Insurance is a contract whereby an insurer or underwriter agrees to compensate the insurer in the event of his suffering a loss, in return for the payment of a premium by the insured.

Insurance is indeed a contractual agreement between the insured (the individual or entity seeking insurance coverage) and the insurer or underwriter (the insurance company). The contract states that the insurer will provide compensation or financial benefits to the insured in the event of a covered loss or occurrence, in exchange for the payment of a premium.

Here are some key elements of an insurance contract:

1. Insured: The individual or entity that seeks insurance coverage and protection against potential risks or losses.

2. Insurer/Underwriter: The insurance company or organization that agrees to provide coverage and compensate the insured in the event of a covered loss.

3. Premium: The payment made by the insured to the insurer. It is typically paid periodically, such as monthly or annually, and is based on factors like the type of coverage, the level of risk, and the insured’s profile.

4. Coverage: The scope of protection and benefits provided by the insurance policy. It defines the types of risks or losses that are covered, as well as any exclusions or limitations.

5. Loss: An event or circumstance that triggers the insurance policy’s coverage, leading to a potential claim and compensation from the insurer.

6. Claim: A request made by the insured to the insurer to seek compensation for a covered loss or occurrence, as specified in the insurance policy.

The insurance contract establishes the rights, obligations, and responsibilities of both the insured and the insurer, ensuring that the insured is financially protected against certain risks or losses.

The basic principle of insurance is the pooling of risks – A number of people who wish to cover themselves against a certain risk contribute to a pool or a common fund out of which compensation is made to those who actually suffer losses arising from that particular risk. The amount of the premium depends on the probability of the risk. The greater the risk, the higher the premium and vice versa. Compensation for victims will depend on the premium paid and the extent of losses suffered. 


Insurance refers to events which are uncertain and which may or may not happen e.g. fire, burglary etc. It is based on probabilities. Assurance refers to events which are certain and which are sure to happen e.g. death must happen. Example is life assurance. Assurance is based on possibilities.


  1. What is insurance?
  2. Distinguish between the terms insurance and assurance.


Risks which are calculable (i.e. the likelihood of their occurrence is possible to be estimated) and for which premiums may therefore be assessed are called INSURABLE RISKS e.g. Motor Accident, Life, Marine, Theft, etc.

In other words, insurable risks are those risks whose likelihood of occurrence can be forecast, from past experience and for which a rate of premium can be calculated to enable the insurance company to collect enough premium to pay those who will unfortunate enough to suffer loss from such risks. Insurable risks hold out the prospects of loss but not again.


Also called un-insurable risks are risks that cannot be insured because their likelihood of occurrence cannot be calculated due to insufficient information being available to insurer to enable him estimate the premium. It holds the prospects of gain as well as loss.


  1. Loss of profit through competition: Insurance typically does not cover losses incurred due to regular business competition or market forces. It is considered a normal part of operating a business.
  2. Loss due to gambling: Gambling-related losses, such as those resulting from betting or speculation, are generally not insurable. These are considered speculative risks that individuals voluntarily undertake.
  3. Loss due to changes in taste and fashion: Insurance does not typically cover losses resulting from shifts in consumer preferences or changes in fashion trends. Businesses are expected to adapt to market changes and bear the associated risks themselves.
  4. Loss due to maladministration: Losses resulting from poor management decisions or mismanagement are generally not covered by insurance. These risks are considered inherent to the business and fall under the responsibility of the management.
  5. Risk due to war: Insurance companies typically exclude coverage for losses resulting from war, civil unrest, or acts of terrorism. These risks are often considered too unpredictable and widespread for insurers to provide coverage.
  6. Loss of profits through a fall in demand: Insurance does not typically cover losses due to a general decline in market demand for a product or service. Business fluctuations and market conditions are considered part of the normal risks of operating a business.

It’s important to note that while these risks may not be insurable through traditional insurance policies, businesses and individuals may explore other risk management strategies or financial instruments to mitigate their exposure to such risks.


1. Indemnity Insurance: Indemnity insurance is a type of insurance where the insured is compensated for the actual loss suffered as a result of an insured event. The purpose of indemnity insurance is to restore the insured to the same financial position they were in before the incident occurred. In other words, the insured is not meant to profit from the insurance coverage but to be made whole again. Common examples of indemnity insurance include property insurance (such as fire, marine, and burglary insurance) and liability insurance (such as professional liability or general liability insurance).

2. Non-Indemnity Insurance: Non-indemnity insurance, also known as non-life insurance or benefit-based insurance, differs from indemnity insurance in that it does not seek to restore the insured to their previous financial position. Instead, it provides a predetermined benefit or sum assured in the event of a specified occurrence, such as death, disability, or certain medical conditions. Non-indemnity insurance typically involves a fixed payout or benefit regardless of the actual financial loss experienced by the insured. Examples of non-indemnity insurance include life insurance, personal accident insurance, critical illness insurance, and health insurance.

It’s important to note that while non-indemnity insurance may not restore the insured to their former position, it still serves as a valuable financial protection by providing a predetermined benefit or coverage for certain risks.


  1. What is meant by the term insurable risk
  2. Distinguished between indemnity and non-indemnity insurance.


  • Explain five circumstances when an insured may not be indemnified
  • Explain the following terms (a) insurable risks (b) non insurable risks
  • Give five main differences between a retail co – operative society and a public limited company
  • Explain five functions of the Central Bank of Nigeria
  • Explain five reasons why many small businesses turn into private limited companies


  1. Which of the following risk would an insurance company not be prepared to cover

(a) death resulting from HIV (b) change in fashion (c) theft of property (d) loss of cash in transit

  1. The aid to trade responsible for compensating traders on loss suffered in the day-to-day business operation is (a) warehousing (b) insurance (c) transportation (d) advertising
  2. Which of the following is a non-insurable risk (a) cash-in-transit (b) fire

(c) consequential loss (d) speculative venture

  1. The sum which the insured pay periodically to his insurance company is called

(a) brokerage (b) commission (c) indemnity (d) premium

  1. The incidence of loss that would have paralysed commercial activities are heaped on

(a) banking (b) communication (c) advertising          (d) insurance


  1. List four examples of non-insurable risks
  2. Distinguish between insurance and assurance

See also

15 Places to WIN $10,000
15 Places to WIN $10,000 Cash






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