Home News COMMERCE FORM FOUR STUDY NOTES, TOPIC 1-2.

COMMERCE FORM FOUR STUDY NOTES, TOPIC 1-2.

TOPIC 1: TAXATION 

Meaning of Taxation
Define taxation
Taxation refers
to the practice of government collecting money from its citizens to pay
for public services. or A means by which governments finance their
expenditure by imposing charges on citizens and entities. Without taxation,
there would be no public Expenditures. One of the most frequently
debated political topics is taxation. Taxation is the practice of
collecting taxes (money) from citizens based on their earnings and
property. The money raised from taxation supports the government and
allows it to fund police and courts, have a military, build and maintain
roads, along with many other services. Taxation is the price of being a
citizen, though politicians and citizens often argue about how much
taxation is too little or too much.
The Purpose of Taxation
Explain the purposes of taxation
What are the objectives of Tax
The
concept of tax was initiated with a view to generate government revenue
in its very beginning stage. In course of time it has been utilized for
various purposes.
  • To raise government revenue for development and welfare programmes in the country.
  • To
    maintain economic equalities by imposing tax to the income earners and
    improving the economic condition of the general people.
  • To encourage the production and distribution of the products of basic needs and discourage the production and harmful ones.
  • To discourage import trade and protect the national industries
The Principle of Taxation
Mention the principle of taxation
If
the major objectives of taxation are to be achieved, taxes should
conform to certain criteria. These are summarized in the following
principles:
  • The principle of simplicity;This
    is Ability of the taxpayer to understand. The principle of simplicity
    is one of principles of taxation and it advocates that Tax system should
    be plain, simple to understand by the common taxpayers. It should not
    be complicated to understand how to calculate and ultimately ascertain
    how much to be paid. This principle of taxation is so important in that
    it helps in avoiding corruption as well as exploitation by the taxing
    Authority
  • The principle of convenience; This
    principle emphasizes that both time and manner in which payments are
    executed should be convenient to the taxpayer. An Economist by Names of
    Adam Smith said that `Every Tax ought to be levied at the time or in the
    manner in which it is most likely to be convenient for the contributor
    to pay’. For instance the payment of Value Added Tax and Excise duty by
    the consumer is very convenient because the consumer pays the Tax when
    he buys the commodities at the time when he has the means to buy the
    product. Furthermore, the manner of payment is also convenient because
    these Taxes are inclusive in the prices of the commodities
  • The principle of certainty;
    According to Adam Smith, there should be certainty in taxation because
    uncertainty creates favourable climate for tax evasion hence
    compromising with the Taxation objectives. By this principle, it means
    that, the tax which each individual taxpayer is bound to pay should be
    certain. The time, the manner of payment and the amount to be paid must
    be clear to the taxpayer. Thus, this requires that there should be no
    element of arbitrariness in a tax. It should be in relation to
    ascertaining as to when, what and where the tax is to be paid.
  • The principle of Equality;Taxes
    should be allocated among individuals fairly and reasonably. In
    taxation systems, the principle of equality is considered as the most
    important. As Adam smith put it forward `The subjects of every state
    ought to contribute towards the support of the government as nearly as
    possible in proportion to their respective abilities’
    . This implies
    that every person should pay the tax according to his ability and not
    the same amount. It further means that every taxpayer should not pay at
    the same rate; rather every taxpayer should pay the tax proportion to
    his income of the taxpayer.
Types of Taxation (Direct and Indirect)
Identify types of taxation (direct and indirect)
What are the Different Types of Tax with Examples
Taxes may be categorized into different as their nature as direct taxes, indirect taxes.
  • Direct Tax;
    A direct tax is the one, which is paid by the person or entity on whom
    it is legally imposed. It is collected from the persons or entities on
    the income they have earned exceeding a certain specified limit. Tax is
    generally calculated at a certain percentage on the income. Income tax,
    corporate tax, land revenue tax etc. are the examples of direct tax.
  • Indirect Tax;
    An indirect tax is the one, which is imposed to one person or entity
    but paid partly or fully by others. It is transferable to others. The
    tax is collected from customers by including it in the price of the
    goods or services they have purchased. The producers collect such a tax
    from wholesalers the wholesalers from retailers and the retailers from
    the final consumers. Excise duty, custom duty, VAT etc. are some of the
    examples of indirect tax.
  • Value Added Tax (VAT);Value
    added tax is the tax levied on value added on the price of the product
    at each stage of production, and or distribution activities. Value added
    is the difference between sales values and purchase value or the
    conversion cost plus profit. Conversion cost means the expenses on rent,
    depreciation, maintenance, insurance, salary etc. It is imposed on the
    goods at import, production and selling stages.
Difference between the Different Systems of Taxation
Distinguish between the different systems of taxation
SYSTEM OF TAXATION
Taxes on Income
The federal government, 43 states and many local municipalities levy income taxes
on personal and business revenue and interest income. In most cases,
income tax brackets are progressive, meaning that the greater the
income, the higher the rate of taxation. Federal rates for the 2013 tax
year range from 10 to 39.6 percent. State and city rates are generally
much lower. In addition, many systems allow individuals to trim their
tax bill with various credits, deductions and allowances. Businesses pay
taxes on their net income, that amount can be taken as an
above-the-line business deduction on a person’s income tax return.
Capital gains taxes
are those paid on any profits made from the sale of an asset and are
usually applied to stock and bond transactions. The capital gains tax
rate has recently been raised from 15 to 20 percent. Profits made from
the sale of real estate are also subject to a capital gains tax. Single
homeowners may exclude up to TSH 250,000 of capital gain on the sale of a
home, as long as the home was a principal residence for at least two of
the five years before the sale; married couples filing jointly can
exclude up to TSH500,000.
Estate taxes
are imposed on the transfer of property upon the death of the owner.
They were created to prevent the perpetuation of tax-free wealth within
the country’s most affluent families. Since the tax exempts the first
$5.43 million of an estate’s worth, estate taxes only affects about 1
percent of the citizenry. The maximum top estate tax rate is 40 percent.
Many states also impose their own estate tax, sometimes known as an inheritance tax.
Opponents of these types of taxes believe that they are an unfair
confiscation of wealth passed on to an heir and call them “death taxes.”
A tax related to the estate tax, and assessed in a similar manner, is
the gift tax, levied on a transfer of wealth during a person’s lifetime. The first $14,000 of a gift is excluded from the tax.
Taxes on Property
Property tax,
sometimes known as an ad valorem tax, is imposed on the value of real
estate or other personal property. Property taxes are usually imposed by
local governments and charged on a recurring basis. For example,
homeowners will generally pay their real estate taxes either once a year
or as a monthly fee as part of their mortgage payments.
Real estate taxes
are often subject to fluctuation based upon a jurisdiction’s assessment
of the worth of a property based on its condition, location and market
value, and/or changes to the amounts apportioned to various recipients
of the tax. For example, if residents of a community have voted to
increase the millage rate (the amount per $1,000 that is used to
calculate taxes) for a school system, homeowners could see an increase
in the tax levied on their properties. Conversely, if property values
have fallen due to adverse economic circumstances, home taxes may
decrease.
Other
items that may be subject to a property tax are automobiles, boats,
recreational vehicles and airplanes. Some states also tax other types of
business property such as factories, wharves, etc.
Taxes on Goods and Services
The sales tax
is most often used as a method for states and local governments to
raise revenue. Purchases made at the retail level are assessed a
percentage of the sales price of a particular item. Rates vary between
jurisdictions and the type of item bought. For example, a pair of shoes
may be taxed at one rate, restaurant food at another, while some items,
like staple commodities bought at a grocery store, may not be taxed at
all. Also, the same shoes may be taxed at a different rate if sold in a
different state or county.
Some
believe that sales taxes are the most equitable form of taxation, since
they are essentially voluntary and they extract more money from those
who consume more. Others believe that they are the most regressive
form of taxation, since poorer people wind up paying a larger portion
of their income in sales taxes than wealthier individuals do.
Excise taxes
are based on the quantity of an item and not on its value. For example,
the federal government imposes an excise tax of 18.4 cents on every
gallon of gas purchased, regardless of the price charged by the seller.
States often add an additional excise tax on each gallon of fuel.
User fees
are taxes that are assessed on a wide variety of services, including
airline tickets, rental cars, toll roads, utilities, hotel rooms,
licenses, financial transactions and many others. Depending upon where
someone lives, a cell phone, for example, may have as many as six
separate user taxes, running up the monthly bill by as much as 20
percent.
So-called
sin taxes are imposed on items like cigarettes and alcohol. Luxury
taxes are imposed on certain items, such as expensive cars or jewelry.
The Meaning of Progressive, Proportional and Regressive Taxation
Define progressive, proportional and regressive taxation
Types of Tax Structures
There
are three general ways that a government can apply tax rates. Taxes can
be levied on a regressive basis, a progressive basis or proportional
basis. Let’s take a closer look at each of these tax structures.
Regressive Tax Structure
A regressive tax structure
results in low-income individuals paying a higher percentage of their
income on taxes than high-income individuals. A regressive tax structure
tends to shift the burden of taxation to the poor.
How
a government defines the income subject to a particular tax rate or
schedule is also important. For example, the United States government
treats earned income differently than investment income and gives
investment income a preferential tax rate. In other words, the
government imposes a higher rate of tax on income earned through wages
and salary than on income earned on investments. That’s why Warren
Buffett pays a lower rate of income tax than the average American
household – most of his income is from investment activities, not from
his labor.
Progressive Tax Structure
  • A progressive tax structure
    is the opposite of a regressive tax structure. In a progressive tax
    system, taxpayers making more money pay higher tax rates than those
    making less money. The United States uses a progressive income tax
    structure because it taxes earned income at progressively higher rates
    as earned income increases. A progressive tax structure tends to shift
    the burden of taxation to the wealthy.
Proportional Tax Structure
  • In a proportional tax structure,
    the tax rate does not depend upon the relative income level of the
    taxpayer. You can think of a proportional tax rate as a flat tax. A
    common example of a flat tax in the United States is a sales tax. The
    poorest member of society pays the same sales tax on a television as the
    richest. A proportional tax system theoretically should create an equal
    tax burden for all taxpayers, but some argue it doesn’t.
The Advantages and Disadvantages of Direct and Indirect Tax
Describe the advantages and disadvantages of Direct and indirect Tax
SOURCES OF GOVERNMENT REVENUE
Government
revenue refer to the income generated by the government through various
income sources inside and outside the particular government, As to any
other person one will be eager to know where government earn money to
finance its activity as well as expenditure of the government. The
following are the source of revenue of various government including
united republic of Tanzania (URT) :-
  • TAXATION ,Like
    we have discussed in the previous tutorial that taxation is a
    compulsory levy imposed by the government whereby no direct benefit
    citizen will receive from the government,The levy is usually payable by
    citizen at different rate depending on the nature of economic activity
    conducted by an individual or firm the obtained amount is
    the revenue for the government and is used to meet various expenditure
    causing taxation to be the first source of government revenue.
  • FEES,These
    are payment made by users of public services on government cost sharing
    in health and education,That is to say the payment made by user of
    public services i.e health and education is not the actual cost that
    they were required to pay rather than contribution on cost already
    payable government.
  • FINES,Refer to the
    penalties imposed by government against law breaches,i.e any person or
    firm which had been proved guilt by law must be exposed to specific fine
    as the compensation for the destruction made by a person or firm and
    the collected amount being the revenue for the government
  • GRANTS,Refer
    to non-payable money provided by the government to another government
    with the aim of helping such government either to improve or to start a
    project which are of great importance.to the society of such government.
  • FOREIGN INVESTMENT,Sometime
    government may decide to invest beyond its boundary provided there is a
    proof for sustainable and profitable cash flow,the obtained amount
    after operation being the revenue for particular government.
Advantages Of Direct Tax
  • Direct tax is equitable as it is imposed on person as per the property or income.
  • Time, procedure and amount of tax paid to be paid is known with certainty.
  • Direct tax is elastic. The government can change tax rate with the change in the level of property or income.
  • Direct
    tax enhances the consciousness of the citizens. Taxpayers feel burden
    of tax and so they can insist the government to spend their
    contributions for the welfare of the community.
Disadvantages Of Direct Tax
  • Direct tax gives mental pinch to the taxpayers as they have to curtail their income to pay to the government.
  • Taxpayers feel inconvenience as the government impose tax progressively.
  • Tendency to evade tax may increase to avoid tax burden.
  • It is expensive for the government to collect tax individually
2. Indirect Tax
An
indirect tax is a tax imposed on one person but partly or wholly paid
by another. In indirect tax, the person paying and bearing tax is
different. It is the tax on consumption or expenditures. Examples of
indirect taxes are:
  • VAT
  • Entertainment Tax
  • Excise Duty
  • Sales Tax
  • Hotel Tax
  • Import And Export Duty etc.
Advantages Of Indirect Tax
  • Indirect tax is convenient as the taxpayer does not have to pay a lump sum amount for tax.
  • There is mass participation. Each and every person getting goods or services has to pay tax.
  • There is a less chance of tax evasion as the taxpayers pay the tax collected from consumers.
  • The government can check on the consumption of harmful goods by imposing higher taxes.
Disadvantages Of Indirect Tax
  • Indirect tax is uncertain. As demand fluctuates, tax will also fluctuate.
  • It is regretful as the tax burden to the rich and poor is same.
  • Indirect tax has bad effect on consumption, production and employment. Higher taxes will reduce all of

TOPIC 2: INSURANCE 

The Meaning of Insurence
Define Insurance
Insurance:
is an agreement in which a person makes regular payments to a company
and the company promises to pay money if the person is injured or dies,
or to pay money equal to the value of something (such as a house or car)
if it is damaged, lost, or stolen. Or is the Risk-transfer mechanism
that ensures full or partial financial compensation for the loss or
damage caused by event(s) beyond the control of the insured party. Under
an insurance contract, a party (the insurer) indemnifies the other
party (the insured) against a specified amount of loss, occurring from
specified eventualities within a specified period, provided a fee called
premium is paid. In general insurance, compensation is normally
proportionate to the loss incurred.
Insurance police:
is a contract whereby the insurer will pay the insured (the person whom
benefits would be paid to, or on behalf of), if certain defined events
occur. Subject to the “fortuity principle”, the event must be uncertain.
The uncertainty can be either as to when the event will happen (e.g. in
a life insurance policy, the time of the insured’s death is uncertain)
or as to if it will happen at all (e.g. in a fire insurance policy,
whether or not a fire will occur at all).
  • Insurance
    contracts are generally considered contracts of adhesion because the
    insurer draws up the contract and the insured has little or no ability
    to make material changes to it. This is interpreted to mean that the
    insurer bears the burden if there is any ambiguity in any terms of the
    contract. Insurance policies are sold without the policyholder even
    seeing a copy of the contract.In 1970 Robert Keeton suggested that many
    courts were actually applying ‘reasonable expectations’ rather than
    interpreting ambiguities, which he called the ‘reasonable expectations
    doctrine’. This doctrine has been controversial, with some courts
    adopting it and others explicitly rejecting it.[3] In several
    jurisdictions, including California, Wyoming, and Pennsylvania, the
    insured is bound by clear and conspicuous terms in the contract even if
    the evidence suggests that the insured did not read or understand them.
  • Insurance contracts are aleatory
    in that the amounts exchanged by the insured and insurer are unequal
    and depend upon uncertain future events. In contrast, ordinary
    non-insurance contracts are commutative in that the amounts (or values)
    exchanged is usually intended by the parties to be roughly equal. This
    distinction is particularly important in the context of exotic products
    like finite risk insurance which contain “commutation” provisions.
Premium;
is the amount of money that an individual or business must pay for an
insurance policy. The insurance premium is considered income by the
insurance company once it is earned, and also represents a liability in
that the insurer must provide coverage for claims being made against the
policy. The amount of insurance premium that is
required for insurance coverage depends on a variety of factors.
Insurance companies examine the type of coverage, the likelihood of a
claim being made, the area where the policyholder lives or operates a
business, the behaviour of the person or business being covered, and the
amount of competition that the insurer.
Risk:
is the event against which insurance is taken out e.g. fire, theft
etc.The insured is compensated on the actual risk insured in case the
loss happens.
Sum insured: This is the price of the property insured as declared by the proprietor at the time of applying for insurance.
Insurer:
Insurance company that issues a particular insurance policy to an
insured. In case of a very large risk, several insurance companies may
combine to issue one policy. after its insured driver caused a three-car
accident on the interstate, the driver’s insurer was forced to settle
the property damage claims of the two non-liable drive.
Insured:
a person or entity whose interests are protected by an insurance
policy; a person who contracts for an insurance policy that indemnifies
him against loss of property or life or health etc.
The
policy holder who agrees to pay a premium against the insurers promise
to pay a certain sum in case certain event should happens.
INSURANCE AND ASSURANCE
Insurance refers to the events or incidents which may or may happen e.g fire,theft etc while
Assurance refers to incidents which bound to happen or that must happens e.g death and old age.
Historical Development of Insurance
Describe the historical development of Insurance
Merchants
and traders, until well into the Middle Ages, had to borrow funds to
finance their trade or to secure goods on consignment from producers or
suppliers. As security for the loans or for the goods of their trade,
the merchants pledged not only their ships or other tangible property
but also their lives (as slaves) and those of their families as well.
Babylonia, in 2000 B.C., was the center of trade with caravans
transporting goods to all parts of the known world.
To
reduce the risk of robbery and capture for ransom, the Babylonians
devised a system of contracts in which the supplier of capital for the
trade venture agreed to cancel the loan if the merchant was robbed of
his goods. An extra charge was added to the usual rate of interest as a
premium for the creditor, to whom the risk of loss by robbery was
transferred. The Code of Hammurabi legalized this practice. (This code
also provided for the indemnification, by the state or the temple, of a
person whose home was destroyed by fire and for murder or robbery.)
These
arrangements were later known as bottomry contracts (where the ship is
security for the loan) and respondent contracts (where the cargo is the
security). Knowledge of these arrangements was transmitted through the
Phoenicians to the Greeks, Hindus, and Romans. The Rhodians established a
comprehensive code of sea laws, including the principle of “jettison”
or “general average,” which provides that if goods are thrown overboard
in order to lighten the ship, what is sacrificed for the common benefit
should be made good by a common contribution. The sea laws, including
the Greek laws of Solon and the Rhodian sea law, were absorbed in the
early Roman civil codes and in the laws of the Byzantine Empire in 533
A.D., and they are a part of today’s laws.
The Need for Insurance
Discuss the need for insurance
The following point shows the role and importance of insurance:
Insurance
has evolved as a process of safeguarding the interest of people from
loss and uncertainty. It may be described as a social device to reduce
or eliminate risk of loss to life and property.
Insurance
contributes a lot to the general economic growth of the society by
provides stability to the functioning of process. The insurance
industries develop financial institutions and reduce uncertainties by
improving financial resources.
  1. Provide
    safety and security: Insurance provide financial support and reduce
    uncertainties in business and human life. It provides safety and
    security against particular event. There is always a fear of sudden
    loss. Insurance provides a cover against any sudden loss. For example,
    in case of life insurance financial assistance is provided to the family
    of the insured on his death. In case of other insurance security is
    provided against the loss due to fire, marine, accidents etc.
  2. Generates
    financial resources: Insurance generate funds by collecting premium.
    These funds are invested in government securities and stock. These funds
    are gainfully employed in industrial development of a country for
    generating more funds and utilised for the economic development of the
    country. Employment opportunities are increased by big investments
    leading to capital formation.
  3. Life insurance encourages savings:
    Insurance does not only protect against risks and uncertainties, but
    also provides an investment channel too. Life insurance enables
    systematic savings due to payment of regular premium. Life insurance
    provides a mode of investment. It develops a habit of saving money by
    paying premium. The insured get the lump sum amount at the maturity of
    the contract. Thus life insurance encourages savings.
  4. Promotes
    economic growth: Insurance generates significant impact on the economy
    by mobilizing domestic savings. Insurance turn accumulated capital into
    productive investments. Insurance enables to mitigate loss, financial
    stability and promotes trade and commerce activities those results into
    economic growth and development. Thus, insurance plays a crucial role in
    sustainable growth of an economy.
  5. Medical support: A medical
    insurance considered essential in managing risk in health. Anyone can be
    a victim of critical illness unexpectedly. And rising medical expense
    is of great concern. Medical Insurance is one of the insurance policies
    that cater for different type of health risks. The insured gets a
    medical support in case of medical insurance policy.
  6. Spreading
    of risk: Insurance facilitates spreading of risk from the insured to the
    insurer. The basic principle of insurance is to spread risk among a
    large number of people. A large number of persons get insurance policies
    and pay premium to the insurer. Whenever a loss occurs, it is
    compensated out of funds of the insurer.
  7. Source of collecting
    funds: Large funds are collected by the way of premium. These funds are
    utilised in the industrial development of a country, which accelerates
    the economic growth. Employment opportunities are increased by such big
    investments. Thus, insurance has become an important source of capital
    formation.
The Meaning of “Pooling of Risk”
Define “pooling of Risk”
To
offset the possible effect of a loss, all those at risk can contribute a
relatively small sum of money (premium) to fund (pool) operated by an
insurance company. The many small sums of money people pay in premiums
form a large pool of money. when a contributor to the pool suffers a
loss there is enough money to compensate (indemnify) them.
The
result of co-operating with others in this way is that risks are
‘spread’ or ‘shared’ between the many people and organizations that have
contributed to the insurance pool. For this reason insurance is
sometimes said to be the ‘pooling of risks’.
The Basic Terms Applied in Insurance
Point out the basic terms applied in insurance
Here is some of terms and their definitions to better help you navigate the sometimes confusing world of insurance.
The General Principles of Insurance
Mention the general principles of insurance
PRINCIPLES OF INSURANCE.
  1. Nature of contract:
    Nature of contract is a fundamental principle of insurance contract. An
    insurance contract comes into existence when one party makes an offer
    or proposal of a contract and the other party accepts the proposal. A
    contract should be simple to be a valid contract. The person entering
    into a contract should enter with his free consent.
  2. Principal of utmost good faith:
    Under this insurance contract both the parties should have faith over
    each other. As a client it is the duty of the insured to disclose all
    the facts to the insurance company. Any fraud or misrepresentation of
    facts can result into cancellation of the contract.
  3. Principle of Insurable interest:
    Under this principle of insurance, the insured must have interest in
    the subject matter of the insurance. Absence of insurance makes the
    contract null and void. If there is no insurable interest, an insurance
    company will not issue a policy. An insurable interest must exist at the
    time of the purchase of the insurance. For example, a creditor has an
    insurable interest in the life of a debtor, A person is considered to
    have an unlimited interest in the life of their spouse etc.
  4. Principle of indemnity:
    Indemnity means security or compensation against loss or damage. The
    principle of indemnity is such principle of insurance stating that an
    insured may not be compensated by the insurance company in an amount
    exceeding the insured’s economic loss. In type of insurance the insured
    would be compensation with the amount equivalent to the actual loss and
    not the amount exceeding the loss. This is a regulatory principal. This
    principle is observed more strictly in property insurance than in life
    insurance. The purpose of this principle is to set back the insured to
    the same financial position that existed before the loss or damage
    occurred.
  5. Principal of subrogation: The
    principle of subrogation enables the insured to claim the amount from
    the third party responsible for the loss. It allows the insurer to
    pursue legal methods to recover the amount of loss, For example, if you
    get injured in a road accident, due to reckless driving of a third
    party, the insurance company will compensate your loss and will also sue
    the third party to recover the money paid as claim.
  6. Double insurance:
    Double insurance denotes insurance of same subject matter with two
    different companies or with the same company under two different
    policies. Insurance is possible in case of indemnity contract like fire,
    marine and property insurance. Double insurance policy is adopted where
    the financial position of the insurer is doubtful. The insured cannot
    recover more than the actual loss and cannot claim the whole amount from
    both the insurers.
  7. Principle of proximate cause:
    Proximate cause literally means the ‘nearest cause’ or ‘direct cause’.
    This principle is applicable when the loss is the result of two or more
    causes. The proximate cause means; the most dominant and most effective
    cause of loss is considered. This principle is applicable when there are
    series of causes of damage or loss.
The Meaning of Indemnity Insurable Interest, Utmostgood Faith, Subrogation, Doctrine of Proximate Cause
Explain the meaning of indemnity insurable interest, utmost good faith subrogation, doctrine of proximate cause
An
insurable interest is a stake in the value of an entity or event for
which aninsurancepolicy is purchased to mitigate risk of loss. Insurable
interest is a basic requirement for the issuance of an insurance
policy, making it legal and valid and protecting against intentionally
harmful acts. Entities not subject to financial loss from an event do
not have an insurable interest and cannot purchase an insurance policy
to cover that event.
The
indemnification principle holds that a policyholder should be
compensated for a covered loss, but that holders should be neither
penalized nor rewarded by a loss. This suggests that policies should be
designed to cover the value of the at-risk asset appropriately. Poorly
conceived or poorly designed policies create moral hazard, in which
parties have incentive to allow or even affect a loss. If moral hazard
is too prominent, it would increase the costs to insurance companies,
thereby driving up premiums to unsustainable levels.
Utmost good faith is a common law principle (sometimes calledUberrimae Fidei).
The principle means that every person who enters into a contract of
insurance has a legal obligation to act with utmost good faith towards
the company offering the insurance. A person must, therefore, always be
honest and accurate in the information they give to the insurance
company. The insurance company also has a responsibility to act with
good faith in all its dealings with the insured.
Subrogation
is a term denoting a legal right reserved by most insurance carriers.
Subrogation is the right for an insurer to legally pursue athird
partythat caused an insurance loss to the insured. This is done as a
means of recovering the amount of the claim paid by the insurance
carrier to the insured for the loss.
One
example of subrogationis when an insured driver’s car is totaled
through the fault of another driver. The insurance carrier reimburses
the covered driver under the terms of the policy, and then pursues legal
action against the driver at fault. If the carrier is successful, it
must divide the amount recovered after expenses proportionately with the
insured to repay anydeductiblepaid by the insured.
Types of Insurance Policies
Identify types of insurance policies
Due
to the development of commerce all over the world, leads to increase
the types of insurance policies categorised into two groups:
  1. Property insurance
    provides protection against most risks to property, such as fire, theft
    and some weather damage. This includes specialized forms of insurance
    such as fire insurance, flood insurance, earthquake insurance, home
    insurance, or boiler insurance. Property is insured in two main
    ways—open perils and named perils. Open perils cover all the causes of
    loss not specifically excluded in the policy. Common exclusions on open
    peril policies include damage resulting from earthquakes, floods,
    nuclear incidents, acts of terrorism, and war. Named perils require the
    actual cause of loss to be listed in the policy for insurance to be
    provided. The more common named perils include such damage-causing
    events as fire, lightning, explosion, and theft.
  2. Life insurance or life assurance
    is a contract between an insurance policy holder and an insurer or
    assurer, where the insurer promises to pay a designated beneficiary a
    sum of money (the benefit) in exchange for a premium, upon the death of
    an insured person (often the policy holder). Depending on the contract,
    other events such as terminal illness or critical illness can also
    trigger payment. The policy holder typically pays a premium, either
    regularly or as one lump sum. Other expenses (such as funeral expenses)
    can also be included in the benefits.
The Procedures for Taking Insurance
Explain the procedures for taking insurance
Customer shall:
  1. Contact by phone or visit one of Company’s representations (see the List of Representations);
  2. Fill in the insurance application form on a chosen class of insurance;
  3. Show (if necessary) the insured assets and sign the survey report.
Company (consultant) shall:
  1. Answer the call and appoints the meeting; Familiarize the potential customer with the insurance conditions;
  2. Investigate the risk (in case of motor, construction and property insurance, etc.).
  3. Prepare and sign the insurance contract and policy;
  4. Issue the insurance policy and exercise contract administering;
  5. Verify, when necessary, the way the insured asset is maintained.
How Insurance Companies Make Profit
Show how insurance companies make profit
First, they pool themoneyto pay claims. Second,insurance companiespay for expenses involved in selling and providinginsuranceprotection. Third,insurance companiesinvestmoney. Earnings from investments help keep down the cost ofinsuranceto policyholders. 

COMMERCE O’LEVEL ALL TOPICS 
FORM ONE TOPICS
FORM TWO TOPIC 1-2.
FORM TWO TOPIC 3-4.
FORM TWO TOPIC 5-6.
FORM THREE TOPIC 1-2.
FORM THREE STUDY NOTES TOPIC 3-5
STUDY NOTES FORM THREE TOPIC 6-8.
FORM FOUR STUDY NOTES, TOPIC 1-2.
FORM FOUR STUDY NOTES, TOPIC 3-4.

SHARE