraft component manufacturers, and airport authorities.

Fire and Other Property Damage Insurance

There are a number of different ways in which property can be damaged. One needs only to think

of a small factory unit to imagine all that can be damaged and all the ways in which damage can

be sustained. Fire and theft probably come to mind first, but then there are very many different

forms of accidental damages.

I. Fire Insurance
In most commercial policies the insured will require cover for buildings, machinery and plant,

and stock. These are the three main headings under which property is insured and in some cases

a list of such items can run to many pages, depending upon the size of the insured company.

In addition to these areas it may be necessary to arrange cover for property while it is still being

built, that is buildings in course of erection, but this form of cover is gradually giving way to a

policy known as 'contractors all-risks’ which will be discussed later.

A standard fire policy is used for almost all business insurances, with Lloyd's of London also

issuing a standard fire policy that is slightly different in its wording. The basic intention of the

fire policy is to provide compensation to the insured person in the event of there being damage to

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the property insured. It is not possible, in the commercial world, to issue a policy that will

provide compensation regardless of how the damage occurs. The insurance companies, the

insurers, have to know which perils they are insuring against.

The standard fire policy covers damage to property caused by fire, lightning or explosion, where

this explosion is brought about by gas or boilers not used for any industrial purpose.

This is limited in its scope because property can be damaged in other ways and, to meet this

need, a number of extra perils (known as special perils) can be added on to the basic policy.

These perils are:

 Storm, tempest or flood;

 Burst pipes;

 Earthquake;

 Aircraft;

 Riot, civil commotion;

 Malicious damage;

 Explosion;

 Impact.

It is important to remember that these additional perils must result in damage to the property, and

it is as well to precede each by saying 'damage to the property caused by special peril element'.

II. Theft insurance

Theft policies have the same aim as the standard fire policy, in that they intend to provide

compensation to the insured in the event of loss of the property insured.

The property to be insured, for a commercial venture, will be the same as under the fire policy,

of course except for the buildings. The theft policy will, in addition, show a more detailed

definition of the stock. The reason for this is that fire is indiscriminate, whereas a thief is not, so

the insurers charge more for stock which is attractive to thieves.

The law has its own definition for theft having an impact on insurance companies, as it defined

the term 'theft'. The legal definition was wider than that which the companies were prepared to

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offer, especially for business premises, because the definition did not mention any need for there

to be force and violence in committing a theft. This meant that shoplifting, for example, was

'theft' and this kind of risk had traditionally been uninsurable. To remedy the problem, insurance

companies included in their policies a phrase to the effect that theft, within the meaning of the

policy, was to include force and violence either in breaking into or out of the premises of the

insured.

Comprehensive Insurances
A step on from issuing combined policies, which is only the combination of separate policies

within the one folder, is the comprehensive policy. This form of insurance represents a widening

in the scope of cover. It is also sometimes called a 'package' policy and is an attempt by insurers

to have a single policy section detailing the policy cover, exclusions and conditions. For

example, the household comprehensive policy covers the basic perils mentioned above and also

includes cover against damage caused by collapse of television aerials, leakage of central heating

oil, the breakage of underground water pipes, sanitary fittings and many more risks.

This widening of scope of the perils insured has been accompanied by alterations in the basic

method of providing cover, so that today it is possible to arrange a household comprehensive

policy which provides cover against damage caused by almost any event and with the amount

being paid representing what it will actually cost to replace the damaged property.

This widening in cover has not been without its problems and many insurers have experienced

large losses on their household insurance business, as a result of which substantial increases in

premiums have been introduced.

Comprehensive policies are also available for offices and shops, where cover is provided as a

package. This is an efficient and relatively inexpensive way of providing cover for small offices

and shops.

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