Investment, Insurance, and Assurance

Understanding Investments and Securities

• Securities: Financial instruments including stocks, bonds, and mutual funds.
• Stocks: Indicate ownership in a company, offering potential dividends and capital gains.
• Bonds: Debt obligations that generate interest over a period.
• Mutual Funds: Aggregated investments from multiple investors intended for diversification.

Types of Securities

• Stocks:
  • Equity investments, similar to owning a portion of a company.
  • Example: Purchasing shares in a company such as Apple.
• Bonds:
  • Debt investments, functioning like loans with interest returns.
  • Example: Acquiring government bonds.
• Mutual Funds:
  • Facilitate diversification through collective investment.

Risks and Returns in Securities

• Risk Factors:
  • Market Risk: Possible losses from market fluctuations.
  • Interest Rate Risk: Impact on bond values resulting from interest rate changes.
  • Credit Risk: Risk that the issuer may not fulfil their obligations.
• Returns:
  • Evaluating high-risk stock opportunities with potential high returns against the stability of low-risk bonds.

Visual Representation

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Insurance vs. Assurance

Definitions and Distinctions

• Insurance: Protection against potential future events with uncertain outcomes, such as accidents or theft.

• Assurance: Relates to certain events, for instance, death or retirement, with predictable results.

• Insurance Definition: Offers protection against unlikely risks, for example, car insurance for accident coverage.

• Assurance Definition: Provides certain coverage for inevitable events, such as life assurance ensuring a payout at death.

Core Principles

• Principle of Indemnity for Insurance: Ensures compensation to restore financial conditions without generating profit.

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• Principle of Security for Assurance: Ensures guaranteed payouts regardless of conditions.

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Duration and Policy Nature

• Insurance:
  • Typically short-term, renewable, and adaptable to changing needs.
• Assurance:
  • Primarily long-term, enduring until death or a maturity event.

Compulsory vs. Non-Compulsory Insurance

• Compulsory Insurance: Insurance mandated by law

  • Examples: Unemployment Insurance Fund (UIF) and Road Accident Fund (RAF).
  • Offers essential financial protection for societal welfare.

• Non-Compulsory Insurance: Optional insurance for added security.

  • Includes options like home, health, and auto insurance.

Role in Risk Management for Businesses

• Liability Coverage: Essential for high-risk sectors such as healthcare and construction.
  • Example: The construction industry contends with on-site accidents.

• Asset Protection: Safeguards against theft, damage, or loss.

  • Worked Example: A retail business with inventory valued at £100,000 experiences a fire that destroys 40% of stock. With property insurance covering 80% of losses, the business would receive £32,000 compensation (40% of £100,000 × 80% coverage rate).

• Business Continuity: Maintains operations following disruptions.

  • Vital for tech companies during service interruptions.

Historical Developments

• Purpose of Studying History:

  • Understanding historical evolution clarifies the development of modern practices and aids in anticipating future trends.

• Ancient Practices:

  • Bottomry contracts were early forerunners to maritime insurance.
  • Roman burial clubs amassed resources to cover funeral expenses.

• Establishment of Lloyd's of London: Emerged in the 17th century, formalising insurance markets.

• Evolution of Life Assurance: Institutions like the Amicable Society established precedents for future frameworks.

• Modern Assurance: Combines protection with investment opportunities.