Inception is another word for commencement, the date that cover will begin in terms of an insurance policy. The exact time a policy begins is also part of the inception date, for example if you take out a policy with an inception date of 1 December, your cover will commence at 12:01 on the 1st of December. Your first premium will be payable on or before the inception date of the policy.

The Incidence Rate refers to the number of times that a specific loss occurs.  Car Insurance Companies keep statistics of all claims received and paid in the different categories for example theft, carjacking, accident, fire and total write-off.

The Loss Severity will measure the amounts that were paid out on claims, again recorded under the various categories. As an example an Insurance Company will report in their annual returns that the incidence rate for theft was 5 432 (the total number of car stolen) and the loss severity was R5 764 000 (the total amount of claims paid out.)

These calculations are done for all types of risks handled by the insurance company. It stands to reason that the more claims the insurance company must pay, the less their profits will be. The incidence rate and the loss severity are used to calculate car insurance premiums. Other factors also play a role in the individual’s premium calculation, such as age, gender, previous claims record and security measures implemented. But we all pay for the losses at the end of the day as insurance companies will increase their overall premiums after a particularly bad year of losses.

These are claims resulting from losses that have already taken place, but the claims incidents have not yet been reported to the insurance company at the time. This scenario becomes important when an insurer deals with an accounting period as the law requires insurance companies to put a reserve in place to cover such losses.

As an example, a car insurance company has their financial year end on the 31 December. Any car accidents that happened before this date, which will give rise to claims against the insurance cover, should be included in the accounting figures for the year end. The insurance company will therefore place an amount in a reserve fund for incurred but not reported claims (IBNR) at the end of December. The amount will be based on previous experience and statistics as provided by the insurance company’s actuaries. The term Incurred but not enough reported (IBNER) will refer to the inadequate reserving of past claims.

IBNER can also refer to claims that have already been reported but where the full extent of the claim is not yet known, such as motor car accidents where serious injuries were involved.

Incurred claims will represent the amount of claims that have been paid as well as the amount placed in reserve for claims still to be paid for the accounting period under question.

Indemnity is an underlying general insurance principle which means that the insured, after having suffered a loss for which a subsequent claim was made, should be put in the same financial position after the loss as that which he was in immediately before the loss. Indemnity is a process of taking over the responsibility for loss by the Insurance Company in exchange for the monthly payment of insurance premiums.

The principle of indemnity comes from common law and is directly linked to the principle of insurable interest. Indemnification is described as the act of providing compensation for a loss where the clear intention is for restoration of the insured party to the financial position prior to the loss.

Benefits are not set at a predetermined level or amount but based on restoring the policyholder’s financial position. It therefore implies another insurance principle, namely that insurance cannot be for gain; you cannot be better off financially after an insurance claim than before the claim. Insurance is designed to make you “whole” again, not to enrich.

There are factors that can prevent the insured from receiving a full indemnity at the time of a claim. These factors include underinsurance, the amount of the excess and also inadequate sums insured as well as non-adherence to the terms of the policy. Account is also taken of depreciation.

Indexing is a method used in insurance to adjust the total sum insured – it makes provision for increases in the value of the items insured when this is warranted due to inflation.

After the unfortunate incident of a car accident, break-in, theft or carjacking you need to advise your insurance company as soon as possible. The insurer will complete, what is called, the initial examination checklist when you advise them of the claim to establish whether or not your claim is valid in terms of the policy agreement between yourself and the insurance company.

Some of the questions on this checklist are:

• Is the policy still in force? Here they will look at things such as premiums being paid up the date and the expiry date of the policy.
• Is the actual loss covered by the policy? If your policy is for third party cover only you cannot claim for the theft or accident damage to your car.
• Is the specific peril covered? Here we refer to the cause of the loss – if your car is destroyed by fire and fire has been excluded on your policy the peril of fire is not covered.
• Is the specific property covered? Was your car covered under the policy?
• Is there any exclusion that would invalidate the claim?
• Did the insured person carry out his obligations in terms of the policy?
• Have any conditions of the policy been violated?
• From the initial report does anything look suspicious that could indicate a fraudulent claim?

The completed checklist will then go to the assessor for further investigation and processing.

When an individual or legal person such as a company is declared insolvent it refers to not having sufficient assets or financial resources to cover liabilities or financial obligations. When an insured business is declared insolvent, the insurer with which they are insured is still legally bound to its obligations in terms of the insurance contract.

The insolvency clause is applicable where there is a reinsurer involved in an insurance transaction. Should the direct insurance company be declared insolvent the reinsurer is still liable for his pro-rata share of any loss in terms of the contract between the insurers.

Any insurer is bound by legislation to ensure that their business is financially sound and they must always be in a position to meet their liabilities. The Financial Services Board (FSB) monitors the solvency of all registered insurers on an ongoing basis. Insurers have to supply the FSB with monthly financial returns and these are used by the FSB to determine solvency. Not all assets can be used to prove solvency and normally diversified assets are required. An insurance company must spread their assets carefully and there are laid down percentages for investments of the insurance companies assets in, for example, cash, shares and government bonds.

When you apply for car insurance you will be requested by the insurance agent or broker to take your car for an inspection at one of the insurance company’s approved inspection centres. This will not be necessary if you are only taking out third party insurance as the insurer has no interest in your car.

The insurance company representative will advise you that until such time as they have received the inspection report you will only be covered for third party claims. This is a serious scenario so rather have it done as soon as possible after arranging the insurance. The insurance company representative will advise you of the nearest inspection centre to where you live or work.

The reason for this inspection is to allow the insurance company to see that the car they are insuring is indeed in an insurable condition. The inspector will record any visible prior damage to the car and also check that you display a valid licence. He also notes any non-standard sound equipment that you may want to insure as well as any safety equipment such as immobilisers and tracking systems. Any security system must be VESA approved to qualify for a discount on your insurance. The inspector will advise the insurance company of the details and from then on you will have full insurance cover.

Make sure that you obtain a copy of the report for your records and also confirm with the insurance company in a day’s time that they did in fact receive the report – just for your own peace of mind.

One of the most important and fundamental principles of short-term insurance is that one can only insure something if you have an insurable interest in the subject of insurance. The relationship between you and the subject must be legally recognizable. The simplest way to look at it is from the point of view of ownership. If you are the owner of a car you stand to suffer a financial loss should anything happen to your car. You therefore have an insurable interest in your car.

You cannot take out insurance on your neighbour’s car – think of the consequences. If both you and your neighbour take out insurance on the same car and the car is stolen you would both claim from insurance. You, not being the owner, would be enriched by receiving compensation for something that was not legally yours. The rule of insurable interest prevents insurance from becoming a form of gambling.

But ownership is not the only rule: potential liability can also be covered by insurance, such as third party insurance. Your interest in the item or peril that you want to insure must always be to the extent that loss or damage will result in a financial loss to you. So when we take out insurance we can actually say that it is our interest in the insured object that we are insuring.

To ensure a risk it needs to meet certain pre-requisites and one must be able to find insurance for it. If no insurance company is prepared to insure a particular risk it simply means that it is not an insurable risk. Insurance companies have the right to refuse insurance if they are not prepared to carry a specific risk. The insurer must be able to operate the business profitably and certain risks fall outside the definition of an insurable risk.

The criteria for an insurable risk are:

• The loss insured against must be definable.
• It must be completely accidental – an unforeseen event, a mishap.
• It must cause a financial loss should it happen, if not, it’s not insurable.
• An insurer must be able to predict losses, therefore it needs to be part of a big enough risk groups.
• The insurance company must be able to calculate a fair premium on the risk.
• The insurance company must be in a position to calculate the possibility of loss.
• Risk must be pure, not speculative. Speculative risks are subject to the possibility of financial gain and therefore not insurable.

If you compare your car to the criteria above and you want to insure is against theft, fire and accident, you will find that it is indeed an insurable risk.

The definition of insurance according to South African law is: a contract between two parties—the insurer and the insured, whereby the insurer undertakes in return for the payment of a premium, to render to the insured a sum of money, or its equivalent, on the happening of a specified uncertain event in which the insured has some interest. The insured party should suffer a loss before a claim can be made, insurance is not for gain.

Insurance is the transfer of risk by means of which the responsibility for carrying a loss is transferred from the insured to the insurer on the payment of a premium. There are many conditions applicable in insurance, for example, the insured party must have an interest in the item he wishes to insure. You can insure your own car but not that of your neighbour as you have no interest in your neighbour’s car. An insurance policy is the legal document that acts as evidence of the contract of insurance between you and the insurance company.

Insurance originated in Greek bottomry contracts where a loan was taken on shipped merchandise to other countries. When this became illegal the Athens insurance exchange was formed. In 1347 AD marine insurance started in Italy – insurance has indeed been around for a long time.

There are many clauses used in car insurance policies and it is very important that you make sure you read and understand the full meaning of every such clause. The most important clauses to read in car insurance are probably not what is included in your cover, but what is not, in other words what is exempt from the cover. These clauses are usually listed in your policy document under a heading called Memoranda.

Acts of war, riots, political acts, public disorder or terrorism are always listed under the exemption clauses in a car insurance policy. Most of these are covered under SASRIA  (South African Special Risk Insurance Association) and you will notice on your policy document that a very small amount of your premium is for the SASRIA cover. Just make sure that it is listed on your policy.

Also take special note of the description of use clause. Unless you specifically bought business insurance you are only covered for social, domestic, pleasure purposes and driving to and from work. If you use your car for business on a regular basis make sure you have business cover.

There are various other important clauses covered in this glossary, such as the average clause. Make sure you are familiar with all the clauses applicable to your car insurance policy.

In your car insurance policy you will find a section referring to the insurance company’s rights after an event. After an event, such as an accident in which your car is written off, the insurance company has certain rights. The main right is that to subrogation which means that the insurance company becomes the owner of the salvage (the remains of your car) and can deal with it in any way it deems fit. For further details see the glossary entries on Subrogation and Salvage.

Insurance policies stipulate a due date when a premium must be paid. In short term insurance, such as car insurance, the due date of the premium is usually on the first of each calendar month. The due date will also be indicated in the insurance schedule and policy contract.

The Insurance Grace Period is a specified period after the due date of the premium – during the grace period the insured person may still make the required payment. During the insurance grace period the insurance cover of the insured object, such as a car, will still be in place. For short-term insurance (including car insurance) the grace period is usually a maximum of 15 days after the due date of the premium.

Once the grace period has expired the insured person will have to pay a re-instatement fee if he wants the insurance to continue. If insurance is not paid for a month, there will be no cover during the month that no premium was paid.

Not only does one run the risk of suffering an unsecured loss, but, in most cases, you also loose your no-claim bonus if the insurance was “skipped” for a month. Please read the conditions that are applicable to grace periods and late payments in your policy document carefully; not all companies have the same conditions in place.

One of the main pillars of insurance is that it is a system built on the principle of risk-sharing. One of the earliest examples was when Chinese merchants would divide their cargoes amongst one another’s boats. That way, should a boat sink everyone lost something and no-one lost everything. The first real insurance contracts started with Greek bottomry and marine insurance.

In South Africa two British offices were established in 1826 in the Cape. Five years later the first local company called South African Life was formed.  Old Mutual was founded in 1845 and is the only one established in those early days still operating today. Insurance, both long term and short term, is seen as being in the interest of society as a whole and therefore it is heavily regulated.

Worldwide many insurance companies have been nationalized to enable governments to have the ultimate control. In South Africa insurance companies are also heavily regulated but they still operate as private, profit-seeking businesses. The short-term insurance act, no 53 of 1998 regulated the registration of short-term insurance companies and their activities. The Financial Advisory and Intermediary Services Act, no 37 of 2002, bought about further controls over insurers and provide protection to the general public in their dealings regarding car and other short term insurance matters.

The Insurance Industry in South Africa is well regulated. The Financial Advisory & Intermediary Services Act (FAIS) Act 37 of 2002 made provision for the appointment of a Short Term Insurance Ombudsman. The office of the Ombud provides an independent complaints and dispute-resolution service to insured parties; it acts as a mediator between insured parties and the insurer.

Every insured party has the right to contact the office of the Insurance Ombudsman if they have an unresolved complaint or dispute with their insurer. The service is available free of charge to insured parties. The purpose of the Ombudsman is to provide an impartial, cost-efficient, informal and fair vehicle for settling disputes out of court, with regards to short-term insurance.

If you have an unresolved issue with an insurance company you should first try to settle it with the company before approaching the Ombudsman’s office. The decisions made by the Ombudsman are binding on Insurance companies but not on insured parties. If you are not happy with the decision of the Ombudsman you still have the legal right to take the matter to a court of law.

The ombudsman is only allowed to investigate cases that are not already the subject of an existing litigation (court case), and where the claim does not exceed R800 000. Details regarding the Ombudsman’s office can be obtained from your insurer as well as on the internet.

The word insurance premium has its origins in Greek insurance, which was the first form of insurance recorded. Insurance was a form of loan taken when goods where shipped to other countries and premium described the interest charged on the loan that was higher than the normal interest.

Today an insurance premium simply means the price of insurance for a specified risk and for a specified period. If you take out car insurance, for example, you will pay a monthly premium (price or rate) for the cover that you receive from the insurance company. Premiums are usually paid monthly although some insurers will give discount for insurance paid in advance. Insurance for vintage or collectable cars are normally charged as an annual premium, paid in advance.

The details of your insurance will be stipulated in your insurance policy contract and schedule. It will list the amount of insurance, when and where it is payable and the length of the contract. Short-term insurance such as car insurance does not have an end date and insurance cover will continue for as long as the premiums are paid (and the other conditions are adhered to.) If the premiums are not paid the insurance cover will fall away after the laid-down grace period, for car insurance it is usually 15 days.

The insured in terms of an insurance policy is the person, business or organization that is covered by the insurance contract. The insured is also called the policyholder. This is the party who the insurer agrees to indemnify against a possible loss or damage as stipulated in the insurance contract. The “insured” can also refer to other people who are covered under the terms of the contract.

When dealing with an all risks policy the insured will be the insured person and the members of his family that stay in the same home. Insurance claims can be paid in the form of a payout, or benefits, or the provision of indemnity for legal liabilities.

In car insurance the insured person can nominate other drivers who regularly drive the car as well. These nominated drivers will then enjoy the same cover as the insured. When you nominate other drivers you will pay a higher insurance premium. Some insurance companies will refuse to pay out any claim if someone who was not a nominated driver happened to be driving the car at the time of an accident. Please check the conditions of your own insurance company regarding this issue.

The term insured is also used when referring to the item that is covered, for example the insured car.

The insurer is the party to the insurance contract who provide cover to the insured. The insurer is also known as the insurance company. The focus of the insurance industry is the safeguarding of people against financial loss due to death or injury, loss and/or damage to property. The insured pass the risks they face to the insurer in return for a payment called the insurance premium.

Sometimes there is more than one insurer involved and the policy will then make reference to the term insurers. In the schedule of the policy the percentage liability that each insurer accepted will be listed individually.

Insurance companies are operating as a profit-making business and therefore they will only accept the risks that they can insure at a profit. The insurance industry in South Africa is highly regulated in terms of law. All insurers must be registered with the Financial Services Board, will receive a license to operate and are subject to its rules and regulations. There are very strict financial controls in place to monitor the financial stability of insurance companies.

The Insurance Ombudsman provides a vehicle for insured parties to lodge complaints against insurers in the case of unresolved claims or alleged unfair treatment. Insurance companies have to accept the findings of the Ombudsman’s office.

The internet has changed the way in which insurers conduct their business. All insurers have web sites where you can obtain information on insurance or even apply for insurance online. An internet insurer is an insurer that conducts his business exclusively on the internet.

Insurance companies are profit-making businesses so they will run their businesses according to business principles. Because short term insurance companies deal with the general public there are strict regulations as to the running of an insurance company. The major portion of the insurance companies’ income comes from the premiums insured people pay every month on their car and other insurance.

The insurance company does not keep all the premium income in the bank to cover insurance claims; they invest the funds in interest-bearing investments or for capital growth. The income from such investments will form part of the insurance companies’ income for the year.

The short-term insurance act lays down specific ratios of what percentage needs to be kept in liquid or short-term deposits or investments. Insurance companies usually spread their investments, or assets as it is also referred to, over a number of different investment products. A short-term insurance company must always protect its cash flow as insurance business is unpredictable. For example, a major storm can be the cause of a flood of car insurance claims that could find the insurer short of cash if it did not invest its funds properly. For this reason the insurers are forced to maintain certain financial ratios.

An intermediary in car insurance will be an agent or broker acting on behalf of an insurance company; it is a person who arranges insurance with the approval of the company. Agents and brokers play a huge role in short term insurance; nowadays if one needs car insurance you look on the internet or you deal with an agent or broker you know. It is extremely rare that someone will walk into an office of an insurance company and ask to take out car insurance.

The Financial Advisory and Intermediary Services Act (FAIS) not only regulated the way banks and insurance companies deal with their clients; it specifically also refers to intermediaries, realizing that they are major role players in the industry. The aim of FAIS was to regulate the insurance profession and ensure that intermediaries are professional and responsible in their dealings with the public.

Since the implementation of the FAIS act all intermediaries had to be licensed and are subject to meeting “Fit and Proper” requirements before they are allowed to operate. These requirements refer to minimum qualifications, competency, experience, operational ability and financial soundness. Intermediaries have to abide by a Code of Conduct that detail requirements such as providing accurate advice, keeping records and full disclosure of products and cost, including their commission earned.