INSURANCE Defination

SECTION 1.

DEFINITION OF THE CONTRACT OF INSURANCE AND INSURER

A contract of insurance is a contract whereby a person called insurer undertakes, against payment of a premium or more, to provide a person named insured or beneficiary a cash benefit in case of realization of a determined risk[1].

Another definition is not directly oriented to the contract of insurance but to “Insurance Business” which is a business of undertaking liability of loss, damage, compensation, disease, health as well as reinsurance business in accordance with laws and agreements[2].

Scholars say that the contract of insurance is any contract whereby one party assumes that risk of an uncertain event, which is not within his control, happening at a future time, in which event the other party has an interest, and under which contract the first party is bound to pay money or provide its equivalent if the uncertain event occurs[3].

The last definition given by the doctrine is more complete because it is précising that the risk could be uncertain, not within the control of the insured and happening at a future time.

Now let us talk about the definition of the insurer as an active moral person involved into financial sector as a non bank financial institution.

An insurer is a party that accepts the risk of loss in return for a premium (payment of money) and agrees to compensate the insured against a specified loss[4].

 

SECTION 2. COMMON TYPES INSURANCE AND THEIR ROLE

Insurance can be divided into seven major categories. These categories are: life insurance[5], fire insurance, casualty insurance, social insurance, marine insurance, inland marine insurance, and fidelity and surety bonding insurance[6].

In Rwanda there are five following private insurers: SONARWA (Société Nouvelle d’Assurances du Rwanda), SORAS (Société Rwandaise d’Assurances), CORAR (Compagnie de Réassurance et d’Assurances  Rwandaise), COGEAR (Compagnie Générale d’assurances et Réassurances Au Rwanda) and Phoenix of Rwanda Assurance Company S.A.

Insurance has been referred to as the handmaiden of industry. Leave alone reducing loss, damage and stress in community to more agreeable levels, the insurance companies of Rwanda have played an important role in mobilization of savings and investments in the social sector in the past 25 years.

The services offered by Insurance companies in Rwanda are evidencing remarkable growth in the range and nature of insurances provided by this dynamic industry.

The focus has been to stick to the traditional roles of insurance in community, which are to spread risk, and if the risk materializes, to spread the resulting loss but at the same time making diverse the range of products provided. Incidental to this task, but increasingly a significant subordinate task of insurance in itself, has been the management of risk and the prevention of loss.

The Insurance companies offer various types of services ranging from life, retirement fund, medical fund, automobile, to property coverage[7].

The cost of retirement was so far covered by the Rwandan social security fund which is a public institution; but the draft law governing the organization of pension scheme foresees a voluntary pension scheme which will be covered by any insurer.

By providing contingent promises insurers offer a risk management tool enabling those who are least able to bear the risk to transfer, at a cost, those risks to those who are able to manage them. With the vulnerabilities to natural disasters in this region, people are exposed to their risks and consequent income fluctuations. Taking insurance cover can offset this.

As custodians of people’s savings, banks are risk averse and not suited to take on general insurance risks. Life insurance companies mobilize savings from the household sector and channel them to the corporate and public sectors. The key difference between banks and life insurers is that the maturity of liabilities in banks is generally shorter than those of life insurance companies. This enables life insurers to play a large role in long-term financing. At the same time, life insurers’ portfolios are typically more liquid than those of banks, making them less prone to liquidity crises.

For insurers, the risks that impact on their ability to pay can be classified into three main categories – technical risks, asset risks and other. Technical risks arise from the very nature of the insurance business hinging on the determination of liabilities. Insurance liabilities are estimated using actuarial or statistical techniques, based on probability using past experience and making assumptions about the future. If these calculations are incorrect, liabilities would be understated or premiums would be undercharged, both would distort the insurer’s true financial position and lead to liquidity or even solvency problems. Under-pricing, unforeseen or inadequately understood events and insufficient reinsurance are all examples of technical risks. On the asset side, insurers face market risk, credit risk and to a lesser degree, liquidity risk. Other risks include legal and operational risks.

On top of all the risks, the heterogeneous nature of the insurance industry – with life and nonlife insurers as well as reinsurers – and the wide range of risks even for insurers in the same country or market, all add to the difficulty in insurance supervision.

SECTION 3. CATEGORIES OF INSURANCE BUSINESS

Insurance business is divided into two categories; long term insurance business and short term insurance business[8].

Categories of insurance business provided by the Law governing the organization of insurance business comprise classes as specified under subparagraphs 2 and 3 of the article 2 of the regulation n°05/2009 of 29/07/2009 on licensing requirements and other requirements for carrying out insurance business.

According to this regulation Long-term insurance business refers to insurance business of all or any of the following classes, namely:  a) ordinary life insurance business,

  • industrial insurance business,
  • treasury bonds investment business,
  • any business carried on by the insurer as incidental to any class of business abovementioned.

 

Short-term insurance business refers to insurance business of any class not being long-term insurance business. This is the non exhaustive list:

  • Motor insurance business comprising commercial Lines and personal lines
  • Property insurance business comprising fire and natural forces, aviation – aircraft, and marine – ships
  • Miscellaneous comprising damage to property, expropriation and confiscation of property, insurance contracts primarily designed to cover the interests of any natural person against loss or damage to immovable and movable property as well as specified property as a result of fire, explosion, storm, water and certain natural forces, (excluding the risks of riot, strike, war and nuclear energy, accidental incident or any other unforeseeable event), transportation insurance business, accident and health insurance, liability insurance, engineering insurance business, guarantee insurance business…

 

[1] Art. 1al 1 of the order n0 20/75 on insurance in J.O. of 1975

[2] Art. 2 (1) 0f Law nº52/2008 of 10/09/2008 governing to the organization of insurance business in O.G n° special of  31 March 2009

[3] JOHN BIRDS; Birds’ modern insurance law, ed. Sweet & Maxwell, London, 2007, p. 9

[4] GORDON W. BROWN (et al); Business Law with UCC Applications, 11th ed. McGraw-Hill, p.939

[5] Some say Assurance – refers to a Certain Event i.e. death, and only the time is uncertain. Life Insurance is for a specified time period and after that time, the policy expires.

[6] NORBERT J. MIETUS (et al); Applied Business Law, 12th ed. South- Western Publishing CO, 1982, p. 442

[7] Insurance in Rwanda, see http://www.guideafrica.com/rwanda/insurance-rwanda/insurance-in-rwanda.html

[8] Art. 4 0f Law nº52/2008 of 10/09/2008 governing to organization of insurance business in O.G n° special of  31 March 2009

 

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