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This Unit is about Insurance as used in International trade.


It is an aid to trade which undertakes to protect those involved in trade against possible risks. The work of the insurance company is to make a pool of money from the insured where the unfortunate few are compensated for accidents that were not planned for.

In Uganda examples include national Insurance Company (NIC), Excel Insurance, Jubilee Insurance, Green Land Insurance, State Wide Insurance Company (SWICO), among others.

Insurance is based on the pact that the fortunate people or traders may help the unfortunate is based on the fact that the fortunate people or traders may help the unfortunate traders who get involved in accidents if insurance services the traders may fear to venture into risks.


This is an aid to trade whose main aim is to prevent financial losses to individuals and business organizations. It’s a method of spreading risks over a wide population so that losses fall lightly on many rather than heavily upon a few unfortunate people.

Insurance is bases on pooling risks ie individuals and organization that are exposed to risk contribute a small amount of money to a common pool from which people who have suffered a loss are compensated.

In order for the above arrangement to take place the insurance company should be able to calculate the following;-

– Amount of money required to compensate the sufferer
– The number of people likely to apply for insurance
– The amount of the money contributed by each person taking an insurance policy

Basic terms used in insurance


This is the event or uncertainty against which an insurance policy is carried out eg accidents, theft, fire etc

Types of risks

Insurable risks. These are risks that can be legally insured in case of their occurrence. Such risks include death, fire, machinery breakdown, theft etc. as can be seen, and an entrepreneur can take a reasonable degree control these risks (except death) by taking appropriate measures in and out of his / her business

Non insurable risks. These are risks that cannot be legally insured and in the event of their occurring, the insurance company cannot be legally compelled to compensate examples are wars, political turmoil, floods, lightening etc


Loss.  This is the happening of events against which insurance is taken. For instance if one insures his business against fire and it is burnt down, the loss of the business happened

  • Total loss, this is when the whole property is completely destroyed

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  • Partial loss, this is only when a part or portion of the property is destroyed

What Happens If Your Car Is Broken Into

Pure risks. These are risks that involve only a chance of loss.

Speculative risks. These are risks which can give either a gain or loss

Factors considered when assessing risks in a business venture.

Nature of the property insured. The levels of risk in a business depend on the nature of the property insured. For instance should there be a fire outbreak, businesses such as petroleum stations are at a higher risk since they are handling substances which are highly flammable. However, there are low risks for those businesses dealing in less inflammable substances.

Nature of policy to take. There are insurance policies that are expensive than others. It should be noted that a higher premium is paid for more valuable policies. For example the premium for the policy of aviation is higher than that of motor vehicle policy.

Precautionary measures put in place to minimize the risk. Business firms (insured) that take up risk mitigation measures often pay a lower premium than those that do not have in place any measure of risk mitigation /management within their firms. For instance, should two firms wish to insure their firms against fire, the firm that has fire extinguishers in place will pay a lower premium as opposed to the firm that does not have any fire-fighting equipment.

Experience and ability of the person assessing the risks. The person who is involved in promoting and managing the business, should possess the required abilities to be able to assess the likely risks in business.

Viability of the business idea. This involves assessing whether the chosen or selected business idea would be profitably done in the same area given the available resources, technical skills of staff, competition and others.

Availability of market. Market is a key factor in success of any business. To assess the degree of risks, it is very important to find out the size of the market for the firm’s products. That is whether the people in the area are in need, willing and able to buy the products of the business or not.

Pricing policies and strategies. This involves finding out whether the prices at which the goods and services produced by the business will be sold, are competitive given the prevailing competition in the market.

Cash flow. Establishing whether the business will generate enough cash (cash flows) and if not, whether the business will be able to raise cash from other sources to fill the gap, and if so, what the implications will be to the business.

Flexibility of the business. Finding out whether the business choice that has been made can be easily changed without having any disastrous effects on the resources invested, the image of the business and the entrepreneur. Finding out whether the people whom the business will deal with such as workers, suppliers, customers and competitors are honest and would be reliable.


These are firms or organisations because which undertake the insurance business ire they take the responsibility to protect or compensate those who suffered a loss e.g united assurance, national insurance company [NIC] and American insurance group [AIG] etc

These are individuals or business organizations which take insurance and are promises compensation in the event of occurrence of a risk.

Pooling risks

This is when individuals or organizations exposed to a risk contribute a small amount of money to a common pool from which people who have suffered a loss are compensated i.e  the loss is spread over a great number of people

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This is the contribution a person pays for insurance coverage i.e it is the amount of money paid by the insured to the insurer and it constitutes the pool. It is paid periodically, monthly, quarterly or annually depending on the company.

Insurance policy

It is a written contract between an insurer and the insured and it states out the risk covered, sum insured, amount of premium paid the period of cover.

Sum insured

This is the value of property insured by the owner at the time of applying for insurance contact. It helps in determining the amount of money [premiums to be paid]

Cover note

This is a letter from the insurer to the insured stating premiums have been paid and that he or she is covered by the insurance company.

A proposal form

This is a questionnaire which is completed by one who wishes to insure against a particular risk

Contents of a proposal form

  • The applicant’s name and address
  • The occupation and location of the applicant
  • The age of the applicant
  • Name and the insurer
  • The risk to be insured
  • The policy to be bought
  • The sum insured
  • First insurance or last insurance
  • Any precautions taken against the risk
  • The signature of the applicant
  • The declaration of the applicant that the information disclosed is true
  • Any other relevant facts about the property insured.

A claim

This is a form that an insured fills and presents to the insured in an event of a loss happening, it shows fill details of the loss

An actuary

This is the person given the responsibility of calculating premiums basing on the available statistics and information.

Assessor/ adjuster

This is the person given the responsibility of calculating losses i.e he estimates the loss suffered by the insured person when a claim is made.

John L McKee (Melbourne Motor Assessor) – Autointegrity

A policy holder
Is the insured that is given protection against the risk

An insurance broker

This is an independent agent who brings clients who are seeking insurance in touch with insurers the advice clients on which insurers offer favorable terms.

Re- insurance
At times property insured may be very valuable and expensive so that in case of a loss, the insurer concerned insurers a high cost to compensate the insured. To offset this high cost, the insurance company concerned insures the risk with another insurance company which is new referred to as the re-insurer. Garden city [insured] – A.I.G [insured] – N.I.C [insurer]

In co-insurance the insured takes the initiative risk to insure themselves in a number of insurance companies in order to spread the risk and the high cost involved in compensating of high value.


Under insurance

This is when the insured under declares the value of the property.

If the insured under – declares the value of their property at the time of taking an insurance policy, he will be changed lower premium but in the event of the loss. He will be paid the sum insured and not the correct is 8 million. The insurer pays 6 million.

Over insurance

This is where the insured over states the value of the property when applying for insurance. If the insured over declares the value of their property each the time of taking an insurance policy, They will pay a high premium. In an event of total loss, the insurer will pay. If sum insured is 8 million and correct value 6 million and insurer pays 6 million

Surrender values
Under certain circumstances on insured may decide to terminate the policy it matures. Ie 1 year elapses. The insurer will pay the insured some money which is usually less than 100% of what they have paid so far.

Average close
This term in principle is supposed to prevent the insured from making the profits. From the under insured it requires the insurance company to only pay for the population in % damage for example;

If the sum insured is 6 million
Correct value is 8 million
Insure pays 6 million
%insurance = 6⁄8 x 100 = 75%
The insurer will also pay only 75% the population of the loss

Renewal advise

This is a document sent by the insure to the insured that their insurance is not renewed the policy is automatically terminated

Renewals. This consists of effecting the contribution of a contract for a further period. When the insurance contract ends, the insured may apply for another contract. This is referred as renewal of the insurance contract

Pooling of risk. This is where everybody exposed to a risk contributes some money to a common insurance pool from which the few who actually suffer losses will be compensated

No claim bonus

This is a discount for the insured that has made no claim from hi policy in a long time. This reduces the premium to be towards the policy

Example 1 [in under insurance]

A trader insured his property which was worth 12,000,000≠ and he declared it @ 8,000,000≠. A fire destroyed a quarter of the property. Calculate how much the insurance company paid him.
Correct value = 12 million
Sum insured = 8 million
Insurer pays =?
= 8⁄12 X 100% = 66.7%

= 1⁄4 of 8 = 2 million
= 3 x 66.7
= 2 million
A shopkeeper has a stock of 100,000≠ and insurers it against 80,000≠ for fire. If the fire destroyed ½ his stock. The insurance company will pay.

C.V = 100,000 = 1⁄2 x 100,000 = 50,000≠
S.I = 80,000 = 800,000⁄100,000 x 100% = 80%
= 80⁄100 x 50,000 = 40,000≠
Stock destroyed
Multiply % insured x proportion lost

Principles of insurance
The system of insurance is based on five basic principles
The principle of ut most good faith
The principle of Indemnity
The principle of Subrogation
The principle of Proximate cause
The principle of Insurable interest

The principle of ut most good faith [ uberrimafides]
This principle requires transparency when declaring facts about the property being insured. It requires the insured to be honest and faithful in order to enable the insurer calculate premiums accurately. If the insurer discovered them any information based on was cancelled deliberated, it will lead to a refusal for any claim on the property insured.

The principle of Indemnity [no profits]

Insurance does not aim at benefiting the insured so no profits are to be made out of any insurance policy. The financial position of the insured should not be better or worse than before the accident happened

After compensation, the insured should be back to their original position before the accident happened.

The principle of Subrogation

This principle states ‘in an event of total loss after an insurer has fully settled the claim, the insurer acquires the right that the insured had in the property destroyed, ‘this implies that if any can be made out of the loss e.g by selling the scrap such belong to the insurer.

The principle of Proximate cause

It states that there must be a fairly close relationship between the cause of the loss and the actual risk insured against for compensation to take place for example if an insured protected f against bug lorry and the property burnt down instead the insured will not be compensated. This means that the cause of the loss must be the same as that insured against.

The principle of Insurable interest

Under this principle a person inuring must have an interest on in the property in other wards they must be the owner of the property to be able feel the financial loss. This principle ensures that you only make a claim on property that belongs to you and no one else.

Principle of insurable risks and non insurable risks

Insurable risks are those risks where property can be forecast or calculated. Such risks include fire, thefts, accidents, bad debts, lightening etc. on the other hand, the non insurable risks are those risks whose probability cannot be calculated or forecast such as inflation, changes interest and fashion.

NB: one cannot insure against non- insurable risks. One has to take up a policy against a risk whose loss and premium can be calculated without difficulty.

Principle of contribution

When one insures with more than one company each contributes
Gloria has insured her car against damage by accident for shs 6.5 m. When the accidents occur, she claims compensation from the insurer. It is found prior to the accident; the car was valued at shs  5.6 m. The wreck is valued at 1 m. How much will the insurer o pay her?
a. 5.6 M + the wreck
b. 5.6 M minus the wreck
c. 6.5 M minus the wreck
d. 4.6 M minus the wreck.

Procedure of taking an insurance policy

Taking insurance requires several steps;

Applying for insurance requires one to fill a proposal form. The insured is required to be faithful in filling this form in directing all necessary facts about the property.

On receipt of the proposal form, the insurer though his agent called an actuary inspects the property to be insured to determine its actual value. This enables the correct premium to be paid.

The insured prepares to pay premium and after the payment of the first premium, the insured is issued with a cover note which is a temporary contract between the insurer and the insured. It is valid for only 30 days.

After 30 days, an insurance policy is then issued. The policy is permanent contract between the insurer and the insured.

In the event of a loss, they insured claims compensation by filling a chain note which is obtained from the insurer.

On receipt of the claim, the insurer sends on agent called an assurer to determine the cause and extent of loss. The insurer may or may not compensate the insured depending of the accusers report.

After 1 year, a policy express and it ends the insurance contract. The insurer may send a renewal advice note to prompt the insured to renew the contract.

Purpose of insurance policy to the insured

  • To aid compensation of the insured in case of occurrence of the risk insured against
  • To act as evidence of insurance contract between the insured and the insurer
  • To provide collateral security to the entrepreneur ie the premiums
  • To promote individual responsibility of the insured by fulfilling contractual obligations
  • To encourage a saving culture among entrepreneurs
  • To enable undertaking of risks in business by entrepreneurs

Procedure for claiming compensation from an insurance company

  • Notifying the insurer of the loss by presenting a police report
  • Filling a claim form, showing full details of the loss
  • Surveying of the damaged property by the assessor who is sent by the insured to determine the loss of the insured
  • Terminating of the insurance policy upon compensation of the insured by the insurer on receipt of the survey report from the assessor.

Circumstances under which an insurance policy may be terminated

  • In case of expiry of the insurance period ie lapse of time
  • When compensation has been made ie by performance
  • In case of an agreement between the insurer and the insured
  • In case one fails to display utmost good faith at the time of taking out insurance.
  • If there is breach of contract e,g failing to pay the premium on agreed time
  • In case of operation of law ie court action
  • In case of destruction of the subject matter
  • In case of frustration ie death, insanity etc

Classes of insurance

There are two categories of insurance;

General insurance

General insurance mainly concerns insurance of property. It is subdivided into three departments mainly; Fire policy and accident policy.

Fire policy

This policy protects one against loss arising from fire outbreak, like compensation for the loss of business property and stock. Fire and special peril policy safe guard an entrepreneur against fire damages and the consequential losses arising from it

theft and burglary

Covers individuals against loss of property due to theft and break in someone premises. this means that in the event of loss resulting from theft and burglary, the insurance company compensates the insured


motor accident insurance

Under this department, property is specifically covered against accidents and loss arising out of loss of profits and money.

It has the following policies

Motor accident policy. This covers loss due to assurance of motor accidents covers the vehicle only

Kiwatule accident: One victim succumbs to injuries, police release details of all vehicles involved – PML Daily

Motor third party. Covers insured vehicles against claims of the third party who was injured in an accident.

Comprehensive motor policy

This covers a vehicle against all possible risks for example accidents theft, fire and lighting etc

Machinery break down and consequential loss. This policy may be taken by one to protect him/her against loss arising from machine break down and consequential loss, such loss will involve reduction in production and loss in time and such a loss will be covered by the insured.

Fidelity guarantee

This policy is usually taken by employers who cover themselves against risks of dishonesty of employees who might embezzle funds in business.

Fidelity Guarantee - Nexus |Nexus

Work man’s compensation/ employers liability

This covers employer against risk of loss of money coming through claims of employment who have suffered injury at their place of work.

How an Accident at Work Hurts More Than the Employee | Work-Fit Blog

Public liability insurance

This covers a business man against claims the public who certain injuries because of the defective nature of their premises because of activities at the premise negligence

Public Liability, Product Liability and Employer's Liability Insurance | AOR

Goods and cash in transit

Under this policy goods and cash are protected against any loss as they are being transported from one place to another.

Goods In Transit Insurance - Crystal & Diamond Insurance Brokers

Personal accidents policy

This covers individual against injuries of any kind

Aviation policy

This policy covers property and individual as they are being transported by air insurance cover that covers an aeroplane is called the vitiation hull policy.

Bad debt insurance
Protect business men against looses by losses b debtors who fail to pay.

Marine department

Marine insurance is concerned with protecting business men again losses while at sea/. This insurance covers sea vessels [marine Holl policy] and those that covered cargo or goods being transported are of marine cargo policies.

Main policies can also be categorized into the following;

Time policies

Cover a ship or goods being transports for a certain period of time usually 1 year. A ship is insured against damage for that length of time whether it soils or not.

Voyage policies

This covers a ship and cargo being transported for a particular voyage.

Mixed policies

They combine both time and voyage

Floating policies

They cover goods which are not constant in value against damage. The sum insured is an estimate which does and depends on value of the commodity.

Life insurance

Policies in life insurances are usually referred to as assured policies because they cover people against risks that are bound to happen e.g death, and old age. Life insurance has the following policies;

Whole life policy

Under this policy, the insured pays premiums throughout his life time or until and agreed time. The sum insured and all the payment of the insured are only payable to the beneficiaries only after death of the insured.

Endowment policy

Under this the insured pays premium for a specific period of time and the money is payable either to the insured or his beneficiaries at the expiry of that time or his death which overcomes first.

This group insurance
Under this family of businessmen take insurance for members of their families which cover them after retirement or during their old age.

Medical insurance
This covers the cost of hospitalization and medical bills, sugary, emergency treatment, dental of the insured individuals.

Types of losses in marine insurance

Actual total loss

This is what happens when a vessel or goods insured are totally destroyed or when the damage is beyond repair

Constructive total loss

This happens when the damage on the ship or cargo are repairable or recovered. However should the cost of repair exceed the value of the new vessel the insurer may decide to compensate by buying a new vessel.

General average loss
This happens when a danger is at sea like a heavy storm that may make it necessary to offload the ship and make it lighter or else it capsizes. This is done by deliberately throwing over boarded some or all the cargo on the ship. This is done to save rather than the cargo.

Particular average loss
This happens when a loss is caused to particular cargo.

Factors considered in determining the premiums to be paid

There are several factors which help an insurer to determine the amount of premium to be paid on a particular property;

Factors considered by the insurer when determining premium

The nature of the property being insured. Delicate and fragile property/ goods to handle e.g. petrol stations attract higher premium than obvious goods.

The number of people exposed to the same risk. The bigger the number the lower the premium because the cost is spread than when the number is small.

The frequency of the occurrence of the risk being insured. The higher the possibility of occurrence of the risk the higher the premium paid than where the possibility of occurrence is low.

Operating expenses of the insurer. Higher administrative costs and rates of claim of compensation attract higher premium than lower administrative operating expenses.

The desired profit margin of the insurer. If the insurer aims at making high profit then a higher premium is charged than when the insurer aims at sale maximization.

Precautions taken by insured to reduce the risk. Availability of precautions like fire extinguishers in building, safety belts in vehicles tend to reduce premium rates than where there are no premiums completely.

Type of policy to be bought. Short term policies mostly attract less premium than long term policies

Value of the property to be insured. Expensive good attract higher premium than cheap goods.

Age of property. Old articles and items face higher chances of damage hence attract higher premium than new articles

Level of incomes in case of life insurance. High income earners are charged higher premium as their beneficiaries have to be given higher compensation than low income earners.


Most people have a misconception that insurance is similar to gambling, however, there are quite a number of features that differentiate gambling from insurance and these include

Insurance aims at helping unfortunate / unlucky ones but gambling makes the lucky ones improve their status

Insurance is legally practiced and accepted but gambling practices are illegally accepted

Insurance, the event insured against may or may not happen, however in gambling the stipulated event must happen so as to decide the winner / lucky one

There are some formalities needed when under taking an insurance policy, like documents that have to be filled and signed, this does not happen in gambling

Insurance, one must have an insurable interest in the property he is insuring, however, in gambling, such condition does not exist

In insurance, money (premium) is normally paid in installments until the whole premium is accomplished, however, in gambling it is paid once and taken once

In gambling, all contribute money to the game, but insurance, one party (insured) contributes the money

Insurance is of great help to entrepreneurs since it provides confidence of the property/ business survival, whereas, as gambling is only a loss to the society

Similarities between insurance and gambling

  • In both cases, many people contribute towards a common pool
  • At least two or more members are involved ie in insurance there is insured and the insurer while in gambling there are gamblers
  • In both cases , either chance or misfortune determines he who takes money from the pool
  • Many people contribute but one or few take the money
  • They both involve some element of gaining by either party ie if the risk does happen, the insurer takes all the money while gambling, the winner benefits.

Importance of insurance to a business man/ trade/ commerce

Insurance gives confidence to business men to undertake investment. The property is surely safe guarded against all risks like fire, accidents and thuggery

Business men are assured of continuity in their business operation. This is because compensation is provided for those who suffer loss.

Insurance companies act as trustees to business man. Insurance companies tend to know their clients’ very well that they can stand in for them in case any type of reference is required.

Some insurance company gives loans to businessmen esp those who operate on large scales and have collateral security.

Insurance is a means of saving especially in whole live policy were the insured accumulates money over a period to be given to beneficiaries.

Insurance promotes international trade since both importers and exporter can trade with confidence without fear of loss.

Insure reduces government expenditure on social welfare. This is because they take up responsibility of compensating individuals who suffer loss on stead they take up responsibility of compensating individuals who suffer loss instead of government

Insurance policies can be used as collateral security to acquire a loan in any leading institution

Insurance companies pay taxes to government.


The majority of the people in Uganda are peasants and therefore poor. They do not have property worth insurable

Many people are not well sensitized or enlightened about insurance. They are ignorant and are not willing to undertake insurance. They think insurance is wastage of money

Loss of trust among people in insurance business. Some insurance companies are reluctant to compensate the insured and others take long to settle the insured claim

Inflation has affected the insurance business because of increasing prices of goods and services. Inflation therefore increases the operational expenses of the insurance company and hence lowers the profits

Insurance companies are not widely spread throughout the country. They are only found in urban centers

Many businesses in Uganda operate on small scale and hence there is no need for insurance for example a hawker of ground nuts

Many insurance companies are still small and have limited capital expansion

There is excessive competition among the insurance companies such that some companies do not have clients and cannot make profits

Insurance companies are charged with high taxes by the government

Political instability may affect the insurance industry