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Some businesses are not well conversant with the differences between overinsurance and under-insurance - NSC Business Studies - Question 5 - 2021 - Paper 2
Question 5
Some businesses are not well conversant with the differences between overinsurance and under-insurance. Others apply the principles of insurance when entering into a... show full transcript
Worked Solution & Example Answer:Some businesses are not well conversant with the differences between overinsurance and under-insurance - NSC Business Studies - Question 5 - 2021 - Paper 2
Step 1
Outline the differences between overinsurance and under-insurance.
Answer
Overinsurance occurs when the insured value of a property or asset exceeds its actual or market value. In this scenario, the insurer may face challenges if a claim is made, as they might refuse to pay the full insured amount beyond the real value of the asset. Conversely, under-insurance happens when the insured value is less than the actual market value. This means that if a loss occurs, the payout will be insufficient to cover the full loss, placing the insured at financial risk in the event of a claim.
Step 2
Explain any THREE principles of insurance.
Answer
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Indemnity: This principle ensures that insurance contracts compensate the insured for actual loss incurred, so the insured does not profit from an insurance payout. It is designed to restore the insured to the financial position they were in prior to the loss.
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Security/Certainity: This principle implies that the insurer guarantees to pay out an agreed amount when an insurable event occurs, providing peace of mind. It assures that the insured will receive a defined benefit upon the occurrence of the event insured against.
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Utmost Good Faith: This principle mandates that both parties involved in the insurance contract must disclose all relevant facts truthfully. Failure to do so can lead to the contract being voided, as one party relies on the complete truthfulness of the other.
Step 3
Discuss the advantages of insurance for businesses.
Answer
Insurance offers businesses several advantages: it transfers risk from the business to the insurer, protecting against potential financial losses due to unforeseen events such as natural disasters or theft. This provides businesses with peace of mind, knowing they won’t face devastating financial losses alone. Furthermore, insurance can help preserve capital for unexpected costs, allowing businesses to reallocate resources to growth and development. It also fosters trust with clients and stakeholders, as a business with insurance is often perceived as more reliable.
Step 4
Advise businesses on the Compensation Fund in terms of the COIDA as a type of compulsory insurance.
Answer
The Compensation Fund under the COIDA provides crucial protection for businesses against occupational injuries and diseases. It is mandatory for all employers to register, ensuring that they can compensate employees for injuries sustained at work. This fund not only shields businesses from litigation but also helps uphold workforce morale by safeguarding their health and well-being. Businesses should ensure compliance with the fund's regulations and timely reporting of workplace incidents to benefit fully from its protections.