TYPES OF INSURANCE POLICIES

INTRODUCTION
Insurance is a concept, a technique, and an economic institution. It is a major tool of risk
management, and plays an important role in the economic, social, and political life of all countries

LIFE INSURANCE
There are two basic types of life insurance:
a). Term Life Insurance covers you for a period of time or term that you choose.
b). Permanent Life Insurance offers a few more variations, and provides a lifetime of coverage.
Each has benefits that may be important to you depending on the needs in your life

1. Permanent life insurance

Permanent insurance, including Whole Life Insurance, Universal Life Insurance and Variable
Universal Life Insurance, can provide protection for your entire lifetime, or in certain instances up
to a specific age at which point the insurer pays the policy owner the cash value. Permanent life
insurance policies can build cash value money that you can borrow against and in some instances,
withdraw to help meet future goals, such as paying for a child's college education.
Permanent life insurance is for people who:
• May need life insurance for a long term.
• May be interested in accumulating policy cash value to provide funds for education,
retirement or other future goals.
• Want to take advantage of the tax-favored treatment of cash value life insurance policies.

Benefits:
• Over time, permanent insurance may be more economical than term insurance since
premiums do not increase with age and the policy can build cash value.
• Policy loans and withdrawals provide access to your cash value.
• If you cancel the policy, the accumulated cash value, minus any surrender charges, is yours
to use as you wish.

Things You Should Consider:

• Permanent insurance is initially more expensive than term insurance.
• Loans, including any unpaid loan interest, and cash-value withdrawals generally reduce the
death benefit, which could leave beneficiaries inadequately protected.

Whole life
Whole Life is the most basic type of permanent life insurance. Depending on your age and health,
your premium will purchase a specific death benefit and produce a specific cash value, which are
guaranteed for the life of the policy as long as your premiums are paid. Whole Life premiums,
while higher than term premiums, are guaranteed not to increase. In addition, Whole Life policies
can earn annual dividends which are based on MetLife’s investment, mortality, and expense
experience. Dividends are not guaranteed. Whole life insurance is suitable for people:
• Have a lifetime need for insurance protection
• Like to know that their premiums will never increase

Benefits:
Over time, whole life insurance may be more economical than term insurance since premiums do
not increase with age and the policy builds cash value.
• Policy loans and withdrawals provide access to your cash value.
• If you cancel the policy, the accumulated cash value is yours to use as you wish. Taxes may
apply.
 • Dividends can be taken in cash or used to increase the policy's cash value and death benefit.
This means that certain “dividend options” may be used to purchase additional insurance
coverage each year, regardless of your health.
• Premiums are guaranteed not to increase over the life of the policy.
• A minimum death benefit is guaranteed.
• The cash value is guaranteed to grow at a specified, minimum rate.

Some Drawbacks to Consider:

• Unlike term insurance, whole life insurance offers no conversion option.
• Loans, withdrawals and any unpaid loan interest generally reduce the death benefit, which
could leave beneficiaries inadequately protected.

Variable universal life insurance

VUL is a variable universal life insurance policy offers a choice of death benefit guarantees and
investment opportunities. It provides money for your family or other beneficiaries if you die, and
money for you while you're living. Equity Advantage VUL gives you the choice of allocating your
net premiums to one or more of our 50 funding options, including a Fixed Account. Since the
policy's cash value will vary with the performance of the particular funding option(s) chosen, there
are no cash value guarantees. However, there is a greater potential for growth. The more
conservative Fixed Account does provide cash value guarantees. This product is currently available
in all states.
Variable insurance policy is for people who:
• Have a need for Life Insurance.
• Have longer time frames to weather the market.
• Want control over where their net premium dollars are allocated.

Benefits:
• There is no set schedule for premium payments after the first policy year, so as your needs
and goals change you may be able to increase, decrease or stop premium payments.
• Since the amount of coverage (face amount) can generally be adjusted, you may never need
to purchase another life insurance policy.
• A minimum death benefit is guaranteed regardless of funding option performance if you
maintain
• Guaranteed Minimum Death Benefit premium payments at specified levels.
• The potential for your cash value to accumulate more rapidly.
• The flexibility to change the funding options in which your net premiums are invested at any
time.
• The ability to transfer money among the funding options at any time, currently without
charge.

2. Term Life Insurance

Term insurance is generally the least expensive and least complicated type of life insurance. It
provides insurance protection for a specified period of time, such as 1, 10, 20 or 30 years.' If you die
within the term period and the policy is in force, a death benefit is paid to your beneficiary. If you
are still living at the end of the term, protection ceases unless the policy is renewed. There is no
“accumulation” element, or cash value with term insurance.

Who’s it for?
• People with a temporary need for life insurance protection.
• Those who need a large amount of insurance protection but have limited budgets.
• People with specific business needs (e.g., business owners who want to cover the life of a
key employee who has a set number of years until retirement).
Benefits:
• It provides insurance protection for a low cost (at least initially).
• If your needs change, most term policies allow you to convert to a permanent life insurance
policy without having to take a medical exam or provide other information about your
health.
• Term insurance is a good way to supplement other coverage when you have added financial
responsibilities for a given period of time (e.g., mortgage, college expenses.

Things to be considered:
Premiums generally increase with age and they could become unaffordable later in life. There is no
cash-value element, so you miss the tax-deferred growth of the cash value of permanent life
insurance policies, such as Whole Life Insurance. Term Life Insurance. Once the term period
expires, unless you renew your policy, the insurance Coverage ceases and the policy has no further
value.

B. HEALTH INSURANCE
Health insurance is a type of insurance whereby the insurer pays the medical costs of the insured if
the insured becomes sick due to covered causes, or due to accidents. The insurer may be a private
organization or a government agency. A Health insurance policy is an annually renewable contract
between an insurance company and an individual. With health insurance claims, the individual
policy-holder pays a deductible plus co-payment (for instance, a hospital stay might require the first
Ksh 5000 of fees to be paid by the policyholder plus 500 per night stayed in hospital). Usually there
is a maximum out-of-pocket payment for any single year, and there can be a lifetime maximum.
Prescription drug plans are a form of insurance offered through many employer benefit plans in
Kenya where the patient pays a co-payment and the prescription drug insurance pays the rest.

Some health care providers will agree to bill the insurance company if patients are willing to sign an
agreement that they will be responsible for the amount that the insurance company doesn’t pay, as
the insurance company pays according to “reasonable” or “customary” charges, which may be less
than the provider's usual fee. The “reasonable” and “customary” charges can vary. Health insurance
companies also often have a network of providers who agree to accept the reasonable and
customary fee and waive the remainder. It will generally cost the patient less to use an in-network
provider. An example of an insurance company which offers this type of insurance is Madison
Insurance Company.

UNDERWRITING
This is the selection and rating of risks, which are offered to an insurer, hi essence, the task of the
underwriter is to manage the pool (created through insurance) as effectively and profitably as he
can.

Thus the roles of an underwriter may be said to be:

• To assess the risk which people bring to the pool.
• Decide whether to accept or not to accept the risk, or how much of the risk, to accept.
• Determine the terms, conditions and scope of cover to be offered.
• Calculate a suitable premium base.
Equally, an underwriter has the task of assessing the hazards associated with the various perils-
brought to the common pool. The concern here is to look out for those hazards that may or might
alter the frequency or severity of the peril. There are two aspects of the hazard, physical and moral
which the underwriter is concerned with.
Physical hazard
These are physical features, which render the proposed risk to be good/bad from, the insurance
point of view. The hazard arises from the natural qualities of the subject matter, in relation to the
likelihood and extent of claims as illustrated below:
• Marine Insurance - type of power used to propel the vessel, type of good comprising the
cargo, geographical area and season involved for the voyage.
• Life Assurance - the health of the proposed assured, the family medical history, the age of
proposer.
• Fire Insurance - the construction of the premises, the proximity of the fire brigades, trade
processes involved in the insured premises.
• Accident Insurance - the occupation of the insured (personal accident), the type of
machinery used (employers liability), the system of check and supervision (fidelity
guarantee).

Underwriting remedies for bad physical hazard

a) General
Where bad physical hazards exists, which is usually evident at the time the insurance is proposed,
the underwriter can often make suitable adjustments to compensate for the adverse features present.
Where suitable underwriting measures will not counteract the adverse features, then the only
prudent option is to decline the risk altogether.
b) Extra Premium
A suitable increase of premium is made to reflect the hazardousness of the risk.
c) Excess or franchise
A limit Is set for each and every claim such that the first portion of each and every claim made shall
be borne by the insured, say 10%.
d) Reduction of cover
This is done by reducing the cover from say full cover to partial or comprehensive to third party
only for motor insurance.
e) Physical improvements
Conditions are set for improvements to be carried out before a risk is accepted e.g. grills on
windows, steel doors, fencing .. .etc,
f) Suitable policy exclusions
Policy limits coverage through exclusions.

Moral Hazard
This is a risk arising from the nature and behaviour of human beings connected with the subject
matter of the insurance.
Adverse moral hazards and their remedies include:
• Fraud - go off cover
• Carelessness - apply excess or franchise.
• Unreasonableness - refusal at renewal.
• Trend of adverse events - adjust premium upwards or decline renewal.
• Regular claimant - adjust premium upwards.

Underwriting Process
The underwriting process varies from one class of insurance to another and there are usually a
variety of sources of underwriting information, namely:
• The proposer/applicant - the applicant gives both written and oral information before
entering into the contract. The written information is captured in a proposal form.
• Agents - they provide insurers or underwriters with reports, opinions and recommendations
about the policyholder.
 • The insurers own inspection or claims department - insurers maintain their own assessors
and surveyors to provide underwriters with physical inspection reports on the properties of
applicants. Claims department gives up to date statistics of claims experience to help in
renewals.
• Insurers bureaus/associations - these provide rating services or lists of undesirable insurance
applicants. The associations are used to standardise or formulate industry rates and
underwriting factors.
• Other external agencies - automobile agencies, doctors' medical reports and disaster
monitoring bodies are used to provide valuable information at their disposal to underwriters.

Both of the above sources give primary and secondary information to support an underwriter's
decision of taking or refusing the risk. A look of the underwriting process in the following classes of
insurance will help to identify which source(s) is/are applicable.

• Personal Insurance
The main source is the proposal form, which is filled by the applicant. The underwriting process is
delegated to someone like a broker who has authority to issue policies up to ascertain monetary
limit of the sum insured for underwriting purposes.-This is actually applicable in household
insurance where there is little discrimination among those cases, which are acceptable.

• Life Assurance
Here the risk is assessed only at inception of the contract. Due to the provision of the cover for a
long period underwriting involves looking at medical factors, occupational factors, family health
history, age and individual lifestyle factors. HIV/AIDS threat occasioned additional investigations
and strict underwriting practices. In order to reach a favourable decision an underwriter may require
more additional information e.g. a report from the proposer's doctor on the proposer's medical
history, specific tests and/or medical examination report from an appointed hospital/laboratory.

• Commercial Insurance
Commercial insurances require complicated and exhaustive information. The size of the risk will
determine the level of complexity of the underwriting process. The underwriter will not only
depend on the information provided in the proposal form by the applicant but will also require
services of other experts such as brokers and surveyors. The broker is able to do site visits and
prepare a report on the relevant aspects of the risk. The documentation though extensive in content
forms the basis of underwriting the risk. Risk surveyors have become indispensable in commercial
insurance underwriting.

There are various risk specialists in liability fire, security, engineering .,. etc, who prepare
comprehensive reports on:
• The full description of the risk.
• An assessment of the degree of risk. This assessment includes both physical'and moral
hazards surrounding the property which may have an impact on' the magnitude of the risk
e.g. in fire insurance.
• The estimated maximum loss.
• What procedures in terms of safety and security should be taken to protect the insured
against the risk.
• Adequacy of the sum insured. Adequacy of the limit of indemnity.

Premium Determination
The underwriter has the duty to determine the premiums to be paid for any particular risk
accommodated. The' premium, which an insured pays represent the insured's contribution to the
common pool. Premiums must thus be fair and reflect the degree of hazardness, which the insured
brings to the pool.

The factors considered in premium determination include:

• Expected claim costs,
• Operational expenses e.g. salaries, advertising, commission and other office costs.
• Costs relating to outstanding claims
• Costs relating to catastrophic risks
• Reserves
• Profit returns or margins
• Inflation
• Interest rates
• Exchange rates
• Market competition

Premium calculations
Premiums are calculated by applying a premium rate percentage or per rnille to a premium base.
The premium rate captures the hazard and the premium base measures the exposure. Each class of
insurance has different bases upon which premium is determined. In fire insurance a base rate
percentage is applied to the sum insured. In public liability, a rate is applied on turnover while
employers' liability is often rated on the wages paid. Those different bases reflect the Different
exposures and the rates indicate the hazardness level. Premiums calculated may be adjustable or flat
premiums.

Insurance companies may charge an adjustable premium e.g. in stock insurance due to its
fluctuating nature while in the majority of cases like motor insurance, a flat premium is charged.
Adjustable premiums There are certain cases where the exact amount of premium may not be
known at the inception of the policy, in which case an estimate is given. It is this estimated figure
that shall be used as a guide to compute the full premium payable in future. At the end of the policy
year the actual figure is worked out whereupon the initial premium is adjusted either up/down
words to reflect the emerging reality. An example may be in the Employer's Liability cover, where
wages may increase/deer ease during the currency of the cover, besides making adjustments for new
recruitment and/or retrenchments, sackings ...etc, thus, it becomes difficult to provide a precise limit
of indemnity at inception of the policy. In stock insurance for example the actual values of stock
vary during the currency of the policy thus making it difficult to calculate the premium out of the
sum insured at 'the beginning of the year. Hence insured are advised to declare a monthly stock
value and pay an estimated premium, which is then adjusted at the end of the year when the actual
value is established.

• Flat Premiums
These are those premiums, which are paid at the beginning of the year and require no adjustments
at the end of the year. In most cases the application of a rate to a premium base does not exist. This
is practised in motor insurance, unless the vehicle has a relatively high value to warrant adjustment.
The flat premium is got from the rating tables, which reflect the hazards, associated with the insured
and the vehicle. The underwriting factors to determine the premium are sourced through the
proposal forms.

Life Assurance premiums

Premiums in life assurance incorporate four aspects:
• Mortality - which entails the risk of death as given from the mortality tables?
• Expenses - provides for operating expenses such as administrative, stationery, commissions and
other
office costs,
• Investment ~ this takes care of the future income earnings from the invested amounts,
• Contingencies - this provides for the safety margin of unexpected level of losses.

CLAIMS
Handling claims is the most important aspect of the insurer's advertising. A claim form is the means
by which claims are intimated. The insured may submit his claims personally or through a duly
authorised agent acting on his behalf such as solicitor or an insurance broker. Similarly different
persons may act on behalf of the insurer namely:-
• Insurers' employees - claims department.
• Loss adjusters - professional claim investigators/quantifiers.
• Other agents - solicitors, brokers to agree settlement on their behalf.

Claims Procedure
Claims procedure involves three stages as listed and discussed here after: • Claims notification
• Claims processing
• Claims settlement
• Claims notification

Insurers needs be notified of a claim as soon as possible usually within, a period of 48 hours. This
helps to investigate the claim while evidence is still fresh in the minds of persons involved and
witnesses can be found without difficulties. All events, which may give rise to a claim in due
course, must be communicated to the insurer. This Is necessary since investigations may have to be
made to verify the loss, which may be prejudiced by delay, and chances of recovery from the
negligent party are also reduced if inquiries are not made within a reasonable dispatch. Nearly every
insurance policy will require the policyholder or his legal personal representative to notify the
insurer of a possible claim within the stipulated period. The Limitations Act broadly allows three
years for submitting a claim involving death or injury and six years for other claims. It is important
to note that the above procedure relates to general insurances. In life assurance, the procedure
involves the use of courts because the rife assured may be dead and thus the cause of the claim. It is
essential to have the system in force for the insurer to receive proper proof of death, proper legal
identification of the recipient of any proceeds incorporating any wills and assignments that may
have been made.

Claims processing
This is dealt by the claims department of the insurer. Insurers have to satisfy themselves that:
• Cover was in force at the time of the loss.
• The policy covers the peril.
• The insurer has taken reasonable steps to minimize the loss.
• Conditions have been complied with by the insured.
• No exceptions to the peril.
• The value of the loss is reasonable.

The duty of providing full particulars and proof of loss rests squarely upon the insured. He must
prove to the insurer that a loss has been caused by an insured peril. In practice, this may sometimes
be difficult, such as providing proof of a burglary. However, all reputable insurers allow a liberal
interpretation of what constitutes proof, and unless there are reasons for suspecting the integrity of
the insured, the insurer will virtually pay all claims.

In essence, since the insurer is holding the insurance fund on behalf of all policyholders, any
payments therefore should be completely warranted. This requires careful investigations and
reasonable proof both of the insurer's liability and of the amount involved. The services of a loss
adjuster-are necessary in claims processing. From the onset to the conclusion of the claim, loss
adjusters being professionals are involved in preserving the interests of the insurer which include:
• Checking that the cover was in force.
• Adequacy of the cover at the time of loss.
• Measures taken that minimizes the extent of the loss.
• Providing possible settlement amount.
• Full description of the loss.
• Application of averages if appropriate.
• Steps of handling the claim.
• The insurer's claims department officials in the hope of providing an equitable settlement
then verify these details.

Claims settlement
The guiding principle in claims work is that there should be careful attention to detail and thorough
investigations, but "when liability is established payment should be made forthwith. Ordinarily, any
uncalled for delay will only result into loss of goodwill and possible future loss of business. Thus, a
prompt and fair claim payment has greater advertising value to the insurer, which is what they
always strive for. The settlement amount depends on the following factors:
• Nature of the cover
• The adequacy of the cover and
• Conditions that may limit the amount payable

The amount payable in the event of a claim is not subject of negotiation at the time of claim, but
will normally depend on among others whether it's a partial or total loss, where partial then the
extent of the damage/ destruction, amount claimed and excesses applicable will all be taken into
consideration. Ordinarily, life assurance claims are more straight forward and clearer than general
insurance claims.

Methods of settlement
• Cash - most suitable method of settling claims and for liability and life claims is the only
practicable method available.
• Replacement - insurer replaces an article other than paying cash. This is usually applied in
glass claims, jewellery and furs.
• Repair - an adequate repair constitutes an indemnity. This settlement is particularly
common, in motor vehicle claims.
• Reinstatement (provides "new for old") - found in fire insurance and concerns the
restoration or rebuilding of premises (not necessarily on the same site) to their former
condition.

Disputes settlement
Few claims give rise to disputes as to either the liability of the insurer to settle the claim or to the
amount of settlement or the speed of processing the claim.

Methods of dispute settlement

• Courts of law
• Arbitration
• Insurance Ombudsman Bureau

Disputes referred to courts of law are those where the insured disagrees with an insurer about
whether a claim is covered by a policy and the liability of the insurer to pay. After casing the courts'
ruling will be binding to both parties.
Policies do carry an arbitration condition that specifies that disputes concerning the amount payable
and/or the liability under the policy should be referred to an arbitrator. An arbitrator is an
independent professional who looks at the pros and cons of the case and makes a judgment. An
arbitrator's judgment is not final and in case of disagreement the case shall be referred to the legal
courts for determination.
The ombudsman bureau is an independent institution for dealing with disputes in some countries
such as UK. It only deals with personal insurances and not business insurances and resolves
disputes concerning policy terms, amount payable and delays in settlement. The insured can accept
or refuse the ombudsman decision. Incidentally, the claimants can only refer their cases to this
bureau only if the insurer is a member.

Claims reserves
These are accumulated funds, which enables insurance companies to sufficiently finance their
claims as they arise. Reserves are basically grouped into:
• Technical reserves
• Free reserves
• Technical reserves
These are to cover outstanding liabilities to insured and are subdivided into those that apply to
general business (non-life) and life business. Technical reserves for non-life business are divided
into six:
a) Unearned premium reserves - this is a segment of this year's premium income that
corresponds to the policy year of the next accounting period.
b) Un-expired Risk Reserves - when there is an unexpected high claim and the unearned
premium reserve is inadequate to service the liabilities it is used to increase the required
reserve level.
c) Outstanding claims reserves - this is a reserve created for reported claims but unsettled
during the particular accounting period)
d) Incurred but not reported reserves - this reserve caters for those losses that have occurred
during the particular accounting period but not reported.
e) Catastrophe reserves - the reserves are for exceptionally worse claims experience.
f) Claims Equalization reserves - these are reserves created when there is a better performance
in returns to provide for a bad year of performance. In life business, during the early years
the actual risk is less than the premium paid. The excess premiums are invested and
accumulate a stable fund out of which future claims are paid. The invested amounts earn
interest and capital gains, which may profit the insurer.

Free reserves
This is the second classification of claims reserve. The free reserves in non-life business are known
as shareholders funds. They are not for any specific liabilities and are used in expanding the
company. Being the capital base, part of it is retained to maintain solvency. The other part is for
dividends to shareholders and to finance contingencies. In life business the free reserves thus form
the profit or the excess. Other reserves for unexpected claims may be withdrawn from these free
reserves. The residual profit is then divided between shareholders and policyholders.